Farmers' lender `overreacted'. But claims are common for delinquent borrowers

Her husband's combine roars in the distance, but Brenda Mantooth isn't watching. She stands defiantly among the crunchy remains of the partly harvested cornfield. There is a fire in her eyes. ``I hope someone will nail them,'' she says. The target of her wrath is the little-known lending organization called the Farm Credit System.

After decades of success, this huge cooperative faces a growing chorus of criticism from borrowers, employees, and even top management within the system.

Not only has Farm Credit hurt itself, they charge, it has had an enormous impact on farmers' lives, exaggerating the upheaval in some parts of the farm belt.

That Dale and Brenda Mantooth were close to their lender is beyond doubt. For 18 years they borrowed money from one of Farm Credit's many local associations, the Rushville Production Credit Association (PCA). The tie with their loan officer, James Morgan, was especially close.

``He was a lot like a brother,'' Mrs. Mantooth says even now.

Adds Mr. Morgan: ``I like to think I'm friends with all my clients.''

The Mantooths operated on a full-proceeds loan, which meant that the PCA took all the farm's income, doled out money for bills and an agreed-to family budget, and applied the remainder to the Mantooths' loan.

When Dale Mantooth wanted extra money to buy a boat, he went to Morgan. When one of his daughters needed braces, he petitioned the loan officer. At one point the Mantooth children even made a recording with a special disbursement from PCA.

The Mantooths' central Indiana hog farm prospered. In 1978, Mr. Mantooth went in to talk with Morgan about expanding. Those conversations became a key point in the Mantooths' legal complaint against their PCA.

In an important test case last year in Indiana's Henry County Circuit Court, the Mantooths claimed that their PCA was more than just a lender, advising them in 1978 to borrow some $200,000 and build a new hog facility.

PCA's flawed counsel later caused farm losses, they said. When near insolvency forced them to put up more security, the Mantooths claim that PCA made and then broke an oral commitment to see them through 1982. In May of that year, the PCA refused to make a payment on the Mantooths' mortgage and eventually foreclosed on them.

The emotional court trial lasted more than a month. Morgan and other Farm Credit officials testified there was no oral commitment and that the Mantooths, not PCA, made all the managerial decisions about the farm.

An advisory jury believed the Mantooths and suggested a $6.5 million award. But Circuit Judge John Kellam, who had the final say, ruled in favor of the PCA.

The Mantooths, who expect to appeal, stand to lose their farm. Their claims are common among delinquent borrowers who blame their lender for foreclosing. But their case has emerged at a time of mounting criticism of Farm Credit. Many people well acquainted with the system charge that it overreacted, at least in those areas hardest hit by the agricultural crisis.

``It was typical of a bureaucracy,'' says a former Midwestern PCA president. At first, ``the organization couldn't react. And when it started to react, it was a knee-jerk reaction.''

Many employees were shuffled or forced out. ``I was told that I had gotten on the wrong side of the desk, that I had become too sympathetic with farmers,'' recalls Hollis Petersen, a former assistant branch manager at the PCA in Storm Lake, Iowa. Mr. Petersen was well rated until 1983, when he was fired. Of that PCA's 17 loan officers and managers, only a couple remain, he says.

Some of the turnover was caused by sweeping consolidations in troubled districts. Last year the Omaha district merged its 37 PCAs into one organization with 15 districts. Of some 33 PCA presidents, all but six have left. And a new hard-nosed outlook began to emerge, several observers say.

``They didn't have people who were trained to restructure loans,'' says Frank Naylor, chairman of the system's regulatory administration. ```Never make a concession on a loan' - that's the background they came from.''

``They were a mean, ruthless group,'' adds the former PCA president who asked not to be named. ``If they had the [human-relations] training, they didn't use it.''

By 1983, Larry Reynolds of Corydon, Iowa, had been told he had a problem loan. But when he asked his Federal Land Bank to see his loan file, he was refused twice. Employees even refused to give him a copy of the bylaws, he says. The Federal Land Banks and their associations are Farm Credit's long-term lending arm.

Meanwhile, some overzealous loan officers, eager to collect as much as possible, pushed farmers so far that they took bankruptcy.

The process often cost the system more money than a negotiated settlement would have, critics charge. Of nearly 57,000 problem and potential problem loans at the system's Federal Land Banks, only 276 had been restructured as of June 30 of this year. Half of those were in the St. Paul district alone.

``They were too tough,'' concedes Howard Holstein, former president of the system's South Omaha PCA. But the sense of crisis was so great that many once-generous farm lenders became inflexible, he adds.

Now, ``the system is a lot more willing to settle.'' The troubled Omaha and Wichita districts, for example, have set up special groups trained to deal with problem loans.

Whether the Mantooths would have benefited from this new flexibility is unclear.

``But they've opened a lot of doors,'' says John Worth, one of their lawyers in the case.

Similar suits against lenders are starting to be filed, he adds. ``We're seeing a resurgence of the same spirit the Mantooths had.'' Next: Rebuilding the system