Members of the House Small Business Committee convened for a hearing Wednesday to discuss the findings of a recent report by the Office of the Inspector General on lending to poultry farmers. At the hearing, leaders from the OIG and the Small Business Administration, whose lending practices were under scrutiny, testified. The hearing follows the introduction of legislation in both the House and the Senate that would improve oversight of SBA lending.
In March, the OIG released a report that investigated the SBA’s lending to poultry farmers as part of its flagship 7(a) loan program. The report found that poultry processors exert so much control over poultry farmers that the farmers were not, in fact, operating as independent small business owners. This “affiliation” between processors and farmers thereby disqualified farmers from nearly $2 billion in lending from the SBA between 2012 and 2016, the report found.
In his opening statement, Hannibal “Mike” Ware, acting inspector general for the SBA, spoke about the “comprehensive control” that poultry processors have over farmers. According to the OIG’s investigation into the sector, “This control overcame practically all of a grower’s ability to operate their business independent of integrator mandates,” he said. “A grower’s failure to comply with these requirements could result in a significant decrease in integrator payments, a reduction in flock placements, or a cancellation of the contract.”
William Manger, an associate administrator at the SBA who oversees the 7(a) loan program, spoke about changes the SBA has made in recent years to improve its poultry lending program, such as limiting loan terms to 15 years to tie the length of the loan to the lifetime of the equipment the loan is used to buy. But he fundamentally disagreed with the findings of the OIG report. “SBA has taken the position for many years that the poultry grower-integrator contract, standing alone, does not bring about affiliation,” he said. “Only firms that [have] common ownership or common management should be considered affiliated.”
During their questioning, representatives focused on whether the SBA was the best lender for the poultry sector, and especially what tests the SBA is using to measure whether poultry farmers would be unable to obtain credit elsewhere. Both Republican chairman Steve Chabot of Ohio and Democratic ranking member Nydia Velazquez of New York drilled down on the “credit elsewhere test” and on whether it was being properly applied by the SBA. “If these loans are such a safe bet,” Velazquez asked, “why do [farmers] need to have an SBA-guaranteed loan?”
In one tense exchange, Velazquez became frustrated with Manger when he couldn’t provide reasons conventional lenders might have for not signing off on poultry loans. “This is an important issue,” she insisted, “because it determines whether or not you are following the law.”
In its investigation, the OIG found very few instances of non-government-backed lenders giving loans to poultry farmers. The SBA and its approved lenders guarantee loans up to 85 percent, meaning that if farmers default, the cost of the loans ultimately falls on taxpayers.
In another line of inquiry, Republican committee member Blaine Luetkemeyer of Missouri questioned the premise that poultry farmers are exceptionally affiliated with processors, as opposed to franchisees in other industries. He challenged Ware to differentiate the control processors exert over poultry farmers from other SBA-qualified franchise relationships, like car dealerships.
“Based on our review on poultry loans,” Ware said, processors determine for farmers “the very specifications of your broiler house,” what times farmers “can walk in [the] broiler house … when the chicks are fed, when they’re given medicine. And if you don’t adhere to anything,” he continued, farmers lose their contracts. “That’s control.”
The OIG’s findings shore up what poultry farmers have said over the years about growing under contract for processors. Over several years of hearings, debates, and policymaking during the Obama administration, poultry farmers fought for the Farmer Fair Practices Rules, a set of USDA rules that would give poultry farmers more leverage in their negotiations with poultry processors. The rules were killed by the Trump administration in October 2017.
In January, Reps. Chabot and Velazquez introduced the Small Business 7(a) Lending Oversight Reform Act of 2018, in response to growing interest in the lending practices of the SBA. The bill, and its companion in the Senate, passed the House and Senate Small Business Committees in March.