Giannoulias cleans up, revamps farm loan program
Abuse by lenders threatened state assistance to farmers

July 13, 2009

After discovering evidence of wrongdoing in the nation’s largest state-backed agriculture loan program, Illinois State Treasurer Alexi Giannoulias has implemented new safeguards to save state tax dollars and ensure farmers can receive financial assistance.

Giannoulias unveiled the state’s new Cultivate Illinois program today that allows financial institutions to offer lines of credit so farmers can access cash for seed, fertilizer and other annual operating expenses.

 “Working with farmers and lenders, we found a way to ensure that farmers now have credit, lenders are liquid and taxpayers are making more on their investment,” said Giannoulias, adding the revamped program would have earned the state roughly $2.5 million in fiscal year 2008.

A review of Illinois’ annual agriculture loan program – known as Cultivate Illinois – found violations and abuse of state statute originating back to 2000 when the state began allowing lenders to open lines of credit for farmers, instead of just low-interest, term-loans for annual operating costs.

Many of the 200 participating financial institutions were not dispersing all of the money available so portions of the credit lines never made it into the hands of the intended farmers, the review showed. This cost the state millions of dollars that could have been invested in other ways.

To stem the abuses, Giannoulias suspended the credit lines one year ago. He lifted the ban on July 1 after working with farmers, lenders and advocates to find a safer way to offer lines of credit so farmers can access money for operating costs.

Lenders must now document the use and distribution of funds and pay a higher rate of interest on idle funds that do not get lent to farmers. The Treasurer’s Office has also implemented safeguards to monitor the program and a new reporting structure to document and ensure banks are complying with program guidelines.

“Treasurer Giannoulias has made much needed changes in the state’s agriculture loan program that put farmers and taxpayers first,” said State Senator Mike Jacobs (36th District –East Moline).

About 11,200 farmers received Cultivate Illinois: Annual Agriculture loans worth $853 million in fiscal year 2008. Those numbers fell significantly after the practice of offering lines of credit was suspended. In fiscal year 2009, roughly 1,200 loans were issued for just $111 million.

”These loans are important to farmers – especially to help young and beginning farmers,” said Philip Nelson, president of the Illinois Farm Bureau, which assisted the Treasurer’s Office in the development of the new lending requirements.

Under the Cultivate Illinois linked deposit program, the Treasurer’s Office is authorized to deposit money at a reduced rate of interest at financial institutions that “document the use of the deposited funds for community development projects,” according to statute. To fulfill that requirement, Cultivate lenders must issue below-market rate loans to farmers, Giannoulias said. Annual loans are available up to $100,000 per borrower or $200,000 per farm operation.

An investigation was conducted after two farmers contacted the office saying they had not received state loans – despite receiving a letter from the Treasurer’s Office confirming they were issued. Giannoulias’ office found that their former bank allegedly forged documents and accepted state deposits under the farmers’ names without their knowledge. The findings were forwarded to the Illinois Department of Financial and Professional Regulation for review, and the bank is also barred from the program.

Additional compliance checks revealed that other lenders renewed lines of credit without their clients’ knowledge and the lines of credit often went untapped. This meant that the lender either earned interest on the money or loaned it out to other borrowers at a higher rate of interest, Giannoulias said. This did not fulfill statutory requirements and effectively prevented the state from investing this money to earn a higher rate of return and revenue for the state.

The amount of money that never made it to farmers and the state’s lost investment income is unknown because lenders previously were not required to document un-lent funds, but Giannoulias believes it amounted to millions of dollars each year since 2000. A two rate system would have earned an extra $2.5 million in interest in fiscal year 2008, assuming half the deposits were idle and invested at average rates for that year.

“The intent of this program is to help farmers, but not at the unnecessary expense of taxpayers,” Giannoulias said. “Given the state’s dire financial situation, we owe it to residents to run the cleanest Cultivate Illinois program possible, free of waste and earning maximum revenue.”