FCS Continues to Report Misleading YBS Lending Data

By Bert Ely

The FCS has long given lip-service to its lending to young, beginning, and small (YBS) farmers and ranchers, an obligation Congress imposed on the FCS in the Farm Credit Act. Young farmers are those 35 or younger, beginning farmers are those who have been farming 10 years or less, and small farmers are those with gross annual sales of less than $250,000. The Farm Credit Administration (FCA), the FCS’s regulator, routinely publishes data on the FCS’s YBS lending, but that data grossly overstates the FCS’s YBS lending because of the manner in which the data is reported.

As the FCS admitted in its 2014 annual report on YBS lending, “borrowers may qualify under more than one category; one should not add Y,B, and S data together.” That is, an FCS loan to a 29-year-old farmer who has been farming for seven years and has annual farm sales of $220,000 is triple-counted in the YBS data. The FCA stated as much, that YBS data “counts are for loans, not for borrowers.” That is, YBS data is not aggregated by borrower. If the 29-year-old farmer in the example above has seven different FCS loans, say two land loans, a seasonal line of credit, and four equipment loans, FCS lending to that one farmer would count 21 times in the FCS’s YBS data. The FCS has acknowledged that it does aggregate its total credit exposure to its largest borrowers, so it certainly can do so for all of its borrowers. The FCS would be a very reckless lender not to do so, even for its smallest, youngest, and least experienced borrowers. A further flaw in the FCS’s YBS data – not everyone who borrows from the FCS is a farmer. It is well known, by bankers and others, that the FCS finances rural estates, hunting lodges, fishing camps, and other recreational properties; those loans get captured in the YBS data. For example, a 50-acre rural retreat owned for the last five years by a wealthy 33-year-old entrepreneur whose weekend farming activities generate $20,000 of farm income annually is hardly the YBS farmer Congress had in mind when enacting the YBS requirement.

Even with this expansive definition of YBS lending, data published in the FCS’s Annual Information Statement indicates that the FCS increasingly tilts away from lending to YBS farmers and ranchers. Loans and loan commitments to young farmers, as a percent of total FCS loans and commitments, held constant, at 11.2 percent, from the end of 2013 to the end of 2014, but were down from 11.7 percent at the end of 2009. The numbers for beginning farmers are even worse – that loan-and-commitment percentage declined from 19.5 percent at the end of 2009 to 17.3 percent at the end of 2013 and to 17.1 percent at the end of 2014. Lending to small farmers showed a similar decline as a percent of total FCS loans and commitments – 24.4 percent at year-end 2009 to 21.3 percent at year-end 2013 to 20.0 percent at year-end 2014. As the FCS’s YBS data helps to demonstrate, the FCS increasingly focuses on lending to large borrowers.

FCA reconsiders a proposed regulation, at FCS’s request

On September 4, 2014, the FCA proposed revisions to its regulatory capital requirements, including “replacing references to credit ratings with alternative risk measurements, as required by the Dodd-Frank Act.” The comment period on these proposed revisions, after an extension, closed on February 16. On March 30, the FCA received a letter from the Farm Credit Council, the FCS’s trade association, “requesting FCA to reopen the comment period” so as to give [FCS] institutions the opportunity to meet with [the new FCA board members, Dallas Tonsager and Jeffrey Hall], in order to discuss the proposed rule.” The FCA did as asked, reopening the comment period for a very short 15-day period, ending on July 10. Only one comment was filed, by Dave Burlage and the FCS Capital Workgroup; Burlage is CoBank’s CFO. The comment consisted of a 12-page PowerPoint presentation to FCA officials on July 7. A key FCS complaint: “The proposed capital rule results in standards that are more stringent than those adopted by U.S. bank regulators for commercial banks and contains provisions that undermine cooperative business principles.” It will be interesting to see the extent to which the final capital rule the FCA issues has been bent to accommodate the FCS’s wishes.

Treasury plays hide-the-ball on FOIA request

On May 8 of last year, I filed a Freedom of Information Act request with the U.S. Department of the Treasury seeking all documents related to the very secretive manner in which Treasury’s Federal Financing Bank, on September 24, 2013, granted a $10 billion, taxpayer-backed line-of-credit to the Farm Credit System Insurance Corporation (FCSIC), the federal agency which insures debt issued by the FCS’s funding arm, the Federal Farm Credit Banks Funding Corporation. Unlike other federal agencies with Treasury lines-of-credit, such as the FDIC has, Congress did not authorize the FCSIC’s line of credit. Despite numerous follow-up requests, Treasury still has not produced a single document. The current line of credit expires on September 30. Congress should hold a hearing on how this potential tap on taxpayer monies came to be created and ponder whether it should continue.

FCS Southwest still in limbo

As the FCW reported last November, FCS Southwest, which serves most of Arizona and the Imperial Valley in California, suddenly pulled from its website all of its published financial reports because management had just uncovered potential loan fraud that rendered those statements meaningless, stating that the financial statements it had issued since 2009 “no longer can be relied upon.” At the same time, the FCA pulled from its website all FCS Southwest call reports filed after 2009. The association said it was “working diligently to prepare and republish restated financial reports . . . as quickly as possible.” Nine months later those reports still have not been republished nor have corrected call reports been posted on the FCA website. FCS Southwest has become a dark hole.

On February 2, FCS Southwest announced that it would merge with Farm Credit West, a larger FCS association serving much of California. This deal has every indication of being a shotgun merger aimed at burying a weak or failing association into a financially stronger one. In the interim Farm Credit West’s CEO, Mark Littlefield, also is serving as FCS Southwest’s CEO, which suggests that operationally Farm Credit West already has taken over FCS Southwest, but without assuming its liabilities. This arrangement bears a strong resemblance to the “strategic alliance” FCS America entered into with Frontier Farm Credit of Kansas in June of last year – an operational takeover but no actual merger. According to an update currently posted on the FCS Southwest website, “later this summer all stockholders of [FCS Southwest] and Farm Credit West will receive the full merger disclose [sic] package that will include” among other items the “projected financial position of the merged associations.” Presumably those materials will include reissued, and audited, financial statements for FCS Southwest. Member/borrowers of the two associations are supposed to vote on this merger “in the August/September time frame with the anticipated merger date being sometime in the fourth quarter of 2015.” It will be interesting to see what actually transpires, and when.

About Bert Ely

Bert Ely
Bert Ely is a consultant specializing in banking issues. He writes ABA's monthly Farm Credit Watch email bulletin.
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