Senate Agriculture Holds Oversight Hearing on FCS, FCA

By Bert Ely

On May 19, the Senate Agriculture Committee held an oversight hearing on the FCS and its regulator, the Farm Credit Administration (FCA). The hearing was chaired by committee chairman Senator Pat Roberts of Kansas. The hearing was comparable to the hearing the House Agriculture Committee held in December. The ABA’s witness, Leonard Wolfe, president and CEO of United Bank and Trust Company, in Marysville, Kansas, was most effective in calling for an examination of the FCS to ensure that it is helping young, beginning, and small (YBS) farmers as required by the Farm Credit Act. As the FCW has reported numerous times, the FCS falls far short of meeting its FCS lending obligations, in part because it double and triple-counts many so-called YBS loans.

While the Senate hearing did not generate quite the fireworks the House hearing did, still there were some very interesting revelations. One especially astounding statement was FCA Board Member Dallas Tonsager’s assertion that FCS institutions “can lend to full-time farmers for other [i.e., non-agricultural] businesses.” The committee should ask Tonsager to cite the specific provision in the Farm Credit Act which grants the FCS the authority to lend to farmers for their off-farm business activities unrelated to the FCS’s mission of financing agriculture and closely related activities.

Mr. Tonsager also was quizzed about the $10 billion line-of-credit the Treasury Department’s Federal Financing Bank granted to the Farm Credit System Insurance Corporation (FCSIC) in 2013. He offered the same rationale the FCA has previously offered – the FDIC and the National Credit Union Share Insurance Fund have Treasury lines-of-credit, so the FCSIC should have one, too. Tonsager failed to mention that Congress authorized the other two lines-of-credit, but has not authorized a line-of-credit for the FCSIC. I have had a Freedom of Information Act request pending at the Treasury Department for over two years seeking copies of documents related to the creation of the FCSIC line-of-credit. Eventually we will learn how this line-of-credit was created without congressional assent.

Sen. Chuck Grassley of Iowa asked a very pointed question about the FCS’s deposit-taking activities; specifically referencing on-line web pages advertising the check-writing features of deposit accounts. Since Sen. Grassley is from Iowa, most likely he was referring to payment services offered by Farm Credit Services of America (FCSA), which serves Iowa, South Dakota, Nebraska, and Wyoming. Tonsager insisted that these accounts are not checking accounts, but clearly drafts that FCSA members write on their accounts at FCSA are equivalent to checks. A distinction without a difference. As is the usual practice at the end of Congressional hearings, committee members were given time to submit additional questions that will be forwarded to the FCA for answers – see the next article.

FCA provided weak answers posed after House ag hearing

After December’s House Ag committee hearing, committee members submitted 38 questions addressing issues raised at the hearing. The FCA’s answers are provided in the report on the hearing.  The answers begin on page 57. Several answers are especially noteworthy. Regarding publicizing enforcement orders, the FCA stated that “Congress has not mandated that FCA disclose the identities of FCS institutions that have been subject to enforcement action . . . we believe that publicly disclosing the identity of FCS institutions that have been subject to an enforcement action would adversely affect the ability of FCA to promptly and effectively correct violations of law or unsafe and unsound conditions in the [FCS], as it would adversely impact the willingness of [FCS] institutions’ boards of directors to enter into formal written agreements with FCA.” Banking regulators seem not to have that same concern, perhaps because they can compel banks to agree to enforcement orders. Surely the FCA can compel the directors of an FCS institution to agree to an enforcement order.

Another question produced an amazing answer: “What are the competitive advantages and disadvantages of the [FCS] compared to community banks?” Answer: “Congress provided the [FCS] with certain advantages to allow the [FCS] to meet its mission through good times and bad . . . The [FCS] has two distinct advantages. First, it sells bonds with spreads close to Treasuries. Second, its cooperative structure.” There was absolutely no mention of the FCS’s tax exemptions, especially on its real estate lending. The answer then asserted that community banks have numerous competitive advantages over the FCS, including broader investment authorities and more funding sources.

The answer to a question about the FCS’s implicit taxpayer guarantee: “We [the FCA] do not in any way assume that Congress would act to provide financial assistance to the [FCS]. The assumption of an implicit guarantee is just that – an assumption. Although the rating agencies often reference the ‘implicit guarantee,’ those references refer to the expectations of investors, not those of FCA.”

FCS Southwest disappears into the ether

As FCW previously reported, last year Farm Credit West in California acquired FCS Southwest, which served most of Arizona. However, because FCS Southwest had serious credit-quality issues, it has not been fully merged into Farm Credit West. Instead, a full merger has been delayed for up to three years as FCS Southwest works through its problems, including litigation related to its credit problems. Future credit losses FCS Southwest incurs will be absorbed by the equity its members have in that association rather than by Farm Credit West members. That seems fair, but FCS Southwest no longer files call reports with the FCA, which means that FCS Southwest members have no way of tracking how their association is faring as its problems are resolved. Instead, FCS Southwest’s financial results are now buried, for call report purposes, in the numbers reported by Farm Credit West. As an FCA official told me in an email, “it will not be possible for members of what was FCS Southwest, ACA, to trace the finances of that association now that it has been merged . . . with Farm Credit West, ACA. FCS Southwest no longer submits call report data to FCA.” That is a troubling lack of transparency.

There is a comparable situation elsewhere in the FCS, but separate call reports are being filed. On January 1, 2015, Frontier Farm Credit, which serves eastern Kansas, formed a “strategic alliance,” with Farm Credit Services of America (FCSA). As CoBank, which funds both associations, stated in its 2015 annual report, “as part of the alliance, Frontier and [FCSA] have integrated their day-to-day business operations, systems, and leadership teams while continuing to exist as separate Associations. Each Association has its own board, with representatives participating in a coordinating committee to facilitate board governance between the two organizations.” Frontier also files call reports with the FCA. Presumably Frontier eventually will merge with FCSA, but in the meantime Frontier member/borrowers can track Frontier’s financial results. Not so at FCS Southwest.

About Bert Ely

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