ABA Banking Journal
On March 29, the House Agriculture Committee held a hearing on the FCS with the following witnesses: Farm Credit Administration (FCA) chairman Dallas Tonsager and FCA board member Jeffrey Hall as well as Tom Halverson, the new president of CoBank; Jimmy Dodson, a farmer and board chairman of the Farm Credit Bank of Texas; and Doug Stark, CEO of FCS of America (FCSA), the largest FCS association. Unlike the normal congressional practice of having separate panels for regulators and industry witnesses, all five men sat as one panel, which had the perhaps unintended effect of demonstrating how intertwined the regulator, FCA, is with those it regulates.
After opening statements from committee members, each witness gave his opening statement. In addition to all the usual puffery about the vital role the FCS plays in financing agriculture and especially FCS financing of young, beginning, and small farmers, Halverson was especially defensive in his statement about CoBank’s “similar entity” lending, such as its loan to Verizon in 2013. After these opening statements, the all-important questioning of the witnesses began at one hour and 16 minutes into the video and ran an hour and one-half as 20 committee members posed a wide range of questions about the FCS and FCA’s regulation of the FCS.
Numerous questions related to how well the FCS is prepared to deal with a prolonged downturn in agricultural commodity prices and the resulting financial problems FCS borrowers will face, with several committee members drawing parallels to the agricultural crisis of the 1980s and 1987’s taxpayer bailout of the FCS. All five witnesses acknowledged today’s problems, especially in grains, citrus, and cotton, but expressed the strong belief that the FCS has the financial capacity to deal with those problems while helping financially distressed farmers work through their difficulties. It all sounded good, but time will tell whether the FCS will be less harsh with troubled farmers today than it was in the 1980s.
Several committee members challenged the wisdom of similar-entity lending, which all the witnesses defended, arguing that such lending provides “income and risk diversification” for FCS institutions. Unacknowledged, though, is the fact that such diversification is substantially nullified by the financial interdependence of all FCS institutions due to the joint-and-several liability of the FCS’s four banks for debt the FCS sells in the capital markets through the Federal Farm Credit Banks Funding Corporation. Similar-entity lending also does not diversify FCS risks beyond agriculture and those industries for which the FCS has lending authority. Similar-entity lending authority actually magnifies taxpayer risk because that lending has ballooned the FCS to a larger size than it would otherwise be.
Perhaps the most absurd assertion at the hearing was uttered by FCSA’s Doug Stark when he claimed that FCS’s tax advantages can be justified by the similar market shares of FCS and commercial banks in agricultural lending even though they have different business models. The unstated implication of Stark’s comment, of course, is that if the FCS paid the same taxes that banks do, banks would have a larger market share, which in turn suggests that the FCS has an inferior business model.
FCA board member Kenneth Spearman dies
Kenneth Spearman, a member and former chairman of the FCA board died on March 27; he was 72. Spearman was appointed to the FCA board by President Obama on October 13, 2009, and served as chairman and CEO from March 13, 2015, until November 22, 2016, when President Obama designated FCA board member Dallas Tonsager as chairman and CEO. It may be a while before President Trump nominates Spearman’s successor given how slowly the president has been filling cabinet positions. Until Spearman’s successor is nominated by the president and confirmed by the Senate, the FCA board will operate with just two members – Tonsager and Jeffrey Hall. Since the Farm Credit Act provides that “not more than two members of the [three member] Board shall be members of the same political party,” the person appointed to fill Spearman’s seat will either be an independent, or more likely a Republican, since Tonsager is a Democrat and Hall a Republican.
The do’s and don’ts of FCS financing of rural housing
Bankers frequently ask about the FCS’s authority to finance rural housing, a not insignificant activity for the FCS – at the end of 2016, the FCS’s rural residential real estate loans totaled $7.15 billion, or 2.9% of total FCS loans outstanding. Such financing is authorized by the Farm Credit Act as follows: Rural home loans “shall be for single-family, moderate-priced dwellings and the appurtenances not inconsistent with the general quality and standards of housing existing in, or planned or recommended for, the rural area where it is located.” Rural area is defined in the Act as an area not including “any city or village having a population in excess of 2,500 inhabitants.” The accompanying regulation states more clearly that “rural area means open country . . . which may include a town or village that has a population of not more than 2,500 persons.” Based on the many complaints I have received over the years, FCS institutions frequently lend in communities with populations far above 2,500. FCS rural home loans can be used for the following purposes: “buying, building, remodeling, improving, repairing rural homes, and refinancing existing indebtedness thereon.”
FCS regulations also provide that a rural homeowner means “an individual who resides in a rural area and is not a bona fide farmer, rancher, or producer or harvester of aquatic products.” Presumably, then, the limitations and restrictions that apply to the FCS’s rural home loans do not apply to home loans granted to farmers, ranchers, or aquatic harvesters, or persons who claim they are farmers, ranchers, or aquatic harvesters. That may be why rural mega-mansions financed by the FCS are on acreage that generates a minuscule amount of agricultural income or, as an FCS association president once told me, a rural estate with a huge home on it that the association had financed had the “potential to generate agricultural income.”
The regulations also provide that a residence financed by the FCS must be “owned and occupied as the rural homeowner’s principal residence” and further “no borrower shall have a loan from the [FCS] on more than one rural home at any one time.” Put another way, the FCS cannot finance second homes. The FCA regulations state that homes with “values at or below the 75th percentile of [housing] values reflected in [credible data] will be deemed moderately priced.” Credible data would be data from an “independent and recognized national or regional source, such as a Federal, State, or local government agency, or an industry source.” FCA regulations are silent about FCS lending to finance manufactured housing, but a few FCS associations advertise their willingness to finance such homes. Some FCS associations also make home loans guaranteed by USDA or loans they sell to Fannie Mae and Freddie Mac instead of holding those loans in portfolio.
