ABA Banking Journal
At its June 8 meeting the three directors of the Farm Credit Administration were presented with the FCA’s annual report on FCS lending to young, beginning, and small farmers. As in prior years, this year’s report grossly overstates the FCS’s YBS lending activities. (See also the related fact sheet.) The FCA has always readily admitted that it double and triple-counts its YBS lending. That is, a loan to a farmer or rancher who is 35 years old or younger, who has been farming or ranching ten years or less, and who is a small farmer or rancher (gross annual agricultural sales of less than $250,000) gets counted three times — once as an young farmer (Y), again as a beginning farmer (B), and yet again as a small farmer (S). Worse, YBS data is based on individual loans rather than the overall borrower relationship. That is, a 33-year-old farmer (Y) who has been farming for eight years (B), who has gross annual agricultural sales of $230,000 (S) and who has three outstanding FCS loans — say a real estate loan, an equipment loan, and an operating loan — will get counted nine times in the FCA’s YBS data.
Since 2015, the FCS has published aggregated loan data by borrower; in fact, good lending practice requires such an aggregation so that a lender can monitor its total credit exposure to a borrower. At the end of 2016, the FCA had 552,638 borrowers who had a total of 1,062,364 loans and loan commitments outstanding. That equates to an average of 1.92 loans per borrower; many so-called YBS borrowers probably have two or more loans outstanding. As further evidence of the multiple counting of YBS loans, as reported in the FCS’s Annual Information Statement, the sum of FCS loans and commitments outstanding at the end of 2016 to small farmers and ranchers (505,175) plus loans and commitments to young farmers and ranchers (193,601) plus loans and commitments to beginning farmers and ranchers (281,812) equals 980,588 loans and commitments, almost as many as the total number of loans and commitments (1,062,364) the FCS reportedly had outstanding at the end of 2016. The FCA would much more accurately present YBS data by reporting the number of YBS borrowers and the amount lent to those borrowers in one of seven categories: Small, beginning, young, small and beginning, small and young, young and beginning, and finally small, beginning, and young.
A much better sense of how little the FCS lends to smaller borrowers is evident from the table on page 54 of the FCS Annual Information Statement for 2016. This table provides a distribution of the number of FCS borrowers by the size range of the amount borrowed. It also shows the total amount lent by the FCS in each size range. For example, at the end of 2016, 425,256 borrowers in the zero to $249,999 size range had borrowed a total of $32.925 billion from the FCS, for an average loan size of $77,424. Presumably, many of these loans financed rural homes, farm equipment, or perhaps some very small, part-time farming operations. At the other end of the scale, at the end of 2016, the FCS had lent at least $5 million to each of 4,684 borrowers, for a total of $117.2 billion, 47% of the total amount of outstanding FCS loans at the end of 2016, for an average borrowing of $25 million. It is unlikely that any of these borrowers were classified as YBS borrowers.
Judge challenged $7 million FCS loan on a Connecticut farm
On Jan. 28, 2016, a probate judge in Connecticut, O. James Purnell, handed down a very troubling decision concerning a loan extended by Farm Credit East, the ninth largest FCS association, with $6.6 billion of assets at March 31, 2017. FCE serves all of New England except Vermont and western New Hampshire, New Jersey, and almost all of New York. FCE is headquartered in Enfield, Connecticut, which is in the north central part of the state, just south of the Massachusetts border. As massive as FCE’s territory is, the loan in question was made to Jarmoc Farms, which is located just a 5-mile drive from FCE’s headquarters. That proximity makes this caper even more puzzling.
The farm was operated by Edwin Jarmoc and his son Stephen; Edwin died in 2009. According to Judge Purnell’s written decision, Stephen borrowed substantial sums from FCE after Edwin died. According to the judge, “much of the money borrowed went to support the lavish lifestyle of Steven [sic] and [his wife], their home, vacations, pension, tuition and a vacation home, none of which were income producing.” According to the decision, the liabilities of Edwin’s estate included “a claim by [FCE] in excess of $7,000,000.00.” The judge also found that “Stephen encumbered assets of [Edwin’s] estate without the Court’s knowledge or permission after being warned not to.” Presumably that finding led the judge to order that “all mortgages or other encumbrances on Estate property made after Edwin’s death are hereby declared null and void.” That order raises this question: How collectable is FCE’s $7 million claim given that its loan may not have been properly secured? As best I can tell FCE has not provided any information to its member/borrowers about its loss on this loan.
Judge Purnell further noted that FCE “walked Steven [sic] through a process to set up a new LLC in order to get additional funds from the federal government that were not available to the business while the estate was being settled. There is a serious question whether this was appropriate or even legal since it was nothing more than a shell corporation to funnel federal money to Jarmoc Tobacco. The Court leaves that question to the IRS and relevant federal agencies to figure out.” The FCA, or the FCA’s Inspector General, should be one of those federal agencies investigating this lending fiasco as well as the incestuous relationship between FCE and Jarmoc Farms given that, according to Stephen’s lawyer, “Edwin and Stephen availed themselves” of financial management assistance FCE provides to farmers “in managing a farm’s receivables, keeps important financial records, and facilitates loan repayment.” Clearly, FCE knew what was happening at Jarmoc Farms. Take a look at the broad range of products and financial services FCE provides to farmers.
FCS loan to St. Joseph’s College looks increasingly doubtful
As I wrote in the February 2017 FCW, Farm Credit Mid-America (FCMA), the FCS’s second-largest association, had lent as much as $27 million to the financially troubled St. Joseph’s college in Rensselaer, Indiana. The loan was only partially secured by farmland. On May 9, the college’s president resigned, three days after the college suspended operations. According to a news release the college issued, it is working “on a transition to a new beginning.” However, it is problematic that the college will ever resume operations, which raises this question: How big a loss will FCMA take on a loan it should never have made. Of course, that loss would be shared with any FCS institutions that purchased participations in the loan. To date, there has been radio silence at FCMA about the status of this loan and now bad the loss will be. This is another loan the FCA and the FCA’s Inspector General should investigate, specifically as to whether it was permissible under the Farm Credit Act.
