By Bert Ely
Several readers noted that last month’s Farm Credit Watch, issue #240, marked the 20th anniversary of the monthly publication of the FCW, which triggered a look-back at the FCW’s accomplishments over the last 20 years, and there have been a few.
Perhaps the most significant has been educating bankers and other readers about what the FCS — America’s least known GSE — actually is and how it has been evolving in recent decades, for the FCS has the most complex structure of any GSE, with its banks, associations, funding corporation, and a little-known regulator, the Farm Credit Administration. FCW also has educated its readers about the FCS’s many competitive advantages Congress and the states have blessed it with, notably the exemption of the profits on its real estate lending from any corporate income taxation, its ability to borrow at interest rates just above Treasury rates, and its exemption from many state and local requirements, such as paying lien recording fees.
Although the FCS still has substantial competitive advantages over taxpaying banks, there have been some victories that have at least slowed down the FCS’s continued growth. Hopefully there will be more such victories. An early, clear-cut victory was the defeat, late in the last decade, of the so-called Horizons Project. Based on materials that fell off a turnip truck passing by my office in the fall of 2005, in the Dec. 2005 FCW, I gave readers a heads up that the FCS, through its trade association, the Farm Credit Council, was launching a major initiative, called the Horizons project, that would expand the FCS’s off-farm lending powers so that the FCS could serve all of rural America. Commercial banks, of course, more than adequately meet that off-farm credit demand. Within a few years, after numerous FCW articles criticizing the Horizons project, this proposal faded away.
Before Horizons, the FCA proposed a “customer’s choice” rule that would have allowed an eligible party to borrow from any FCS institution, regardless of that institution’s assigned territory. In reality, this was a “lender’s choice” rule that would have permitted any FCS institution to lend anywhere in the United States. With lender’s choice, FCS institutions, with their taxpayer-backed borrowing power, would have been able to compete against each other in lending to agricultural borrowers. Credit quality surely would have deteriorated as FCS institutions expanded their out-of-market lending. Strong opposition to the customer choice proposal, fueled by numerous FCW articles, led to a successor proposal by the FCA — national charters — which would have enabled an FCS association to obtain a charter from the FCA authorizing it to lend anywhere in the United States. Strong congressional opposition to national charters, led by Rep. Jim Leach (R-IA), then the chairman of the House Banking Committee, coupled with hearings held by both Agriculture Committees, followed by opposition from the George W. Bush administration, led the FCA to kill the National Charters proposal on Oct. 11, 2001. There has been no serious attempt since then to revive it.
More recently, CoBank, which has the exclusive authority within the FCS to lend to agricultural and rural utility cooperatives, had begun lending to large, investor-owned utilities such as AT&T and Verizon, by buying participations in loans originated by large banks. CoBank would then resell portions of those participations to other FCS institutions. Numerous FCW articles challenged this CoBank activity, which led to sharp questioning of this practice by members of both the House and Senate Agriculture Committees. As best I can tell from publicly available information, CoBank has stopped buying such loan participations and may have even sold some of them. But vigilance must never cease, which is why I continue to value greatly all the tips I get from bankers and others about FCS activities that exceed its lending and investing authorities. Dear readers, please keep it up!
Who dropped the ball?
Responsible parties within the FCS have been dropping the ball in recent years with regard to important supervisory and regulatory responsibilities of the FCA and FCS banks, apart from the repeated instances where FCS institutions have lent to borrowers ineligible to borrow from the FCS or for purposes not authorized by the Farm Credit Act.
Two glaring examples of inept oversight by the FCA and FCS banks that I have reported in the FCW have been the accounting problems, and possible lending fraud, at two FCS associations — FCS Southwest, which served most of Arizona and a small portion of California, and Lone Star Ag Credit, which serves a portion of Texas. Each association had to withdraw its financial statements and call reports, pending a restatement of them. FCS Southwest was later forced to merge with Farm Credit West; the fate of Lone Star Ag Credit has not yet been determined. In both situations, FCA examiners failed to detect the serious accounting and credit management problems at those associations. Additionally, the FCS banks providing most of the funding for these associations — CoBank for FCS Southwest and Farm Credit Bank of Texas for Lone Star — failed to adequately monitor their credit-risk exposure to these associations.
Perhaps a more serious case of the ball being dropped is the apparent lack of diligence by the FCA in ensuring that every FCS institution fully complies with the Bank Secrecy Act (BSA) and its anti-money laundering (AML) provisions. The FCA’s examination guidance, for example, is sketchy at best in discussing steps FCA examiners must take in ensuring BSA/AML compliance by every FCS institution. Non-compliance has become increasingly likely as the FCS’s deposit-taking activities have increased, a topic I have discussed in prior FCWs. In surveying the websites of the four FCS banks as well as the larger FCS associations, I found just one reference to AML — a one-page Anti-Money Laundering & USA Patriot Act Certification on CoBank’s website. What is almost comical is this statement in the certification — “it is the policy of CoBank and its subsidiary . . . to comply with AML laws and regulations, including the Bank Secrecy Act, the USA Patriot Act, and the Office of Foreign Asset Control (OFAC) regulations.” The word “policy” suggests that CoBank’s compliance with these laws and regulations is voluntary — compliance certainly should be mandatory, as it should be for every FCS institution, and as it is for commercial banks. The FCA will be deeply embarrassed when news erupts that an FCS institution has been utilized to launder illicit funds to, for example, purchase a farm or ranch or an agriculturally related business.
How should the FCS be restructured?
As I have previously reported, most recently in the Feb. 2018 FCW, FCA Chairman Dallas Tonsager has repeatedly urged FCS institutions to consider how the FCS should be restructured, specifically “the relationship between the funding bank and its associations.” CoBank echoed that call in its 2017 annual report, posing this question: How will the FCS evolve to ensure it is optimally configured to serve customers and fulfill its vital mission going forward? An excellent question, but not one to be addressed solely by the FCS. To move the debate forward, Tonsager, CoBank, and others within the FCS should put specific restructuring proposals on the table. For example, should larger associations be able to obtain their funding directly from the Federal Farm Credit Banks Funding Corporation?
