Farm Credit Spotlight

CoBank does it again – lends to investor-owned water company

CoBank not only lends to investor-owned utilities, but brags about it. According to a recent blog post on AGgregator, run by the Farm Credit Council (the FCS trade association), CoBank is a substantial lender to the Connecticut Water Service, Inc. The company characterizes itself as “the largest U.S. based publicly-traded water utility company in New England.” Its ticker symbol is CTWS. The company had $671 million in assets at the end of 2014, a net worth of $210 million, and after-tax profits in 2014 of $21.3 million. S&P has given CTWS an investment-grade credit rating of A, so CTWS is hardly struggling financially and certainly does not warrant any taxpayer-subsidized funding.

According to CTWS’s most recent 10-K, CoBank has provided the company with a $15 million line-of-credit, alongside a $20 million line-of-credit from a commercial bank.  At the end of 2014, CTWS and its subsidiaries also owed CoBank $75.63 million in long-term debt, for a total credit-risk exposure of almost $91 million. Some of CTWS’s long-term debt appears to remain from the $36.1 million CTWS borrowed from CoBank in 2012 to help finance the acquisition of a water company in Maine. CTWS has to be one of CoBank’s larger individual risk exposures in its water/wastewater lending business, where it had lent a total of $1.26 billion at the end of 2014. Possibly CoBank has participated portions of its CTWS credit exposure to other FCS institutions. It is highly unlikely, though, that any FCS participants in CoBank’s CTWS loans understand that credit risk.

FCS squeezing commercial banks out of loan participations?

The FCS loves to talk about how it seeks to work with commercial banks in providing credit to rural America. For example, the Farm Credit Council states that “the [FCS] works with commercial banks across America on a daily basis to meet the needs for vital capital.” Working with commercial banks usually means banks taking participations in FCS-originated loans, and vice versa. CoBank, for example, has participated in loans to large, investor-owned telecommunication companies, such as Verizon, that were originated by a commercial bank. CoBank also routinely sells to banks participations in loans it has originated, all of which is authorized under the Farm Credit Act.

The matter of FCS institutions and commercial banks buying and selling loan participations to each other may begin to clash with a key difference between the FCS and commercial banks – unlike banks, most FCS institutions, but not all, pay “patronage dividends” to their member/borrowers. Although called dividends, patronage dividends effectively are interest-rate rebates as the amount of the annual patronage dividend generally relates to the amount borrowed the previous year. In effect, the FCS passes through to its borrowers a portion of the tax savings and funding-cost advantages the FCS enjoys by virtue of being a government-sponsored enterprise. These rebates are not insignificant. For 2014, the FCS as a whole recorded cash patronage dividends totaling $1.20 billion, equal to 14.5% of the total amount of loan interest income the FCS reported for 2014. The dividend/rebate each borrower received likely varied from this percentage, but this percentage gives an idea of the current magnitude of patronage dividends. In addition, various FCS institutions granted $387 million of non-cash capital stock, participation certificates and surplus allocations to their member/borrowers.

Recently, a large commercial bank participating in a large loan originated by a very large FCS association was told that it was being dropped from the loan “because [the bank does] not pay patronage.” As bankers know, interest-rate spreads on large loans are quite thin. In this case, the requested patronage payment would have chewed up much of the bank’s lending spread over LIBOR, leaving an insufficient spread to cover the bank’s operating costs, credit risk and required return on its equity capital. This particular case, where a bank is being squeezed out of an FCS loan participation, illustrates so well the competitive edge the FCS enjoys by virtue of being a substantially tax-exempt GSE. Ironically, that bank’s share of the loan probably will be reparticipated within the FCS.

FCS plunging further into the payments business

FCS associations are plunging into the banking business, offering both payments services and accepting what are tantamount to deposits, even though the FCS is not authorized to accept deposits. Here is how FCS effectively accepts deposits: FCS banks are authorized under the Farm Credit Act and related regulations to sell Farm Credit Investment Bonds to member/borrowers of the associations they fund. These bonds are not insured by the FDIC or by the Farm Credit System Insurance Corporation, which insures FCS bonds sold to investors. Instead, these bonds are unsecured, interest-bearing debt of the FCS bank which sold them. However, an FCS bank selling investment bonds must hold “specific eligible assets at least equal in value to the total amount of [these] debt securities outstanding.” In effect, the FCS banks selling investment bonds are running the equivalent of an uninsured money-market fund. As last month’s FCW reported, though, Fitch Ratings assigned AA- ratings to the FCS banks – three notches below the federal government’s credit rating – so investment bonds issued by FCS banks clearly are not as creditworthy as FDIC-insured bank deposits.

At the present time, only two of the four FCS banks – CoBank and AgriBank – issue investment bonds; in effect, the FCS associations, acting as sales agents for their funding bank, sell these bonds as one element of the payments services they offer to their member/borrowers.  These services include remote deposit capture as well as using drafts to make payments; these drafts are the functional equivalent of a check. Any positive account balance in a borrower’s account with an FCS bank is then invested in the bank’s investment bonds. Because the Federal Reserve Act authorizes Federal Reserve Banks to “act as depositories for and fiscal agents of” the FCS banks, each FCS bank has an ABA routing number and therefore can deal directly with the Fed; they do not need to clear deposits and drafts through a commercial bank. In effect, FCS banks function as if they were a commercial bank, but without providing FDIC insurance to their customers.

The investment bonds the two banks sell, which at AgriBank are shown on its balance sheet as Member Investment Bonds and at CoBank as Cash Investment Services Payable, provide a not insubstantial amount of funding to the banks. At the end of 2014, CoBank reported a $2.53 billion payable for its cash investment services, up from $1.61 billion at the end of 2012. AgriBank reported $1.10 billion in outstanding Member Investment Bonds at the end of 2014, up from $786 million at the end of 2012. One can reasonably wonder when the other two FCS banks – AgFirst and the Farm Credit Bank of Texas – will begin to sell investment bonds through the associations they fund as one element of expanding the payments services their associations can provide to their member/borrowers, in direct competition with taxpaying commercial banks. The Senate Banking and House Financial Services Committees might want to examine this uninsured FCS deposit-taking.

 

Report FCS lending abuses to: green-acres@ely-co.com
Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to: green-acres@ely-co.com

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Farm Credit Watch: Does Ken Auer fully understand the FCS’s tax advantages?

Ken Auer is president of the Farm Credit Council, the FCS trade association that lobbies on behalf of the FCS and its constituent Farm Credit banks and associations.  During the 2013-14 period, the Council’s Political Action Committee raised $1.08 million and contributed $935,000 to candidates for federal office. Those contributions give the Council, and therefore the FCS, a lot of clout in Congress and especially with members of the House and Senate Agriculture Committees as the FCS fights to protect its tax exemptions while opposing the ABA’s request for periodic congressional oversight hearings of FCS activities. The ABA letter requesting hearings can be found here.  A similar letter was sent to the House Agriculture Committee.

In the April 15 issue of Brownfield Ag News, Auer asserted that “the FCS does pay federal taxes, but has special tax provisions and does not pay many state taxes.” Auer is right that the FCS “does not pay many state taxes,” but he grossly misrepresented the extent to which the FCS is exempt from the federal corporate income tax, or perhaps he does not understand the magnitude of that exemption. The FCS’s largest tax break is its exemption from federal income taxes on profits earned on real estate lending; FCS real estate loans are carried on the books of Federal Land Credit Associations (FLCAs). All but two FLCAs are subsidiaries of the FCS’s 74 Agricultural Credit Associations (ACAs) that cover almost all of the country. Each ACA also has a Production Credit Association (PCA) subsidiary that holds its non-real estate loans; PCA profits are subject to federal income taxes. Understandably, the ACAs have a powerful financial incentive to maximize the profitability of their tax-exempt FLCA subsidiary while minimizing the income of their federally taxable PCA subsidiary.

According to the FCS’s annual Information Statement for 2014, the FCS’s “nontaxable entities;” principally the FLCAs, effectively reduced the FCS’s federal tax bill by $1.26 billion, or 73%. The comparable reductions were $1.23 billion and 72% in 2013 and $1.09 billion and 72% in 2012. This federal income tax reduction gives a lie in Auer’s statement to Brownfield Ag News that “there is NO federal or taxpayer money involved in the [FCS].” The FCS’s federal income savings are financially equivalent to the U.S. Treasury Department sending checks in those amounts to the FCS. Additionally, the FCS has a $10 billion line-of-credit at the Treasury. Perhaps Auer does understand the magnitude of the FCS’s tax subsidy, but does not want to publicly admit it, especially since the FCS increasingly tilts toward lending to larger borrowers and investor-owned utilities rather than to young, beginning, and small (YBS) farmers the FCS is supposed to focus on serving.

The FCA’s double-standard on enforcement actions

Like the bank regulators, the Farm Credit Administration (FCA) takes enforcement actions against FCS institutions for various reasons. Unlike the bank regulators, though, the FCA does not publish its enforcement orders nor does it even name the FCS institutions subject to those orders. However, these institutions (usually FCS direct-lending associations) do disclose the existence of those orders in their quarterly and annual reports to their members. It takes a lot of work, though, to identify those institutions. Presumably the FCA fears dire consequences if it names names, yet the FCA does not hesitate to name the individuals it has barred from serving, without the FCA’s consent, “as a director, officer, or employee of any FCS institution.” Rarely, though, are individuals prohibited from working in the FCS – over the last decade, just four persons have been subject to a prohibition order.

Although the FCA does not name the institutions subject to enforcement orders, it does provide some data regarding those orders. That data, though, is not clear-cut. For instance, the FCS’s 2014 annual Information Statement reported that at the end of 2014, the FCA “had entered into written agreements with three Associations who assets totaled $1.191 billion, as compared with eight Associations whose assets totaled $4.803 billion as of December 31, 2013.” On the surface, that decline looks pretty good. However, a March 31, 2015, report issued by the FCA’s Inspector General (IG) on the FCA’s special supervision and enforcement processes paints a more disturbing picture.

According to the FCA’s IG, during the fiscal year ended September 30, 2014, eight FCS institutions were under enforcement orders and three were subject to “special supervision,” which is one step away from an enforcement action. Assuming all eleven are FCS associations, this means that approximately one of every seven FCS associations experienced supervisory issues during fiscal year 2014, a time of exceptionally good economic conditions in American agriculture. Ten of the eleven associations’ “areas of concern” involved management issues and nine related to asset quality. Clearly some associations generated both management and asset quality concerns.

Especially troubling is how long it takes the FCA to resolve supervisory issues.  Eight institutions falling within the scope of the IG’s report were “under enforcement [that] ranged from one and a half to five years, with an average of 39 months” – over three years! It appears from data in the FCS annual Information Statements that most of these associations are relatively small – well under $1 billion in total assets, which raises this question: Why does it take the FCA so long to get these problems resolved? Further, the FCA has had to take numerous formal supervisory actions against some of these associations – six over 46 months in one case and five over 60 months in another case. Possibly some of these associations have been resolved through mergers with stronger associations. Putting a spotlight on these problem associations, by publicizing their enforcement orders, would help greatly to reduce these problems. The new FCA Chairman, Ken Spearman, should so order.

The FCS Southwest saga continues

FCS Southwest, which serves most of Arizona plus California’s Imperial Valley, announced last October that due to “a sudden significant increase in the level of delinquent loans” it would have to restate its financial results. At the same time, the FCA removed from its website all call reports Southwest had filed since 2010. That financial restatement process still has not been completed. The FCA website simply states that a “data correction is underway [for Southwest] and data not available at this time.” In February, Southwest announced its intent to merge with Farm Credit West, a large California FCS association. Shortly thereafter, Farm Credit West’s CEO assumed the CEO position at Southwest and the two associations began “operating under a joint management agreement.”

Almost certainly, the FCA engineered a shotgun marriage of Southwest into Farm Credit West, but that deal cannot be closed until each association’s borrower/stockholders approve it; August 1, 2015, is the anticipated merger date. However, they cannot vote on the deal until due diligence has been completed and “detailed disclosure documents [have been] provided to each stockholder.” Of course, Southwest’s financial restatement must be completed before the disclosure documents can be finalized. In the meantime, a criminal investigation reportedly is underway at Southwest related to fraudulent transactions that led to the “sudden significant increase” in delinquent loans.

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Farm Credit Watch: CoBank overreaches, again, in lending to investor-owned utility

CoBank has overreached, again, when, on March 10, acting as a co-syndication agent, it participated in a $450 million unsecured revolving credit facilities for the California Water Service Group (CWS). CWS is an investor-owned, New York Stock Exchange-listed company providing “regulated and non-regulated water service to approximately 2 million people in more than 100 California, Washington, New Mexico, and Hawaii communities.” Given its size and financial strength, CWS certainly does not need to tap taxpayer-subsidized credit provided by CoBank, which probably would argue that under the Farm Credit Act it can lend to CWS because as a water utility CWS has activities that are “functionally similar” to the cooperatively owned water utilities that CoBank is authorized to lend to. However, this loan to CWS, like the $1.5 billion of CoBank loans to investor-owned telecom companies that Rep. Mulvaney questions, clearly stretched congressional intent with regard to the FCS’s lending authority. Questions that Sen. Pat Roberts, chairman of the Senate Agriculture Committee, raised at the confirmation hearings for Tonsager and Hall are an additional indication that members of Congress are increasingly concerned about FCS lending that goes beyond congressional intent. The FCS, and CoBank in particular, should worry where its lending overreach could lead.

FCS’s 2014 financial results

The FCS has finally published its 2014 financial statements, almost two weeks later than usual. FCS’s after-tax profits in 2014 reached a record level – $4.72 billion – up1.8% over 2013 as average loans outstanding in 2014 rose 6.7% above 2013’s average. Due to a 14 basis point decline in net interest spread, to 2.50%, the FCS’s net interest income for 2014 was only 1.9% higher than in 2013; that modest increase carried through to the FCS’s bottom line. The FCS attributed the decline in net interest spread to “competitive pressures, greater average loan volume in lower spread lines of business and a lesser amount of debt being called;” i.e., debt that was refinanced at lower interest rates. The FCS’s tax bill for 2014 was the same as 2013 – $221 million – which means its overall tax rate dropped slightly, to 4.47% from 4.55% in 2013 and 5.12% in 2012. CoBank, though, accounts for most of the FCS’s tax liability – $162.9 million in 2014. For the rest of the FCS, its effective tax rate has been declining, from 1.76% in 2012 to 1.61% in 2013 and to 1.50% in 2014.

The FCS remains strong financially, reflecting both the continuing strength of the farm economy and the FCS’s continuing ability to use its favorable tax and GSE status to cream-skim the stronger agricultural and utility credit risks. FCS capital remains at an elevated level – 16.2% of total assets of $283 billion at the end of 2014 compared with 16.3% at the previous year-end. Credit quality improved, with a decrease of $303 million in nonperforming loans and a $66 million decrease in other real estate owned. The FCS’s allowance for loan losses at the end of 2014 equaled 71% of total nonperforming loans.

The FCS is not without its warts, though. A financial restatement still has not been published for FCS Southwest, the FCS association serving most of Arizona that is being forced into a shotgun merger with Farm Credit West, as reported in last month’s FCW. According to the FCS’s Annual Information Statement for 2014, Southwest has had to add $47 million to its allowance for loan losses and charge off $42 million of loans. Whether Southwest was solvent at the end of 2014 will not be known until its restated financial statements are published.

My Treasury FOIA request may eventually bear fruit

FCW readers may remember that I filed a Freedom of Information Act (FOIA) request with the Treasury Department on May 8 of last year to obtain all documents related to the creation of a $10 billion line-of-credit the Farm Credit System Insurance Corporation (FCSIC) obtained from Treasury’s Federal Financing Bank on September 24, 2013. That line of credit expired on September 30, 2014; it has since been renewed for another year. As I reported in the December 2014 FCW, I have persevered since last May in trying to obtain these documents. As recently as March 11, I was advised by a Treasury official that once she completed her review, “they will be reviewed by the [Treasury] General Counsel . . . I am going to try to get the documents out to you within the next two weeks.” Of course, I was told the same thing months ago. It will be interesting to see how informative these documents are given that this line-of-credit apparently was created without Congress’s knowledge or consent.

 

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Optimistic Outlook for Farm Banks in 2015

Farm banks are well positioned for 2015. Add this to the growing list of facts and projections that Farm Credit would rather the American public not hear. According to the American Bankers Association’s annual Farm Bank Performance Report released today, farm banks upped their agricultural lending by a staggering 13.6 percent in 2014.

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Farm Credit Watch: FCA will bury an embarrassment through a shotgun merger

The November FCW reported on an accounting scandal that had just erupted at Farm Credit Services Southwest (FCS Southwest), the FCS association serving most of Arizona plus California’s Imperial Valley. This scandal stems from the discovery during the third quarter of 2014 of “a sudden significant increase in the level of delinquent loans affecting an identifiable portion of the Association’s loan portfolio.” Consequently, the FCS Southwest directors reported in an October 10, 2014, letter to the association’s borrower/stockholders that the association’s financial statements issued since 2009 “can no longer be relied upon. Accordingly, the Association expects to restate such financial statements.” So far, restated financial statements have not yet been issued. On a parallel track, the FCA removed the links on its website to all the call reports FCS Southwest filed after 2009. Those links have not been restored. Today, FCS Southwest is an accounting black hole.

On February 2, FCS Southwest announced that it had “entered into a letter of intent to merge with Farm Credit West,” the fifth-largest FCS association. Farm Credit West serves portions of California and Nevada. According to the FCS Southwest letter, “over the next couple of months, both Associations will be undertaking due diligence to more closely assess the potential benefits of a merger to their respective shareholders and to finalize the terms of a merger agreement,” with an anticipated “effective date for the merger of August 1, 2015.” Eleven days later, on February 13, FCS Southwest informed its borrower/stockholders that Farm Credit West’s CEO was also now serving as FCS Southwest’s CEO. Clearly, there are severe management and financial problems at FCS Southwest. One wonders how the borrower/stockholders of either association can intelligently vote on the proposed merger given all the financial unknowns. Once again a troubled FCS association will be buried through an FCA-sanctioned merger with another association. This shotgun merger must be seen as a supervisory failure of both the FCA and Cobank, FCS Southwest’s funding bank.

FCS delays publishing year-end financial results

Perhaps because of the financial-reporting problems at FCS Southwest or possibly due to accounting issues elsewhere within the FCS, the FCS will be publishing its 2014 financial results almost three weeks later than it normally does. According to the website for the Federal Farm Credit Banks Funding Corporation (the FCS’s funding arm), the news release reporting the FCS’s 2014 results will be published during the “week of March 9.” The FCS’s annual earnings news releases for the prior two years were dated February 19, 2014, and February 20, 2013. This delayed announcement almost certainly means that the FCS’s audited financial results will be published much later than usual. It will be interesting to read that report’s discussion of FCS accounting issues and perhaps other problems.

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Farm Credit Watch: FCS offers weak defense to ABA’s call for oversight

The FCS, through its trade association, the Farm Credit Council, quickly fired back at Keating’s call for oversight hearings. Here is the link to the Council’s very evasive, misleading letter.  Before addressing specific issues the ABA letter raised, the Council asserted that commercial banks enjoy a taxpayer subsidy while ignoring the enormous taxpayer subsidies the FCS has used to maintain a significant competitive edge over banks: The FCS’s ability to borrow at close-to-Treasury rates, by virtue of being a GSE; a complete exemption from taxation on profits derived from real estate lending; state income-tax exemptions on non-real-estate lending; and exemptions from numerous state fees, such as mortgage recording fees. Not only do banks pay income taxes, either at the bank level or in the case of Subchapter S banks, at the stockholder level, but the banking industry has fully funded its FDIC deposit insurance. FCS institutions also are largely exempt from a broad range of safety-and-soundness laws and regulations, notably the Dodd-Frank Act, that hobble bank competitiveness.

The Council letter was especially defensive on the subject of “similar entity lending,” which is how the FCS defends its lending to large, stockholder-owned corporations. While noting that the FCS, through CoBank, can lend to telephone cooperatives, the letter completely ignores a key point Keating made in his letter, and that has been reported in the FCW: Over the last year, CoBank has provided $1.5 billion of financing to four large stockholder-owned telecom companies – Verizon, AT&T, U.S. Cellular, and Frontier Communications – each of whom competes against smaller, cooperatively owned telecom entities that CoBank supposedly is dedicated to serving. The fact that the Council ignored this criticism of CoBank’s lending speaks volumes. Hopefully this aspect of the FCS’s “similar entity” lending will draw sharp questioning during the oversight hearings.

The FCS’s “indirect lending,” notably through AgDirect, is another issue the Council misrepresented when it implied that AgDirect only provides equipment financing to farmers. However, ag equipment dealers acting as agents for AgDirect also sell riding mowers, small tractors, and similar equipment to people who do not generate any farm income and therefore cannot be considered to be farmers. How well these dealers, always trying to get a sale, verify that a prospective borrower is a farmer is highly questionable. AgDirect also sidesteps the territorial boundaries for individual FCS institutions that have been established by the FCS’s regulator, the Farm Credit Administration (FCA).

On the crop-insurance issue, the Council is simply not credible in stating that it is “not aware of any” valid regulatory or legal challenges “regarding how [FCS] institutions conduct their crop insurance business.” I have written on several occasions about actions state insurance regulators have taken to address illegal crop-insurance rebating practices by FCS institutions, notably in Illinois and North Dakota. Unfortunately, the FCA, as it has with many other issues, has chosen to ignore this illegal rebating. On the issue of retained mineral rights arising from farmland foreclosures, the FCS is far from transparent about the value of those rights or why the FCS should not be required to sell them.

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Top Banker to Congress: Where’s the FCS Oversight?

Count traditional bankers among those whose frustrations with the Farm Credit System (FCS) are growing as quickly as the System itself.

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Farm Credit Watch: CoBank does big financing deals with AT&T, U.S. Cellular

In just two days this month, CoBank committed to providing $425 million of
taxpayer-subsidized funding to two of the largest stockholder-owned
telecommunications companies – $225 million on January 22 to U.S. Cellular
and $200 million on January 21 to AT&T. These loans follow on the heels of
CoBank’s $350 million loan last June to Frontier Communications and
CoBank’s $725 million loan to Verizon last February. These four credit
extensions to stockholder-owned corporations total $1.5 billion. According to
an SEC 8-K filing on the U.S. Cellular deal, it appears that CoBank sold
participations of at least $5 million each to the Farm Credit Bank of Texas and
twelve FCS direct-lending associations. An interesting question is whether
these associations have the authority, under the Farm Credit Act, to lend
money to U.S. Cellular.

These loans lie far outside CoBank’s authority to lend to cooperatively owned
telephone companies, yet it appears the FCS’s regulator, the Farm Credit
Administration (FCA), has done nothing to prohibit CoBank’s lending to
corporate America. In fact, it appears that the FCA has green-lighted
CoBank’s expansion into financing stockholder-owned utilities. Perhaps that
light flashed green for CoBank when FCA board member and former
chairman Leland Strom vigorously defended the Verizon loan at the secret
symposium the FCA held last January where FCS insiders and selected
guests discussed the future of the FCS. Strom stated that “greater lending
capacity provides opportunity for [FCS] institutions like CoBank to participate
in large corporate banking transactions such as the recent Verizon purchase
of Vodaphone’s stake in Verizon Wireless. This loan was made under the
Farm Credit Act’s similar lending authority as it relates to rural telecom
lending.” [emphasis supplied]

Leaving aside the fact that AT&T, U.S. Cellular, Verizon, and Frontier
Communications can hardly be characterized as rural telecom companies
even though they may serve rural areas, it is hard to imagine that Congress,
when it granted the FCS the authority to lend to rural cooperatives in 1933,
envisioned that the FCS, and CoBank specifically, would use that authority “to
participate in large corporate banking transactions.” It also is hard to believe
that when Congress granted what today is CoBank the authority to lend to
“similar entities,” that is, businesses “functionally similar” to the telephone
cooperatives eligible to borrow from CoBank, it intended for CoBank to be
providing taxpayer-subsidized credit to large firms readily able to tap global
capital markets. These four loans certainly warrant congressional scrutiny as
they are excellent examples of, one, the FCS, and CoBank in particular,
abusing its lending authority and, two, the FCA turning a blind eye towards these deals.

Indiana college obtains $27 million loan from the FCS

An even more egregious FCS lending abuse occurred in May 2013, when St.
Joseph’s College in Rensselaer, Indiana, borrowed $27 million from Farm
Credit Mid-America (FCMA); FCMA, headquartered in Louisville, is the
second-largest FCS direct-lending association. According to a St. Joseph’s
news release, the college refinanced “its long term debt obligations through
partnerships with DeMotte State Bank [of DeMotte, Indiana] and
[FCMA].” The loan “will be locked in at a fixed interest rate for a 20 year
term.” Reportedly, the bank, with assets of $364 million, merely services the
loan on behalf of FCMA.

Clearly the FCS is not authorized to lend to educational institutions, which
raises the question: How could FCMA make this loan to the
college? According to news reports, the late Juanita Kious Waugh, upon her
death in 2010, bequeathed 7,634 acres of farmland, valued at approximately
$40 million, to St. Joseph’s, which already owned another 800 acres of
farmland. The farmland is leased and actively farmed; in addition, windmills
on the land generate substantial revenue. Presumably this valuable farmland
collateralizes the FCMA loan. But there are two problems with this
arrangement.

First, is St. Joseph’s an eligible FCS borrower? More specifically, to use the
language of the Farm Credit Act, is St. Joseph’s a bona fide farmer, rancher,
or producer or harvester of aquatic products given that the college leases its
farmland to persons who do the actual farming? FCA regulations define a
bona fide farmer as “a person owning agricultural land or engaged in the
production of agricultural products, including aquatic products.” [emphasis
supplied] However, the first portion of the regulation, “a person owning,” goes
beyond a plain reading of the phrase “bona fide” as that phrase is used in the
Farm Credit Act. The dictionary meaning of “bona fide” is genuine or
real. Synonyms include authentic, true, actual, legitimate, and valid. All of
these meanings apply to a person actually engaged in farming – they
certainly do not apply to a person, or a college, who merely owns the
farmland and leases that land to actual farmers. Hence, the FCA regulation
governing who is eligible to borrow from the FCS has a far broader scope
than the statute on which that regulation is based.

Second, even if St. Joseph’s is an eligible FCS borrower, can FCMA establish
a valid first lien on the farmland Ms. Waugh donated to the college given that
the Farm Credit Act requires that FCS real estate loans must be secured by a
first lien on the real estate securing the loan. Ms. Waugh, reportedly a savvy
businesswoman, “worried that the church might one day overturn any
agreement she had with the college and sell her land if it needed
cash.” Therefore, to prevent the sale of the land, “she stipulated in her will
and written agreements with the college that neither the college nor the
church could sell the farmland, going so far as to stipulate in the transfer deed
that the land could be used only for farming and wind-energy production and
never sold.” This restriction raises this crucial question: Can FCMA place a
valid first lien on the farmland given that the college is barred from selling the
land under any circumstance? If not, then is FCMA’s loan to the college a real
estate loan or an unsecured loan, which clearly FCMA cannot make to an educational institution.

In November, I asked the FCA if St. Joseph’s could be considered to be a
“bone fide” farmer as Congress meant that term to be interpreted. I also sent
the FCA information about the FCMA loan, including copies of news articles
reporting that the Waugh farmland cannot be sold. Michael Stokke, the FCA’s
Director of Congressional and Public Affairs, responding to my email, stated
that my inquiry “does not involve a loan for which you are obligated,” which is
how the FCA often blows off complaints about improper FCS
lending. Stokke’s letter then stated that “we assure you that, under our
examination authority, we have reviewed [FCMA’s] relationship with the
College and determined that, in its business dealings with the College,
[FCMA] has complied with our regulations.” Hence, it appears that the FCA is
saying that an FCS institution can make an unsecured loan to an educational
institution that is not actually engaged in farming. Presumably FCA Chairman
Jill Long Thompson, who used to represent a congressional district near
Rensselaer, agrees with Stokke’s response. I also asked a representative of
FCMA about the appropriateness of this loan. To date, FCMA has not
responded, which is not surprising. This is another FCS loan that merits
congressional inquiry.

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Farm Credit Watch: Shedding Light on America’s Least-Known GSE

by Bert Ely

On May 8, I filed a Freedom of Information Act (FOIA) request with the Treasury Department to obtain all documents related to the creation of the $10 billion line-of-credit the Farm Credit System Insurance Corporation (FCSIC) obtained from the Treasury Department’s Federal Financing Bank.

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