The details are everything. One gritty detail, often overlooked, is that Farm Credit is allowed to have in-house appraisers – just one of its many advantages over small, rural farm banks, and an Achilles heel that could threaten its stability. The case of LoneStar ACA, a Farm Credit association in Texas, is especially illustrative. It issued a Notification of Non-Reliance on Previously Issued Financial Statements last month, which made clear that: “As of and for the year ended December 31, 2016, as well as the three months ended March 31, 2017, should no longer be relied upon.” The Notice continues, “During the second quarter of 2017, Association management discovered appraisal and accounting irregularities affecting a segment of the Association’s lending portfolio. [emphasis added]”
This disconcerting news might have come as a shock to those outside of the agricultural world, but it’s no shock to any Farm Credit System (FCS) or rural community farm bank customer. LoneStar ACA has a robust appraisal program, and just like any other FCS association, it has a huge advantage over rural community farm banks when it comes to the appraisal process.
The Dodd-Frank Act of 2010 set certain standards for banks – including small farm banks – on their relationships with appraisers. The act is unequivocal: ‘‘Acts or practices that violate appraisal independence shall include… any appraisal of a property offered as security for repayment of the consumer credit transaction that is conducted in connection with such transaction in which a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates a person, appraisal management company, firm, or other entity conducting or involved in an appraisal, or attempts, to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate such a person, for the purpose of causing the appraised value assigned, under the appraisal, to the property to be based on any factor other than the independent judgment of the appraiser; [emphasis added]”
Under this section of the act, it’s clear that a bank cannot employ an appraiser in-house. Fortunately for Farm Credit, it’s not subject to Dodd-Frank, so it is allowed to employ an appraiser in-house. And with that comes immense financial benefit for each FCS association, as well as the opportunity for corruption to fester. The financial benefits are immense. With an in-house appraiser, FCS institutions have a single sunk cost – the appraiser’s salary and benefits. FCS institutions can do as many appraisals as possible and have a streamlined process to boot.
For banks, the issue is far more complicated. If a farm bank needs to conduct an appraisal for one of its customers, it has to find and negotiate with an independent appraiser, who can charge fees which the farm bank must either put on its balance sheets or pass on to the customer. And if the farm bank needs to pass along the charge to the customer, then the customer will most likely take the cheaper option and work with an FCS institution.
This is just one example of how an uneven playing field benefits Farm Credit to the detriment of its competitors and its customers. But the uneven playing field doesn’t just benefit Farm Credit – it also puts it at risk! Congress enacted the Dodd-Frank appraisal independence rules for a reason – appraisers subject to a vested interest like Farm Credit are more likely to be coerced or corrupted, resulting in “appraisal and accounting irregularities.” Sound familiar? Though the source of LoneStar’s appraisal irregularities is unclear, it is instructive that there are appraisal irregularities and that LoneStar, and all FCS institutions, are not subject to the same laws and regulations put into place to protect the financial system.
The details are everything. A small section of a huge law could have prevented LoneStar’s current troubles – if only Farm Credit were competing on a level playing field. America’s farmers rely on stability, and that requires prudent regulation applied equally to all financial institutions. Let your member of Congress know: the FCS should be subject to the same laws and regulations that other similar financial institutions are subject to. Fair competition – and the FCS’ own stability – is at stake.