The Farm Credit System (FCS) and the Farm Credit Administration (FCA), only a month after being exposed at the House Appropriations Agriculture Subcommittee oversight hearing, were called before the House Committee on Agriculture for a “review”. Review is a bit of an understatement; if the FCS and the FCA have any more reviews like this then they’ll suffocate under the weight of the criticism.
This hearing followed the House Appropriations Agriculture Subcommittee’s oversight hearing in February, the Senate Agriculture Committee’s oversight hearing in May 2016 and the House Agriculture Committee’s oversight hearing in December 2015.
On the panel were the FCA Chair, Dallas Tonsager, Jeffrey Hall, the Chair of the Farm Credit System Insurance Corporation (FCSIC), James Dodson, Chair of the Farm Credit Bank of Texas, Doug Stark, President and CEO of Farm Credit Services of America, and Tom Halverson, CEO of CoBank.
Ranking Member Collin Peterson (D-MN) struck the first blow:
“I’m beginning to get calls from constituents who claim they are trying to work with the system lenders, and they feel like, some of them at least, feel like they aren’t getting flexibility on loan terms that they think they should be able to get. Are your institutions permitted to provide flexibility to theses borrowers facing stress? And is there anything that regulators could do assist?”
Stark fielded this question, though his answer was left wanting:
“We are doing a lot to proactively reach out to modify loan terms with customers even before they experience stress. Even going back as far as two years ago, we started meeting with customers to reamortize loan payments to reduce their overall debt burden on a per acre basis to a more manageable level.”
This is a sneaky answer: Stark is suggesting that they have proactively reached out to people to prevent these well-justified complaints from ever occurring. But he doesn’t address the fact that, even after these proactive measures, there are still farmers, ranchers and producers out there that are calling in to Ranking Member Peterson’s office for relief because the FCS isn’t helping them – even when the FCS says that they help “during the good times and the bad.” Perhaps the FCS should retire that phrase if it can’t live up to its promises.
Rep. Frank Lucas (R-OK) took the FCA to task on its stress testing of FCS institutions:
“Under Dodd-Frank, banks are required to do stress testing. Can you explain how the Farm Credit Administration does stress testing of the Farm Credit System, and in particular, how often these tests are done and how the tests compare to those done by commercial banks, that sort of thing?”
To which Chair Tonsager replied:
“The institutions do do stress testing, we examine for stress testing. They’re not the same kind of stress testing as required by Dodd-Frank.”
Anyone, anyone, listening to this should naturally ask: why isn’t the stress testing for the FCS the same as stress testing for banks? The FCS, if it were a bank, would be the seventh largest in the country. Why should it play by different rules?
Rep. Lucas didn’t pull any punches – he was curious about the dubious status of the FCS’s mineral rights holdings.
Rep. Lucas: ““In Oklahoma, we have a state law that says the banks cannot hold real estate for more than five years. Of course, the logic behind that principle is that banks should be lenders and not long-term asset holders. In according 2015 FCA annual report, the Farm Credit System had about $76 million in account for mineral royalties on properties. Could you visit with us for a moment where these mineral rights are owned and how long the assets have been held by the system? And what ultimately is the plan for this?”
Chair Tonsager: “I can’t recall the year, but I think there was a change prior 1985. Institutions could keep those assets permanently, but then the statutes changed. And the newly acquired assets, the mineral rights had to be sold off. And so, primarily those assets held before the change in the statute, continue to be held in many cases. But since that time, it is no longer the case.”
Tonsager’s response addresses the legality of the situation: yes, it is legal for FCS institutions to hold onto those mineral rights. But should they currently? The law was changed to prevent FCS institutions from holding mineral rights in the future – shouldn’t the FCS institutions that still hold mineral rights adhere to the spirit of the law? In these tough times for producers, wouldn’t it be better for a farmer, rancher or producer to reap the income from those mineral rights instead of a large, removed and uncaring financial institution?
Rep. Rick Crawford (R-AR) weighed in, taking issue with the FCS’s questionable “similar entity authority,” which the FCS has abused to make gargantuan loans to large multinational corporations and investor-owned businesses.
Rep. Crawford: “The last time we had a hearing on the Farm Credit System, I asked a few questions about CoBank’s use of similar entity authority to make certain loans. Can you give us a snapshot of how CoBank determines whether or not to make a loan under its similar entity authority? And specifically, do you have any internal practices in place that you use to review this type of lending decision?”
Halverson’s response was thorough – it described the vigorous legal review which CoBank undertakes to make sure that the loan is permissible. But his answer hints at something more going on behind the scenes…
Halverson: “There will be cases, as you can imagine, where it may fit within the letter of the law on the regulation, but there may be facts and circumstances that we think people might criticize. There might be reputation risk associated with it. And those are run through an additional screening process, where we will render a good judgment as to whether we think we are comfortable with the reputational risk before we actually execute it.”
And there you have it. CoBank understands that some of their loans, while adhering to the strict wording of the law, do not follow the spirit of the law. Perhaps CoBank would not have to face criticism and would not have had to construct an additional review process if it simply loaned to those the Farm Credit Act was passed to help – young, beginning and small farmers, and not a publicly-traded database REIT, a publicly-traded forestry REIT and large telecoms like Frontier Communications and Lumos Networks.
From then on, “similar entity authority” was the phrase of the day. Rep. Bob Gibbs (R-OH) began a stream of questioning with revealing, and shocking, answers:
Rep. Gibbs: “Has there been some overturned or forced dissociation or divestment from those loans? What’s the record, I guess?”
Chair Tonsager: “I think we have had six instances in the last several years out of many hundreds that we’ve felt went outside the perimeter of the statute. And I can’t recall if those were found by our examiners or individual institutions. It seems to me there has been a case at least where that has occurred.”
Rep. Gibbs: “So most of the time its examiners, the banking examiners come in and raise a red flag. And they’d say there is the possibility this is out of your scope?”
Chair Tonsager: “Right. That it may not be in scope of the program.”
Rep. Gibbs: “Like I said, I’ve got a lot of my community banks that aren’t happy and I’m trying to sort through all this.”
Chair Tonsager: “I would remind that the…every similar entity loan must be initiated by a bank and the System buys into those loans as a participation. And banks have to hold half or greater than the total loan.”
This was a line of questioning which revealed much, despite an absence of sparks flying.
First, Chair Tonsager believes that there have only been six instances of inappropriate loans in the last several years. It may be true that there have only been six instances which the FCA has investigated, but there are dozens more which should have been investigated and divested, including:
This is only a small snapshot of inappropriate loans the FCA has not required the FCS to divest. What exactly does that say about the FCA’s efficacy as a regulator? Is it actually regulating?
Second, Chair Tonsager laid down an important requirement: “every similar entity loan must be initiated by a bank and the System buys into those loans as a participation. And banks have to hold half or greater than the total loan.”
If Chair Tonsager is correct, and he is, then why has the FCA not yet acted to quash CoBank’s new $320 million loan to a Hawaiian telecom? CoBank is funding 100 percent of a $230 million sub-loan under this arrangement – far more than half of the total loan. This is a loan that should be examined – will the FCA stick to its word and actually exercise its regulatory authority? And if Chair Tonsager had been aware of the loan, then what would have compelled him to perjure himself before the committee?
And to soften the blow of his poor answer, Chair Tonsager added that “the overall amount in that category [similar entity loans] is seven percent at this time.” Hardly exculpatory, given that seven percent of the FCS’s gross total loan volume is only $15.4 billion. $15.4 billion is a huge sum, and it’s all too easy to forget that when attempting to regulate a $320 billion government-sponsored enterprise.
Chairman Mike Conaway (R-TX) clearly saw that something was amiss in Chair Tonsager’s answers, and he called for clarification:
Chairman Conaway: “Just to clarify, the divestitures of loans that were directly made by the institution, these…participations.”
Chair Tonsager: “Yes, these are participations.”
Chairman Conaway: “So you asked them to divest from a participation. Have there been circumstances where a bank or an institution has made a direct loan themselves, originated a loan, that you saw was outside the scope and you made them divest from that?
Chair Tonsager: “Yes. We’ve had direct loans… A few, it’s been a very few. Since my time back at the agency, it’s been one or two.”
Chairman Conaway: “Okay. We’re going to want some information in respect to the record on that. Because that’s really where the issue is.”
Beside the point of whether the divestments were of loans made directly by the institutions, Chair Tonsager’s responses are not confident and don’t exactly befit his status as the regulator of the FCS. If there were only one or two instances in which divestment was necessary, surely he’d remember the circumstances of the loans, right? Which association made the loan, to whom, what the amount was, what it was for – all of this information falls by the wayside. And it slips from the memory of the very person who should be remembering these sorts of details. So the question comes about: if the FCA isn’t regulating as effectively as it should, then what’s the problem? What exactly is gumming up the works?
Rep. Tim Walz (D-MN), echoing his colleague Ranking Member Peterson, posed a question that goes to show that the FCA’s under-regulation has immediate effects at ground level:
“How do I respond to my constituents when they talk about that you have an unfair tax advantage? How do you respond to that?”
Stark responded with a seemingly levelheaded response:
“You know, Mr. Walz, I would say when you look at the bottom line how it washes out, it is really born out of a marketshare. A hundred years of the farm credit system has been in existence. They have 40 percent market share we have 40 percent market share.”
Despite the fact that this doesn’t answer the question at all, and that Stark’s answer is a dodge worthy of Muhammad Ali, it only tells half of the story. According to the Kansas City Federal Reserve, farm banks and the FCS have approximately 40 percent of the total market. But the FCS provides nearly 55 percent of real estate loans, while farm banks provide nearly 61 percent of production loans. This is a small point, but still significant – if a farmer, rancher or producer is over-extended, and needs to miss a payment on one loan or the other, which would they likely choose? Most will likely value their property and the land which grows the products over the products themselves. And that means that the FCS reaps historic profits while farm banks are left holding an empty bucket. To reduce the issue purely to total market share is absurd, but Stark played it off well – at the expense of producers across the country.
If there was any common thread in this oversight hearing, it was that the FCS and their feckless regulator the FCA could spin a tale and weave a tapestry – two-dimensional, simple and lacking any sort of nuance.
America’s farmers, ranchers and producers deserve better. They deserve a robust credit system that is responsive to the needs of its customers, not one that only seeks to maintain the status quo. Congress has now seen writ-large the FCS’s complacency and its regulator’s inefficacy. Now is the time to act. Now is the time to reform Farm Credit.