Check the Record – If it looks like a loan and acts like a loan, it’s a loan

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Note: This is the fourth in a series examining the Farm Credit Administration’s (FCA) responses to questions submitted for the record by members of the House Committee on Agriculture following its oversight hearing of the Farm Credit System (FCS) in December 2015.

At every twist and turn, the Farm Credit Administration (FCA) and the Farm Credit System (FCS) bend the rules and subvert the spirit of the law so that the FCS can chase a quick buck instead of fulfilling its mission “to provide American agriculture with a dependable source of credit.” This time, the FCA is trying to justify the FCS’ issuing loans to non-eligible entities by branding loans as “investments.”

What does the FCA think the difference between a loan and an investment is?

Chairman Conaway (R-TX) of the House Committee on Agriculture entered this question into the record of the House Committee on Agriculture’s hearing on the FCS in December 2015:

Chairman Conaway: As I understand it, a key question relating to the investments issue is whether the financing is labeled as a loan or as an “investment.” Can you explain the distinctions between loans and investments?

FCA: We review each investment request on a case-by-case basis and evaluate the underlying characteristics of the investment to determine whether the requested investment would be considered an investment from legal, accounting, and market recognition perspectives. In making this determination, we analyze applicable case law, Federal securities laws, accounting guidance, and knowledge of market norms regarding investment products versus loan products.

The FCA’s answer, though thorough, doesn’t answer the question: what is the distinction between a loan and an investment? The FCA’s explanation states that it considers case law, securities law, accounting guidance and market norms for its determination, but ultimately the decision comes down to whether the FCA wants the investment (read: loan) to stand.

And the FCA has the authority to do this – it granted itself that power under §615.5140(e). Under this regulation, according to the FCA’s testimony, it has authorized “investments” from FCS banks or institutions in at least three instances.

The first “investment” was for a hospital. To be fair, providing investments or loans to a hospital is a good cause, but should that be performed by the Farm Credit System? Without a doubt there are plenty of financial institutions or government agencies that are legally authorized to carry this out.

The second “investment” was for an agribusiness “to expand a grain milling company in rural Indiana.” The FCA notes that “While this financing was completed through the association’s investment authority, the borrowing entity is eligible to obtain loans from the association, and grain milling is an activity that the System can finance under its statutory lending authorities.” If that’s the case, then why is the FCS association structuring this financing as an investment instead of a loan? More explanation on this point would help to dismiss the notion that this was structured as an investment in order to bypass either the Farm Credit Act or another FCA regulation.

The third “investment” was for an FCS institution to purchase rural housing mortgage-backed securities.

You read that correctly.

The FCA approved an FCS institution’s purchase of the same type of security that led to Fannie Mae and Freddie Mac, government-sponsored enterprises (GSE) like the FCS, receiving a huge bailout and ultimately being placed under federal conservatorship.

This regulation allows the FCA and the FCS to skirt around the spirit of the Farm Credit Act and should be revoked. For the sake of financial stability, Congress needs to increase its oversight so that the FCA doesn’t continue to allow FCS institutions to make the same mistakes that led to the Fannie and Freddie bailouts. Taxpayers can’t afford another disastrous GSE bailout – remember: take care of the pennies now and the dollars will take care of themselves.



Photo Courtesy of Matt Wiebe