Is FCA Finally on the Right Track with Oversight?

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On October 2, the Farm Credit Administration (FCA), the Farm Credit System’s regulator (FCS), publicly posted a memorandum outlining its National Oversight Program (NOP).

Longtime readers of Reform Farm Credit would expect this memo to simply be a blank sheet of paper. The FCA has an abysmal record for oversight, allowing Farm Credit to flagrantly violate the spirit of the Farm Credit Act by allowing it to lend to large telecoms, public companies building “server farms” and consumers in the market for luxury housing.

But counter to expectations, it outlines a surprisingly coherent approach to oversight for the next fiscal year. Drafted by the Director of the Office for Examination, the memo calls for the FCA to be aware of the precarious commodities market that may contribute to System instability.

And just as important, the memo recognizes that some Farm Credit institutions have let too much slip through the cracks. It acknowledges that “FCA and the System have noted a limited, but increased incidence of internal control weaknesses that led to credit losses, increased operating expenses, and increased reputation risk. Many of the conditions underlying these events are directly related to inadequate internal controls. In other cases, strong controls existed, but individuals were still able to circumvent controls.”

“Internal control weaknesses?” “Increased reputation risk?” These euphemistic turns of phrase are grating, but at least it acknowledges that there is a problem with internal controls, and that this problem has a direct impact: potentially illegal activity undertaken by Farm Credit East in creating shell entities for one of its clients, and the “irregularities” in Lone Star Ag Credit’s accounting, to name just two.

It’s refreshing to see someone in the FCA actually push it to do its job, even if for selfish reasons (“reputation risk”). But what sort of solution does the NOP offer?

“We support System efforts to strengthen controls and encourage every institution to dedicate staff and audit resources to ensure a strong internal controls environment — starting with the board of directors to provide the proper ‘tone at the top.’”

Good! The right tone needs to be established at the top – one that emphasizes service for its own sake, and one that puts farmers, ranchers and producers first and foremost. Although Farm Credit institutions probably don’t care for this proposed approach (the House version of the Farm Bill would have repealed a limit on compensation for FCS board directors), it’s important to see that it has even been suggested.

The FCA board has not yet approved this plan. If it does, then it will have taken its first step toward becoming an actual oversight agency, rather than a captured one. And if it doesn’t – well, business as usual will continue with Farm Credit. And America’s farmers, ranchers and producers can’t and shouldn’t tolerate business as usual.