Lone Star ACA, a Farm Credit System (FCS) Association in Texas, Is In a Whole Heap of Trouble.

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Last year it issued a Notification of Non-Reliance on Previously Issued Financial Statements, which is as bad as it sounds. Financial statements from 2016 and the first quarter of 2017 were to be disregarded and no longer relied upon due to, in Lone Star’s words, “appraisal and accounting irregularities.”

FCS institutions are notoriously opaque. But FCS institutions like Lone Star are still, in theory, accountable to their customer-owners, so Lone Star has provided an update in its 2017 annual report. According to Lone Star, the “irregularities” – that is, a loss of $8 million – were the “result of the activities of a former loan officer who breached the Association’s policies and procedures and engaged in improper conduct that included improperly advancing funds without appropriate approvals, offering unauthorized loan terms to borrowers, originating loans to fictitious borrowers, and originating loans and advancing funds based on fabricated documentation.”

These are serious allegations, and if they are true, then the former loan officer likely committed multiple felonies. Farm Credit’s defenders may claim that this is a single incident isolated to one bad actor, but that’s not true – similar incidents have happened at other Farm Credit institutions. Not too long ago, a judge in Connecticut found that Farm Credit East helped a customer “through a process to set up a new LLC in order to get additional funds from the federal government that were not available to [his] business while the estate was being settled…there is serious question as to whether this was appropriate or even legal since it was nothing more than a shell corporation to funnel federal money.”

The allegations alone should give observers pause, but their seriousness is compounded by Farm Credit associations’ status as government-sponsored enterprises (GSEs). GSEs are implicitly-backed by American taxpayers, and operate under the auspices of the federal government. An abuse at a GSE, no matter how small, is an abuse of the public’s trust.

The easiest way to handle bad actors at GSEs like Farm Credit is to make sure that there isn’t an environment for them to flourish. And that means regular, stringent oversight from Farm Credit’s regulator, the Farm Credit Administration (FCA). But yet again, the FCA has been caught asleep at the wheel.

Congress has done the right thing and has signaled that the FCA needs to straighten up and fly right. Both the House and Senate drafts of the Farm Bill include provisions that empower the FCA so that it can crack down on bad actors. The House Farm Bill gives the FCA the authority to issue disciplinary notices or orders to bad actors in the FCS for up to six years following termination of employment. And the Senate Farm Bill prohibits those same bad actors from employment in other sectors of the financial industry.

What more does the FCA need to prevent the “appraisal and accounting irregularities” at Lone Star Ag Credit and Farm Credit East? How could these happen under the FCA’s watch? If the FCA is unable to rein in bad actors, then Congress needs to step in to deal with the problem directly, before more FCS associations lose millions of dollars. Because if too many FCS associations lose millions, then American taxpayers will end up footing the bill.