The Farm Credit Administration (FCA), the regulator of the Farm Credit System (FCS), has announced that it will be rolling out new regulations through 2019 to address pressing issues, including reducing regulatory burden and instituting new criteria for restoring problem loans. Among these many proposed regulations is one on appraisals.
This proposed regulation “would consider whether changes in appraisal regulations are necessary in light of changing and economic conditions.” Times are tough, economic conditions may not be stable, and it may be necessary – for a number of reasons – for the FCA to change its appraisal regulations. Let’s hope it uses this opportunity to fix a glaring, structural problem with Farm Credit.
A short primer on appraisals: when a customer wants to purchase a property, the financial institution working with the customer will hire an appraiser to determine the property’s value. If that financial institution wants to issue a mortgage to the customer for that property, it will use the value determined by the appraiser for that purpose.
Financial institutions subject to the Dodd-Frank Act – major financial legislation – must either contract with an independent appraiser, or must have appropriate firewalls in order to prevent conflicts of interest. Otherwise, an appraiser who has substantial ties to the financial institution could be put into a situation where their livelihood depends on their providing an appraisal that is favorable to the financial institution.
The FCS doesn’t have to follow this policy at all. In fact, the FCS holds fast to its current system of using in-house appraisers – appraisers that are employees of the Farm Credit institutions for which they appraise properties – without appropriate firewalls. Unlike other financial institutions, Farm Credit institutions do not have to contract with an independent appraiser, or even have the same firewalls other financial institutions have to have in place.
And that creates a slew of conflicts of interest: Farm Credit’s appraisers may face pressure to change their appraisals so that it positively affects the Farm Credit institution’s bottom line. And that isn’t just likelihood, it’s reality – LoneStar ACA, a Farm Credit association in Texas, is still undergoing an audit for its “appraisal and accounting irregularities affecting a segment of the Association’s lending portfolio.”
Reform Farm Credit has explained the FCS’s appraisal problem before, looking at the details of which laws must be changed and how. This new regulation, however, is a strong opportunity for policymakers to make headway on a problem that could be a spark in the FCS’s haystack. Policymakers – including farmers, ranchers, producers and anyone else reliant on credit for agriculture – need to voice their concerns about FCS appraisers’ conflicts of interest and the need for independence and transparency. The FCS will be held accountable, even if the FCA needs a push.