Coming hot on the heels of the Farm Credit System (FCS) oversight hearing in the House Committee on Agriculture last December, the Senate Committee on Agriculture, Nutrition and Forestry held its own oversight hearing on May 19. For those interested in viewing the full hearing, a video can be found on the committee’s website. Additionally, the Reform Farm Credit team is pleased to provide a recap of the hearing’s highlights.
On the whole, turnout at the hearing was excellent. Of the eleven senators in attendance, nine posed questions to either the first panel, featuring Farm Credit Administration Chairman Kenneth Spearman, Dallas Tonsager and Jeffrey Hall, members of the FCA Board, or to the second panel, comprising an agricultural producer, two community bankers and Doug Stark, President and CEO of Farm Credit Services of America.
While many of the senators just scratched the surface of the FCA’s lack of oversight, Senator Chuck Grassley’s (R-IA) line of questioning, in particular, revealed just how out of touch the FCA is.
Midway through the hearing, Sen. Grassley asked a simple question:
Sen. Grassley: Has the Farm Credit Administration required an institution to divest a loan that was not appropriate to the mission of the Farm Credit System?
A straightforward question that the FCA had no trouble answering at the hearing in December, the FCA’s answer this time just left out “specifics:”
Jeffrey Hall: Yes sir, it has. There have been instances that the FCA has taken action, corrective action, and has asked an institution to actually divest. We can’t give you specifics, but yes, that has happened, yes sir.
If the FCA really has done its job to prevent FCS’s inappropriate activity, then why has it been unable to provide any examples, especially when asked in a Senate oversight hearing?
Sen. Grassley continued in his questioning, touching on the FCS’s dubious checking account scheme:
Sen. Grassley: By law, Farm Credit lenders cannot take deposits, however many advertise the ability of members to [access] “Advanced Conditional Payment Accounts.” One of these accounts has an online advertisement that as of yesterday a person could:
“Earn interest without tying up your funds”
“Easy Access: your funds are always available to you. Go online and use the phone.” And the last quote –
“Complete liquidity, contrary to CDs”
Those are online advertisements. So could you explain to me how these accounts are any different from checking or savings accounts? These Farm Credit accounts seem to function exactly like checking and savings accounts based on the way that they’re being marketed.
Sen. Grassley is not wrong – Farm Credit associations have been advertising these accounts shamelessly.
The FCA offered a misleading explanation:
Kenneth Spearman: Senator, these accounts are not checking accounts – this particular procedure is allowed for under the Act, and they are actually prepayment or draft accounts, where borrowers from a System (sic) can put funds in to pay their loans down.
This would be a fine answer if it were true, but it isn’t – the Farm Credit Act of 1971 does indeed authorize these accounts under sections 1.5(6) and 2.2(13). But nowhere does the Act authorize the payment of interest. The accounts Spearman is referencing were started so that farmers could maintain an easily accessible line of credit, but now they’ve morphed into functional checking accounts.
Senator Grassley, incredulous, asked:
Sen. Grassley: Then you’re telling me, I think you just told me that they’re not like checking or savings accounts even though the advertisements online seem to lead people to believe that.
Spearman offered no further explanation, except to repeat his previous assertion:
Kenneth Spearman: I’d have to see the advertisement, but no they’re not checking accounts.
If it looks like a checking account and acts like a checking account, then the FCA should consider that it might be a de facto checking account – in which case, it needs to crack down on the offending FCS institution.
After Sen. Grassley concluded his questioning, Senator Klobuchar (D-MN) began hers. From the start, she addressed a key issue: why are FCS institutions making non-agricultural loans?
Sen. Klobuchar: And often, the Farm Credit System and our commercial community banks work together on deals for the benefit of farmers, ranchers and producers, and yet other times Farm Credit banks provide loans that are non ag loans, and I’ve heard from a lot of our small banks in Minnesota that they believe there’s an unfair advantage here because of how that’s being handled. Could you explain what’s happening in your view on this?
This was a reasonable question, and to the FCA’s credit, it was answered directly:
Dallas Tonsager: There’s a couple things to consider I think. First, so when the Farm Credit System is loaning to an individual producer, if that producer is a fulltime farmer, the System can lend to him for all of his credit needs, including if he establishes other businesses. So, we’ve had some cases where farmers may choose to put up another business of some kind, and they are allowed by the statute to use the funds from the Farm Credit System for that purpose.
If a producer is running other businesses then he or she is not a fulltime farmer. And even supposing that buried somewhere in the Farm Credit Act is a clause allowing for the FCS to make loans for all of a member’s credit needs, then policymakers, including Congress and the FCA, should ask: is this in the spirit of the law? Should the Farm Credit System be providing credit for strictly non-agricultural,commercial purposes?
The FCA board was followed by the second panel, featuring community bankers Verlin Barker and Leonard Wolfe, Jed Welder, an agricultural producer, and Doug Stark, President and CEO of Farm Credit Services of America.
The panel, which briefly covered the current credit climate for agricultural producers, concluded with a question from Chairman Roberts (R-KS) that struck to the heart of the discussion:
Chairman Roberts: If, especially the three folks here that are representing our community banks, if there is one piece of legislation that could address your concerns, and that would probably fall to the finance committee – I happen to be on the Finance Committee – but, what would that be? What’s the one thing we could do to make your life easier?
Going down the line, the panelists gave a variety of answers – continued access to crop insurance, repeal of the Dodd-Frank Act and general financial stability were all mentioned. But Leonard Wolfe, a community banker from Marysville, Kansas, brought the discussion back to why the hearing was called in the first place:
Leonard Wolfe: Frankly, in my bank, the biggest threat to me, seriously, is Farm Credit. If we could somehow – Mr. Welder mentioned a fair deal, that’s all he’s looking for – if we could just get to that point. And there’s a real misconception that banks want to eliminate the Farm Credit System – no, that’s not correct, I’m not an advocate of that. We have to coexist. We have to find a way to do that.
Mr. Wolfe put it best – the FCS, a federally chartered instrumentality of the United States government, does not need to be eliminated. But it needs to coexist with private enterprise, and it needs to stay within the bounds of its mandate. And that mandate must comport with the original reason for the creation of the FCS: to support America’s farmers, no matter their age, experience or the size of their operation, by providing them with reliable access to credit.
This is only the beginning – senators on the committee heard the FCA’s responses, and they will demand more answers. Chairman Roberts mentioned that the committee had not held a hearing on the FCS for over ten years. After hearing the FCA’s cavalier responses at this hearing, it’s clear that there needs to be annual hearings to keep the FCS in check. This can happen, but it means that everyone who believes in responsibility and reform for Farm Credit must make their voices heard.