[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]
HEARING TO REVIEW THE FARM CREDIT SYSTEM
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON AGRICULTURE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
DECEMBER 2, 2015
__________
Serial No. 114-35
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Agriculture
agriculture.house.gov
______
U.S. GOVERNMENT PUBLISHING OFFICE
98-358 PDF WASHINGTON : 2016
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Publishing
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800;
DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC,
Washington, DC 20402-0001
COMMITTEE ON AGRICULTURE
K. MICHAEL CONAWAY, Texas, Chairman
RANDY NEUGEBAUER, Texas, COLLIN C. PETERSON, Minnesota,
Vice Chairman Ranking Minority Member
BOB GOODLATTE, Virginia DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma JIM COSTA, California
STEVE KING, Iowa TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan SEAN PATRICK MALONEY, New York
JEFF DENHAM, California ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California PETE AGUILAR, California
RODNEY DAVIS, Illinois STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington
TRENT KELLY, Mississippi
______
Scott C. Graves, Staff Director
Robert L. Larew, Minority Staff Director
(ii)
C O N T E N T S
----------
Page
Conaway, Hon. K. Michael, a Representative in Congress from
Texas, opening statement....................................... 1
Prepared statement........................................... 3
Peterson, Hon. Collin C., a Representative in Congress from
Minnesota, opening statement................................... 3
Scott, Hon. Austin, a Representative in Congress from Georgia,
submitted letter............................................... 49
Scott, Hon. David, a Representative in Congress from Georgia,
submitted letter............................................... 49
Witness
Spearman, Hon. Kenneth A., Chairman of the Board and Chief
Executive Officer, Farm Credit Administration, McLean, VA;
accompanied by S. Robert Coleman, Director, Office of
Examination, FCA; Hon. Charles R. Rawls, J.D., General Counsel,
FCA............................................................ 4
Prepared statement........................................... 5
Submitted questions.......................................... 57
Submitted Material
Auer, Kenneth E., President and Chief Executive Officer, Farm
Credit Council, submitted letter............................... 49
Independent Community Bankers of America, submitted statement.... 55
HEARING TO REVIEW THE FARM CREDIT SYSTEM
----------
WEDNESDAY, DECEMBER 2, 2015
House of Representatives,
Committee on Agriculture,
Washington, D.C.
The Committee met, pursuant to call, at 10:00 a.m., in Room
1300, Longworth House Office Building, Hon. K. Michael Conaway
[Chairman of the Committee] presiding.
Members present: Representatives Conaway, Goodlatte, Lucas,
King, Thompson, Gibbs, Austin Scott of Georgia, Crawford,
DesJarlais, Hartzler, Benishek, LaMalfa, Davis, Yoho, Walorski,
Bost, Rouzer, Abraham, Moolenaar, Newhouse, Kelly, Peterson,
David Scott of Georgia, Costa, Walz, Fudge, McGovern, DelBene,
Vela, Lujan Grisham, Kuster, Nolan, Kirkpatrick, Aguilar,
Plaskett, Adams, Graham, and Ashford.
Staff present: Caleb Crosswhite, Jessica Carter, Josh
Maxwell, Matt Schertz, Scott C. Graves, Stephanie Addison, John
Konya, Anne Simmons, Lisa Shelton, Liz Friedlander, Matthew
Mackenzie, Robert L. Larew, Nicole Scott, and Carly Reedholm.
OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE
IN CONGRESS FROM TEXAS
The Chairman. Good morning, everyone. We will call the
hearing to order. I will ask Rick Crawford to open us with a
prayer.
Rick?
Mr. Crawford. Thank you, Mr. Chairman.
Father, I bow humbly before you, thankful for every
blessing of life, Lord, and thankful for this country that You
have blessed us with. Father, I would just ask that You be with
each Member here and be with our nation. And I would ask that
You give each Member a spirit of discernment today, Lord, that
all that we say and do will be pleasing to You.
I ask it in Jesus' name. Amen.
The Chairman. Thank you, Rick. Well, good morning. This
hearing of the Committee on Agriculture to review the Farm
Credit System, will come to order.
Providing credit to America's farmers and ranchers is a
necessary and serious challenge for many lenders in the United
States. After a recent period of record highs, crop prices have
declined due to record plantings and strong production. Input
costs have risen. And some of our biggest foreign competitors
are sharply increasing their subsidies, tariffs, and non-tariff
barriers to trade.
Meanwhile, farmland values are on a downward trend. And
while livestock producers are rebounding on the balance sheet
with lower feed costs, our western producers are still
struggling with consecutive years of drought.
Unfortunately, the U.S. Government has added to the
challenges faced by America's farmers and ranchers. The EPA
continues to push for new and costly regulations. And then
there are those issues standing in the way of critical tax
relief, ranging from a permanent section 179 and bonus
depreciation to repeal of the death tax. It is times like these
that our farmers and ranchers are most in need of reliable
sources of credit at competitive rates. I am thankful we have a
network of commercial and community banks, USDA loan programs,
and a Farm Credit System, that each plays a critical role in
providing that access.
The importance of the Farm Credit System is largely unknown
to those outside the agricultural community, often leaving it
prone to political attacks. So I am thankful that we have an
opportunity today to highlight the System and its century-long
mission of providing credit to agriculture and rural America
during the good times and the bad, as well as the Farm Credit
Administration in ensuring the soundness of the System and its
lending practices.
While Congress has generally outlined the authority by
which the Farm Credit System may fulfill its ultimate mission
of ensuring a dependable source of credit for agricultural and
rural America, I realize that authority is not necessarily
delineated with bright line rules. Therefore, we largely rely
on FCA as the regulator to ensure that the System banks are
doing their part to stay within the bounds of the Farm Credit
Act. In that vein, there has been much scrutiny of System bank
financing deals with major telecommunication networks that I am
sure a number of our colleagues will be eager to discuss again
today. I look forward to a healthy discussion of similar-entity
lending authority that provides greater clarity for all
involved.
On the whole, I believe that the Farm Credit System is
fundamentally safe and sound and in a position to weather the
challenges that it is likely to face in the times ahead.
Together with commercial banks, community banks, and the Farm
Service Agency, the Farm Credit System will continue to play a
crucial role in maintaining the success of the American
agriculture.
Today, we will hear from the Farm Credit Administration,
the regulator of the Farm Credit System. Before we begin, I
would like to thank our witness, Ken Spearman, for being here
today. Mr. Spearman has had a recent medical procedure. And
that is the reason why he is wearing his chapeau this morning.
He is not being disrespectful but saving us from whatever is
going on under there. So we will get that off the table right
now. We are happy to hear he is recovering well.
And I appreciate you making the time to be here this
morning. And is it Maria? Your wife is also here backing him
up. So I appreciate that.
[The prepared statement of Mr. Conaway follows:]
Prepared Statement of Hon. K. Michael Conaway, a Representative in
Congress from Texas
Good morning, and welcome to today's hearing.
Providing credit to America's farmers and ranchers is a necessary
and serious challenge for many lenders in the United States. After a
recent period of historic highs, crop prices have declined due to
record plantings and strong production, input costs have risen, and
some of our biggest foreign competitors are sharply increasing their
subsidies, tariffs, and non-tariff barriers to trade.
Meanwhile, farmland values are on a downward trend, and while
livestock producers are rebounding on the balance sheet with lower feed
costs, our western producers are struggling with consecutive years of
drought.
Unfortunately, the U.S. Government has added to the challenges
faced by America's farmers and ranchers. The EPA continues to push for
new and costly regulations, and then there are those standing in the
way of critical tax relief, ranging from a permanent section 179 and
bonus depreciation to repeal of the death tax.
It is in trying times like these that our farmers and ranchers are
most in need of reliable sources of credit at competitive rates.
Thankfully we have a network of commercial and community banks, USDA
loan programs, and the Farm Credit System that each play a crucial role
in providing that access.
The importance of the Farm Credit System is largely unknown to
those outside the agricultural community, often leaving it prone to
political attacks. So I am thankful that we have an opportunity today
to highlight the System and its century-long mission of providing
credit to agriculture and rural America during the good times and the
bad, as well the role of the Farm Credit Administration in ensuring the
soundness of the System and its lending practices.
While Congress has generally outlined the authority by which the
Farm Credit System may fulfill its ultimate mission of ensuring a
dependable source of credit for agriculture and rural America, I
realize that authority is not necessarily delineated with bright line
rules. Therefore we largely rely on FCA as the regulator to ensure that
System banks are doing their part to stay within the bounds of the Farm
Credit Act.
In that vein, there has been much scrutiny of System bank financing
deals with major telecommunications networks. I am sure a number of my
colleagues will be eager to discuss that topic again today, and I look
forward to a healthy discussion of ``similar-entity lending authority''
that provides greater clarity for all involved.
On the whole, I believe that the Farm Credit System is
fundamentally safe and sound and in a position to weather the
challenges that it is likely to face in the times ahead. Together with
the commercial banks, community banks, and the Farm Service Agency, the
Farm Credit System will continue to play a crucial role in maintaining
the success story of American agriculture.
The Chairman. With that, I will turn to our Ranking Member
for any comments that he would like to make.
OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE
IN CONGRESS FROM MINNESOTA
Mr. Peterson. Thank you, Mr. Chairman.
And good morning, everybody.
I would like to welcome today's witness, as well as, Mr.
Coleman and Mr. Rawls.
The topic of today's hearing is very timely given what is
happening across the countryside right now. Commodity prices
have fallen and will likely continue to fall. And land values,
for some reason, continue to increase. This has a lot of
farmers asking if they will have access to the financing they
need for the next planting season. Access to credit is one of
the most important tools that we can provide to our farmers and
ranchers. And the farm bill's commodity programs work hand in
hand with crop insurance to provide a safety net to ensure
continued access to credit. Having a crop insurance policy in
place gives lenders the certainty to know that farmers will
make good on their commitment and pay back their loans even
during difficult times. So I appreciate the opportunity to have
this hearing today.
And I yield back the balance of my time.
The Chairman. Thank you, Collin.
The chair would request that other Members submit their
opening statements for the record so that our witness may begin
his testimony to ensure there is ample time for questions. I
would like to welcome to our witness table today, Mr. Ken
Spearman, Chairman of the Board and CEO of the Farm Credit
Administration, from McLean, Virginia. He is joined this
morning by Robert Coleman, who is the Director of the Office of
Examination, Farm Credit Administration, and Mr. Charles Rawls,
the General Counsel for the Farm Credit Administration. And his
other two Commissioners are in the audience as well. And I have
it on good authority they are not in violation of any kind of
Open Meetings Act by having all of them in one room.
This is not the first time the FCA has been here. We have
had conversations with them at the Committee at least every
term since I have been here. And it is good to have the
Chairman here to talk to us directly about a variety of things.
So, Mr. Spearman, the 5 minutes is yours. And then we will
get to our questions.
STATEMENT OF HON. KENNETH A. SPEARMAN, CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION,
McLEAN, VA; ACCOMPANIED BY S.
ROBERT COLEMAN, DIRECTOR, OFFICE OF EXAMINATION, FCA; HON.
CHARLES R. RAWLS, J.D., GENERAL COUNSEL, FCA
Mr. Spearman. Thank you, Mr. Chairman and Ranking Member
Peterson.
Chairman Conaway, Ranking Member Peterson, and Members of
the Committee, it is a privilege to appear before you to report
on the mission of the Farm Credit Administration. I have a
written statement to submit for the record.
President Obama appointed me to the FCA Board on October
13, 2009. On March 13 of this year, the President designated me
FCA Chairman and CEO. I have the pleasure of serving on the
board with two distinguished colleagues, Dallas Tonsager and
Jeff Hall, who are here today.
FCA is an independent Federal agency that regulates and
examines the banks, associations, and related entities of the
Farm Credit System, including the Federal Agriculture Mortgage
Corporation or Farmer Mac. Our responsibility is to ensure that
the System meets its Congressional mission to provide a
dependable source of credit for agriculture and rural America.
FCA was created by an Executive Order of President Franklin
Roosevelt in 1933. During the agriculture credit crisis of the
1980s, this Committee restructured the FCA, giving it
regulatory and enforcement powers similar to those of other
Federal financial regulators. FCA is not an appropriated
agency. We are funded primarily through assessments paid by
System institutions.
The Farm Credit System, which was established in 1916, is
the nation's oldest government-sponsored enterprise. It is a
nationwide network of borrower-owned cooperative financial
institutions and affiliated service organizations. Currently,
the System includes four banks and 75 direct-lending
associations. The banks provide loan funds to the associations,
which in turn provide operating loans and long-term real estate
loans to farmers, ranchers, and other eligible borrowers. One
of the System banks also has authority to lend to agriculture
cooperatives and to rural utilities.
Farm Credit banks and associations cannot take deposits.
The System obtains loan funds by selling securities on the
national and international money markets. The securities are
not guaranteed by the Federal Government. The System is the
only GSE that makes loans at the retail level. It was
established to provide a dependable source of competitive
credit to farmers, ranchers, and farm cooperatives. The System
was not established to be the lender of last resort. Its
mission is to serve American agriculture in good times and bad.
By providing competitive credit, the System has helped our
farmers provide abundant, affordable food and fiber to people
at home and around the world. I am pleased to report that the
System's banks and associations are fundamentally safe and
sound. They are well capitalized, with solid earnings and
strong credit quality. Farmer Mac, and the System, is well-
positioned to meet this challenge.
And FCA is taking steps to make sure the System remains
safe and sound. We are updating capital rules, emphasizing
internal controls, and monitoring emerging risks. We are also
emphasizing mission fundamentals. The System must serve all
eligible creditworthy potential borrowers regardless of race or
gender, and regardless of the size of the producer's operations
or the commodities they produce. In addition to serving large
production operations, we want to make sure the System
institutions serve small operations that produce organic and
value-added foods for local markets.
As you know, the farm economy is cyclical. That is why
Congress long ago created a safety net to help farmers survive
downturns in the agricultural economy. In a recent hearing,
Chairman Conaway noted that agriculture is the backbone of the
economy. He said: ``America has been able to not only survive
but thrive because our agricultural safety net helps farmers
weather the bad times.'' I cannot agree more. And the Farm
Credit System is an important part of that safety net.
Thank you, and I would be happy to answer your questions.
[The prepared statement of Mr. Spearman follows:]
Prepared Statement of Hon. Kenneth A. Spearman, Chairman of the Board
and Chief Executive Officer, Farm Credit Administration, McLean, VA
Introduction
Chairman Conaway, Ranking Member Peterson, and Members of the
Committee, I am Kenneth A. Spearman, Farm Credit Administration (FCA)
Board Chairman and Chief Executive Officer. On behalf of my colleagues
on the FCA Board, Dallas P. Tonsager of South Dakota, Jeffery S. Hall
of Kentucky, and all the dedicated men and women of the agency, it is a
privilege to appear before you today.
FCA is an independent agency responsible for examining and
regulating the banks, associations, and related entities of the Farm
Credit System (FCS or System), including the Federal Agricultural
Mortgage Corporation (Farmer Mac). The banks and associations of the
FCS form a nationwide network of borrower-owned financial institutions
that provide competitive credit to all creditworthy farmers, ranchers,
and other eligible borrowers.
FCA Mission
As directed by Congress, FCA's mission is to ensure a safe, sound,
and dependable source of credit and related services for agriculture
and rural America. We accomplish this mission in two important ways.
First, we protect the safety and soundness of the FCS by examining
and supervising all FCS institutions, including Farmer Mac, and we
ensure that they comply with applicable laws and regulations. Our
examinations and oversight strategies focus on an institution's
financial condition and any material existing or potential risk, as
well as on the ability of its board and management to direct its
operations. We also evaluate each institution's compliance with laws
and regulations to ensure that it serves all eligible borrowers,
including young, beginning, and small farmers and ranchers. If a System
institution violates a law or regulation or operates in an unsafe or
unsound manner, we use our supervisory and enforcement authorities to
take appropriate corrective action.
Second, we develop policies and regulations that govern how System
institutions conduct their business and interact with customers. Our
policies and regulations protect System safety and soundness; implement
the Farm Credit Act; provide minimum requirements for lending, related
services, investments, capital, and mission; and ensure adequate
financial disclosure and governance. We approve the corporate charter
changes of System institutions, System debt issuance, and other
financial and operational matters.
Through the oversight and leadership of the House and Senate
Agriculture Committees, many important reforms were made to the Farm
Credit Administration and the FCS as a result of the agricultural
credit crisis of the 1980s. This included restructuring FCA as an
independent arm's-length regulator with formal enforcement powers,
providing borrower rights to System borrowers with distressed loans,
and establishing the Farm Credit System Insurance Fund (Insurance Fund)
to protect System investors.
Since then, the Farm Credit System has restored its financial
health and the public trust. Using our authority as an arm's-length
regulator, we have contributed to the System's success by ensuring that
System institutions adhered to safety and soundness standards. The
Insurance Fund also helped by restoring investor confidence.
Both the System and FCA learned much during the crisis of the
1980s, and those lessons helped build a much stronger Farm Credit
System, as well as a stronger regulator. We will continue to focus on
ensuring that the System remains safe and sound by promulgating
regulations, providing appropriate guidance, and maintaining strong and
proactive examination and supervisory programs. With the dynamics and
risks in the agricultural and financial sectors today, we recognize
that FCS institutions must have the appropriate culture, governance,
policies, procedures, and management controls to effectively identify
and manage risks. Today the System is a dependable provider of credit
to agriculture and rural America as intended by Congress.
Farm Credit System Mission
The FCS is a government-sponsored enterprise (GSE) created by
Congress in 1916 to provide American agriculture with a dependable
source of credit. The System's banks and associations form a nationwide
network of cooperatively organized lending institutions that are owned
and controlled by their borrowers, serving all 50 states and the
Commonwealth of Puerto Rico.
The System provides credit and other services to agricultural
producers, aquatic producers or harvesters and farmer-owned
agricultural and aquatic cooperatives. It also makes loans for
agricultural processing and marketing activities, rural housing, farm-
related businesses, rural utilities, and foreign and domestic companies
involved in international agricultural trade. In addition, the System
provides funding and discounting services to certain ``other financing
institutions'' and forms partnerships with commercial banks to provide
credit to agriculture and rural America through participations and
syndications.
As required by law, System borrowers own stock or participation
certificates in System institutions. The FCS had nearly one million
loans and approximately 500,000 stockholders in 2014. Approximately 85
percent of the stockholders were farmers or cooperatives with voting
stock. The remaining 15 percent were nonvoting stockholders, including
rural homeowners and other financing institutions that borrow from the
System. The U.S. Department of Agriculture's latest data show that the
System's market share of farm debt was 39 percent, compared with 41
percent held by commercial banks.
One of FCA's oversight roles is to ensure that the System, with its
mission devoted to agriculture and rural America, maintains its
presence in the agricultural marketplace to provide competitive and
dependable credit for all eligible and creditworthy farmers, ranchers,
aquatic producers or harvesters and agricultural cooperatives. In fact,
the System has maintained its mission service during the difficult
markets of the past years to help producers and rural America. When
commodity prices soared in early 2008, System institutions stepped
forward to meet the critical financing needs of the grain elevator
industry. They met increased demands for financing machinery and higher
input costs for producers. The FCS also helped Midwest borrowers
affected by floods and worked with livestock producers, especially
dairy and hog producers, as they made difficult decisions during
stressful market conditions. Overall the System continued to have
access to funds and was able to increase its lending to agriculture and
rural America during a financial crisis and severe recession.
Condition of the FCS
The FCS remains fundamentally safe and sound and is well positioned
to withstand the challenges facing U.S. agriculture during the current
cyclical downturn. The depth and duration of market weakness is
unknown, which will continue to present challenges for the System until
markets rebound.
The U.S. Department of Agriculture is forecasting lower net cash
income in 2015 for the second consecutive year as receipts for crops
and livestock decline in tandem. Continued weak farm prices stem
primarily from large U.S. and global crop supplies and expanding
livestock production. Average prices received by farmers for corn and
soybean have dropped sharply from records posted in 2012 and remain
near or below levels last received in 2007.
As a consequence of lower prices, margins for many crop producers
in 2015 remain low or negative for the third consecutive year. For
livestock producers, lower crop prices translate into lower feed costs,
but profitability has been adversely affected by lower protein product
prices, particularly for the hog, dairy, and broiler sectors. Lower
grain prices have also resulted in softening in some farmland markets,
specifically in the Midwest.
While the current credit stress level in the System's loan
portfolio is well within its risk-bearing capacity, asset quality is
expected to decline modestly in 2016 from relatively strong levels in
2015. Supporting the overall condition of the FCS is moderate loan
growth, adequate capital, and reliable access to debt capital markets.
The System continues to grow at a moderate pace. As of September
30, 2015, gross loans totaled $226.8 billion, up $18.8 billion or 9.0
percent from September 30, 2014. Real estate mortgage lending was up
$7.0 billion, or 7.2 percent, as demand for cropland continued in 2015.
Overall, real estate mortgage loans represent 45.7 percent of the
System's loan portfolio. Production and intermediate-term lending
increased by $2.9 billion or 6.4 percent from the year before, and
agribusiness lending increased by $4.2 billion or 13.9 percent.
The System also continues to enhance its capital base, which
strengthens its financial position as low or negative farm returns
increase financial stress on borrowers. As of September 30, 2015,
System total capital equaled $48.9 billion, up from $45.8 billion the
year before. The System's total capital-to-assets ratio was 16.8
percent as compared with 16.9 percent a year earlier. Moreover, more
than 82 percent of total capital is in the form of earned surplus.
The increase in total capital is due in large part to the System's
strong earnings performance. For the first 9 months of calendar year
2015, the System reported net income of $3.5 billion compared with $3.6
billion for the same period of the previous year. The small decline
results from slightly higher non-interest expenses and provisions for
loan losses, which offset an increase in net interest income. The
increase in net interest income stems from a higher level of average
earning assets despite an eight-basis-point decline in net interest
margin to 2.56 percent. Compression of net interest spread is expected
to continue as interest rates change and borrowers prepay or reprice
loans.
Credit quality in the System's loan portfolio continues to be
strong. In each calendar year since 2010, the amount of non-performing
loans has declined, and capital has increased. In the most recent
period, as of September 30, 2015, non-performing loans totaled $1.7
billion, or 0.76 percent of gross loans, as compared with $1.8 billion,
or 0.85 percent, for the same quarter a year ago. Relative to total
capital, non-performing loans represented 3.5 percent at quarter-end.
For historical comparison, at year-end 2010, non-performing loans as a
percentage of capital was more than ten percent.
Lenders expect an uptick in loan delinquencies and other indicators
of loan repayment problems as they move into 2016, but a large increase
in problematic loans is unforeseen at this point. With weak margins,
more farmers are expected to change their operating structures to
reduce production costs or rebalance their farm balance sheets by, for
example, lengthening loan terms or selling unproductive assets.
The System continues to have reliable access to the debt capital
markets. Investor demand for all System debt products has been
positive, allowing the System to continue to issue debt on a wide
maturity spectrum at very competitive rates. Risk spreads and pricing
on System debt securities remained favorable relative to corresponding
U.S. Treasuries. Further strengthening the System's financial condition
is the Insurance Fund, which holds just under $4.0 billion.
Administered by the Farm Credit System Insurance Corporation, this fund
protects investors in System-wide consolidated debt obligations.
System banks also maintain liquidity reserves to ensure they can
withstand market disruptions. As of September 30, 2015, the System's
liquidity position equaled 183 days, significantly above the 90 day
regulatory minimum required for each FCS bank.
A Changing Risk Profile in Agriculture
U.S. farmers and ranchers are in the midst of serious belt-
tightening. Commodity prices have declined sharply while input costs
have been slow to adjust downward. Both the crop sector and livestock
sector are operating generally in price environments that are either
squeezing margins or pushing them into negative territory for many
producers.
An extended downturn in the farm sector would be a major challenge
for U.S. agriculture. In the past 2 years, many farmers have been
coping with a declining market by using working capital generated
during the previous period of strong earnings. As a result, the System
has recorded relatively low loan losses and maintains a strong
financial position to date. However, if commodity price weakness
extends for another year or 2, we expect significant financial stress
on borrowers as working capital erodes further and as farmers make
additional cuts to capital expenditures, household spending, and
operating costs.
Weakness in commodity prices is due to both supply and demand
factors. Globally, good weather in major producing regions has resulted
in large supplies of grain and oilseeds. Expanding stocks have
insulated many markets from significant price volatility, and in the
absence of major weather shocks, commodity prices could remain subdued.
In 2015, export demand for U.S. agricultural products has been
slowed by the higher value of the dollar, which reduces U.S. price
competitiveness in foreign markets. Also, while long-run trends are
positive, modest economic growth tempers demand in major U.S. export
markets, including China. Exports of high-value commodities, including
meat, dairy, fruit, tree nuts, and vegetables, are particularly
vulnerable to changes in income that drive export growth. Further
strengthening of the U.S. dollar or a downturn in global economic
growth would represent additional risk to U.S. farm receipts and loan
repayment capacity.
After rising rapidly in recent years, farmland values have leveled
off generally, with markets either slightly higher or lower, depending
on the type of acreage and region of the country. In fall 2015 relative
to the year earlier, according to surveys conducted by several Federal
Reserve Banks, the value of irrigated acreage declined in several
producing areas, as did farmland in Illinois and Iowa. Farmland
registered modest gains in the upper Midwest and West, as did ranchland
in most regions. A positive sign for producers who cash-rent land is
USDA data indicating a decline in cropland rents in the Midwest for the
first time in 20 years.
During the next year, many observers expect farmland values to
weaken given the outlook for commodity markets. However, any downward
movement could be limited by investors stepping into the market.
Impacts of declining land values on the Farm Credit System would be
mitigated by the System's underwriting procedures, which have been
prudent during the recent run-up in land values.
Anticipation for higher interest rates remains part of the economic
landscape. Nevertheless, rates are expected to remain relatively low
and increase very slowly over the next couple of years to maintain
economic stability. Higher interest costs could put additional pressure
on producers, especially those with liquidity problems, and any
substantial rise in long-term rates would have negative effects on land
values.
Farm program payments for major crops will assist many grain and
oilseed producers through at least next year. Farm financial health
also benefits from the typical lender practice that requires borrowers
to obtain crop insurance and use other risk-mitigating strategies for
marketing. Over time, though, if market prices remain relatively weak,
farm program payments will provide less assistance to corn, soybean,
and other producers who selected Agriculture Risk Coverage as revenue
guarantees begin to adjust downward.
Examination Programs for FCS Banks and Associations
FCA is responsible for regulating and supervising the banks,
associations, and related entities that compose the Farm Credit System.
Our examination and oversight programs provide strategic, proactive
risk supervision of the System. In conducting our institution-specific,
risk-based oversight and examination activities, we assign highest
priority to institutions that present the greatest risk.
We also perform nationally focused examinations that target
specific issues and operational areas to monitor the condition and
operations of the System as a whole. We actively monitor risks that may
affect groups of System institutions or the entire System, including
risks from the agricultural, financial, and economic environment.
Through our oversight, we require System institutions to have the
programs, policies, procedures, and controls to effectively identify
and manage risks. Our oversight program also requires compliance with
laws and regulations. When institutions are either unable or unwilling
to address unsafe and unsound practices or to comply with laws and
regulations, we take appropriate supervisory or enforcement action. We
use a comprehensive regulatory and supervisory framework to ensure the
System's safety and soundness. FCS institutions, on their own and in
response to our efforts, continue to improve their risk management
systems.
FCA uses the Financial Institution Rating System (FIRS) to assess
the safety and soundness threats to each System institution. Similar to
the systems used by other Federal financial regulators, the FIRS is a
CAMELS-based system, with component ratings for capital, assets,
management, earnings, liquidity, and sensitivity, all factoring into an
overall composite rating. System institutions are assigned component
and composite ratings based on FCA's evaluation of quantitative and
qualitative factors. FIRS ratings range from 1 for a sound institution
to 5 for an institution that is likely to fail.
Although the System's financial condition remains sound, a small
number of individual institutions display some weaknesses. These
weaknesses stem from several factors that have adversely affected some
System borrowers.
As the System's regulator, we have increased supervisory oversight
and dedicated additional resources to institutions experiencing stress.
As of December 31, 2014, four System institutions had a composite FIRS
rating of 3 or higher. While these institutions represent less than one
percent of System assets and do not meaningfully affect the System's
consolidated performance, they require significantly more resources to
oversee.
The chart below includes the System banks and their affiliated
associations. The figures in the bars reflect the number of
institutions by FIRS rating.
Farm Credit System FIRS Composite Ratings
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Source: FCA's FIRS Ratings Database.
Regulatory Activities
Congress has given the FCA Board statutory authority to establish
policy, prescribe regulations, and issue other guidance to ensure that
System institutions comply with the law and operate in a safe and sound
manner. We are committed to developing balanced, flexible, and legally
sound regulations.
Over the past few years, we have revised our regulations to
accomplish the following objectives:
To require each System institution's business plan to
include strategies and actions to serve all creditworthy and
eligible persons in the institution's territory. In addition,
the regulation encourages institutions to serve nontraditional
customers, such as women and minorities, who often operate
within local food systems by producing organic or specialty
crops on small farms. The regulation also seeks to achieve
diversity and inclusion in the workforce of System
institutions.
To ensure that System funding and liquidity requirements are
appropriate and to ensure that the discounts applied to
investments reflect their marketability.
To ensure that prudent practices are in place for the safe
and sound management of System investment portfolios.
To establish a regulatory framework for the reporting of
System accounts and exposures to FCA. The revisions reaffirm
our authority to collect data on System institution accounts
and exposures, including data on shared assets.
To establish standards for Farmer Mac's capital planning
process. The revised process emphasizes the quality and level
of capital and annual stress testing.
To increase the level and quality of assets held in Farmer
Mac's liquidity reserve.
To implement the requirements of the Dodd-Frank Wall Street
Reform and Consumer Protection Act by imposing margin
requirements on non-cleared derivatives transactions and
removing references to credit ratings.
To implement Title III of the Terrorism Risk Insurance
Program Reauthorization Act of 2015 that grants exceptions from
the margin requirements of the final rule for non-cleared
swaps.
To implement the provisions of the Biggert-Waters Flood
Insurance Reform Act of 2012, as well as the additional
provisions of the Homeowner Flood Insurance Affordability Act
of 2014.
To revise regulatory requirements for mergers or
consolidations of banks and associations.
To seek public input on FCA regulations that may duplicate
other requirements, are not effective in achieving the stated
objectives, are not based on law, or impose burdens that are
greater than the benefits received.
Currently, we are working on regulatory projects to accomplish
these additional objectives:
To enhance our risk-based capital adequacy framework to more
closely align it with that of other Federal banking agencies
and the Basel Accord. We published a notice of proposed
rulemaking to solicit comments on amending our regulations to
replace the current core and total surplus capital standards
with a Tier 1/Tier 2 capital framework.
To clarify and strengthen the standards-of-conduct
requirements for System directors, employees, and agents.
To strengthen the safety and soundness of the investment
activities of System banks by more accurately reflecting the
risk in particular investments, and to comply with a provision
of the Dodd-Frank Act by replacing credit rating requirements
with other standards of creditworthiness.
To clarify or change the loan amortization limits for
agricultural credit associations and production credit
associations.
To amend FCA regulations applicable to System lending to
conform with the private flood insurance provisions of the
Biggert-Waters Flood Insurance Reform Act of 2012.
To ensure appropriate and effective risk governance and
board oversight at Farmer Mac, and to clarify standards-of-
conduct and conflict-of-interest requirements.
To remove reliance on credit ratings from investment
eligibility regulations pertaining to Farmer Mac and to
maintain the quality and availability of Farmer Mac's liquid
investments.
Corporate Activities
The number of FCS institutions has declined over the years as a
result of bank and association mergers. Generally, System institution
mergers result in larger, more cost-efficient and better-capitalized
institutions with broad, diversified asset bases, both by geography and
commodity.
However, these mergers also increase the complexity of the
continuing institutions. The increased complexity places greater
demands on both FCA staff resources, as well as the level of expertise
required of staff, particularly in areas of regulation, policy,
examination, and legal interpretation. As of November 1, 2015, the
System consisted of the following:
Seventy-five direct-lender associations.
Three Farm Credit Banks and one Agricultural Credit Bank.
Five service corporations that provide support, technology,
leasing, human capital, and other services.
A funding entity that markets the securities--chiefly bonds
and discount notes--that the banks sell in the capital markets
to raise loan funds.
A GSE with the mission of providing a secondary market for
agricultural real estate and rural housing mortgage loans.
Federal Agricultural Mortgage Corporation
Congress established Farmer Mac in 1988 to provide a secondary
market for agricultural mortgage and rural home loans to improve the
availability of cost-effective long-term credit and liquidity to
America's farmers, ranchers, and rural communities. Farmer Mac creates
and guarantees securities and other secondary market products that are
backed by mortgages on farms and rural homes, including certain USDA
guaranteed loans. Loan originators that participate in Farmer Mac's
secondary market programs include community banks, Farm Credit System
institutions, mortgage companies, commercial banks, insurance
companies, and credit unions. The 2008 Farm Bill expanded Farmer Mac's
program authorities by allowing it to purchase and guarantee securities
backed by eligible rural utility loans made by cooperative lenders.
Through a separate office required by statute (the Office of
Secondary Market Oversight), FCA examines, regulates, and oversees
Farmer Mac's operations and its safety and soundness. As the secondary
market GSE devoted to agriculture and rural America, Farmer Mac has the
statutory authority to, in extraordinary circumstances, issue
obligations to the U.S. Treasury Department, not to exceed $1.5
billion, to fulfill the guarantee obligations of its guaranteed
securities. The Insurance Fund does not back Farmer Mac's securities,
and the System is not liable for any Farmer Mac obligations.
Farmer Mac continues to grow its business through an increasing
network of rural lenders and to strengthen operations to advance its
statutory mission. Farmer Mac's outstanding business volume reached
$15.6 billion as of September 30, 2015, on a compound annual growth
rate of 12 percent from 1999 to 2014. The number of institutions
participating in Farmer Mac programs grew 47 percent, from 367 to 542,
over the past 4 years. Farmer Mac recently reported that small farm
loans contributed 38 percent of the loans related to its Farm & Ranch
program. Despite the decreasing number of small farms, Farmer Mac has
seen an overall increase in the dollar volume and number of small farm
loans in its programs.
Over the past several quarters, Farmer Mac has improved the quality
of its capital base and risk-bearing capacity through healthy core
earnings and capital restructuring. As of September 30, 2015, Farmer
Mac's core capital totaled $558.2 million, $115.4 million above the
minimum capital level required by Farmer Mac's statutory charter. As of
September Farmer Mac's core capital level was $766.3 million, which was
$345.0 million above the minimum requirement. The decrease in capital
in excess of the statutory minimum capital level was due primarily to
the redemption of $250.0 million of Farmer Mac II LLC preferred stock
on March 30, 2015. Farmer Mac also issued an aggregate of $150.0
million of non-cumulative preferred stock during the first half of
2014.
Lower-quality capital was replaced with higher-quality capital as
part of Farmer Mac's capital restructuring initiative and new
regulatory requirements. In accordance with FCA's capital planning
rule, Farmer Mac has adopted a policy for maintaining a sufficient
level of Tier 1 capital (consisting of retained earnings, paid--in
capital, common stock, qualifying preferred stock and accumulated other
comprehensive income allocated to investments not included in its four
business lines). The preferred stock issued in 2014 qualifies as Tier 1
capital whereas the Farmer Mac II LLC preferred stock that was redeemed
did not qualify as Tier 1 capital. At September 30, 2015, Farmer Mac
reported a Tier 1 capital ratio of 11.5 percent. Farmer Mac is also
required to conduct stress tests to evaluate its ability to maintain
sufficient capital under adverse economic conditions and develop
possible strategies to address potential risks to capital in accordance
with FCA regulations.
Farmer Mac's credit quality metrics remain favorable. As of
September 30, 2015, Farmer Mac's 90 day delinquencies increased over
the 12 month period but remained low at $36.7 million, or 0.67 percent
of Farm & Ranch volume, compared with $24.7 million, or 0.46 percent,
as of September 30, 2014. The increase in delinquencies was related to
an idiosyncratic borrower situation rather than an increasing trend
related to a specific commodity or geographic region. Real estate owned
as of September 30, 2015, was $1.4 million, up from $1.2 million a year
earlier. Farmer Mac reported no delinquencies in its pools of rural
utility cooperative loans. On September 30, 2015, Farmer Mac's
allowance for losses totaled $10.3 million, compared with $10.6 million
on September 30, 2014.
Farmer Mac continues to enjoy reliable access to the debt capital
markets to support its mission of providing financing and liquidity to
agriculture and rural markets. To improve its financial flexibility in
the event of a financial or market disruption, Farmer Mac has taken
significant measures to increase the quality of its $2.0 billion
liquidity investment portfolio.
Serving Young, Beginning, and Small Farmers and Ranchers
As part of their mission to serve all eligible, creditworthy
borrowers, System institutions are required to develop programs and
make special efforts to serve young, beginning, and small (YBS) farmers
and ranchers. In 2014, the System continued to show gains in loan
dollars outstanding and loan numbers outstanding to YBS producers. From
2013 to 2014, the number of new loans made to young and beginning
farmers increased approximately two percent. However, the number of new
loans made to small farmers declined 1.4 percent.
For this past year, the total outstanding YBS loans by both number
and dollar volume increased as a percentage of the System's total farm
loans. These results are encouraging given the high costs of starting a
farm, the declining number of people entering agriculture, and the
rising average age of farmers.
FCA issued a bookletter in August 2007 to encourage institutions to
seek ways to better serve YBS borrowers. The bookletter provides
institutions with more flexibility to lend to YBS borrowers and
encourages them to use credit enhancements to allow more YBS borrowers
to qualify for credit. Credit enhancements for YBS borrowers may
include
lower rates or fees for YBS borrowers,
differential underwriting standards, and
USDA loan guarantees.
In response to this guidance, a higher percentage of institutions
are committing capital to assist in their YBS lending and are using
advisory committees to update YBS policies and procedures. In addition,
many institutions have stepped up their YBS outreach efforts and their
coordination with outside parties or organizations to serve YBS
producers.
In addition to providing credit to YBS borrowers, FCS institutions
offer other financial services to YBS borrowers, and many institutions
provide special training and educational programs for them.
Our efforts to encourage System institutions to emphasize diversity
and inclusion and to serve producers of local and regional foods also
benefit YBS producers. In 2012, to ensure the System fulfills its
Congressional mission to serve all eligible, creditworthy borrowers, we
issued a regulation requiring institutions to develop human capital and
marketing plans that promote diversity and inclusion. Because many
small and beginning farmers belong to underrepresented groups, this
regulation helps strengthen service to YBS borrowers. Likewise, a
bookletter we issued in 2012 to provide guidance regarding service to
local and regional foods producers also benefits YBS borrowers because
many of these producers would be classified as young, beginning, or
small.
Working with Financially Stressed Borrowers
Risk is an inherent part of agriculture, and the causes of risk are
many:
Adverse weather.
Changes in government programs.
International trade issues.
Fluctuations in commodity prices.
Crop and livestock diseases.
General increase in interest rate environment.
These risks can sometimes make it difficult for borrowers to repay
loans. The Farm Credit Act provides System borrowers certain rights
when they apply for loans and when they have trouble repaying loans.
For example, the act requires FCS institutions to notify borrowers of
the right to seek restructuring of loans before the institutions begin
foreclosure. It also provides borrowers an opportunity to seek review
of certain credit and restructuring decisions. When a System
institution acquires agricultural property through liquidation, the
Farm Credit Act also provides borrowers the opportunity to buy or lease
back their former properties.
FCA enforces the borrower rights provisions of the Farm Credit Act
and examines institutions to make sure they are complying with these
provisions. We also receive and review complaints from borrowers who
believe their rights have been denied. Through these efforts, we ensure
compliance with the law and help FCS institutions continue to provide
sound and constructive credit and related services to eligible farmers
and ranchers.
Conclusion
We at FCA remain vigilant in our efforts to ensure that the Farm
Credit System and Farmer Mac remain financially sound and focused on
serving agriculture and rural America. While we are proud of our record
and accomplishments, we remain committed to excellence, effectiveness,
and cost efficiency, and we will remain focused on our mission of
ensuring a safe, sound, and dependable source of credit for agriculture
and rural America. This concludes my statement. On behalf of my
colleagues on the FCA Board and at the agency, I thank you for the
opportunity to share this information.
The Chairman. The chair will remind Members that they will
be recognized for questioning in order of seniority for the
Members who were here at the start of the hearing. After that,
Members will be recognized in the order of arrival. I
appreciate Members' understanding.
And I recognize myself for 5 minutes. Again, Mr. Spearman,
thank you for coming this morning. Can you look into your
crystal ball and talk to us about next year and the year after
that? I am concerned, given the stresses on the agriculture
economy and the new regulations that are coming on the
commercial banking side as well as across the System--will
farmers next year be able to have access to the credit they
need, given the hard results they are going to get this year?
Will they have the access to that credit that they are going to
need to get next year's crop in? What is your view on that?
Mr. Spearman. Thank you, Mr. Chairman. That is a very good
question. And with the looming cloud over agriculture as
predicted by the USDA estimate of a 36 percent decline in farm
income in the subsequent year, the System is fundamentally
sound, well-positioned to be able to provide credit for
America's farmers and ranchers and aquatic producers.
The System is, again, in my opinion, only one part of being
able to provide credit to the market. It needs to work with the
other organizations that provide credit, such as the community
bankers, other lenders, in order to be able to provide that
credit. The good thing about the System is that it is a GSE,
and it has a mission component that the System has to be there
in bad times. And we, as the regulator, need to make sure that
the System remains safe and sound so that it can be there.
The Chairman. We have a lot of friends in the room. There
are bankers in the room and Farm Credit Service folks in the
room. Most of us on this panel have friends on both sides of
every issue. And most of us try to stick with our friends. But
your agency has the mission to make sure that the System stays
within its lanes of authority. Can you talk to us a little bit
about the similar-entity lending authority that has been used
in some of the higher profile loans of late and how that
mechanically works? And you may need to refer to one of the
other witnesses to flesh that out. But if you could walk us
through that.
Mr. Spearman. Well, I will start and then I will turn it
over to our General Counsel, who will be able to kind of
explain some of the specifications of the Act and how they
relate to similar entities. Similar entities were started as a
risk-mitigation tool, if you will. Because the System is a
monoline lender, their market is fairly limited. This risk-
diversification tool is necessary to be able to help them get
involved with entities that they may not necessarily have been
able to do without this particular rule. One of the key factors
of that rule, and I am sure our General Counsel will get into
that, is that these loans cannot normally be eligible loans
that they can participate in. So I will turn it over to Charlie
and let him get into some of the specifics of the similar-
entity rule.
Mr. Rawls. Okay. Thank you, Mr. Chairman.
And Chairman Spearman covered a lot of the most important
points about the similar-entity authority. It did come into the
Act first in 1992 as a risk-diversification tool. It is not a
direct lending authority of System institutions. So it is a
participation authority, which means that someone else, usually
a commercial bank, would lead a transaction. It would typically
be a multilender transaction. Some of these transactions are
quite large. And System institutions have authority then to, in
plain English, buy part of that credit, to participate in that
credit, but only up to 50 percent of the credit. So there is
that limitation.
There are other portfolio limitations. For example, Farm
Credit System institutions can only hold up to 15 percent of
their portfolio in these types of credits. They are nowhere
near that. I think the last time we looked at the numbers, they
might be about six or seven percent System-wide. But that is
one of the other limitations. So some of this, as we say, is
not intuitive except from the very basic standpoint that this
is a risk-diversification tool. This is not a mission-directed
type of authority. There is no particular rural requirement on
it or that kind of thing.
The first requirement, as we say, of similar-entity lending
is that it is a credit that is not eligible under the Farm
Credit Act. And the second basic requirement is that it has to
be an entity that is functionally similar to someone that is
eligible. And so looking at that functional similarity is where
our examiners and the legal staff would get involved in looking
at these credits after they are made. We don't have any prior
approval authority. I think that is the basics and I would be
happy to follow up with questions.
The Chairman. Well, other Members will maybe ask some
follow-ups. My time has expired.
I will turn to the Ranking Member for 5 minutes.
Mr. Peterson. Thank you, Mr. Chairman. And I wanted to also
focus in a little bit on the mission, Mr. Chairman, as we
discussed. One of the main things that you are there to
accomplish is to make sure that the System is safe and sound,
and there is oversight over the System.
But as the Chairman said, we keep getting complaints from
constituents. For example, the Minnesota bankers sent me a
letter last year that said that, ``the FCS engages in various
activities that are well beyond the scope of its lending
mission.'' And so there is a lot of confusion about what the
mission is. So if you could just respond to that question or
statement, and also talk about how you make sure that the
System is staying within the parameters of its mission.
Mr. Spearman. Thank you, Ranking Member Peterson, for that
question. I am aware that there are issues about what we are
about and how we relate to the Farm Credit System. I want to
assure you that we are the regulator of the System. Our task is
to make sure that the System remains safe and sound, is there
in good times and bad times. There are issues that may come up
within the Act, such as the similar-entity, which Charlie has
kind of gone over, that may be somewhat controversial. We, as
an agency, our folks do a great job of trying to read the
mission and understand that the Farm Credit System is a GSE and
that it has that mission component; that it must be there in
good times and bad. I don't want to get into any specific
areas. What I want to do is kind of turn it over to our chief
examiner. And he can give you an idea of how an examiner pretty
much goes in the field and makes that determination if
something controversial comes up and how we handle that as an
agency.
Mr. Coleman. Thank you, Chairman Spearman. Our examination
program looks at each institution to the safety and soundness
and if they are operating within the parameters of the statute
and the regulations. We look primarily to the risk-control
systems of the institution. We come up with a financial
institution rating system, 1 through 5, for each institution.
That also includes looking at their asset portfolio as well as
looking at if those loans are within the statutory and
regulatory requirements in regards to mission and scope of
financing, et cetera. The Farm Credit System also has some
limited investment authority. So there are certain investments
that Farm Credit System institutions work with USDA and other
commercial banks in regards to certain aspects and local
communities in that area. But the primary mission, as Chairman
Spearman discussed, is providing credit to creditworthy
borrowers, farmers and ranchers and rural residents within
specific authorities.
Mr. Peterson. Thank you. One of the other missions that you
are charged with under the statute is young, beginning, and
small farmers. And could you talk about what you are doing to
promote and comply with that mission.
Mr. Spearman. Thank you, Congressman.
Yes. The YBS or the young, beginning, and small farmer
facet of the Act has to do with mission component, if you will.
American agriculture, all its statistics is showing that
American farmers today are advancing in age. And the YBS
Program, my understanding, was begun to help fill that pipeline
of young farmers to come in and to be able to have a capital
structure to become full-fledged farmers. As an agency, since
it is a requirement that the System deal with the YBS program,
our agency collects statistics. We require that certain things
be done to make sure there is a strategic program.
What I am going to do at this point is refer to Robert
again there because he can kind of explain to you somewhat what
our examiners do in the field.
The Chairman. In order to give every Member a chance to ask
a question, we are going to follow the 5 minute clock. So we
will take that question for the record, or your answer for the
record, or we will come around a second time.
Mr. Lucas, for 5 minutes.
Mr. Lucas. Thank you, Mr. Chairman.
And coming from, being a good farmer from an old farm
family, a multi-generation of debtors, we are always interested
in our credit providers from every source. So I would like to
continue down the vein of the discussion just a moment ago. I
sit on Financial Services, as well as Agriculture, of course.
And under Dodd-Frank, that amazing piece of legislation that
affects the rest of the banking industry, banks are required to
do stress testing. Can you explain, as we continue down this
line of focus on the examinations, can you explain how the Farm
Credit Administration does stress testing of the Farm Credit
System? Because that is more than just, are you loaning it to
eligible participants; you are staying within the guidelines of
how those loans are structured. Stress gets down to the
viability of the loans themselves.
Mr. Chairman?
Mr. Spearman. Thank you, Congressman Lucas.
Yes, stress testing is a risk-mitigation tool that the
System utilizes to put certain pressures on an operation to try
and determine if A happens, what happens with B. The agency
requires that the System do stress testing. And we did that in
the form of an Information Memorandum. We require every year
that they, at a minimum, that they put certain stresses on
their operations.
Mr. Lucas. So an annual basis. And could you explain, or
one of your folks there, explain how the stress test that you
apply or your agency applies compares with what, say, the
commercial bankers are going through?
Mr. Spearman. I am going to defer to Robert----
Mr. Lucas. Please.
Mr. Spearman.--on the stress testing.
Mr. Coleman. In 2010, we put out, as Chairman Spearman
mentioned, an Informational Memorandum that laid out our
expectations for each and every Farm Credit System institution.
And what we expect on an annual basis is the Farm Credit System
institutions to stress test every significant portion of their
balance sheet. With Farm Credit System institutions, obviously,
the huge majority of that component is around loan assets. So
what we ask institutions to do, we give lots of different
parameters, but the institutions have some flexibility in
looking at what they want to do.
Over the last several years, obviously, there has been a
lot of focus on land values, real estate values, and stress
testing around significant drops if they were to occur in real
estate values, most especially in the Midwest. We also look at
other components around interest rates, around softening of
commodity prices, et cetera. But those expectations were laid
out. And we require the institutions to do that annually.
Mr. Lucas. Mr. Coleman, if I could ask, in your last round
of stress tests, did you have any surprises or any regions or
particular commodity groups, any areas where the red flags went
up?
Mr. Coleman. I wouldn't say red flags, but areas of caution
or concern, most especially in the Midwest, as recognized by
other bankers and academics, starting to see flattening or
softening of real estate in the Midwest, certainly with USDA
projections for a 36 percent decline in net farm income. A lot
of that is impacted in regards to grains. The Farm Credit
System has about 18 percent of the total portfolio concentrated
in grains. So those institutions in the Midwest are heavily
concentrated in corn, soybeans, and wheat. We certainly have
paid more attention to what they are doing and how, as Chairman
Spearman mentioned, they have well positioned themselves over
the last several years to deal with the borrowers and deal with
the stress anticipated.
Mr. Lucas. Chairman Spearman, one last question. In
Oklahoma, we have a law that says that banks cannot hold real
estate for more than 5 years. The logic is that banks should be
collectors of capital, arbitrages of capital, make loans, they
should not be in the long-term asset-holding business. But my
understanding is that some of the Farm Credit institutions have
some rather substantial mineral holdings around the country
perhaps that generate substantial revenue. From an Oklahoma
perspective, that would seem to me to be contrary at least to
the spirit of the way we have always done things in our state.
Is this correct? And if that is the case, do you know how long
these assets have been on the books, mineral rights?
Mr. Spearman. Yes, Congressman. Mineral rights are being
held by some institutions in the System. Primarily, I believe,
it is AgriBank that holds most of them. But this happened years
ago. And, currently, System entities are no longer eligible to
acquire mineral rights.
Mr. Lucas. But we have not dispersed those old assets yet?
Mr. Spearman. No. We have not.
Mr. Lucas. Thank you, Mr. Chairman.
The Chairman. The gentleman's time has expired.
Mr. Scott, for 5 minutes.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
Welcome, Chairman Spearman. First of all, let me say that
what an outstanding job you are doing, Mr. Chairman. You are
doing a great job. And I wanted to call attention to you and
the Farm Credit System under your leadership. First of all,
what I would like to do, Mr. Chairman, I would like to submit
this letter for the record. It is an important letter. It is
from Fort Valley State University. As you know, Mr. Chairman,
you and I have worked hard to address the issue of the 1890s,
which are your African American colleges and universities. We
had an outstanding hearing. It was remarkable. Farm Credit
played an exciting role in that.
But, Mr. Chairman, I would like to submit this letter for
the record. Let me just state one little sentence out of here
where it says: ``Over the past years, Farm Credit has not only
provided financial support through internships and scholarships
for FVSU students, but has also been actively involved in
providing educational programs such as the AgAware program to
our farmers in order to successfully prepare them for future
endeavors.''
The Chairman. Without objection.
[The document referred to is located on p. 49.]
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
For beginning farmers and addressing this issue is
paramount to us, and particularly with the age of our farmers
now averaging about 60 years of age. Many of us realize it is
not only an agriculture issue; it is a national security issue
because we need to make sure we protect our food supply in our
own hands. So our efforts on that are very, very important. And
your support of the 1890s, our African American students, to
get more African Americans into farming and into agriculture is
very critical.
Now, I want to go to one question, let me follow up here
for a moment. I want to ask, Chairman Lucas, former Chairman
Lucas brought up the stress testing. Let me just follow up with
that for a moment. How would you compare your stress testing
with commercial banks? Is it on an equal footing?
Mr. Spearman. Again, stress testing, Congressman, is a
risk-mitigation tool that is utilized. We have asked--I don't
want to say ask. We expect, through this memorandum, for the
System to perform certain stress testing on their institution
financials at a minimum of once a year.
I am not aware of any comparison that is done with
commercial bankers. We are, our folks are aware of what areas
that are more vulnerable than not. And the stress testing that
is done on those areas, as Robert mentioned, such as interest
rates----
Mr. David Scott of Georgia. All right.
Mr. Spearman.--they try to ensure that that stress testing
is performed on those areas.
Mr. David Scott of Georgia. Okay, Mr. Chairman. Let me ask
you this question: The FCA has responsibility for ensuring the
safety and soundness of the Farm Credit System institutions.
Tell me, how many examiners do you currently employ to get this
job done, and how frequently are FCA employees in the System
institutions reviewing what they are doing?
Mr. Spearman. Congressman, we currently employ roughly 300
individuals. Since we are primarily a regulator, more than \1/
2\ of those folks are examiners.
Mr. David Scott of Georgia. Yes.
Mr. Spearman. And according to the Act, each institution
must be examined at least once every 18 months.
Mr. David Scott of Georgia. Yes.
Mr. Spearman. We have one institution that, by our choice,
we examine once a year.
Mr. David Scott of Georgia. All right. Now, finally, Mr.
Chairman, the Chairman opened up and he made a very profound
statement that we have friends in the banking community and the
Farm Credit community, and we love our friends. So I wanted to
ask just briefly, because 42 percent of this market is handled
by Farm Credit and 42 percent of this is handled by the banks.
So it is important for us to communicate and harmonize here.
So, finally, Mr. Chairman, can you give us an example of
opportunities where both Farm Credit and the banks work
together and harmonize?
Mr. Spearman. One example I can think of off the top of my
head that was brought up by our General Counsel here, the Farm
Credit System does participate in investments in rural
communities. I had an opportunity to go out and visit one
project where there was a joint working between community
bankers and the Farm Credit System. It was a hospital in
Minnesota. And those folks were just thrilled to be able to
have the capacity with this joint venture to be able to have
that facility.
Mr. David Scott of Georgia. Thank you, Mr. Chairman.
The Chairman. Mr. King, 5 minutes.
Mr. King. Thank you, Mr. Chairman. And especially I want to
thank you for holding this hearing here today and giving us an
opportunity to have this discussion and take a look at Farm
Credit. I think if we don't have this hearing publicly and do
so annually, we will just simply not do the examination that is
necessary, the oversight that we have. So I appreciate having
it today.
And, Mr. Chairman, I appreciate your visit and the
opportunity to hear your testimony here. I just looked back on
the past hearing, and it is not clear to me the exact mission
statement, that, to me, there are a number of different pieces
along on this. But is there a compact, printed, published
mission statement that we can look at that anchors us to the
mission of Farm Credit? And could you deliver that to me
please?
Mr. Spearman. Our annual report, of course, annually
publishes the mission of the Farm Credit Administration. And
the Farm Credit System publishes a mission statement also in
their annual report. And the mission statement primarily states
that the Farm Credit System is to provide sound and dependable
credit to America's farmers and ranchers, producers, and
harvesters of aquatic products, their cooperatives, and limited
types of farm-related businesses.
Mr. King. Okay. Thank you. That actually is the one I am
working with. I wanted to make sure we read the mission
statement into the record. And then I wanted to expand a little
further on some of the inquiry we have heard from the other
Members with regard to is it your belief that Farm Credit has
gone outside the boundaries of that mission statement you have
just read?
Mr. Spearman. No. It is not. My General Counsel says I
shouldn't start out with a negative like that. But as a
regulator, our primary function is to look at areas that have
possibly gone outside of the mission.
Mr. King. Thank you. And I did hear that answer earlier in
one of your responses. And so I would ask you then, who is
responsible for staying within the, let's say, the fences of
the mission statement? Who is responsible to ensure that Farm
Credit lenders stay within the boundaries of the mission
statement?
Mr. Spearman. The Farm Credit Administration.
Mr. King. The Administration--that would be Article II, the
Obama Administration?
Mr. Spearman. The Farm Credit Administration, FCA.
Mr. King. Okay. The Farm Credit Administration then does
have the responsibility. And Congress has the responsibility of
oversight.
Mr. Spearman. That is correct.
Mr. King. Could we imagine, if we backed up, say, 20 years
and let's go back to the 1980s when we really did have a farm
crisis, and could we imagine then that we would be having this
conversation now about Verizon and other telecommunications
companies and hundreds of millions of dollars that have gone
into those particular endeavors? Let's just say if some Members
of this Committee have a sense of mission creep, is that
totally explainable? And I want to understand this. Is there a
limit within the Administration, the Farm Credit
Administration, that would say we are going outside our
boundaries, and is that boundary in the definition of the
mission, or is it in the concern that Congress will look in and
look at that definition of the mission?
Mr. Spearman. Well, we have the mission, Congressman, and
we also have the Act that we have to follow. So we have legal
guidance whenever we look at any product that the System kind
of brings before us. And what we do is we follow the guidance
of what we believe that the----
Mr. King. But we agree that we would not have imagined this
mission statement to encompass, say, back during the farm
crisis years, we would never imagine this mission statement to
encompass some of the lending that has taken place, especially
with regard to telecommunications. And I would add to that
acquiring private-sector businesses, such as crop insurance
companies that look like they are being used as leaders, that
opens up the doors to direct that into Farm Credit. And I
brought this up the last hearing we had--I bring it up at this
hearing too--is that the language in the mission statement
seems to me to confine Farm Credit to a narrower set of
boundaries than those that you have adhered to. And I like what
Farm Credit has done. I look around my neighborhood, and I have
neighbors I wouldn't have if it weren't for Farm Credit. But it
behooves us all to stay within those boundaries. I think the
mission statement is fine. But you have overstretched it. So I
appreciate your testimony and the hearing.
And I yield back the balance of my time.
The Chairman. The gentleman yields back.
Mr. Walz, 5 minutes.
Mr. Walz. Thank you, Mr. Chairman.
And thank you, Chairman Spearman, for being here.
As you are constantly looking at risk in lending to farmers
and ranchers, this might be more for our colleagues who aren't
here, could you explain to me how important crop insurance is
to lenders as they make decisions?
Mr. Spearman. Thank you, Congressman, for that question.
Crop insurance, again, is a risk-mitigator. There are two
issues that come to mind about the availability of crop
insurance. One would be that, without crop insurance, would a
potential borrower be able to get a loan? And the other issue
would be, would they be able to repay the loan? So crop
insurance is very important.
Mr. Walz. Well, I ask this question. I think it is
important. I would like to thank Chairman Conaway, Ranking
Member Peterson, and all the Members of this Committee, along
with Speaker Ryan, have ensured crop insurance will remain
strong. The promise that we made will be kept. And hopefully
that makes our lending work for people.
One more question from me. In speaking of this mission, and
you heard a concern that comes from a lot of our folks of
trying to stay within that mission, my concern is, do you have
the tools necessary--you heard a little bit from Mr. Scott
dealing with this--but do you have all the tools necessary to
make those loans to small, beginning farmers and ranchers? This
is something that we have taken an interest in, we passed
legislation in the last farm bill to do that. Do you have the
tools to make that happen?
Mr. Spearman. Congressman, yes, we believe that we have the
tools to make that happen. Could they be better? Yes. And we
are open to working with the staff of the Committee to help to
improve some of those areas. But for me personally, the YBS
program is an excellent program. And there are areas that we
could improve upon.
Mr. Walz. I think we will take you up on that because we
all know that barriers to credit are what stops people from
getting in this. It is not their desire. They have to be able
to, as you heard the Ranking Member say, land prices continue
to go up as crop prices go down. But we have people out there
who want to take advantage of this. We want to get them
educated. We want to make sure we are making good loans and
they are well thought out and we have the tools necessary. So I
appreciate that. And I thank you for your testimony.
I yield back.
The Chairman. The gentleman yields back.
Mr. Gibbs, 5 minutes.
Mr. Gibbs. Thank you for holding this hearing.
And thank you for being here. As a previous borrower of
Farm Credit--my first loan was in the 1970s--and also managing
a local--on the board, working at a co-op bank, was a good
experience, very supportive of the organization. I want to
follow up a little bit more on the mission. And it is clear by
my colleague from Iowa's questions. But here in the second
quarter of 2015, we saw that Farm Credit Service increased
their risk exposure level to $1.5 billion. That is double the
limit it was 2 years ago. What precipitated that change? And
how many farmers and ranchers need a $1.5 billion loan?
Mr. Spearman. Thank you, Congressman, for that question. I
am going to defer to Robert, who is our chief examiner, to be
able to talk specifically about the particular size of loans.
Mr. Coleman. Thank you, Congressman. The Farm Credit System
has almost 17 percent capital today, significantly larger than
it was 20 or 30 years ago. And those increased limits are
reflective of the risk-bearing capacity of the Farm Credit
System and the institutions. Primarily those larger loans are
going to be farmer co-ops, processing co-ops, and rural
utilities, all authorized under different titles of the Farm
Credit Act.
Mr. Gibbs. In my past life borrowing experience, when I
went in and talked about a loan, we kind of had to put out what
the line of credit, kind of what the purpose was or if it was
buying property or building a facility, it was pretty well
spelled out. And one issue, first of all, I guess I have to ask
the question: It has been reported to me that the Farm Credit
System made a $700+ million loan to Verizon. Is that true?
Mr. Coleman. Last year, that is correct.
Mr. Gibbs. Okay. And it also has been brought to my
attention that that was really to buy the final stake in a
European cell phone company, Vodafone. Is that correct?
Mr. Coleman. I am not aware of the details. I believe that
is correct.
Mr. Gibbs. So that is where we really get back to the
mission. I am sure anybody would make the argument that we want
to expand broadband and get fiber optic out there and those
kinds of loans. But how could the regulators sign off on a deal
like that that really has nothing to do with the mission? I am
really struggling with that. And this is almost $\3/4\ billion.
How does that help my farmers in Ohio?
Mr. Coleman. If I may, our General Counsel mentioned
earlier today, the similar-entity authority was provided for
risk-mitigation. Since Farm Credit System institutions are
limited to agriculture, there was a provision added in the Act
about 20 years ago that allowed Farm Credit System institutions
to participate in loans that were originated, led by others,
commercial banks primarily, so they have to be invited in, and
their participation in those loans is for risk mitigation. One
of the first requirements in the Act for similar-entity
participation is that it is an ineligible loan. We would all
recognize, up front, that those are ineligible loans, but they
are authorized in the Act by the similar lending authority.
As our General Counsel mentioned earlier, two other
requirements are that either the assets of the company or the
income generated by the company have to be functionally similar
to an entity that the Farm Credit System could make an eligible
loan for.
Mr. Gibbs. Okay. I will follow up a little bit more on the
loans made to--just certain conditions to make loans to build
houses in rural areas, 5 acres or whatever. Because I am
running out of time here, I want to mention my concern to make
sure that they keep in the light the mission. We have to be
careful because they have access to money that the private-
sector doesn't have. And they have a competitive advantage. In
the spirit of the mission, the regulators have to keep that in
mind. And I kind of agree with the previous comments that the
spirit of the mission and what is actually happening is a
concern and the effect it has on the other part of the banking
sector, especially my community banks, the competitive
advantages or disadvantages. And that needs to be addressed.
And I appreciate the Chairman for the oversight hearing. I
think this is something we need to delve into to make sure that
you, as the regulators, are making sure that the spirit of the
mission is complied with and not kind of mission creep. And
that is my concern.
And I yield back.
The Chairman. The gentleman yields back.
Ms. Adams, 5 minutes.
Ms. Adams. Thank you, Mr. Chairman.
And thank you, Chairman Spearman, for being here. As a
member of the Farm Credit System, Ag Credit North Carolina is
using its corporate mission fund to provide grants to
scholarships that support beginning farmers and connect local
producers to food retailers, including in the 12th District
that I represent. Ag Credit North Carolina is also providing
scholarships to poor students from my alma mater, North
Carolina A&T, which is also one of the schools that the Ranking
Member spoke about. The services provided by the Farm Credit
System are very important for residents to receive rural
housing and farming loans. Some credit options, such as
guaranteed loans, reduce lender risk and make lending possible
to beginning farmers who might otherwise have difficulty
accessing credit. When utilizing such a lending program for
beginning farmers, what kind of education and support do you
provide to beginning farmers that increases their chance of
successful loan repayment?
Mr. Spearman. Thank you, Congresswoman, for that question.
As I mentioned previously, the YBS program is a special
interest of mine because when I came to the FCA, I noted that
there was a lack of information about what the Farm Credit
System was all about. I was hearing things that we were part of
USDA; we were the lenders of last resort in the USDA. A lot of
my job, the way I see it, is to go out, when I do have an
opportunity to give a speech, is to sort of educate people
about what the Farm Credit System is about and how FCA relates
to that System. We are the regulators of the System. There are,
within the statute, rules that the System has to follow
regarding YBS programs. They have to have a plan within their
strategic operation on how they are going to implement the YBS
program. And our examiners evaluate that plan. We do not set
specific rules. It is up to the particular institutions to come
up with what their marketing plan is going to be for their YBS
program. We just evaluate it to make sure that they do have a
plan and that plan is being executed.
Ms. Adams. Thank you. In the 12th District, there is a
significant level of interest in developing regional food
systems to provide more fresh food options for constituents
that live in food deserts. And you may know that in North
Carolina, in my district, we are actually ranking very high as
it relates to food insecurity. And so that is a concern. How is
the Farm Credit Administration shaping its policies and
regulations to encourage more lending to young farmers and
small farmers that serve a regional food system?
Mr. Spearman. Congresswoman, a big interest of mine since I
came to the FCA is urban agriculture and being able to make
sure that, as you mentioned, that food deserts don't exist. The
System has capacity to be able to get involved with programs at
the urban level. That is sort of a mission of mine to be able
to come up with a plan, to see if we can, as an agency, help
them to be able to help mitigate some of the deficiencies in
under-served areas.
Ms. Adams. Okay. Thank you, Chairman Spearman. And I would
certainly like to have my staff follow up with you at some
point in time to work on this very serious issue in North
Carolina, particularly in the 12th District. So thank you very
much for your testimony.
I yield back, Mr. Chairman.
The Chairman. The gentlelady yields back.
Mr. Austin Scott, 5 minutes.
Mr. Austin Scott of Georgia. Thank you, Mr. Chairman. And
I, too, had questions about the young, beginning, and small
farmers. They have been answered. And I also have a letter to
submit on behalf of Fort Valley State as my colleague,
Congressman Scott from Georgia.
The Chairman. Without objection.
[The document referred to is located on p. 49.]
Mr. Austin Scott of Georgia. Gentlemen, Mr. Spearman
especially, thank you for being here today.
And virtually every Member of this Committee has mentioned
the concerns about certain banks, I would suggest, in the
System or a certain bank in the System getting outside of the
scope of what Farm Credit is supposed to be about.
And I would just read from your annual statement: ``The
Farm Credit System is a network of borrower-owned, cooperative,
financial institutions and service organizations servicing all
50 states and the Commonwealth of Puerto Rico created by
Congress in 1916 to provide American agriculture with a
dependable source of credit. The FCS is the oldest government-
sponsored enterprise.''
When you look through your annual report, cows, chickens,
everything in your annual report is farm-oriented. There is not
a picture of a Verizon shop in there. I want to be maybe a
little more blunt than some of my other colleagues have. You
are the regulator. I think the Farm Credit System is extremely
important to the parts of the country that I represent. Certain
people getting outside of the parameters of what the Farm
Credit System was set up for, I believe, are putting the whole
System at risk. As the regulator, I do think when you have an
organization who is putting the System at risk, you do have the
ability then to step in and stop that.
And while what they are doing might be technically legal,
it is certainly, in my opinion and apparently in the opinion of
the majority of the Members of this Committee, who are your
greatest advocates in Congress, that it is outside the scope
and the intent of the Farm Credit System. I will just be honest
with you. I don't think CoBank is going to stop until someone
stops them. And I hope that you, as regulators, will work to
get them back into what the scope of the Farm Credit System was
set up for.
Mr. Rawls, you have been with the Farm Credit System for a
long time. Is that correct?
Mr. Rawls. I have been with FCA a little over 12 years.
Mr. Austin Scott of Georgia. And you are one of the ethics
officers?
Mr. Rawls. There is a Chief Ethics Official that is within
my office. And I function as essentially an alternate or Deputy
Ethics Official.
Mr. Austin Scott of Georgia. Are you aware of one of your
institutions accessing confidential and proprietary information
from a password-protected extranet of its competitor?
Mr. Rawls. I am aware a number of years ago of probably the
incident that you are referring to, yes.
Mr. Austin Scott of Georgia. If that happened to a private-
sector institution, what do you think the consequences for the
executives of that institution would be?
Mr. Rawls. I really couldn't say. It depends so much on the
facts and circumstances of any particular incident like that.
I would say the agency in this case did follow up with our
supervisory activities that we found appropriate at that time.
Mr. Austin Scott of Georgia. I think that bank would
probably be shut down in the private-sector. What was the
monetary payment for that conduct?
Mr. Rawls. I would have to get the details on that and get
back with you. I just don't recall.
Mr. Austin Scott of Georgia. I would appreciate it very
much if you could get back to me with the details of the whole
event and whether or not the people, the individuals whose
information was accessed, were notified properly that their
information had effectively been taken without authorization.
And, again, the Farm Credit System is extremely important.
I think that, I hope that you guys, as regulators--and I mean
this with all sincerity--can keep within the scope of the
original intent of the Act that was written. If not, I worry
that the System may not exist in the future. And it is
important to me and my community that it does exist and that it
function as it was originally intended to.
With that, I yield the remainder of my time.
The Chairman. The gentleman yields back.
Mr. Costa, for 5 minutes.
Mr. Costa. Thank you, Mr. Chairman.
The credit lending and agriculture throughout the country
has changed over the decades, as we all know, American
agriculture has changed. The note that you made, Mr. Chairman,
in your opening statement about President Roosevelt's Executive
Order, there used to be more than a thousand, several thousand
institutions around the country. And, today, there are around
80 if my numbers are correct. A lot of that has resulted in the
changing of the lending practices that have taken place over
the decades for agriculture communities. But, also,
consolidation has been a part of that effort.
In California, we have perhaps one of the largest
portfolios in terms of farm credit, with over $20 billion in
lending activity that takes place. Consolidation, and mergers,
as I have met and spoken with my local institutions, have been
a part of that change. Do you foresee additional mergers taking
place, Mr. Chairman? And do you think by and large the approval
of those, as the Board looks at each one on an individual
basis, is done in a way that protects the fiscal integrity of
the institutions?
Mr. Spearman. Thank you, Congressman, for that question.
Mergers come up from the System. Our role primarily is to
evaluate the merits of it. As you mentioned, there is the
impact on safety and soundness of the System. There is, as an
agency, we do what is called a preliminary review in our Office
of Regulatory Policy. And our General Counsel office reviews
each application as it comes in very thoroughly. We give what
might be called provisional approval. Then it goes back to the
banks. And the banks end up, the stockholders actually vote on
whether the merger ought to take place or not.
Mr. Costa. How long does that process, since you have been
Chairman in 2009, typically take, the mergers that you have
supervised?
Mr. Spearman. My experience since I have been there has
varied. It depends upon the complication. We had two banks that
merged. It took a substantial amount of time.
Mr. Costa. So it is not simply a process where a couple of
institutions get together in an area or within two different
states or whatever and say, ``we are going to do this,'' and
then there is a thorough review that has to happen?
Mr. Spearman. It is a very thorough review. And to your
point, if the two institutions are not contiguous that is even
a factor that is considered.
Mr. Costa. Okay. I want to get some clarity because a
number of the questions, of course, that many of us have
thought about have already been raised. But I wanted to get
some clarity.
When you and I spoke, we talked about the issue of--this
has been termed mission creep and the constraints upon the
System on a 15 percent of nontraditional loans, as it is put.
But now that 15 percent cap, as I understand it, is both per
institution and System-wide. And now there is also a
distinction between lending activity and participatory loans as
well. And I want to be clear or let you clarify the
distinctions within that constraint.
Mr. Spearman. That is a statutory question, and I am going
to refer to Charlie to be able to respond.
Mr. Rawls. Thank you, Mr. Spearman. The 15 percent
referenced is a portfolio limitation System-wide on the
similar-entity participations that we talked about. And that is
right from the statutory language.
Mr. Costa. So that is participatory? It doesn't include
lending activity?
Mr. Rawls. As we have talked about this, that is not what
we call a direct lending authority. Those are our
participations, yes.
Mr. Costa. And that is locally and System-wide?
Mr. Rawls. The System-wide would be 15 percent on the
participations through a similar-entity. To further confuse
things, but the System engages in other participations that
would be outside of that, much more cooperating with commercial
banks and more traditional loan makings.
Mr. Costa. So that would be outside of the 15 percent?
Mr. Rawls. Yes, yes.
Mr. Costa. So a local institution could have more than 15
percent?
Mr. Rawls. In participations, it could. I would have to ask
Robert if he has any numbers. But it could, yes.
Mr. Costa. All right.
Mr. Chairman, I would like them to respond back to the
Committee.
The Chairman. And we will get a clarification of that. It
is confusing. If the System went to 15, how would you then
scale it back in any one individual entity? So I will ask you
for a written response on that issue.
Mr. Crawford.
Mr. Costa. Thank you, Mr. Chairman.
Mr. Crawford. Thank you, Mr. Chairman.
I want to thank the gentlemen for appearing today.
I really hate to beat a dead horse here, but I have to go
down this road and take a little bit of a different turn here.
We have addressed at some length in detail the issue with
CoBank and the acquisition or the help in Verizon acquiring
Vodafone. Two things here. Number one, I would like if you can
identify any ancillary benefits to our rural communities here
in the United States, I would love to give you the opportunity
to do that right now and then let me follow up with another
question that relates to that.
Do you see any ancillary benefit to that, to our rural
constituencies across the United States?
Mr. Spearman. Congressman, are you referring to the
similar-entity program, ancillary program?
Mr. Crawford. I am referring to the CoBank participation in
the Verizon-Vodafone activity.
Mr. Spearman. I am going to refer to Robert on that.
Mr. Coleman. Thank you, Mr. Spearman.
As we had mentioned, there is a 15 percent limit on
similar-entity lending. The System has about five or six
percent of its total loan volume out. So the other 95 percent
are either----
Mr. Crawford. Okay. And let me stop you there because I
know that was the answer basically that was given earlier. But
you are threading a needle there.
What I am trying to get to is: That is good for CoBank, but
how is this good for rural constituencies? And this leads to my
second question.
And a quick background, I started my business literally
under the roof of Farm Credit. I rented space from them. I have
a longstanding relationship with the Farm Credit lenders in my
district. These are not just my constituents; they are my
friends. Also, the bankers are my friends because I borrowed
money from them to start my business. So I have a pretty vested
interest in both of those, in the soundness of those in ag
lending. But what has happened here with CoBank, they have done
considerable damage to the Farm Credit brand. And I am
wondering what can be done, what you are doing actively to
repair that damage because risk reputation is what has
transpired as a result of that. And I am hearing this--the day
after this became public, I went into my Farm Credit office in
my hometown, and they stood there with their hands up, with no
explanation. And the damage that that has done in my community
to the Farm Credit brand is something that I don't see being
resolved or addressed at this level.
Can you comment on that?
Mr. Coleman. Two points, if I may. How does it benefit?
With a monoline lender, diversification of an income stream
is important, just like when we were talking earlier about corn
producers, if they also have other income, that other component
of income is helpful in diversifying the risk-management
component. I think that was the original intent. It continues
to be the intent today in regards to similar-entity
participation authority.
In regard to the issue over how that transaction was dealt
with, we had conversations with the institution that purchased
a portion of that similar-entity loan, and that no longer
exists in that institution today.
There are three of the four other banks, as well as a
handful of other Farm Credit System institutions, that do the
majority of the similar-entity lending in the Farm Credit
System. And we have looked at more closely over the last
several years those types of transactions and actually worked
with the System on guidance around some of the very issues that
you are visiting with us today on. And we have found instances
in the past where we have required Farm Credit System
institutions to actually divest of some of those similar-entity
participations where we thought that there was some
reputational risk or other areas where they shouldn't be doing.
Unfortunately, we just see the Verizon account a little bit
differently in regards to compliance with the law.
Mr. Crawford. Okay. Let me interject something right there.
The optics of this, the fact that we are spending so much time
on this and the amount of energy that is being devoted to
defending it probably means that it is one of those kinds of
things that has done some severe damage to the brand.
Let me suggest this in the time that I have remaining, that
if CoBank wants to help Farm Credit restore the damage that
they did to the Farm Credit brand, they might want to be very
forthright and proactive in helping to engage rural utilities
to deliver rural broadband across this country. So we actually
could see the tangible benefits accrue to rural constituents to
the extent that they did help Verizon and Vodafone.
Thank you. I yield back.
The Chairman. The gentleman's time has expired.
Mr. Aguilar, for 5 minutes.
Mr. Aguilar. Thank you, Mr. Chairman.
Mr. Spearman, thank you for being here today and for your
update on Farm Credit Administration.
CRS has forecasted that the agricultural industry net
income would decline over 52 percent from 2013. You talked a
little bit earlier from urban farming, and I represent an area
that is more urban, and it has taken off as a grassroots
movement, as you discussed.
What is the Administration doing to kind of forecast or
project urban farming demands? And where might you be able to
offer help? Where do you envision this market in the next few
years? And could this be an opportunity for growth within the
Administration?
Mr. Spearman. Thank you, Congressman, for that question.
We just recently had a strategic planning session as an
agency. And expanding the pie is one of the issues that we are
discussing, during those sessions. Urban agriculture is a
personal interest of mine, as I mentioned, because of the fact
that this is one way to expand the pie.
My staff and I, we had an opportunity to go and visit a
small operation in Austin, Texas. This young fellow started his
agricultural farm, in his backyard, on very small plot. And he
took his crop and he sold it at a farmers' market. Today, as a
result of YBS and the Farm Credit System, today he has over 200
acres of agriculture that he is growing, and he has developed a
CSA program.
This is something that if I can do as Chairman of the Farm
Credit Administration, I can go out and see these things and
promote them and share that with other institutions, I see that
as a growth area.
Mr. Aguilar. What tools did that individual use? What areas
in your discussions with them and when you and your staff
visited, what areas did you walk away thinking this was working
or this could be expanded? Could you expand on that a little
bit more?
Mr. Spearman. Well, one of the tools that this young fellow
was using there was through a YBS program. And he worked with
his institution because he didn't have--this was not a legacy
farm. He was able to, through that program, get some mitigation
of an underwriting standard to allow him to be able to get a
loan that he normally would not have been able to get through
some other area. So it was the change in the underwriting
standard that helped him.
Mr. Aguilar. What other programs do you think would help
more urban borrowers?
Mr. Spearman. Programs like the YBS program.
Mr. Aguilar. Do you think that they are aware of the YBS
program sufficiently? Or do you think that efforts can be
expanded to raise that to their awareness?
Mr. Spearman. I think both. I think raising it to their
awareness and expanding the program would be great for the
farming community.
Mr. Aguilar. Thank you.
I will yield back, Mr. Chairman.
The Chairman. The gentleman yields back.
Mr. DesJarlais, for 5 minutes.
Mr. DesJarlais. Thank you, Mr. Chairman.
Gentlemen, thank you so much for appearing before us today.
I share with my colleagues, when they say that they are
supportive of the work that the Farm Credit System does.
Tennessee is very appreciative and benefits greatly from the
services you provide. However, it is always concerning when you
hear stories of a quasi-government entity potentially expanding
beyond what appears to be its statutory authority.
I had the privilege yesterday of sitting down with some of
our Tennessee bankers, Mr. Tim Amos, the Executive Vice
President of Tennessee Bankers Association, and also Mr. John
Barker, a community banker from my district. And as important
as you all are, our small town community banks are also very
important.
We have heard some examples of Verizon and Vodafone and you
talked about the risk-mitigation clause, if you will.
I was getting more and more concerned as we heard the
questions and answers this morning about the expansion beyond
your charter, if you will. They are going outside the fence.
Because what they brought to me was a list of e-mails from all
over the State of Tennessee from small town community banks.
And I won't burden you with the 20 or so different examples I
was given. But let me share a few: One was a loan for a car
wash in a small town in Tennessee. Another was funding a
vacation home on the Gulf Coast for a local farmer. There was
funding to acquire a property for an exotic animal hobby farm.
And there was even funding for a local restaurant chain. So I
guess I would ask if you could elaborate on how these lending
practices support farmers in their rural communities.
Mr. Spearman. Thank you, Congressman, for that question.
If you earn 100 percent of your income from farming, there
are broad authorities under the Farm Credit Act. The car wash
and the items that you have mentioned, I am not aware of any. I
know that our examiners examine for loans when they are
reviewing loan portfolios at the institutions. And if anything
comes to our attention there, we immediately indicate that they
need to divest of it. We do have those authorities and the
powers to do that. And if you are aware of any specific ones,
please let me know.
Mr. DesJarlais. Yes, because I was going to say, there is
probably no justification for those types of loans if they are
at face value of what I shared today. You would be concerned
about that and think that probably goes beyond your scope,
assuming that what I am telling you is accurate, that these
loans were made.
Mr. Spearman. Assuming that is accurate and it is outside
of the scope of lending.
Mr. DesJarlais. Okay. And you agree that is probably not
what Congress envisioned when it passed the Farm Credit Act?
Mr. Spearman. Well, you are asking me to make a personal
assumption here.
Mr. DesJarlais. I get that. But what I would like to do is
get some specifics to you. Again, a hearing is a tough place to
give you specific examples. But if, indeed, what I read through
is correct, it would be very concerning to you and certainly is
not fair to the small community bankers.
They are as willing to accept healthy competition as anyone
else. But if the playing field is that unlevel, it threatens
the small town community banks. And we want to see the Farm
Credit System do what it is intended to do. But if it is
hurting small community banks because of these types of loans,
then that is certainly something that y'all would want to look
into. Would you agree?
Mr. Spearman. I would agree.
Mr. DesJarlais. Okay. So let me do this, let me get some
specific examples that are in writing and then we can
correspond further.
I yield back.
Mr. Spearman. Great. Thank you.
The Chairman. The gentleman yields back.
Mr. Ashford, for 5 minutes.
Mr. Ashford. Thank you.
I think the issues involving mission and loans outside of
the mission have been covered. I would second your answers to
questions about the markets in urban areas. I think that is
significant. It is very significant in Omaha, where I live. In
some low-income areas, we are making significant progress and
the Farm Credit is a partner in that.
I just have a hypothetical, and it may be very simplistic.
But in Nebraska, we are trying to develop our dairy industry. I
mean, we are not in the top 20 or so in dairy. Just how would
the Farm Credit approach that? I mean, we have producers who
would like to expand their operations. We just don't have
anybody to sell the milk to. And we are losing that capacity.
Even what we did have, we have lost up in the northeast
Nebraska area.
Could you just generally answer that? What can we do in
Nebraska? What can you do to help us expand already existing
operations on the dairy side?
Mr. Spearman.
Mr. Spearman. Thank you for that question, Congressman.
I spent some time in visiting Farm Credit Services of
America there. They have a very dynamic institution.
One suggestion I would have is that some of those folks
probably need to be talked to about, they are going to be very
knowledgeable about what System can lend to.
I can't think off the top of my head of anything that I
could suggest to you right at this point of what dairy farmers
can do in Nebraska. I will turn to one of my colleagues to see
if they have any comments.
Mr. Ashford. Yes.
Mr. Spearman. Robert?
Mr. Coleman. Thank you, Chairman Spearman.
As Mr. Spearman mentioned, FCS of America, which operates
out of Omaha, a large institution, a lot of different
borrowing. And I would agree with him in regards to looking for
ideas there for additional programs or additional lending
capacity that may help in that expansion either in dairy or in
any other areas where it will help further diversification.
In addition to that, USDA is obviously a contact point as
well as others in regards to other Farm Credit System
institutions. I know that in the upper tier in the United
States, a couple Farm Credit System institutions up there that
have been very active in the dairy industry and the expansion
of dairy not only there but also down in California. So it is
quite a bit of a knowledge base in several different Farm
Credit System institutions that could be helpful.
Mr. Ashford. Let me just ask one other follow-on.
It would seem to me that in the area of expanding an
existing product line--dairy, for example--in a state like
Nebraska that has a rich agriculture tradition, that is an area
where collaboration between the private-sector banks and the
Farm Credit could make a significant difference. Would that be
your thought as well?
Mr. Coleman. I would absolutely agree, yes.
Mr. Ashford. Good. That is all I have. I yield back.
The Chairman. The gentleman yields back.
Mr. Abraham, for 5 minutes.
Mr. Abraham. Thank you, Mr. Chairman.
And I thank the witness for being here.
Everybody in this room wants the young and beginning
business man or woman to succeed. So I guess my first question
is, what percentage of those applications that fall on that YBS
heading are actually approved? Do we have that number?
Mr. Spearman. Congressman, I don't have that number in
front of me here.
Mr. Abraham. And if you could get it, I would be
interested.
So I will follow up with that. Of your total loan
portfolio, what percentage falls under the YBS heading?
Mr. Spearman. Robert, do you have that number?
Mr. Coleman. Yes, sir. We require institutions to report to
us in each category. In the young category, beginning, and
small. And for the number of loans outstanding in the Farm
Credit System, about one in six go to young farmers; about one
in four go to beginning farmers; and almost \1/2\ are in the
category of small farmers.
Mr. Abraham. I am doing the math. So maybe under that whole
heading, 28, 29 percent.
Mr. Coleman. I apologize. I didn't hear you.
Mr. Abraham. I said, under the whole YBS heading then, I am
guessing 28 to 30 percent.
Mr. Coleman. We don't add those numbers together. When we
look at what we believe is best recorded in our annual report
to Congress, we try to keep each one of those categories
separate.
Mr. Abraham. I will echo my colleagues' statements on the
CoBank.
I live in rural--my district is rural Louisiana. And I
certainly have many areas where I can't get cell phone service,
certainly not Internet. And we know that without these
instruments today, you can't have a business. You literally
cannot. And I appreciate the transparency of the Farm Credit
System that allows us to talk about these issues, about the car
wash and the condos and the CoBank. So to that aspect, kudos to
you guys for having your system in place that allow those areas
to come up for discussion and for us to talk.
My final question. I read your testimony. And since 2010,
your non-performing loans have been decreasing steadily. Now we
are done to $1.7 billion in non-performance loans.
Give me both the region and the sectors that are still your
hot spots for those non-performing loans.
Mr. Coleman. Mr. Spearman, if I may?
Mr. Spearman. Yes, go ahead.
Mr. Coleman. I mentioned earlier California, a significant
state for agricultural production as well as loan volume in the
Farm Credit System.
Mr. Abraham. But they are still one of your top non-
performers?
Mr. Coleman. Correct. So the non-performing would basically
track where the loan volume is; California and Texas being the
largest ones. There is no other particular geographic
concentration or commodity concentration.
Mr. Abraham. I looked at the pie chart where most of your
loans come from, ag production, ag business, real estate, and
it looked like that is a good 60 percent of the whole pie.
Are those two states that are non-performing more, is that
basically due to climate, drought? Why?
Mr. Coleman. In those two states, the non-performing, the
numbers would just be higher just because that is where the
larger portion of the volume is within the Farm Credit System.
They are the largest states.
Mr. Abraham. Okay.
Thank you, Mr. Chairman. I yield back.
The Chairman. The gentleman yields back.
Ms. Lujan Grisham, for 5 minutes.
Ms. Lujan Grisham. Thank you, Mr. Chairman. I appreciate
your holding this hearing. And thanks to the panelists.
As we try to strike the balance between looking at your
mission and making sure that we are not competing
inappropriately with independent banks and community banks that
have their lending portfolio priorities; and making sure that
we protect small and young farmers and rural access, we want to
make sure that they have access to capital, which I appreciate
that you will include in your oversight and administration
efforts, that they do outreach.
I am also clear that in the context of your evaluating--it
seems to me that based on this hearing, I am clear--that your
mission does not include doing outreach or requiring that
outreach is an effective component for access to capital by
disadvantaged or minority farmers. Is that correct?
Mr. Spearman. Thank you, Congresswoman, for that question.
Since I have been on the Board at FCA there, I have noticed
that there are areas that the System could do better.
Traditionally, my observation has been that loan officers would
sit in their office and wait for people to come to them.
One of the issues that is important to me is that the
System live up to its mission. That its credit is available to
all creditworthy borrowers, no matter what the size or what
have you, even though I am putting more emphasis on the smaller
urban and rural areas for me personally.
Ms. Lujan Grisham. Well, that is terrific because it seems
to me that has been separated in terms of who does what. And I
would agree with you that arguably if we are not reaching out
to those disadvantaged farmers, it is another layer of
discrimination, given the way in which we are not focusing on
making sure they have access to capital. And, in fact,
discrimination for this subset of farmers is well documented in
USDA by themselves internally. Externally, I would tell you,
given the number of settlements--although we are not anywhere
close to getting that, Mr. Chairman, addressed by USDA--that it
is clear that we are still having those issues. And in a
minority-majority state with real issues with small and young
and disadvantaged minority farmers, if we are not clear about a
pathway, a significant pathway investment, which includes
outreach and real access to capital--recognizing that it is not
a universal issue, right? Not everyone is going to be eligible.
But if they never get in the door, I can tell you this, that my
state, which relies significantly--and so, therefore, the rest
of the country--on our agricultural investments, will cease to
be able to make them if we don't figure out a way to be clear
that everyone should be addressing outreach and access to
capital in the appropriate lending institutions for not just
the small and rural farmers, but also those disadvantaged and
minority farmers.
How can we help you to make sure that that occurs?
Mr. Spearman. Well, as an agency, we are always willing to
work with the Committee to help us to strengthen the areas
within the Act. Our examiners are in the field daily, and they
are seeing what is actually happening on the firing line. So we
would be a wealth source to help the Committee come up with
some future improvement in the Act to help that area.
Ms. Lujan Grisham. I really appreciate that.
And, Mr. Chairman, maybe we can get that in writing and ask
for a couple of things, given that you appropriately--I am not
sure if it was teasing or chastising me. I am okay with either.
But let's get the data from this group to show who has access
and who doesn't; get it separated by those minority and
disadvantaged farmers, as well as the young and small farmers.
And then let's come up with some ideas from the Committee that
is a bipartisan effort to make sure that we are reaching,
universally, the folks who were intended to have access to this
capital.
The Chairman. Well, certainly, we will put that question
before the witnesses so they can give us that information.
But as we have said earlier in the hearing, it is about 40
percent of the lending commercial banks; 40 percent. FSA is in
the fight. So there is a broad spectrum of lenders that need to
be a part of that solution.
Ms. Lujan Grisham. I am in.
Thank you, Mr. Chairman. I yield back.
The Chairman. The gentlelady yields back.
Mr. Newhouse, for 5 minutes.
Mr. Newhouse. Thank you, Mr. Chairman.
Gentlemen, thank you for being with us this morning. As a
farmer, I certainly appreciate the credit being made available
to agriculture around the country. Currently my loan balance is
zero, but that is due to change here dramatically shortly.
Someone said ``at the risk of beating a dead horse,'' maybe
there is a little life left in that horse.
I wanted to ask one more question about mission. You have
talked quite a bit about that this morning. There is quite a
bit of interest, obviously, on the Committee about that
subject. And you have talked about some of the regulatory
measures in place to ensure that financing falls within the
lines of the mission.
So let me ask your opinion. Do you see any additional
mechanisms that would help FCA or FCS preserve that mission? Is
there something else that you could use to help alleviate some
of the concerns and make sure we stay on track and, as one of
my colleagues said, preserve the ability of Farm Credit to have
financial credit available in the future?
Mr. Spearman. Thank you, Congressman, for that question.
There are probably always things that can be improved upon. The
Act, as it is stated now, has provisions. We do have authority,
as an agency, to put regulations out. We also have the
authority to put various memorandums out to the System that may
not have the authority of a regulation. We believe at this
point that we have the authorities to be able to keep the
System safe and sound. Again, I would offer that if there is
something that the Committee has in mind that they would like
for us to assist them in, we would be more than glad to do
that.
Mr. Newhouse. So you have everything you need? All the
tools in place?
Mr. Spearman. I don't want to say we have everything we
need but we have adequate kinds of authorities to be able to
make sure the System remains safe and sound.
Mr. Newhouse. Okay. Another question in opening comments
talked about the downturn in the ag economy, and certainly that
places a lot of stress on farmers but also on lending
institutions.
Could you talk a little bit about the impact that has had
so far across the System and the ability for people to pay back
their loans? Is there enough capital within the System to
protect against losses? And also, as kind of a follow-up to
that, what is in place to work with farmers who may have
difficulty in making payments? I am not sure who to direct that
to, Mr. Chairman.
Mr. Spearman. Well, to answer your first question, there is
record low, as was mentioned previously, about non-performing
loans in the System right now. Some of this could be due to the
good times that ag has experienced in previous years, but we
all are reading the tea leaves now that there are some clouds
on the horizon.
The System is well postured, I believe, right now--and not
just me, the staff also--to weather some downturn in the
economy. But we are vigilant, and our examiners are constantly
making us aware of some of the clouds that may be on the
horizon. And we are taking action.
Mr. Newhouse. So there are things in place to help farmers
who may be having difficulty making those payments?
Mr. Spearman. There are some. There are some. But we have
borrower rights that are part of the mission component there to
be able to work with--and that is another mission component of
the Farm Credit System there--to work with institutions there
to make sure that they get the right of first refusal,
restructuring some of the tools that are available under the
borrowers' rights provisions.
Mr. Newhouse. Right. Okay. I see my time is up. I
appreciate very much your responses. Thank you.
The Chairman. The gentleman yields back.
Mr. Kelly, for 5 minutes.
Mr. Kelly. Thank you, Mr. Chairman.
And I thank the witnesses for being here and all our other
people who came here that are interested in this.
I want to go back to the 15 percent. The individual entity,
are they bound by the 15 percent of their loans rule, the
individual entity, not as a System but as each bank held by
that?
Mr. Spearman. Charlie?
Mr. Rawls. The 15 percent that we have talked about, is
also by implication, a System-wide limitation on the similar-
entity participations. So at the individual institution level,
overall for participations, I am not sure that there is a
limit.
Mr. Kelly. All right. I am a pretty simple guy. But, I
mean, it is a simple question. Is the individual entity held to
the 15 percent? Because we have had this question asked several
times. And I want to know, is each bank or each lending
institution held to the 15 percent limit in that institution?
Mr. Rawls. The answer is no for all types of participants.
Yes, for similar-entity only.
There is a separate ten percent limit on how much of that
institution's capital can be devoted to similar-entity. I am
sorry if we have not been clear. The 15 percent would apply to
the institution level.
Mr. Kelly. And I, like everyone else--and the Chairman
started out right. We have friends on both sides of this. And I
am talking about really good friends.
Self-regulation is very, very important. It is very, very
important. And we all are parents or we deal with soldiers or
deal with employees and those kinds of things. And when we fail
to do those things ourselves, okay--sometimes they are right.
Sometimes they are legal and lawful. I am a lawyer too, so I
understand that sometimes they are legal and lawful, but they
are still not right. Okay? They are not morally, or they are
not the honorable, or integrity, or trustworthy thing to do.
I would just ask our banker friends, your banker friends,
our banker friends if they like all the regulations that came
with Dodd-Frank. Okay? And most of those guys did not, as
individuals, do anything wrong that caused those regulations to
come down on them. They were a part of the System.
I see you guys as a System. Just remember, if you don't
regulate those things which may be lawful, that you ask for an
outside entity to do that. And I would just add extreme caution
that maybe if 15 percent does apply across the System, then
maybe it should apply to each individual entity so that they
are not able to use that or certain ones, certain bad actors,
because 95 percent of the people that you represent are doing
the right things for the right reasons. I would ask, what can
we do to make sure that those five percent don't disparage the
other 95 percent?
Mr. Spearman. Well, Congressman, one thing that we are
doing is that, there has been an Informational Memorandum that
went out to the particular institution that I believe you are
addressing, where some of these issues are arising. The
memorandums centered around getting the Board directly involved
because, as an agency, we don't have prior approval for a lot
of these. So we are seeing them--the way the Act works--we are
seeing them afterwards. As an agency, we have to turn them down
and ask them to divest after the fact. We have asked the Board
to review these items.
As an individual, I am concerned about reputational risk
for the System, and I don't think that I am the only one. I
think the System's funding corporation--because they have to go
out to the market in order to sell the paper for the System.
The market may be concerned about that, exactly what you are
saying. So we are trying to do the things that we can do as an
agency.
Again, we would be willing to work with you if there is
anything you see that might be able to assist us.
Mr. Kelly. Thank you. And I appreciate that. And like I
said, I am a huge friend. But I am just telling you, the best
person to regulate you is you.
The final point I would just like to make--and I don't have
time really to ask a question.
Young, beginning, small farmers, if it is a priority--
Congress obviously said, ``We want you to lend money to these
folks,'' okay. And I would suggest, if you are not tracking
that, it cannot be a priority or it cannot be something you are
focused on if you are not tracking what you are doing with
that. And I would just suggest that maybe you look at or you
put that as a data point that you look at to make sure that you
are carrying out what Congress intended the right percentages.
I yield back, Mr. Chairman.
The Chairman. The gentleman yields back his time.
G.T., for 5 minutes.
Mr. Thompson. Mr. Chairman, thank you.
Gentlemen, thank you for being here.
I have a number of questions. Let me jump right into them.
How do you measure creditworthiness risk in terms of the
regulatory pressure on agriculture? Because agriculture is
somewhat unique with the pressures. And, specifically, I mean,
there is a long list I could give you.
But like Waters of the U.S.: Where someone is applying for
a loan, if Waters of the U.S. is in place, what is their number
one asset, their soil, all of a sudden becomes off-limits
unless you get EPA permitting.
Do you measure that in terms of your consideration or
creditworthiness risk?
Mr. Spearman. Thank you, Congressman, for that question. I
am going to defer to Robert to give some of the specific CAMELS
and FIRS ratings type of processes that our examiners follow
and measure and rate.
Robert?
Mr. Coleman. Thank you, Mr. Spearman.
We require each Farm Credit System institution to have loan
policies and procedures that guide their underwriting
standards.
Mr. Thompson. I understand that. I want to zero in because
I have a couple questions.
Robert, I am really looking for the question of: Do you at
this point take into consideration pending, looming regulatory
pressures that fall on the backs of the agriculture industry,
our farmers, when it comes to--does that play a role in
determining creditworthiness, those potential risks?
Mr. Coleman. The short answer is, yes, absolutely. And
uncertainties around any of those areas, crop margin,
compression pressures, et cetera.
Mr. Thompson. Okay. Great. And I appreciate that because
that should be given as some of the advantages that Farm Credit
has, that is one of those things that makes sense to be part of
the mission, trying to mitigate some of those undue pressures
and appropriate pressures as well, however you want to describe
them.
With that said then, with your exposure of the differences
in terms of between 1980s and today, I mean congratulations.
Your portfolio looks like--the number I read, $217 billion in
2013 in terms of loans that are out there or were out there at
that point. But, also, if there is a potential decline in the
agriculture economy--and just for the record, the Chairman and
the rest of us are doing our best to make sure that does not
occur with the good work that we are trying to do--but also the
regulatory threats that are there, is FCS prepared to handle
possible loan defaults, given the size of your portfolio? Where
are your reserves, and how is FCS better prepared than in the
1980s to deal with that situation?
Mr. Spearman. Robert?
Mr. Coleman. Thank you, Mr. Spearman.
As I mentioned earlier, Congressman, the System overall has
about almost 17 percent capital, as compared to total assets.
If you go back to the 1980s, that is almost twice of what it
was. If you look at the System earnings overall, about $4.5
billion generated last year, on track probably to exceed $4
billion this year.
Another very important component, most especially after the
2008 financial crisis, is liquidity. We came up with new rules
that require the banks to hold at least 90 days of liquidity.
They have more than twice that now, as an average. So there are
very good levels of liquidity in regards to that.
Credit quality, as you mentioned, over 96 percent of the
loans outstanding in the Farm Credit System are currently
classified as acceptable. And just over \3/4\ of 1 percent on
total non-performing. So the System is very well positioned to
handle adversity or areas where we anticipate some stress over
the next several years.
Mr. Spearman also mentioned the Farm Credit Act added in
the late 1980s the borrower rights. So if there are
difficulties with borrowers, Farm Credit System institutions
are required to look at restructuring plans and the ability to
keep the farmers on the ranch and keep them in production
agriculture, if at all possible.
Mr. Thompson. Great. One suggestion, I guess, and then a
quick question.
I think we are all looking for outcomes when it comes to
mission. So doing that in a transparent way--maybe a dashboard
or something where we can look at the percentage of young,
beginning farmers--anything that can provide greater
transparency to us is helpful since there is a specific
mission.
And then my other question--and I am not going to have time
for a verbal response, but I would appreciate one for the
record--what safeguards do you have in place to prevent mission
creep? Because mission creep in government is well known and
certainly in quasi-government agencies as well. I think it is a
human nature tendency. And I would love, for the record, if you
could send the Committee a list of, what are the safeguards you
have in place to keep you within the lines of what Congress
envisioned when this authorizing legislation was passed?
Once again, thank you, gentlemen, for being here.
The Chairman. The gentleman's time has expired.
Mr. Yoho, for 5 minutes.
Mr. Yoho. Thank you, Mr. Chairman.
Gentlemen, I appreciate your being here.
Mr. Spearman, I appreciate your work with the Florida
citrus industry and everything you have done with that. You
know the plight we have in Florida with the citrus industry.
In agriculture, when times are good, everybody wants to
lend money to the farmers. And we know that is a good thing.
But when the economy turns and the ag sector takes a big hit,
there are not as many people out there willing to lend. They
like to ride that wave of good fortune. And in today's
situation, especially in Florida, the way I understand it, just
in two regions with the Farm Credit System, there is about $200
million owed in the citrus industry or lent out.
Would that happen or would that be possible or would you
have credit available in a situation like today if there wasn't
a Farm Credit System? How difficult would it be to get that
money?
Mr. Spearman. The short answer: It would be very difficult.
Mr. Yoho. So I mean, the service that you provide, the
ability to borrow the money in times like this is, it is
imperative that we have that.
And being a veterinarian for over 30 years, working in the
ag sector with food animals, we have so many clients that are
members of the Farm Credit System. And I commend you for what
you do.
What do you anticipate in the future, say in the next 5
years, if the economy and the ag industry stay a little bit
lean? Do you see anything that Congress can do to either help
or stay out of your way so that you can perform the job that
you need to perform for our farmers?
Mr. Spearman. Congressman, there is nothing I can see
directly. Again, I would mention that there are certain
authorities that could probably be improved upon that we have.
But that is something that, as I mentioned previously, we would
be willing to work with the Committee on to shore those up.
I would defer to Robert to see if he has any comments.
Mr. Yoho. Mr. Coleman, anything you want to add to that?
Mr. Coleman. I have nothing to add. We stand ready to work
with the Committee on any specific areas.
Mr. Yoho. Well, that is good.
Again, when you look at all this stuff and the lending
portfolios that you guys deal with and you look at the
breakdown of that, it is just nice to know that it is there, it
is available for the farmers when they need it--whether it is
real estate, whether it is equipment or planting the next crop.
And that is the stability that we need. And I commend you for
the work that you have done.
Mr. Rawls, do you have anything you want to add, any of the
challenges you see coming up in the ag community in the next
couple of years?
Mr. Rawls. Congressman, it has been pretty well covered. We
are just very vigilant now about what is going to be happening
with commodity prices and the issues that seem to be coming
into view now with farmers, going forward. Hopefully this will
not be a long downturn.
Mr. Yoho. Yes. We hope that. And I hope that the citrus
greening gets taken care of real quick, and I appreciate your
work.
Mr. Chairman, I yield back. Thank you.
The Chairman. The gentleman yields back.
Mr. Benishek, for 5 minutes.
Mr. Benishek. Thank you, Mr. Chairman.
I have been listening to all this for quite some time. And
one of the things that comes to my mind--I am from Michigan. I
represent the northern half of Michigan. And we have a very
diverse agricultural economy in Michigan. I am familiar with
our local credit agency GreenStone, and there may be, because
of that diversity, there is more stability. Of course, in
states like Iowa that have a lot of corn, these issues can lead
to crisis, I think.
I would like to delve into that a little bit more. I have a
couple of questions about this stuff that, we have been hearing
all this mission creep stuff, and it is something that comes to
my mind. What is this mineral rights issue that Mr. Lucas
talked about? I mean, that seems to be a mission creep to me.
One of your institutions is holding mineral rights as an asset.
Is that correct?
Mr. Spearman. Well, as I mentioned, Congressman, this goes
back a ways.
Mr. Benishek. Don't you look at that and say, ``Well, this
is an inappropriate asset to be holding, and you should
diversify''?
Mr. Coleman, is this one of the things that you would
consider as a diversification?
Mr. Spearman. Well, that Act, it was changed so that these
mineral rights cannot be held. But I will defer to Robert there
because they actually examine those.
Mr. Coleman. Thank you, Mr. Spearman.
The Farm Credit System was allowed by statute to hold
mineral rights for land that was foreclosed upon because of
nonpayment and default. So those mineral rights track back to
many, many years ago when those Farm Credit System institutions
acted under the statutory authority to acquire those and not
transfer them with the surface rights.
Later--in the 1980s I believe it was--there was a
requirement that any mineral rights would attach to the surface
rights when that acquired property was sold. So some of the
Farm Credit System institutions who had mineral rights in their
portfolio or on their balance sheet chose to sell those. Other
institutions chose to keep those. But since the mid-1980s, no
new mineral rights----
Mr. Benishek. All right. Let me ask you this: Are there any
transactions that you would look at and say, ``This is not
appropriate from the Farm Credit Administration''? I mean, I
understand are you saying there is like a 15 percent cap maybe.
But is there any transaction that one of your members would
make that you would look at and say, ``Well, this is not
appropriate''?
Mr. Coleman. We have regulatory requirements in regards to
eligibility.
Mr. Benishek. Could you give me an example of something you
would say, ``This is not an appropriate transaction''?
Mr. Coleman. We have to make sure the loan is extended to
an eligible borrower and for an eligible purpose.
Mr. Benishek. But, as I understand it, there is no
completely eligible purpose as long as it leads to what you
call the more stability of the System.
Mr. Coleman. I believe you are now talking about the
similar-entity transactions. Is that correct?
Mr. Benishek. Well, is there any transaction that you would
reject when somebody did it because it was inappropriate?
Mr. Coleman. Absolutely. I think the point that was----
Mr. Benishek. Give me an example of that.
Mr. Coleman. If we looked at a loan that a Farm Credit
institution extended and we believed that it was outside of the
eligibility or outside of the scope of lending, then we would
tell that institution, you need to divest of that loan.
Mr. Benishek. But I haven't heard anything like that. I
mean, everything that I have heard today is that this Verizon
loan seems to be outside the scope, except that it is a
similar-entity, and there are all kinds of reasons to stabilize
the economy or to stabilize the loan portfolio.
You haven't told me of an example that you would reject.
Mr. Coleman. Well, there is another example of a similar-
entity loan that a Farm Credit System institution entered into
where we did not agree that it was authorized, and we required
the institution to divest of it, and they divested of that
similar-entity transaction. So there are loans that fall
outside of that we would look at on a----
Mr. Benishek. Could you give me an example of what that
would be?
Mr. Coleman. There was a loan made to Cracker Barrel by a
Farm Credit System institution, and we did not agree with the
conclusion by the institution that it was----
Mr. Benishek. What percentage of loans does that occur to,
that type of thing?
Mr. Coleman. It is extremely small from a percentage basis.
As we mentioned earlier, there is only about five percent of
the loan volume in similar-entity transactions across the Farm
Credit System.
Mr. Benishek. Thank you. I am out of time.
The Chairman. Mr. LaMalfa, for 5 minutes.
Mr. LaMalfa. Thank you, Mr. Chairman.
And thank you, Chairman Spearman, for being here with your
colleagues today. It is good to see you.
We have much praise for the Farm Credit System in America
and in California, again, one of the largest states. And I hope
today's hearing doesn't sound too much like a flogging or
whatever. But, the same questions keep coming up over and over
again, but they are good questions, good points about the
mission.
So, as you know, in California, over \1/2\ of our state's
farms are under 50 acres in size. So we are concerned with the
small operations continuing to be viable and that is where Farm
Credit comes in and provides alternatives where we haven't
necessarily had them in the past, especially going back to the
1980s, when things were going bad with other types of
financing. So I guess some of my questions would revolve
around--one of the important ones right now, obviously, we are
in a huge drought in California and in much of the West. So do
you see your focus being able to help directly with drought
relief efforts on that? Not just infrastructure or typical farm
loans but being able to go directly to alleviate some of the
crisis on that?
Mr. Spearman. Thank you, Congressman, for that question.
We receive reports periodically. They are mainly quoted
from our economists and also from our examiners, as board
members.
Mr. LaMalfa. Pardon me. Let me have the focus be on
restructuring existing loans. Pardon my interruption.
Mr. Spearman. Well, that is part of it. If it was ever to
get to that point, to where there was potential for some
foreclosure on a loan. But there is attention that we, as an
agency, pay to risks within the System. The drought in
California definitely is a risk that I am sure you would
appreciate also to agriculture and to farmers' abilities to
repay their loans. It is something that, as an agency, we
definitely are aware of. How can we help you to mitigate that?
I don't know off the top of my head what the agency could do,
other than mitigation in loans or something of that nature
there, if they were to run into financial trouble.
Mr. LaMalfa. Well, restructuring and more patience. I mean,
we are all banking on, to use the term, the end of the drought
someday.
Mr. Spearman. Yes.
Mr. LaMalfa. If we don't want to bet on the end of the
drought, then we are in bigger problems than anything we are
talking about here today.
So does Farm Credit have the ability or have the patience,
the longer view, to say, ``Yes, we have to help these guys and
gals through this crisis and maybe bend in a way we haven't
bent before on that''?
Mr. Spearman. Well, Congressman, we are getting back to the
mission component of the System, where we need to be there. The
System needs to be there in bad times.
Mr. LaMalfa. Yes, we do expect that from Farm Credit for
the farm sector. And in your statement here on mission, it is
to ensure a safe and sound, dependable source of credit for ag
and rural America.
Now, do you think that, given the line of questions today,
that the rural America portion--due either to restructuring or
something that happened in previous legislation 20 years ago or
whenever--that there has been a greater emphasis done on the
portion called rural America and less from agriculture; the
other things that are ancillary to what people typically think
of the mission. Is the rural America part becoming too big a
part of your portfolio and less from ag? And is it something
that legislatively we have caused or you feel pressured to do?
Mr. Spearman. Well, I am not sure if I totally understand
your question. But rural America is very important. I think
that there is----
Mr. LaMalfa. But if it is not farm-related things so much.
If that is the mission creep that keeps coming up, do we need
to have kind of a snapback on that to get more focused? Has
that been caused by pressure put on by this Committee or by
Congress? We have heard other priorities here brought up today,
pressuring you guys to do certain things. Is that a result of
legislation that we are having a bigger rural America focus and
less on ag?
Mr. Spearman. I don't foresee that. I believe that the
agency has adequate powers to be able to take care of the
System in bad and good times. I don't perceive any pressure
from the Committee that we need to do some----
Mr. LaMalfa. Or for other certain types of loans, et
cetera?
Mr. Spearman. I beg your pardon?
Mr. LaMalfa. Or for other certain types of loans, there is
not Congressional pressure to do things that don't make sense
to you?
Mr. Spearman. No.
Mr. LaMalfa. I yield back, Mr. Chairman, thank you.
The Chairman. The gentleman yields back.
Former Chairman Goodlatte, 5 minutes.
Mr. Goodlatte. Thank you very much, Mr. Chairman. I
appreciate you holding this hearing.
Mr. Spearman, you testified that non-performing loans have
decreased each year since 2010 and currently total $1.7
billion. Is the non-performing loan portfolio dominated by any
certain sector of the agriculture industry?
Mr. Spearman. I am going to let Robert answer that
directly. But in my opinion, it is not because it is more
related to the capital asset management of the institution and
not necessarily a particular segment. But I will let Robert, as
our chief examiner, respond also.
Mr. Coleman. Thank you, Mr. Spearman.
The one area that is a bit higher than all the other
sectors is horticulture. That area suffers from the continuing
housing weaknesses. That is a very, very small portion of the
total overall, one or two percent.
Mr. Goodlatte. Can you explain that? How is horticulture
affected by housing weaknesses?
Mr. Coleman. Primarily, they would be greenhouses that
produce either turf or nursery products and so forth,
landscaping, production agriculture of those components.
Mr. Goodlatte. I have you. Okay. And is there any region of
the country that contributes to this non-performing loan total
more than others?
Mr. Coleman. The regional areas are more focused from a
non-performing standpoint in the two largest states where the
loans are outstanding, in California and in Texas. So that is
just a function of where the loan volume is.
Mr. Goodlatte. Thank you.
Mr. Spearman, agriculture continues to evolve and change.
And, yet, the law that you administer has not really received
any major overhaul since the mid-1980s or earlier. Is the
current law constraining the Farm Credit System's ability to
fulfill its mission?
Mr. Spearman. The short answer, again, would be no,
Congressman. I think that the authorities that we have as an
agency are adequate for us to be able to ensure the safety and
soundness of the System. They can always be improved upon.
Mr. Goodlatte. I have heard complaints from farmers and
from people with Farm Credit that they can lend to farmers but
they can't lend to the people who do business with farmers.
What would you say about that?
Mr. Spearman. Again, we would have to refer back to the Act
and what the Act allows and----
Mr. Goodlatte. I know what the Act allows. What I would
like to know is whether it allows enough.
Mr. Spearman. Again, that question is almost relative, what
we would do, that needs to be pondered. Enough? Enough for
whom? It is an issue where we, as regulators, focus on pretty
much what the Act is right now. To answer your question, is
there something that we would personally recommend to add to
the Act to be able to improve the lending ability to those who
sell to farms.
Mr. Goodlatte. I am talking about farm implement dealers,
other folks who could use financing to be able to maintain the
inventory they have on their business lots. Are you able to
loan to those folks?
Mr. Spearman. There is a provision in the Act, I believe,
where we are to, the System is able to lend to equipment
dealers. And I will defer to Robert to----
Mr. Goodlatte. Because I am running out of time, let me ask
you to respond in further detail after you have a chance to
more carefully examine what the current practices are and what
the law allows. But I am sure you would agree that the Farm
Credit System has certain advantages and benefits that small
community banks don't have. Alternatively, what advantages do
community banks have over the Farm Credit System? That may be
one of them. The small community bank can lend to that
implement dealer but Farm Credit cannot.
Mr. Spearman. Well, when you talk about, Congressman, when
we talk about advantages and disadvantages, both sides have
certain advantages and disadvantages. Community banks can't
take--they take deposits; the System cannot. When you start
weighing the advantages and disadvantages, the way that I look
at it personally is that the ag market needs all concerned. It
needs the Farm Credit System. It needs community bankers. And
it needs those to be able to provide credit for it.
Mr. Goodlatte. Thank you very much.
Thank you, Mr. Chairman.
The Chairman. The gentleman's time has expired.
Mr. Spearman, you are almost through. Good job this
morning.
Let me follow up with some quick nits and nats that are out
there. Tax structure for these entities, as I understand it, on
the real estate portfolio, the entities do not pay tax but on
all the rest of the portfolio, they do pay tax. Is that
accurate? Mr. Rawls?
Mr. Spearman. That is, I believe, accurate. Charlie, go
ahead.
Mr. Rawls. Yes, fundamentally.
The Chairman. All right. Are there any real issues between
how the banks apply that rule, and is there anything we need to
do there in terms of the allocation of overhead and anything
else? Mr. Coleman, are there any issues when you examine the
banks on the way they do their taxes?
Mr. Coleman. Mr. Chairman, we look at each Farm Credit
System institution. And we have a requirement that they have
audited financial statements. So we rely heavily on the outside
auditors to help address that----
The Chairman. I got you.
Mr. Rawls, you have a bad actor out there, somebody that is
doing something that is against the rules. Could you bring
charges against them? Could you do anything to a particular
loan officer or anything? What is your authority to go after a
bad actor?
Mr. Rawls. We have very broad enforcement authorities under
the Act.
The Chairman. That is against the bank. What do you have
against the individuals who actually do the bad stuff?
Mr. Rawls. It is limited on individuals. And that would be
one area that probably could be improved.
The Chairman. The way I understand it is once they leave
the employment of the bank, you really have no authority,
unless you refer it to Justice.
Mr. Rawls. That is correct.
The Chairman. In the circumstances where you have referred
a case to Justice, what actually happened there?
Mr. Rawls. That is a mystery. In working with the
prosecution, they have to decide that it is something worth
their time to take up. And oftentimes, it is not.
The Chairman. Right. Several times, Mr. Spearman, you
mentioned that banks or that your entities don't take deposits.
However, it seems that the System has some scheme--that is
probably a harsh word--but of holding funds in an account that
looks and acts like a checking account. Can you walk us through
the mechanics of how that is not a deposit and how you are
complying with the rule that they don't take deposits? Mr.
Coleman?
Mr. Coleman. Yes, sir. Mr. Chairman, Farm Credit System
institutions are allowed to hold advanced conditional payment
accounts. So if you have a Farm Credit System loan, and let's
say it is a real estate loan and you have two payments to make
during the year, you can deposit that payment, future payment,
and then have it held by the institution until the payment is
actually due. Farm Credit System institutions are authorized to
have those.
The Chairman. Can you write checks on that? How does that
customer access that advanced payment?
Mr. Coleman. They would have to come back to the
institution and request that those funds be released.
The Chairman. Come back. Okay. Do you pay them interest on
that, on those deposits? Does the System pay interest?
Mr. Coleman. On that advanced conditional payment account,
there would be funds paid, correct.
The Chairman. Okay.
Mr. Rawls, any indication that the similar-entity lending
arrangements, the 15 percent, which you say is about five
percent, has that come at the expense of all the other lending
things that more directly relate to your core businesses? So
are there instances where but for a similar-entity loan, the
bank would have had the capacity to make other loans to small
businesses and small farmers and others? Any sense of that?
Mr. Rawls. No, sir. Based on everything we have heard,
there is no credit rationing or limitations in the System right
now.
The Chairman. Okay. Back in my banker days, 6 years of my
life, we had a restriction on what is called a tying act. That
may not have been the proper name. But as a banker, I couldn't
make a loan to somebody and require them to do something else
in exchange for that. Buying credit, buying crop insurance and
getting a better rate, is that going on? If it is, is it okay
under the regulations to allow credit or Farm Credit System
banks to require customers buy the insurance from a particular
insurance agency or agent?
Mr. Rawls. Mr. Chairman, that is not okay. And that is
specifically disallowed under our regulations and policies and
so on and so forth. And that would be something that examiners
would follow up on, any concerns with that.
The Chairman. I got you.
Ms. Plaskett, you were not here earlier, so 5 minutes.
Ms. Plaskett. Yes, hi. Thank you very much, Mr. Chairman,
Mr. Ranking Member.
Thank you, gentlemen, for being here today. I know that
most of my colleagues have probably asked the bulk of the
questions. I am thankful that my staff has been keeping me
apprised while I was in another hearing.
But I did have a question about the Farm Credit
institutions. So your examiners are out looking at Farm Credit
institutions and what they are doing every day. Do you see Farm
Credit institutions and commercial banks working together to
serve rural communities in agriculture? And, more importantly,
can you give us specific examples of how that has been
effective and how that has worked in some of those communities?
Mr. Spearman. Thank you, Congresswoman, for that question.
Yes, I have had an opportunity to go out and visit programs and
projects where the two entities have worked together on. And it
was primarily through the Investment in Rural America Projects.
And I had an opportunity to visit a hospital, a nursing home.
And, in my opinion, that really works favorably toward the
mission aspect of the Farm Credit System.
Ms. Plaskett. And how do you feel that it fits within the
mission to accomplish that?
Mr. Spearman. It fits within the mission because the Farm
Credit System's mission deals with the fact that they need to
be there in good times and bad times for America's farmers and
ranchers.
Ms. Plaskett. That is really interesting to me because in
the Virgin Islands, we are considered a rural area. And we
have, after many, many years not really, at one point actually,
about 100 years ago, we were considered the bread basket of the
Caribbean. And we have moved completely away from farming, with
other industries falling off, our farmers are beginning to once
again try and revamp themselves, modernize, become much more
technical and businesslike in their work.
And one of the things that I wanted to understand was we
realize that the Virgin Islands are excluded from seeking
credit through FCS. And I just wanted to know if you could
explain to me, any of you, why that is and what can be done to
rectify that.
Mr. Spearman. My understanding is that the Farm Credit
System does lend to the Commonwealth of Puerto Rico. The Virgin
Islands, I believe, my understanding is that, it is different
from yours, that they could possibly do it. But I will refer to
Charlie on that.
Mr. Rawls. Just quickly if I can, there is authority under
the Farm Credit Act for lending activities in the Virgin
Islands. But a charter has never been issued or expanded for
that area.
Ms. Plaskett. And who would be responsible for that
charter?
Mr. Spearman. The Farm Credit Administration issues
charters.
Ms. Plaskett. So we would need to petition the Farm Credit
Administration to issue a charter to support the farmers of the
Virgin Islands.
Mr. Spearman. That is correct.
Ms. Plaskett. And how long does that take? What are the
impediments to that happening?
Mr. Spearman. I am not sure personally.
Ms. Plaskett. More often than not, what happens is that
people think that it is in Puerto Rico, so it is covering the
Virgin Island. But we are two completely different animals. And
when you have a population of three million people and then a
separate jurisdiction with 100,000, you know where most of the
interest and the resources go. So to encourage Farm Credit
banks to do business in the Virgin Islands, then we need to now
do the charter. But does there need to be any legislative
changes? Or is it strictly a regulatory or an agency matter?
Mr. Spearman. I believe it is just a regulatory matter. I
can get back to you on the length of time.
Ms. Plaskett. I will get with you. You won't have to get
back with me. I will be getting back with you. Okay. Well,
thank you. That was pretty much the bulk of my questions.
So thank you very much for your responses and for the
information, which will be really helpful to us.
And thank you, Mr. Chairman and Ranking Member.
The Chairman. The gentlelady yields back.
I will turn to David Scott for the closing statement of the
ranking Minority Member. And I would like to also recognize
that David is also on the Financial Services Committee, which
has the other set of friends in the room.
So, David, any remarks?
Mr. David Scott of Georgia. Yes, indeed, I am on both of
those committees, Mr. Chairman. That is why in conclusion and
summary of this hearing, it can be summed up in six words: We
have two trains running here. One train is financial, the Farm
Credit System. And the other train is our banks. And our task
here is you get these two trains on these two tracks; we can't
let one train jump over the other track or we have a big wreck
coming. And our farming system cannot handle that. And this is
why this has been such an extraordinary hearing.
And it will be good, Mr. Chairman, if we just reviewed for
a moment why, back in 1994, we, in Congress, added the similar-
entity lending language to the Farm Credit Act. It was put in
there to provide greater diversity at a very, very serious time
for this reason, so that we could add to the portfolio of the
Farm Credit Council for risk management. It was very much
needed. Now, but we also put in there some very important
language, that it could not exceed 15 percent of the Farm
Credit entity lending portfolio, and it could not exceed over
50 percent of the total individual loan. And that is why we are
here. And we are going to have to modulate that a bit.
We have to make sure we keep both trains running. And it is
very interesting that the train for the Farm Credit System has
42 percent of the loans and the train of the community banks
and the commercial banks has 40 percent of the loans.
And so that is why this is so important, Mr. Chairman, why
this is such an important hearing. And it may do good for us,
as we summarize, to see--and from the banking community and
from the Farm Credit System--if there is any need for
legislation to continue to smooth it or if, so to speak, we can
keep that oil in there on both of these trains so we don't have
a train collision.
So this has been a wonderful hearing. Thank you very much,
Mr. Chairman.
The Chairman. The gentleman yields back.
I, too, want to thank Mr. Spearman, Mr. Coleman, and Mr.
Rawls for this morning. I think all of us operate better with
the facts as opposed to misinformation we might have. I have
had some things clarified this morning and that has been very
helpful. I appreciate your testimony today. This is not the
first time the agency has been up for a review, and we will
continue to do this.
I had an analogy that I was going to use that I used with
the Texas Farm Credit System in Albuquerque earlier this year,
but the train issue that my colleague from Georgia just talked
about is probably a better one. You are the referee in this
deal. And you have great responsibility to make sure that the
mission for the Farm Credit System is met and that it is safe
and sound and all the tools are available. If we need to relook
at those tools, that is fine. But the tools are in place to
keep the System safe because if it is safe, it continues to
make loans in the bad times. And that is really what this is
all about, to keep a program there. It is pretty instructive
that about \1/2\ the loans are done by commercial bankers and
community bankers, and about \1/2\ are done by the Farm Credit
System. And our farmers and ranchers and small, by the way, is
there a height and weight limit on a small farmer? At any rate,
I guess probably not.
I want to thank our witnesses again. Great job this
morning. Thank you for being here.
I appreciate your wife being here and the other
Commissioners.
It is hard, sometimes, to get folks to come testify. And it
is great that you had your whole team here this morning. And I
appreciate that.
Before we close, under the rules of Committee, the record
of today's hearing will be open for 10 calendar days to receive
additional material and supplementary responses. I think there
were a couple of questions that Members had. I got some head
nods behind you that they have those ready, that you will get
those responses to us.
And this hearing on the Committee of Agriculture is
adjourned. Thank you.
[Whereupon, at 12:17 p.m., the Committee was adjourned.]
[Material submitted for inclusion in the record follows:]
Submitted Letter by Hon. Austin Scott and Hon. David Scott,
Representatives in Congress from Georgia
November 30, 2015
Hon. Austin Scott,
Member of Congress,
U.S. House of Representatives,
Washington, D.C.;
Hon. David Scott,*
---------------------------------------------------------------------------
* Editor's note: Identical letter sent to Mr. David Scott. For the
purposes of publishing this letter, both Representatives are listed
here to avoid duplication.
---------------------------------------------------------------------------
Member of Congress,
U.S. House of Representatives,
Washington, D.C.
Dear Representative Scott:
It is my understanding that a House Agriculture Committee oversight
hearing will be taking place on December 2, 2015 on the Farm Credit
Administration. In this regard, as Dean of the College of Agriculture,
Family Sciences and Technology at Fort Valley State University (FVSU),
I would like to ask that my views about the Farm Credit System be added
to this hearing record.
As an 1890 land-grant university, FVSU has provided 120 years of
service to communities throughout Georgia and beyond. We have a proud
tradition of conducting outreach as well as providing a productive
environment for cutting-edge academic and practical research in
agriculture, animal science, biotechnology, energy, the environment as
well as other fields. While we understand that Farm Credit makes loans
to young, beginning and small farmers, it's important to also recognize
that they do more than just make loans. Over the past years, Farm
Credit has not only provided financial support through internships and
scholarships to FVSU students, but has also been actively involved in
providing educational programs such as the AgAware Program to our
farmers in order to successfully prepare them for future endeavors. The
AgAware Program is available through AgSouth Farm Credit and is
designed to assist young, beginning, small and minority farmers through
educational workshops, community projects and more.
We appreciate Farm Credit's partnership with Fort Valley State
University and the vital role they play in supporting agriculture in
our state. I appreciate the opportunity to submit this letter for the
hearing record.
Sincerely,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Govind Kannan, Ph.D.,
Dean.
CC:
Hon. David Scott.
______
Submitted Letter by Kenneth E. Auer, President and Chief Executive
Officer, Farm Credit Council
December 11, 2015
Hon. K. Michael Conaway,
Chairman,
House Committee on Agriculture,
Washington, D.C.;
Hon. Collin C. Peterson,
Ranking Minority Member,
House Committee on Agriculture,
Washington, D.C.
Dear Chairman Conaway and Ranking Member Peterson:
We appreciate the opportunity to submit this testimony to be made a
part of the record of the oversight hearing held on December 2, 2015 on
the Farm Credit System.
The Farm Credit System supports rural communities and agriculture
with consistent, reliable credit and financial services, today and
tomorrow. Farm Credit finances the farmers, ranchers, and agricultural
marketing, processing and supply cooperatives, and other agricultural
businesses that make American agriculture a pillar of our nation's
economy and help feed a growing world. Farm Credit finances the rural
infrastructure that is so vital to the quality of life for rural
families and the economic lifeblood of agriculture and rural businesses
as they create jobs and compete in a global marketplace. Farm Credit
also finances rural families who want quality, affordable homes in
rural communities. Farm Credit finances the export of U.S. agricultural
products to overseas markets; markets that are vital to our nation's
farmers and ranchers as well as the growth of the U.S. economy. Most
importantly, Farm Credit does all of these things through good times
and bad--ensuring a continued supply of affordable credit to many
important segments of the rural economy.
Congress gave Farm Credit this specific mission and everything the
System does is designed to make sure that mission is fulfilled. Farm
Credit's success in fulfilling its mission is demonstrated by the
loyalty of its customers and the strong support of groups that advocate
for a thriving rural America.
Thank you for calling attention to Farm Credit and its mission
during last week's hearing. We are grateful for the continued support
of the House Agriculture Committee and fully commit to working with the
Committee to address the many issues facing our nation's farmers,
ranchers, and rural communities.
Farm Credit Is Financially Strong
We agree completely with the testimony provided by the Chairman of
the Farm Credit Administration that the Farm Credit System is
fundamentally safe and sound, with strong capital, strong earnings and
a moderate pace of loan growth. Farm Credit is very proud of the fact
that its financial performance was such that Farm Credit institutions
returned in 2014 over $1 billion in earnings through cooperative
dividends back to the farmers, ranchers and cooperatives that own the
System.
These are matters of public record with System institutions
publicly disclosing their financial results individually and on a
combined basis quarterly. These disclosures contain detailed
information regarding not only the present position of the System but
also include discussions regarding conditions in agriculture and the
economy which can impact on the financial safety and soundness of Farm
Credit institutions. In addition, the Farm Credit Administration posts
summary performance information on their website. They provide a
detailed annual report to the Congress that includes a discussion about
what Farm Credit is doing to meet its mission. While the numbers speak
for the success of the Farm Credit System; the customers and other
beneficiaries of the Farm Credit System tell a powerful story of
alignment of interests to build and protect an important part of
America--rural America.
Farm Credit's Mission--Supporting Rural Communities and Agriculture
The Farm Credit System has a very clear mission--to support rural
communities and agriculture with reliable, consistent credit and
financial services today and tomorrow. There is no mission creep in
either Farm Credit's service to rural communities or agriculture. The
Farm Credit Act specifically authorizes what Farm Credit can do to
accomplish its mission and System institutions operate within those
boundaries. The purpose statement for the Farm Credit Act of 1971, as
amended, makes perfectly clear that the mission of the System is not
exclusively agriculture. That purpose statement reads as follows, ``To
further provide for the farmer-owned cooperative system of making
credit available to farmers and ranchers and their cooperatives, for
rural residences, and to associations and other entities upon which
farming operations are dependent, to provide for an adequate and
flexible flow of money into rural areas, and to modernize and
consolidate existing farm credit law to meet current and future rural
credit needs, and for other purposes.''
The policy and objectives section of the Farm Credit Act recognizes
the ``growing credit needs of rural areas'' and that the Farm Credit
System be, ``designed to accomplish the object of improving the income
and well-being of American farmers and ranchers by furnishing sound,
adequate, and constructive credit and closely related services to them,
their cooperatives, and to selected farm-related businesses necessary
for efficient farm operations.'' It also states that the Act is
intended to ``modernize and improve the authorizations and means for
furnishing . . . credit for housing in rural areas.''
But in order to fully understand the breadth of Farm Credit's
mission and whom Farm Credit is intended to serve, you need to look
beyond the broad introductory language of the Act to the specific
lending authority set out in the law itself. The law makes clear that
the System is expressly authorized to lend to everything from rural
home buyers to the companies that provide rural areas with electricity,
broadband and other telecommunications services, water and waste
services, agricultural cooperatives and many other rural businesses.
More recently, Farm Credit was called upon to provide financing to
renewable energy which is a growing part of our country's power supply.
Our country's rural infrastructure providers have come to rely on Farm
Credit as a significant provider of credit as well as an important
partner in the development of our rural communities as good places for
people to start businesses and raise families. And our rural
communities are increasingly looking to Farm Credit to provide credit
for community facilities that are essential to a quality of life that
rural residents deserve.
Farm Credit institutions are authorized to serve farmers and
ranchers both for their farming and non-farming credit needs and to
serve farm-related businesses that support agricultural producers.
Those that suggest Farm Credit was never intended to serve anything
beyond farmers and ranchers ignore over eighty years of history since
the Banks for Cooperatives were first authorized in the 1930's as well
as the plain language of the Farm Credit Act as it was put in place in
1971. These services are critical to the future of our rural
communities.
While the ``farm'' in Farm Credit remains the focus of the majority
of the System's loan volume, it is far from the only focus or the only
area in the rural economy that is positively impacted by Farm Credit's
activities. Farm Credit has demonstrated itself to be a highly
efficient and dependable mechanism for rural America to tap into both
domestic and international money markets in order to attract capital
for rural America's benefit. When many other sectors of the economy
struggled to have access to capital in late 2008 due to the mess made
by some financial institutions, the agricultural sector and rural
infrastructure providers continued to have access and performed far
better than other sectors throughout the resulting recession. Farm
Credit was at the front and center of those institutions that could be
relied upon, and we are very proud to have helped ensure that capital
was available.
Managing Risk Through Participating in Loans With Commercial Banks
There also has been great confusion regarding the concept of the
Farm Credit's System's participation with commercial banks in loans to
what are known as ``similar entities'', a concept unique to the Farm
Credit System. Participating with commercial banks in similar-entity
loans helps Farm Credit accomplish its mission of supporting rural
communities and agriculture. These partnerships with commercial banks
help ensure that credit is available in rural areas in difficult
economic times. Back in the 1990's the Congress recognized that with so
much of its loan portfolio concentrated in agriculture and rural
America, the Farm Credit System was vulnerable to prolonged downturns
in the agricultural or rural economy. Congress understood that when
times got tough in agriculture, commercial banks reduced their lending
to agriculture and pursued other less vulnerable credits. But with part
of Farm Credit's mission being to serve agriculture and rural
communities during both good times and bad, even when commodity prices
won't cover the cost of production or financing a rural infrastructure
project is not in vogue, the Farm Credit System is expected to figure
out a way to continue to make credit available to those that produce
the food and support the rural communities on which our nation and many
around the world rely for their quality of life. Producers must have a
reliable, timely source of credit available to them to use to purchase
the inputs necessary to grow a crop. Rural infrastructure providers
need the same dependability and rural communities need an advocate that
is there day in and day out.
To help the System have a more diversified portfolio that will help
generate income to help cover the operating costs of continuing to
serve farmers and ranchers while agriculture weathers tough times,
Congress authorized the Farm Credit System to participate with
commercial banks in loans to entities that would not otherwise be
eligible to directly borrow from the System but which are engaged in
activities that are ``similar to'' what an eligible borrower may engage
in.
This same basic principle applies to Farm Credit's rural
infrastructure mission. Farm Credit is charged providing financing so
rural communities have modern power, telecommunications, and water and
wastewater services and facilities. Participating with commercial banks
in loans made to the more urban infrastructure services providers, or
to those companies that are large enough and have the capacity to
provide rural areas with the same quality of services such as high-
speed broadband that our urban and suburban residents enjoy,
diversifies Farm Credit's risk and helps ensure they can still support
rural infrastructure providers through inevitable economic cycles.
Importantly, similar-entity participation authority was not
provided as an open-ended authority that would overtake serving the
needs of directly eligible customers. Very specific limits restricting
the use of this ``similar-entity'' authority are built right into the
law. The most important limitation is that similar-entity
participations must be done in partnership with non-Farm Credit
commercial lenders. The System is prohibited from holding the majority
share of any ``similar-entity'' loan. Each individual Farm Credit
institution may not have more than 15% of its assets dedicated to
similar-entity participations and the total amount of similar-entity
loans to one borrower made by all institutions in the System may not
exceed 10% of total System capital. The use by the System of this
diversification authority is not close to reaching any of these limits.
It is critically important that the Committee understand that every
similar-entity loan that the System makes, by definition, has to have a
commercial bank or banks holding the majority of the credit. In
virtually every one of these deals, commercial banks bring the credit
to the System asking that Farm Credit participate with them in the
credit as a result of our deep knowledge and lending capacity. If banks
did not want Farm Credit to be involved in these credits, Farm Credit
would not be involved in them. In fact, clearly stated in the
legislative history surrounding this authority is the desire to
encourage commercial banks and Farm Credit institutions to work
together more--and there are many examples of strong partnerships that
have been formed between commercial banks and Farm Credit institutions
as a result.
We want you to know that we have heard the concerns raised by
Committee Members about the use of this authority. Farm Credit is
addressing this internally, conducting an assessment of involvement in
similar-entity participations by Farm Credit institutions, how they are
using this authority, and making sure that its use is closely tied to
supporting the System's mission and being used as Congress intended to
diversify risk. While making adjustments may help address the
reputational risk issues that surround some of these credits, if Farm
Credit has to step back from effectively using this authority this will
mean less diversity in the System's loan portfolio and could result in
the need for a more cautious approach in serving agriculture especially
in tough economic times.
Serving All Sizes and Types of Agricultural Producers
The Farm Credit Act is very clear that the Farm Credit System
exists to serve ``. . . all types of agricultural producers having a
basis for credit.'' (see Sec.1.1 of the Farm Credit Act of 1971, as
amended). America's farming and ranching operations are very diverse in
their size, scope and in the types of enterprises they operate. A quick
review of USDA's report ``Structure and Finances of U.S. Farms: Family
Farm Report, 2014 Edition'' published in December, 2014, illustrates
throughout its more than 60 pages the diversity that is U.S.
agriculture. It highlights how the majority of farmland in the U.S. is
owned by small farmers and that those small farmers are highly
dependent on off-farm employment and the success of the rural economy
to stay on their farms. It also illustrates how 8% of farms are
responsible for 60% of the value of all agricultural production in the
country. Farm Credit serves all of these differing operations and
everyone in between.
Farm Credit is intensely committed to serving the next generation
of agricultural producers. Every local Farm Credit association has
programs in place specifically targeted at supporting young, beginning
and small farmers. Every Farm Credit institution reports the results of
their programs annually to the Farm Credit Administration and every
year FCA reports the results directly to the Congress.
The facts are plain and we will compare our record of service to
young, beginning and small producers to anyone's. For 2014, over 21% of
the new loans made by System institutions went to beginning farmers,
about 17% were made to young farmers and over 40% were provided to
small farmers. These categories are not additive. Each is considered a
separate category and a borrower can fit into multiple categories at
the same time. Farm Credit institutions are required by regulation to
track and report this data in this manner. No other lenders can report
at this level of detail and no other financial regulator outside of the
Farm Credit Administration requires this level of specificity in
reporting on service to these groups.
The Farm Credit Act specifically makes clear that full time farmers
and ranchers can come to Farm Credit to meet their other financing
needs. When it comes to working with small farmers for this same
purpose however, regulations limit what the System can do to support
them as they work to generate sufficient income to cover their family
living expenses from off-farm activities.
The System has created specific outreach programs to support young,
beginning, small, and minority agricultural producers as well as
programs to support small and minority cooperatives, small rural water
and wastewater systems, and emerging renewable energy projects. As
authorized by law, the System invests in Rural Business Investment
Companies that make equity financing available to rural businesses,
particularly smaller and agriculture related entities. We also actively
cooperate, collaborate and partner with others who serve rural
communities and agriculture, including community banks, USDA, and other
lenders. The System delivers on this mission at no direct cost to the
American taxpayer or support from the government, while making an
important difference as a socially responsible corporate citizen. We
are standalone cooperative institutions that are owned by our customer-
members and heavily regulated by the Farm Credit Administration who
maintain a strong financial and business profile so the System is
resilient and able to serve its mission throughout the inevitable ups
and downs of the economic, financial, and agriculture business cycles.
Banks Benefit From Direct Government Backing and GSE Benefits
One of the greatest myths that commercial banks continually put
forward is that the Farm Credit System somehow enjoys taxpayer backed
access to the financial markets while they have to rely on the private
sector. The truth of the matter is quite the opposite. Commercial banks
enjoy direct taxpayer backing whereas the Farm Credit System does not.
If you doubt the veracity of this statement, we refer you to a
regular study produced by the Federal Reserve Bank of Richmond, not
known as an apologist for the Farm Credit System. The Federal Reserve
Bank of Richmond publishes on a regular basis a report detailing the
taxpayer backstopping of financial institutions and the risk to
taxpayers that is created. Their report called the ``Bailout
Barometer'' was last updated in May, 2015. Always on the top of their
list for the greatest amount of ``explicitly guaranteed liabilities''
by U.S. taxpayers are banking and saving firms--to the tune of just
over $6 trillion (see https://www.richmondfed.org/safetynet/). In
comparison, the number for explicitly guaranteed liabilities of the
Farm Credit System is $0!!! This does not fit the narrative that the
bankers put forward in their characterization of the relationship they
have with the government versus what Farm Credit has. $6 trillion
versus $0 is a rather stark difference and the lack of validity in
their claims doesn't stop there.
Beyond the direct taxpayer guarantee of their liabilities enjoyed
by the banks, they also have direct access to GSE funding through
Fannie Mae and Freddie Mac to make housing loans, and through Farmer
Mac to make agricultural loans. Commercial banks also are the majority
stockholders of the Federal Home Loan Bank System through which they
have access to advances of GSE funds that can be used to support
housing, small business and agricultural loans by banks. They even can
gain access to funds to be used for operating loans for farmers by
creating a funding relationship with Farm Credit institutions. It is
important that Committee Members be reminded of this picture in order
to better understand the competitive landscape among various financial
institutions.
Direct backing to their liabilities by the U.S. Government and
virtually unfettered access to GSE funding for loan making--these are
the facts regarding banks. We have never heard of a bank wanting to
become a Farm Credit System institution. That alone should tell you
something.
Stress Testing Is an Important Part of Understanding Risk
Farm Credit System institutions undertake a variety of stress
testing exercises as a critical component of both their annual and ad
hoc business and financial planning. The shock variables which are
applied to a given entity's portfolio are designed to identify and
stress the particular combinations of credit, market, and economic
conditions to which that institution is most vulnerable. The results of
these stress tests then form part of the management information
provided to each institution's leadership team and board of directors
to help direct business and contingency planning. These exercises
supplement scenario analysis and related disclosure elements required
and examined by the Farm Credit Administration. All Farm Credit
institutions are required to create capital adequacy plans that support
their portfolio strategy and engage in regular analysis and stress-
testing of their loan portfolios. Each institution is unique based on
the part of the country they serve and the composition of their
portfolio in terms of the businesses they serve and the risks inherent
to those businesses. Farm Credit stress testing, while having many
similarities to the CCAR testing completed by banks, would not match
specifically that done by banks due to the operating differences
between banks and Farm Credit institutions.
In summary, Farm Credit is accomplishing its mission to support
rural communities and agriculture, staying within the boundaries
Congress set for it and bringing great benefits to agricultural
producers, rural infrastructure providers, rural families, and rural
communities. The support Farm Credit has across agriculture and rural
America was evidenced earlier this year when over forty farm, commodity
and rural organizations wrote to the President of the American Bankers
Association (ABA) expressing their opposition to the ABA's stated goal
of eliminating the Farm Credit System. A copy of the letter sent by
these groups is attached.
Thank you for providing us the opportunity to elaborate on a number
of these key issues discussed at the recent hearing. If at any time
you, your staff or any Member of the Committee has an issue or concern
about the operations of the Farm Credit System, please do not hesitate
to reach out and we will be happy to respond.
Sincerely,
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Kenneth E. Auer,
President and CEO.
CC: Members of the House Committee on Agriculture
attachment
May 1, 2015
Frank Keating,
President,
American Bankers Association,
Washington, D.C.
Dear Mr. Keating:
Your radio actuality release dated April 13 calling for the
elimination of the Farm Credit System (FCS) has been brought to our
attention. As organizations representing farmers, ranchers and rural
communities, we want to register our strong objection to your goal to
eliminate the FCS.
Credit availability is absolutely critical to our members. The FCS
as well as rural and other commercial banks play vital roles in
ensuring that farmers, ranchers and other rural Americans have access
to constructive, competitive credit on an ongoing basis. The array of
credit products offered by both Farm Credit and commercial banks--often
in a collaborative, cooperative manner--ensures that agricultural
producers and their industry sector partners have access to financial
tools that are vital to their success and economic sustainability.
The suggestion that the FCS and/or commercial banks and other
lending institutions should be further constrained or even eliminated
from the marketplace would be unwelcome and injurious to those who live
and work in rural America. Rather than calling for the elimination of
the FCS, we believe it would make more sense to find improved ways to
work collaboratively with Farm Credit and other credit providers for
the benefit of farmers, ranchers and rural communities.
The stakes are simply too high for rural America to have fewer
financing options to meet the challenges of advancing rural economic
growth. We want you to know that your effort to reduce competition is
not supported by those of us whose members live, work and form the
economic foundation in rural areas. We would appreciate the opportunity
to work constructively with your organization and others, including the
Farm Credit System, to improve and expand farmers', ranchers' and rural
businesses' access to competitive and stable credit offerings to meet
the challenges rural America faces in our still-recovering economy.
Sincerely,
American Agri-Women; National Council of Farmer
Cooperatives;
American Association of Farm National Farmers Union;
Managers and Rural Appraisers; National Milk Producers Federation;
American Farm Bureau Federation; National Pork Producers Council;
American Feed Industry Association; National Potato Council;
American Honey Producers National Rural Electric Cooperative
Association; Association;
American Horticulture Industry National Rural Water Association;
Association;
American Mushroom Institute; National Sorghum Producers;
American Soybean Association; National Sunflower Association;
American Sugar Alliance; NTCA--The Rural Broadband
Association;
Association of Equipment Rural and Agriculture Council of
Manufacturers; America;
California Association of Winegrape Society of American Florists;
Growers;
Florida Fruit and Vegetable Southern Peanut Farmers Federation;
Association;
National Association of State United Egg Producers;
Departments of Agriculture; USA Rice Federation;
National Association of Wheat U.S. Apple Association;
Growers;
National Barley Growers U.S. Canola Association;
Association;
National Black Growers Council; U.S. Cattlemen's Association;
National Cattlemen's Beef U.S. Dry Bean Council;
Association;
National Christmas Tree U.S. Rice Producers Association;
Association;
National Corn Growers Association; Western Growers;
National Cotton Council; WTA--Advocates for Rural Broadband.
______
Submitted Statement by Independent Community Bankers of America
On behalf of the more than 6,000 community banks represented by the
ICBA, thank you for convening today's hearing: ``To Review the Farm
Credit System.'' When Chairman Conaway convened the House Agriculture
Committee on January 21 of this year he pledged to ``focus on
aggressive oversight of all policies and programs under the Committee's
jurisdiction.'' On September 15, Chairman Conaway referenced once again
his ``commitment to hold a top-to-bottom review of a full range of
issues and policies within our jurisdiction.''
This type of review is especially important in regards to the Farm
Credit System (FCS), a government sponsored enterprise (GSE) that has
run amuck of the law and its historical mission. ICBA noted in our
June, 2014 statement on credit availability in rural America: ``we
could raise a number of additional issues regarding FCS abuses. We
believe these types of issues and questions warrant a series of
separate hearings. There are many concerns Congress should explore in
their oversight capacity over the FCS.'' We continue to urge this
Committee and its Senate counterpart to conduct a series of in-depth
hearings on the FCS's questionable and secretive activities.
Adrift from its Historic Mission
Congress created the FCS to specifically serve bona fide farmers
and ranchers, farmer cooperatives and a narrow group of businesses that
provide on-farm services. However, the FCA in recent years has become a
willing accomplice in FCS's efforts to expand into non-farm financing
and has derived creative ways to circumvent the law to accommodate
FCS's desires. FCS has sought to morph from a GSE with a narrowly
targeted mission into a generalized rural lender serving all types of
borrowers in rural credit markets and even non-farm borrowers in non-
rural areas. In this sense, the FCA, quite frankly, has become a
captive regulator, often willing to do the System's bidding at the drop
of a hat while claiming to be an independent regulator.
Illegal Investment Schemes: One example of FCA's capitulation to
FCS's expansionist agenda to engage in non-farm lending is the agency's
tortured effort to implement its `Investments in Rural America'
program. The FCA allowed FCS lenders to create a series of pilot
programs which often included non-farm lending projects. FCA also
released a major proposed regulation to allow FCS non-farm lending if
such lending was characterized as ``investments.''
FCS lenders could, for example, extend credit for hospitals,
commercial offices (doctors, lawyers, and dentists), manufacturing
facilities, apartment complexes in cities, hotels and motels, trucking
and towing companies, auto dealerships, etc.). Any limitations would
primarily be based on the FCA/FCS's lack of imagination.
After 5 years, the FCA announced it was withdrawing its proposed
rule and ending its allowance of FCS rural investment pilot programs.
However, these actions were just a sleight of hand by the regulator.
While eliminating the pilot programs, the FCA allowed the financed
projects to continue through the term of the financing which in some
cases will last for decades. The FCA then briefly published on its
website a guidance memo instructing FCS lenders on how to apply and
gain approval to engage in investment programs that included financing
for non-farm businesses, communities, rural areas and infrastructure
projects. In other words, even though the FCS lobbied Congress for
years to receive expanded powers--appeals that were mostly rejected by
Congress--the FCA has suddenly and quietly decided to just allow FCS
lenders to do whatever they want as long as FCA provides their rubber
stamp of approval.
ICBA submitted several letters with comprehensive questions to FCA
asking for details on FCA's intentions based on the guidance memo. FCA
refused to answer the questions. This raises a further question--why is
the FCA adamantly against transparency and accountability to the
outside world?
FCA finally responded to a few of the questions after pressure from
the Senate Agriculture Committee. The gist of FCA's response was that
its investment authorities appeared in a separate section of the Farm
Credit Act (Act) and therefore financing of FCS investments were
virtually unlimited and could go beyond the constraints that Congress
put in place in the loan making sections of the Act. ICBA adamantly
rejects this preposterous interpretation and notes the complete lack of
legislative history supporting FCA's position. Congress did not intend
to limit the purposes of FCS loan making in one section of the Act but
then allow unlimited purposes for FCS financing in another section of
the Act. ICBA seeks further answers to the questions we have submitted
to FCA and we believe the non-farm financing envisioned by the guidance
memo should be halted immediately.
$725 Million Verizon Loan: It appears the FCA was initially unaware
that CoBank, the FCS's large lender to cooperatives, had made a $725
million loan to Verizon to buyout Vodaphone's interest in a joint
venture. Verizon and Vodaphone are headquartered in New York City and
London and this extremely large loan was not rural in nature nor would
it be allowed under the provisions of the Act. However, CoBank and the
FCA hid behind a provision referred to as ``similar entities'' lending,
but this provision was never meant to allow CoBank or any FCS lender to
make ineligible loans. FCA is again abandoning their regulatory
oversight responsibilities in an effort to go to any length necessary
to allow FCS lenders to make whatever types of non-farm loans they
desire.
During debate on the 2008 Farm Bill, ICBA noted that the FCS's
Horizon's Project proposals were loosely worded and would allow FCS
lenders to engage in financing large Fortune 500 companies. FCS
representatives derided this contention and claimed it was misleading.
But what has happened since, even though Congress rejected the
misguided Horizons proposal?
CoBank has provided major financing to Verizon, AT&T, U.S.
Cellular, Frontier Communications and other very large corporations. In
the Verizon example, CoBank's financing did not target a ``rural''
telecommunications cooperative. Vodafone is a British multinational
telecommunications company headquartered in London and ranks as the
world's second-largest mobile telecommunications company in terms of
revenues and number of subscribers. Verizon Communications,
headquartered in New York City, had just reported quarterly profit of
over $2 billion and revenues of over $30 billion and hardly represented
a rural telephone cooperative in need of financing by a government
sponsored enterprise.
CoBank's newly found lending activities appear to be an effort to
leverage their GSE advantages deeply into the realm of multi-national,
non-agricultural, non-rural and non-cooperative corporate financial
deals. This is not the purpose for which CoBank and other FCS lenders
were created.
Keep in mind that the FCA has recently raised the lending limit for
FCS entities to $1.5 billion and the FCS already has several very large
loans in their portfolio. Congress should require a list of these large
borrowers and the amounts financed.
$10 Billion Line of Credit: On September 24, 2013, the Treasury
Department, through its Federal Financing Bank, entered into a $10
billion note purchase agreement with the Farm Credit System Insurance
Corporation (FCSIC) to establish a standby line of credit to provide
FCS funds at the Treasury's cost of funds. This line of credit, which
the FCA sought in secret, raises a number of serious questions. For
example, why did the FCA seek a $10 billion line of credit at a time
when FCS lenders were reporting record profits of $4.64 billion in
2013?
Why did the FCA not seek Congressional approval? When the FCS
failed in the 1980s, the farmland values which the FCS utilized as
collateral had collapsed. Yet, the $10 billion line of credit,
according to FCA, is ``collateralized'' meaning the collateral backing
this line of credit could be dramatically reduced. If the FCS were to
collapse, as it did in the 1980s, American taxpayers would be on the
hook once again for a sizeable bailout.
The FCSIC was created to collect premiums from FCS institutions as
a backstop in the event of financial deterioration within the System.
Why then did the FCA seek and obtain a line of credit from the
Treasury's FFB as additional protection? A report to the FCSIC prepared
by the Brookings Institution stated: ``FCS should be required to
approach the Congress and the Administration for legislative help'' in
seeking a line of credit. Yet, FCA did not go to Congress but secretly
went to the Treasury to obtain the line of credit. There should have
clearly been hearings on a GSE seeking a $10 billion line of credit.
This is another example of FCA/FCS seeking to avoid transparency and
accountability.
FCA and FCS Diminishing Ag Credit Markets
When ICBA surveyed bankers about their experiences with the FCS the
responses were quite informative. Bankers complained about the FCS
cherry-picking activities and stated FCS almost exclusively targets top
borrowers, offers these targeted borrowers below market rates and is
willing to set those below market rates at longer terms.
By taking top borrowers from community banks, FCS weakens the
overall community bank portfolios and leaves the less seasoned/younger
borrowers and higher leveraged borrowers with community banks.
Similarly, if community banks stretch to keep top borrowers, community
banks must accept less return and assume more interest rate risk by
fixing the rate for a longer period which is difficult to do based on
the short term nature of their deposits. Bankers typically stated the
FCS largely ignores young, beginning and small farmers. As one banker
stated, ``FCS wants us to get these types of farmers started first and
then later attempts to take them away once they become financially
stronger.''
With Farm Financial Stress on Horizon FCS Needs to Focus on Farm Sector
The USDA has noted farm sector profitability is projected to
decline again this year with net cash farm income forecast at $93
billion, down about 28 percent from 2014 levels. Net farm income is
forecast to be about $56 billion in 2015, down 38 percent from 2014's
estimate of $90 billion. If realized, the 2015 forecast for net farm
income would be the lowest since 2002 in both real and nominal terms
and a drop of 55 percent from the recent high of $123 billion in 2013.
With low prices expected to continue next year and potentially
greater financial stress over the next year and possibly beyond, this
is not the time for the FCS to dilute its emphasis on farmers and
ranchers by seeking to finance non-farm borrowers. FCS needs to remain
focused on its mission as a GSE intended to serve the narrow niche of
production agriculture.
Conclusion
We thank the Committee for conducting this initial review of the
FCS by questioning the FCA. The FCA has clearly lost respect for the
Act's boundaries established to keep the FCS a narrowly targeted GSE.
By thumbing their noses at the Act, the FCA and FCS are also thumbing
their noses at Congress and the history and legislative intent of the
Act. If FCA believes the Act is so loose as to allow it to grant any
type of financing desired by FCS lenders, then the Act needs to be
tightened. Congress never intended for FCS to be a general purpose
rural lender. If the FCA and FCS do not want to play by the rules,
there are many other lenders that would welcome the heavy subsidies
enjoyed by the FCS as a government sponsored enterprise with tax and
funding advantages.
A series of hearings focused on FCS abuses and FCA's complicity in
circumventing the law and intent of Congress would be a welcomed next
step. We look forward to discussing these issues in more depth with
Congress in coming months. Thank you again for holding this hearing and
for the opportunity to submit this statement for the record.
______
Submitted Questions
Response from Hon. Kenneth A. Spearman, Chairman of the Board and Chief
Executive Officer, Farm Credit Administration
Questions Submitted by Hon. K. Michael Conaway, a Representative in
Congress from Texas
Question 1. When was the last audit of the Federal Farm Credit
Banks Funding Corporation? Who conducts the audit and is it available
to the public?
Answer. Under Farm Credit Administration (FCA) regulations, each
Farm Credit System (FCS or System) institution must, at least annually,
have its financial statements audited by a qualified public accountant
in accordance with generally accepted auditing standards. In addition,
FCA examines each FCS institution at least every 18 months. The last
examination of the Funding Corporation occurred for the 18 month period
ended March 31, 2015. FCA examination reports are shared with the
institutions' boards of directors, but not with the public.
Question 2. Could you explain the role of the Farm Credit System
Insurance Corporation in providing oversight of the Farm Credit System
and whether any taxpayer funds are involved in its operation?
Answer. FCA is the government entity primarily responsible for
oversight of the System. The Farm Credit System Insurance Corporation
(FCSIC) insures the timely payment of principal and interest on System-
wide debt obligations issued to investors on behalf of the System
banks. By protecting investors, the Insurance Corporation helps to
maintain a dependable source of funds for farmers, ranchers, and other
System borrowers. As of December 30, 2015, investors held $243 billion
in insured System debt obligations. To minimize risk to investors and
the Insurance Fund's exposure to potential losses, the Insurance
Corporation actively monitors and reviews key ratios and financial
trends throughout the System and has the authority to require troubled
System institutions to undergo special examinations, if needed.
The Insurance Corporation assesses and collects premiums from
System banks and manages the Insurance Fund. The Insurance
Corporation's costs are paid out of the Insurance Fund, and no taxpayer
funds are involved in the operation of the Insurance Corporation.
Congress also gave the Insurance Corporation certain other specific
statutory responsibilities, such as the authority to regulate golden
parachute and indemnification payments made by System institutions.
The Insurance Corporation's basic statutory authorities are modeled
on those of the Federal Deposit Insurance Corporation, including the
responsibility to act as conservator or receiver of a System
institution. However, unlike the FDIC and other Federal entities with
receivership authority, the Insurance Corporation's resolution
authorities have never been updated and modernized, creating potential
legal uncertainty in the event of a System institution failure.
Question 3. The Farm Credit System has the authority to lend to
rural infrastructure projects--rural electric, telephone, broadband,
water and sewer, these types of things. Are you seeing the System
working closely with USDA on these types of efforts?
Answer. Yes. CoBank works closely with the Rural Development (RD)
agency in USDA on rural utility lending. In addition, the entire System
works with RD on investments in rural infrastructure projects and the
Rural Business Investment Company (RBIC) program.
Question 4. How is the agency working to control its costs?
Answer. We are a small agency, with the majority of our operating
costs in human capital and travel expenses for our examiners to
complete onsite examinations. While we work hard to manage costs on
travel expenses, it is very important for our examiners to spend time
onsite in the institutions we regulate. As you know, FCA is not
taxpayer supported, but funded by assessments on the System
institutions we regulate. We are proud that FCA's cost to System
borrowers equates to only 1.8 basis points on outstanding assets--a
measure of our productivity that has reflected an improving trend for
the past 30 years.
We are controlling travel costs by taking such measures as using
video-conferencing, issuing cost-saving travel procedures, and
controlling conference expenses. We have leveraged technology to
maintain examination effectiveness (e.g., workflow programs, electronic
files, loan database, extending equipment lifecycles when appropriate).
Finally, FCA has carefully managed its resources. We have managed the
cost of service providers, standardized equipment purchases, increased
electronic distribution and publication of material, and shared
resources across the organization.
Question 5. Why does the FCA not disclose the names of the
institutions that have corrective or enforcement actions taken against
them?
Answer. Under Board Policy Statement PS-34, FCA only discloses the
following information about enforcement actions to the public: (1) the
date and type of enforcement action taken; (2) the type of institution
that is subject to the enforcement action or, if the action is against
an individual or entity, the relationship between the person or entity
and the institution; and (3) a description of the essential facts
pertaining to the action, excluding information that would identify the
institutions or persons involved. Some enforcement actions have
required FCS institutions to disclose a summary of the enforcement
actions in their annual reports to shareholders.
In contrast to other Federal regulators of financial institutions
that take deposits, Congress has not mandated that FCA disclose the
identities of FCS institutions that have been subject to enforcement
action. The Freedom of Information Act (FOIA) explicitly exempts
information ``contained in or related to examination, operating, or
conditions reports prepared by . . . an agency responsible for the
regulation or supervision of financial institutions'' from disclosure
in response to a FOIA request.
We believe that publicly disclosing the identity of FCS
institutions that have been subject to an enforcement action would
adversely affect the ability of FCA to promptly and effectively correct
violations of law or unsafe and unsound conditions in the System, as it
would adversely impact the willingness of System institutions' boards
of directors to enter into formal written agreements with FCA.
Question 6. It is my understanding that the CFTC has exempted Farm
Credit System institutions from swap dealer registration requirements
regardless of their level of swap dealing activity. In the absence of
this exemption, are you aware of any System institutions that would
currently exceed the CFTC's de minimis registration threshold of $8
billion in swap dealing activity?
Answer. Currently, no Farm Credit System institution is required to
register as a swap dealer with the CFTC. This is because no System
institution, at this time, meets the criteria of a swap dealer under
the applicable provisions of the Commodity Exchange Act and CFTC
regulations. Currently available information indicates that no Farm
Credit System institution (1) holds itself out as a dealer in swaps,
(2) makes a market in swaps, (3) regularly enters into swaps with
counterparties in the ordinary course of business for its own account,
or (4) engages in activity causing itself to be commonly known in the
trade as a dealer or market maker in swaps. In addition, a CFTC
regulation grants System banks and associations an exception from
registering as swap dealers because they are cooperatives that deal in
swaps on behalf of their borrower-members. Separately, the CFTC granted
an exemption to depository institutions in connection with originating
loans to their customers.
In further response to your question, CoBank, ACB, has a notional
amount of derivatives totaling over $25 billion of which over $22
billion notional is in interest rate swaps as of September 30, 2015.
The vast majority of these derivatives are not cleared through a
clearinghouse. Farmer Mac has swaps totaling about $8 billion notional,
the majority of which are cleared through a clearinghouse.
Question 7. With USDA projecting continued softness in commodity
prices, how important is it for Farm Credit institutions to be able to
have a diversified loan portfolio? Are there things that the agency can
do to help institutions achieve more diversity in their loan
portfolios?
Answer. As the System's safety and soundness regulator, we believe
it is very important for System institutions to diversify their loan
portfolios. By law, the System is restricted to lending to agriculture,
rural utilities, farm-related service businesses, and certain rural
homeowners. System institutions will be better able to manage risks and
meet the credit needs of eligible and creditworthy borrowers if they
have a flexible and appropriate set of tools to diversify their loan
portfolios.
FCA does several things to help System institutions achieve greater
diversity in their loan portfolios. We routinely evaluate and assess
the concentration and individual lending limits at FCS institutions.
When we identify through our oversight process that an institution has
an unsafe level of exposure (relative to its risk-bearing capacity) to
a particular commodity, market segment, industry, or obligor, we
require the institution to take corrective action, such as developing
plans to effectively reduce the concentration within a certain period
of time. Risk must be properly managed, and institutions must hold
adequate capital.
FCA regulations and policy encourage System institutions to use
their statutory authorities to buy and sell loan participation
interests with each other and non-System lenders so they can achieve
greater geographic and agricultural sector diversification in their
loan portfolios. Another way that System institutions can diversify
their loan portfolios is to buy whole loans and assignment in loans
from each other. Also, we encourage System institutions to consider
loan guarantees and Farmer Mac credit protection programs as risk
management strategies to manage concentration risk.
Similar-entity participations with commercial lenders provide an
avenue for System institutions to diversify their loan portfolios. This
was the intent when the Farm Credit Act was amended to authorize these
credits in 1992. There are limits on the total amount of similar-entity
participations that may be purchased or held by System institutions.
One such limit is a 15 percent portfolio limit on each institution. At
the hearing, Congressman Costa and Congressman Kelly asked specifically
about how this limit is applied. Our answer and the discussion of the
issue may have been confusing. To clarify, the 15 percent portfolio
limit on similar-entity participations applies at the institution
level.
Question 8. The FCA withdrew a proposed ``Rural Community
Investments'' pilot project program and a related proposed rule in
2013. But in September of 2014, the FCA released an informational memo
providing guidance for investment requests. 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?
Answer. 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. Case-by-case
investment requests require FCA Board approval and are subject to
specific conditions of approval, including requirements that the
investments must be accounted for as investments under GAAP and be
securities under Federal securities laws.
Question 8a. Since the release of the investments guidance memo
last September, can you provide examples of the investment projects FCA
has approved that are non-farm in nature and whether any of these
projects would be illegal if considered as loans?
Answer. Since the release of the investments guidance memo, FCA has
approved four investment requests. The first and second requests
approved an investment by two institutions in a rural hospital located
in Minnesota. FCA has clear statutory authority to approve investments
on a case-by-case basis and does so as provided by regulation
615.5140(e). A rural hospital would not be eligible to obtain loans
from the System under the lending authorities provided by the Farm
Credit Act. The two institutions invested in the rural hospital by
purchasing debt securities issued by the hospital.
The third investment request was for an institution that invested
in a bond issued by an agribusiness--with the proceeds used to expand a
grain milling company in rural Indiana. 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.
The fourth investment request was for an institution to purchase
rural housing mortgage-backed securities. This type of mortgage-backed
security is an eligible investment for liquidity purposes. However,
this investment was approved as a mission-related investment under
615.5140(e) because of the Farm Credit Bank's intention to hold the
investment to maturity and not make it available for sale for liquidity
purposes. The underlying rural housing mortgages were extended by
commercial lending institutions serving rural areas and this secondary
market activity serves to improve liquidity to that marketplace.
Question 9. Are you finding that credit is generally available for
production agriculture? Are there any areas where the market is not
being adequately served by FCS and commercial banks?
Answer. Yes. We are finding that traditional and nontraditional
agriculture is being well served by the System and community bankers,
and other commercial lenders. At our recent strategic planning session,
we heard from a number of experts and lenders who indicated that the
agricultural credit market is highly competitive, and for the most part
is well served by FCS and commercial lenders. Nonetheless, through
other venues, we have also heard some evidence that there are pockets
of areas that are less well served--such as microcredit to start-ups
for highly specialized commodities and nontraditional producers and
urban agriculture. We are committed to identifying and removing any
regulatory or other barriers that would prevent System institutions
from providing creditworthy producers in these markets with necessary
financial services.
Question 10. Many assume that as a GSE, the Farm Credit System has
an ``implicit guarantee,'' similar to Fannie Mae and Freddie Mac. Thus,
in the late 1980s when the Farm Credit System was in trouble, the U.S.
Government bailed it out. Do you agree that GSEs, including the Farm
Credit System, are provided an implicit guarantee that the Federal
Government will not allow them to default on their obligations? In
other words, are they too big to fail?
Answer. A determination of whether the System is too big to fail
would ultimately be made by Congress. Congress would need to consider
various financial, economic, and political factors when it decides
whether or not to provide assistance to a GSE. In our regulation,
examination, and supervision of the System, we do not in any way assume
that Congress would act to provide financial assistance to the System.
The assumption of an implicit guarantee is just that--an assumption.
Although the rating agencies often reference the ``implicit
guarantee,'' those references refer to the expectations of investors,
not those of FCA.
FCA uses all of the examination, regulatory, and supervisory tools
at its disposal to ensure that the FCS always operates in a safe and
sound manner. For this reason, FCA does not ever consider implicit
guarantees a backstop to its safety and soundness authorities. As far
as the System is concerned, much has changed since the 1980s.
Legislation in 1985, 1986, and 1987 converted FCA into an arm's-length
safety and soundness regulator, established FCSIC to insure System-wide
bonds, restructured the FCS, created Farmer Mac as a secondary market
for agricultural loans, and enacted other reforms that substantially
reduce the risk that Congress would need to consider a bail-out of the
FCS in the future.
Question 11. In September of 2013, the Farm Credit System Insurance
Corporation secured a $10 billion line of credit from the Federal
Financing Bank, an arm of the U.S. Treasury. What is the current asset
base of the Farm Credit System Insurance Corporation and why was this
$10 billion line of credit obtained? Should we be concerned?
Answer. Currently, the Insurance Corporation has $4 billion in
assets. Those assets are invested only in U.S. Treasury securities.
Unlike other financial institutions, the System does not have
guaranteed access to the Federal Reserve, the U.S. Treasury, or any
other lender of last resort leaving it vulnerable to a market crisis
similar to what occurred in 2007 and 2008. The Insurance Corporation
has statutory authority to provide financial assistance to System
institutions, including during a liquidity crisis in which external
market conditions have jeopardized the System's ability to fund itself.
The Insurance Corporation obtained the credit line to provide more
assistance to System banks in such a market crisis than would otherwise
be available in the Insurance Fund to protect investors and taxpayers
from losses.
Question 12. Your testimony highlights the Farm Credit Insurance
Fund. Do other GSEs have similar insurance funds or reserves?
Answer. The three housing GSEs do not have similar insurance funds.
Treasury may provide direct financial assistance to them by purchasing
their debt obligations. (Separately, Treasury has injected capital into
Fannie Mae and Freddie Mac, which are currently under U.S. Government
conservatorship, so they have sufficient capital to meet their
obligations.)
In further answer to your question, we note that Farm Credit System
debt is ultimately backed by the joint and several liability of the
System banks, not the full faith credit of the United States. The
obligations of Farmer Mac are not insured by FCSIC. However, Farmer Mac
can issue obligations (not to exceed $1.5 billion at any time) to the
Secretary of Treasury, the proceeds of which may be used by Farmer Mac
solely for the purpose of fulfilling its obligations under any
guarantee it provides under the Farm Credit Act.
Question 13. From 1998 to 2013, the USDA defined small farms as
those farms with gross sales less than $250,000. In 2013 the USDA
raised the cutoff to $350,000 to better reflect price increases for
farm commodities. According to the FCA's 2014 annual report, the FCA
still uses the old cutoff. Why is the FCA using the more limited
threshold and how many small farmers might be left out as a result?
Answer. FCA has formed a workgroup that is studying whether we
should adopt USDA's Economic Research Service's new threshold of
$350,000.
Question 14. Regarding the Farm Credit's equipment financing
program AgDirect, how do you ensure that the borrowers are credit
worthy? Additionally, if any equipment dealer can use AgDirect, how do
you guarantee that the borrower meets the qualifications to be a Farm
Credit customer?
Answer. FCA does not determine the creditworthiness of the
borrower. The FCS institution must do this through its underwriting
standards, which we review during our examinations. Likewise, AgDirect
has controls to ensure that the borrowers meet qualifications to borrow
from the System. We review these controls during our examinations.
Question 15. The FCA held a series of symposia in January and
February of this 2014 to discuss future FCS consolidations and mergers.
We understand that the symposia were by invitation only, and not open
to the general public. Why were these meetings not open to the public?
Was this in violation of Federal open meeting laws?
Answer. The symposia were held with interested parties, including
representatives from academia, the System, and former Members of
Congress to gather information on past experiences and future thoughts
on FCS consolidations and mergers. Invitations were limited to allow
FCA to hold the briefings at FCA's headquarters and manage expenses.
The symposia were informational briefings in nature and not designed to
gather input on any regulatory or policy proposal. The FCA Board did
not conduct policy deliberations, and for this reason, the symposia
were not meetings under the Government in the Sunshine Act. Transcripts
of the symposia were provided to the public via FCA's website.
Accordingly, we believe that attendance at the symposia was
appropriately limited, and that the symposia were conducted in full
compliance with all relevant Federal laws.
Questions Submitted by Hon. Collin C. Peterson, a Representative in
Congress from Minnesota
Question 1. I know that one of the major distinctions between Farm
Credit banks and commercial banks is the ability to take deposits.
However, there is information on the Farm Credit Services of America's
website that promotes something called CashPlus that says, ``CashPlus
offers a convenient way to handle your cash flow through one interest-
bearing account--make deposits and pay bills anytime without penalty or
fee.'' During the hearing it was indicated that an account such as this
is allowed and that it can be interest bearing. I just wanted to
clarify on the interest bearing ability as well as the ability to write
checks from such an account. Are these actions allowed?
Answer. Yes, such accounts are authorized for customers who have
outstanding loans with an association. We refer to these accounts as
Voluntary Advanced Conditional Payment (VACP) accounts. VACP accounts
are expressly authorized by sections 1.5(6) and 2.2(13) of the Farm
Credit Act. In addition, section 4.37, 12 U.S.C. 2219b, requires funds
in a borrower's VACP account to ``be immediately applied as payment
against the indebtedness of any outstanding loans of such borrower'' if
the institution is placed in liquidation. VACP accounts are subject to
the FCA's regulatory and supervisory authority under the current
statutory framework. Currently, FCA regulation 614.4175 and an FCA
bookletter, BL-30, apply to VACP accounts at FCS institutions.
Funds received from customers with VACP accounts, such as CashPlus
accounts, are either applied to the borrower's outstanding loan
balances or held for future payments and interest is paid on funds
held. Appropriate disclosures are made to the borrowers that funds
placed in these accounts are not federally insured. FCS institutions
pay interest on VACP accounts. Drafts, which function similar to a
check, are not written directly on the VACP account, but on established
lines of credit. System borrowers have been using drafts to access
their lines of credit for several decades.
Question 2. A question was asked regarding lending ability to
qualified borrowers in the U.S. Virgin Islands. I wanted to clarify
whether an existing System institution could ask to have their charter
expanded to begin lending in the USVI. Is that how it would work? Could
an existing entity ask to serve the islands? Or would you need to
charter a new bank?
Answer. Under section 1.2(b) of the Farm Credit Act, 12 U.S.C.
2002(b), FCA may extend the FCS to the USVI if the agency first
determines that extending credit and providing other authorized
services to farmers and other eligible borrowers there is feasible. In
the past, FCA has studied this issue and concluded that it would not be
economically feasible for the System to extend credit and provide other
financial services in the USVI If FCA were to determine that providing
credit in the USVI would be feasible, it would first assign the USVI to
one of the Farm Credit districts, as the statute requires. Afterwards,
FCA could either charter a new association to serve the USVI in
accordance with several provisions of the Farm Credit Act, or it could
modify the charter of an existing association so its territory would
include the USVI In the absence of an active association in the USVI,
the Farm Credit bank could make mortgage loans there in the interim. We
would gladly work with interested parties to evaluate the possible
scenarios and circumstances involved.
Question 3. There was discussion during the hearing regarding the
ability to track participation in Farm Credit System lending beyond the
current categories of size, time in farming and age of borrower. Are
you able to legally track borrowers by race/ethnicity or age?
Answer. As with all creditors, the Equal Credit Opportunity Act
(ECOA) generally prohibits System institutions from asking the race or
ethnicity of loan applicants or borrowers. The ECOA permits creditors,
including System institutions, to ask the age of applicants; this
information can be used only for limited purposes in credit decisions,
as specified in the ECOA. System institutions may consider age when
determining if an applicant or borrower is a ``young'' farmer (aged 35
or younger) who may qualify for favorable lending treatment. In certain
residential lending, the ECOA requires creditors, including System
institutions, to ask each applicant his or her race, ethnicity, and age
for monitoring purposes, but the applicant is not required to provide
this information and a creditor may not use this information in making
credit decisions.
Question 4. The FCA had a proposed rule on ``Rural Community
Investments'' and withdrew it. FCA also had a pilot program on these
investments and withdrew it. FCA then issued a guidance memo that
allowed approval of projects being considered in the proposed rule and
pilot program on a case by case basis.
Did all or most of the pilot projects being financed continue even
though the program was ended? How many, if any, pilot projects were
discontinued?
Answer. To our knowledge, no pilot projects were discontinued, and
FCA did not direct any institutions to discontinue funding any
projects. System institutions were specifically allowed to continue
funding projects where commitments were extended prior to December 31,
2014. The FCA Board permitted System institutions holding investments
on December 31, 2014, under the Pilot Programs to continue to hold
those investments subject to the conditions imposed by FCA for the
applicable Pilot Program. Those investments could be held only through
the date of maturity that existed as of December 31, 2014, without
renewal or extension, except as approved on a case-by-case basis by
FCA. After December 31, 2014, institutions could fund commitments for
Pilot Program investments only if the commitments were made prior to
that date.
Question 4a. Does the guidance memo basically allow FCA to approve
financing categorized as an investment for virtually any purpose if
it's a viable credit? Is the entire proposed investment program
approved or is approval granted to individual investments?
Answer. FCA evaluates the merits of each request on a case-by-case
basis. In addition to the risk characteristics, investment requests
must detail the purpose and objectives of the investment. Each request
must demonstrate that the proposed investment is mission related, and
it must address factors such as supplementary liquidity and earnings
diversification. Since the end of the pilot programs, FCA has approved
requests from four institutions to make investments under strictly
defined conditions of approval.
Question 4b. How are these investments structured?
Answer. Three of the investment requests were structured as bonds.
The fourth investment request was for the purchase of rural housing
mortgage-backed securities.
Question 5. CoBank's gotten a lot of attention for making a $725
million loan to Verizon and other large loans to large
telecommunication companies under the ``similar-entity'' provision of
the Act. Can you describe the circumstances regarding the Verizon, U.S.
Cellular and AT&T lending interactions with System institutions?
Answer. The Farm Credit Act authorizes CoBank to lend to rural
telecommunications utilities. Rural utilities are eligible to borrow
from CoBank if they either have a loan, loan commitment, or loan
guarantee from the Rural Utilities Service (RUS) or the Rural Telephone
Bank (RTB), or are eligible for credit from the RUS or RTB under the
Rural Electrification Act of 1936, as amended. Wireless carriers
(including U.S. Cellular) that qualify for credit under the Rural
Electrification Act are eligible to borrow from CoBank. Since the
wireless communication industry's infancy, CoBank has been lending to
wireless carriers serving customers located in rural areas. As the
industry has matured, most of the rural startup cellular companies have
been purchased by larger companies, such as Verizon or AT&T.
Telecommunication carriers that are not rural utilities under the Rural
Electrification Act may qualify as similar entities under section
3.1(11)(B) of the Farm Credit Act. Both Verizon and AT&T qualify as
similar entities. Also, each has an extensive wireless network in rural
areas.
CoBank often acts as the System's lead lender for similar-entity
participations, utilizing its statutory authority to lend to rural
utilities. The lead commercial bank(s) on the $13 billion syndicated
loan transaction for Verizon offered CoBank, as the System lead, the
opportunity to purchase a portion of the credit, which CoBank completed
(approximately six percent of the total syndication) on its own behalf
as well as other System partners.
FCA's review of the Verizon participation purchase (as well as the
AT&T deal) found that the legal authority exists for this participation
activity and the risk management benefits achieved through balance
sheet and earnings diversification are consistent with the intent of
the authority granted by Congress. Similar-entity authority also
provides opportunities for commercial lenders and the Farm Credit
System to work together to meet the needs of agriculture and rural
America by mitigating risk.
Under the Farm Credit Act, the System can only participate in
similar-entity loans when a commercial lender is involved. Commercial
lenders must retain 50 percent or more of the credit. Congress also
imposed limits on the extent of this activity to no more than 15
percent of an institution's portfolio. At this time, similar-entity
volume is less than ten percent of the System's outstanding loan
volume.
Question 6. What is the status of the merger between the failed FCS
Southwest and their merger with California's Farm Credit West? Has this
been voted on by shareholders and if so what was the outcome? Can you
provide a written summary of what led to the failure of this
association?
Answer. FCS Southwest was not failing before it merged with Farm
Credit West. An incident involving possible fraud by an employee
occurred that led to substantial losses, but the association continued
to meet all regulatory capital requirements. Upon discovery of the
fraud incident, we were onsite immediately and took appropriate actions
to ensure the association addressed the incident in a timely and
appropriate manner. The Agriculture Committees were notified, and the
FCS in its report to investors reported the incident and the potential
cause. The Board of FCS Southwest elected to pursue merger with Farm
Credit West. The voting stockholders approved the merger of FCS
Southwest with Farm Credit West, the funding bank approved the merger,
and FCA granted its approval. The merger became effective on November
1, 2015.
Question Submitted by Hon. Bob Goodlatte, a Representative in Congress
from Virginia
Question. But I am sure you would agree that the Farm Credit System
has certain advantages and benefits that small community banks don't
have. Alternatively, what advantages do community banks have over the
Farm Credit System?
Answer. The advantages that community banks have over the Farm
Credit System stem largely from their broader charters, which allow
them to accept deposits, offer more financial services, and allow for a
broader range of lending authority. The following provides a brief
summary of some of those advantages:
The deposits of community banks are insured by the Federal Deposit
Insurance Corporation, and the deposit insurance fund is backed by the
full faith and credit of the United States. The FDIC has a line of
credit with the U.S. Treasury, which it has utilized during recent
banking crises. FDIC insurance provides community banks with a stable,
low-cost source of funding. The existence of FDIC insurance greatly
lessens the impact of the bank's financial condition on the cost and
stability of its funding.
Community banks are authorized to offer a broad range of financial
services to its customers. This provides community banks the
opportunity to attract low-cost funds for lending, and to diversify
earnings sources.
In contrast to the System, community banks are not restricted by
law to lending primarily to a single sector of the economy. As a
result, community banks may lend to a full range of businesses,
industries, and consumers for all types of purposes and needs.
Community banks may also offer consumers and businesses a broad array
of financial services and products that the System cannot offer its
customers. As a result, community banks have greater flexibility than
the System to manage loan portfolio concentration risks.
Community banks have the option of becoming a member of the Federal
Reserve Bank in their district. The Federal Reserve Banks are lenders
of last resort to their member banks, and they provide discount and
other services to such banks, much like those that banks provide for
their customers. These services include collecting checks,
electronically transferring funds, and distributing and receiving cash
and coin.
An independent study titled ``Lending Competition of Community
Banks and the Farm Credit System'' was published in August 2009 by the
Federal Reserve Bank of Kansas City. This study provides an excellent
discussion of the advantages and disadvantages of commercial banks and
the System. It can be found on the Federal Reserve Bank of Kansas
City's website at https://www.kansascityfed.org/publicat/fip/
LendingCompetition08-09.pdf.
Questions Submitted by Hon. Frank D. Lucas, a Representative in
Congress from Oklahoma
Question 1. Do you agree that the Farm Credit System should not be
in the business of holding on to long-term assets, such as oil and gas
and other minerals?
Answer. The Federal Land Banks, which were predecessors to the Farm
Credit banks, and the defunct Farm Mortgage Corporation, which was a
wholly owned government corporation that was a System institution until
Congress dissolved it in 1961, acquired mineral rights through
foreclosures on farms starting in the Great Depression of the 1930s.
Thus, it became common practice for the former Federal Land Banks and
the Farm Mortgage Corporation to retain the mineral rights on
foreclosed farms and sell the surface rights. The 1961 statute that
dissolved the Farm Mortgage Corporation transferred its mineral rights
to the Department of the Interior. The Farm Credit Amendments Act of
1985 added section 4.35 to the Farm Credit Act of 1971 to require Farm
Credit System institutions that acquire real property through
foreclosure to sell both the surface and the mineral rights to the same
buyer. However, this statutory amendment does not apply retroactively
to mineral rights that System institutions previously acquired. Mineral
rights that System institutions acquired before 1985 and continue to
hold do not violate the law, do not pose a safety and soundness risk to
the System, and are consistent with long-term assets held by FCS
institutions.
Question 2. Does the FCA know the cost basis and present value of
AgriBank's mineral assets? If so, can you provide that information to
the Committee?
Answer. AgriBank's mineral rights currently have no book value;
these intangible assets have no recorded value on the bank's Statement
of Condition. AgriBank (successor to the Federal Land Banks and Farm
Credit Banks of St. Paul, St. Louis, Louisville, and AgAmerica)
acquired all of its mineral rights before Congress enacted the 1985
statute. The majority of revenue-producing mineral deposits are located
in North Dakota and Arkansas (the bank holds mineral interests in 13
states). Upon acquisition, the rights were likely recognized at fair
value and amortized over the estimated useful life. FCA does not have
the information necessary to determine what the cost basis was when
acquired, nor do we have sufficient information to calculate the
present value. AgriBank's mineral income in 2015 was $56.5 million.
Question 3. Will the FCA require AgriBank to dispose of its mineral
assets, which the bank has held for over 5 years? If not, please
explain.
Answer. As noted above, mineral rights that AgriBank acquired
before the Farm Credit Amendments Act of 1985 do not violate the law,
and they do not impair the safety and soundness of the bank. Under the
circumstances, FCA has no legal basis to require AgriBank to dispose of
these assets.
Question Submitted by Hon. Glenn Thompson, a Representative in Congress
from Pennsylvania
Question. And then my other question--and I am not going to have
time for a verbal response, but I would appreciate one for the record--
what safeguards do you have in place to prevent mission creep? Because
mission creep in government is well known and certainly in quasi-
government agencies as well. I think it is a human natural tendency.
And I would love, for the record, if you could send the Committee a
list of, what are the safeguards you have in place to keep you within
the lines of what Congress envisioned when this authorizing legislation
was passed?
Answer. The System's mission is defined by the Farm Credit Act.
Essentially, the Farm Credit Act authorizes the Farm Credit System to
lend to agricultural producers and their cooperatives, rural utilities
that meet certain requirements, exporters of agricultural products and
capital equipment, farm-related service businesses, and certain rural
homeowners. In addition, System institutions have authority to
participate in loans that non-System lenders originate to entities that
are not eligible to borrow directly from the System, but engage in
activities that the System routinely finances. FCA has promulgated
regulations pertaining to eligibility, scope of financing, and similar
entities that provide adequate safeguards against mission creep. A list
of those eligibility regulations is provided as follows:
PART 613--ELIGIBILITY AND SCOPE OF FINANCING
Subpart A--Financing Under Titles I and II of the Farm Credit
Act
613.3000 Financing for farmers, ranchers, and
aquatic producers or harvesters
613.3005 Lending objective
613.3010 Financing for processing or marketing
operations
613.3020 Financing for farm-related service
businesses
613.3030 Rural home financing
Subpart B--Financing for Banks Operating Under Title III of the
Farm Credit Act
613.3100 Domestic lending
613.3200 International lending
Subpart C--Similar Entity Authority Under Sections 3.1(11)(B)
and 4.18A of the Act
613.3300 Participations and other interests in loans
to similar entities
FCA examinations routinely evaluate System institutions' compliance
with the above eligibility criteria. The System's statutory authority
is broader than the System's competitors acknowledge. FCA is proud of
the job our staff has done to ensure the System stays within its
mission while fully recognizing that agriculture continues to evolve
and the System must continue to evolve as well to meet the vast credit
needs of producers and the agribusinesses on which they are dependent.
In supervising the System, FCA constantly strives to strike the proper
balance so System institutions stay within the parameters of the
statute while, at the same time, ensuring that they are always able to
furnish adequate and affordable credit to American agriculture.
Questions Submitted by Hon. Jackie Walorski, a Representative in
Congress from Indiana
Question 1. We all want to ensure access to credit for our farmers.
However, as the hearing demonstrated, there are concerns about mission
creep and whether the Farm Credit System is becoming a competitor
rather than a complementary source of credit. I received an e-mail from
a local banker talking about a situation where a local, well-
established farmer bought a couple hundred acres at auction. He already
owned a sizable plot of land and had no debt. Farm Credit offered him a
3.15% fixed rate for 15 years while a Treasury bill was yielding 2.2%.
The best the local banker could offer was 4.16% over 15 years. The
farmer did what any sane person would do and took the lower rate. I
can't blame him and the banker couldn't either. He is concerned that
the System is prioritizing loan growth targets above all and that, in
order to meet those targets, they are seeking out large, established
farmers to grow the portfolio, potentially at the expense of small and
beginning farmers. And an anecdote like that certainly does raise
eyebrows. What does the FCA do to maintain a complementary role in the
credit market? Does the FCA give any guidance on portfolio growth rates
and targets and incentives to meet the rates and targets to ensure that
it's not undercutting banks, who do not enjoy the tax benefits that
Farm Credit does?
Answer. The statute does not designate the Farm Credit System as
lender of last resort that lends only to borrowers who cannot obtain
credit elsewhere. Similarly, the Farm Credit Act does not specify that
the System is a complementary source of credit to commercial banks and
other agricultural lenders. Instead, the FCS has authority to compete
with commercial banks and other lenders in making loans to eligible
borrowers. Accordingly, the System operates in a very competitive
agricultural credit market, and it competes for business against
commercial banks, life insurance companies, and companies providing
trade credit. The Farm Credit Act directs the institutions of the Farm
Credit System to ``provide equitable and competitive interest rates to
eligible borrowers.'' For this reason, FCA examinations routinely
evaluate the pricing practices of System institutions to ensure that
all loans cover the cost of funds, including the operating costs of the
institution--provisions for loan losses, costs of servicing, and the
need to retain earnings and provide for adequate capitalization.
Aside from the tax benefits that the System's competitors often
highlight, the System has evolved into an efficient business model. The
System's efficient business model was highlighted in an independent
study completed by staff of the Federal Reserve Bank of Kansas City:
``Lending Competition of Community Banks and the Farm Credit System.''
It can be found on the bank's website at https://www.kansascityfed.org/
publicat/fip/LendingCompetition08-09.pdf.
Question 2. Have you been contacted by the Government
Accountability Office to provide information for a study they are
conducting on the Farm Credit System? If so, what information were you
asked to provide?
Answer. No, we have not been contacted recently by the Government
Accountability Office to provide information for a study it is
conducting on the Farm Credit System.
Questions Submitted by Hon. Mike Bost, a Representative in Congress
from Illinois
Question 1. According USDA, 49% of Illinois farmers hold jobs off
of the farm and view agriculture as their secondary occupation. This
shows why rural economic development is so important to supporting
agriculture. FCA recently completed a pilot program called
``Investments in Rural America'' where Farm Credit institutions worked
with community banks and other rural stakeholders to broaden access to
capital to support rural communities. Could you briefly discuss the
results of that pilot program and whether there are other initiatives
at the agency to encourage Farm Credit institutions to work with local
community banks on financing rural projects in a collaborative manner?
Answer. The pilot programs were determined to be successful and
informative in evaluating the appropriate scope of rural investment by
System institutions. Consistent with the finding of the pilot programs,
FCA issued a proposed rule to codify the authority for System
institutions to make certain types of mission-related investments.
However, a final rule was not pursued. Subsequently, in September of
2014, FCA released an Informational Memo providing guidance for
investment requests. As was the case prior to the pilot programs, 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 appropriate mission-related
investment from legal, accounting, and market recognition perspectives.
One of the key criteria used in this evaluation is whether the System
institution is working with local community banks to partner in the
rural project. While we evaluate these investment requests by System
institutions, FCA is not leading any initiatives to encourage Farm
Credit institutions to work with local community banks on financing
rural projects in a collaborative manner.
Question 2. Can you please explain what actions the FCA is taking
to ensure that FCS institutions are complying with state insurance laws
when it comes to the licensing and regulation of FCS employees selling
crop insurance?
Answer. FCA examinations routinely include FCS employees'
compliance with all applicable laws concerning the sale of crop
insurance. Our examinations have not found any instances of wrongdoing,
and as a result, no enforcement actions have been taken.
Question 3. Can you explain AgDirect to me? How do you ensure that
the borrowers are credit worthy? Additionally, if any equipment dealer
can use AgDirect, how do you guarantee that the borrower is a farmer or
at least meets the qualifications to be a Farm Credit customer?
Answer. AgDirect is an equipment financing program offered by
participating Farm Credit System associations of AgDirect, LLP, through
representative equipment dealers. The program uses standardized
underwriting practices to determine creditworthiness of the borrower.
It has controls that ensure borrowers meet the qualifications to be a
Farm Credit customer. AgDirect, eligibility controls, and the
underwriting standards are subject to ongoing FCA examination.
Question 4. If a borrower uses AgDirect, do they have to buy the
$1,000 worth of stock to become a Farm Credit customer? Do they have
voting rights in the Farm Credit Association that offered the AgDirect
loan?
Answer. If a borrower uses AgDirect to finance the purchase of
equipment, he or she does not buy stock in an association. The
equipment purchase is completed using a retail installment sales
contract with the equipment dealer. AgDirect borrowers are obtaining
credit from the dealer, not the FCS association. The FCS association
then purchases a participation interest in the sales contract. The FCS
association is participating in the credit but is not the lender of
record. For this reason, the borrower does not buy stock in the
association. If that is the borrower's only relationship with Farm
Credit, then he or she does not have voting rights. However, the
majority of farmers and ranchers using AgDirect own stock in a Farm
Credit association because of another loan product that affords the
borrower voting rights.
Question 5. What was the total asset size of AgDirect at the end of
2013? How much new loan volume did AgDirect book in 2013?
Answer. AgDirect volume is pooled on an annual basis through
participations sold to AgriBank. At year-end 2013, total volume
reported at AgriBank was $2.5 billion. During 2014, AgDirect booked an
additional net increase of $500 million, resulting in total volume
reported at AgriBank of $3.0 billion at year-end 2014. Outstanding
AgDirect volume will be reported at year-end 2015 in AgriBank's
financial statements.
Question 6. Is there any concern with the AgDirect program since
equipment sales are down and there are some potential struggles on the
horizon for equipment dealers?
Answer. There is reason for concern in any lending relationship
with farmers during difficult economic conditions. AgriBank reported
that it added $5 million during the third quarter of 2015 to its
allowance for loan losses for exposure related to AgDirect volume.
Questions Submitted by Hon. John R. Moolenaar, a Representative in
Congress from Michigan
Question 1. Can you expand on the process of mortgage and homeowner
lending? What is the default rate for home and commercial loans across
the Farm Credit System?
Answer. The credit quality of homeowner loans and commercial loans
extended by the System is excellent. At September 30, 2015, just 0.9
percent of rural residential real estate loans and 0.8 percent of
commercial loans were non-performing.
Question 2. In your view, what are the competitive advantages and
disadvantages of the Farm Credit System compared to community banks?
Answer. It is our view that Congress provided the System with
certain advantages in the marketplace to allow the System to meet its
mission through good times and bad. We believe that, likewise,
commercial banks are provided distinct advantages to meet the needs of
its customers. The System has two distinct advantages. First, it sells
bonds with spreads close to Treasuries. Second, its cooperative
structure means that System institutions are owned by their farmer-
borrowers, rather than investors, which means profits generated by the
System institutions go back to the farmer-borrowers instead of
investors. Community banks have three distinct competitive advantages
over the System. First, the assets and liabilities of community banks
are more diverse than those of the FCS. In contrast to the FCS,
community banks are not required to primarily lend to a single sector
of the economy. Their investment authorities are also broader. They
also have more funding sources than the FCS. Second, the low-cost
deposits of community banks are expressly backed by the full faith and
credit of the United States whereas System bonds are not. Also, many
community banks (but not all) have a lender of last resort, which is
their Federal Reserve Bank. In contrast, the FCS has no guaranteed
lender of last resort.
The agricultural credit marketplace is competitive, with commercial
banks and the System each maintaining about 40 percent market share,
while insurance companies and trade creditors together have a 20
percent market share. This competition directly benefits the farmers
and ranchers of America. For a more complete and unbiased discussion of
the advantages and disadvantages of the System and community banks
serving the agricultural marketplace, we refer you to a study published
in August 2009 by the Federal Reserve Bank of Kansas City, titled
``Lending Competition of Community Banks and the Farm Credit System.''
It can be found on the bank's website at https://www.kansascityfed.org/
publicat/fip/LendingCompetition
08-09.pdf.
[all]