Pub. 10 2015-2016 Issue 5

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2016 Bert Ely FCA Faced Tough Questions at House Ag Committee Hearing O N DEC. 2, 2015 THE HOUSE Agriculture Committee held a three-hour hearing “to review the FarmCredit System.” The sole witness was Kenneth Spearman, chairman and CEO of the Farm Credit Administration (FCA), the Farm Credit System (FCS) regulator. Although Spearman has been a full-time member of the FCABoard of Directors for the last six years and CEO since March of 2015, in responding to questions from com- mittee members, he needed substantial assistance from two FCA executives, Charles Rawles, the FCA’s general coun- sel, andRobert Coleman, the FCA’s chief examiner. Most of the committee’s 45 members attended the hearing; nearly all of themasked questions. Whilemany committee members expressed support for FCS, with several acknowledging that as farmers they were or had been FCS borrowers, they still asked a lot of tough questions and offeredmany sharp criticisms of the FCS and, by extension, the FCA. The following summarizes key issues raised at the hearing. FCS Mission In the context of posing questions about who the FCS was lending to, numerous concerns were expressed about the FCS lending outside its statu- tory mission. Members raised concerns about “mission creep,” especially with regard to CoBank’s lending to Verizon and other investor-owned telecom- munications companies. Spearman attempted to justify these CoBank loans as “risk diversification,” claiming that was why Congress authorized the FCS to lend to “similar entities.” A “similar entity,” according to the Farm Credit Act, is “an entity that, while not eligible for a loan [from the FCS], is functionally similar to an entity eligible for a loan [from the FCS].” The concept of “similar entity” certainly does not encompass a racetrack and casino loan the FCSmade in New York. Chief Examiner Coleman claimed that the FCS needs to diversify its risks outside agriculture, but that assertion is absurd given the diversity of American agriculture and the fact that the FCS, primarily CoBank, already has about $23 billion of credit exposure to electric and telecommunication utilities—10 percent of the FCS’ total credit risk. One committee member stated that CoBank “has done considerable damage to the FCS brand” by lending to Verizon. The FCA witnesses strongly implied that the FCA directed, or at least encour- aged, CoBank to get rid of its Verizon loan. Apparently there have been other instances where the FCA has ordered an FCS institution to sell a loan that did not fit within one of the FCS’ lend - ing authorities and was not a loan to a similar entity. Loan Participations Closely related to the mission issue and “mission creep” is the amount of participations in loans to “similar enti- ties” held by FCS institutions. While participation loans held by CoBank can- not exceed 15 percent of its total assets, questions were raised about limits on the amount of participations in loans to “similar entities” held by other FCS institutions, with the suggestion that the 15 percent limit should be imposed on all FCS institutions as a way to limit mission creep. It may take a change in the Farm Credit Act, though, to impose a 15 percent limit on all FCS institutions. FCS Deposit-Taking Committee Chairman Michael Con- away, a former banker, raised an issue of great importance to bankers—FCS deposit-taking—when he asked how “funds held” accounts are not in fact deposit accounts. The FCA sidestepped his question by answering that “Vol- untary Advance Conditional Payment Accounts,” or VACPs, have been au- thorized by the FCA. However, the FCA seems unaware, or chooses not to be aware, of the extent to which FCS asso- ciations are flouting the limitations the FCA has supposedly imposed on VACP accounts. Specifically, an FCA memo - randum states that “the VACP balance should be at or below the projected maximum outstanding loan balance for related loans using a revolving line of credit.” However, FCSAmerica, the largest FCS association, offers a Cash-