Letters to Regulators
Young, Beginning, and Small Farmer Proposed Rule - RIN 3052-AC07
January 20, 2004
Mr. Robert Coleman
Re: Young, Beginning, and Small Farmer Proposed Rule - RIN 3052-AC07
Dear Mr. Coleman:
We are sending this letter on behalf of the Independent Community Bankers of America (ICBA) and its 4,500 community bank members. ICBA is the nation's largest national banking trade association and exclusively represents the interests of the nation's community banks. Our comments pertain to the Farm Credit Administration's (FCA) request for comments regarding proposed changes to the young, beginning, and small (YBS) farmers and ranchers program.
Background: YBS Farmers and Ranchers Proposed Rule
The FCA has asked for responses to a proposed rule that would update its regulations for measuring the performance of the YBS farmers and ranchers programs of Farm Credit System (FCS) institutions. The proposed rule would require the disclosure of a report to the FCS shareholders and investors on the level of service provided to YBS farmers and ranchers. The proposed rule would require the reporting of YBS program activity to shareholders by each direct lender association, and in aggregate by each farm credit bank for its member associations. Information from direct lender associations on their YBS program would apparently not be available to the public, however. Further, individual FCS lenders would simply be given a "pass" or "fail" grade on their YBS program.
The FCA proposes that each direct lender association should develop a mission statement for its YBS program and that quantitative targets and qualitative goals be incorporated into the operational and strategic business plans. In addition, the proposed rule seeks better internal controls and oversight of the YBS program, including the establishment of clear lines of responsibility for program implementation, performance results, and quarterly or annual reporting to the local board of directors. FCA believes this will allow the board to assess the strengths and weaknesses of the YBS program and consider the necessary changes to improve performance.
General Accounting Office (GAO) Recommendations
In March of 2002, the General Accounting Office (GAO) released a report after examining the FCA's oversight of FCS institutions' compliance with the statutory requirement to serve YBS farmers and ranchers. GAO noted that the current direction from the FCA allows FCS institutions to report YBS loans in more than one loan category, which distorts the FCS reports when the same loan is counted more than once. The GAO stated in its report, "The totals for loans provided to YBS are not mutually exclusive, and depending on characteristics, a borrower may be counted in two or even all three categories."1 ICBA believes that if the YBS program is to be credible, it should not allow for double or triple counting i.e., allowing the same person to be counted several times in arriving at the total number of YBS farmers served.
The GAO report also recommended that the FCA promulgate a regulation that would outline specific activities and standards that constitute an acceptable program to implement the YBS statutory requirement. In addition, the report noted that FCA examiners should fully execute and document their examinations of institution's YBS performance and ensure that the results of individual YBS compliance examinations be disclosed to the public.
Testimony at FCA Public Meeting in Kansas City
General System Viewpoint In testimony presented to the FCA board by the Farm Credit Council (FCC) at the YBS public meeting November 13, 2002 in Kansas City, Missouri, the FCC witness disputed the GAO report2. FCC claimed that FCA is "doing absolutely everything they are supposed to be doing under the Farm Credit Act."3
The FCC representative also said that GAO's suggestions are inconsistent with the clear language in Sections 4.194 and 5.175 of the Farm Credit Act and implied that FCA, the System's regulator, has no role in establishing YBS program policies because Congress directed that the programs of the associations be reviewed and approved by the supervising Farm Credit Banks, not by FCA. Although Section 4.19 states that FCS institution's YBS programs "shall be subject to review and approval by the supervising bank", it also stipulates that "the bank shall provide to the Farm Credit Administration an annual report summarizing the operations and achievement in its district under such programs".
A number of System institutions subsequently commented on the FCA's ANPRM, raising their fears about public disclosure of their efforts to offer a genuine YBS program and suggested they were worried about increased costs or compliance burdens from having to actually implement an authentic YBS program as Congress mandated.
ICBA's Statement An ICBA witness pointed out to the FCA that one reason such little emphasis is placed on serving YBS farmers by FCS is because of the FCS's focus on using below-market pricing (predatory pricing as stated in the statute) to take away prime ag customers from commercial banks.
ICBA continues to believe that requiring constraint on FCS lenders in this area would be helpful to orienting FCS lenders to serving a clientele more representative of the entire agricultural credit sector, including YBS farmers.
ICBA's statement responded to three questions asked by FCA:
ICBA's focus was primarily on questions # 2 and #3. We felt that without adequately addressing these questions, the guidelines FCA uses for its new YBS regulation would be, for all practical purposes, irrelevant. Our witness noted, ". . . unless you properly define what you mean by the YBS categories and unless you have accurate data on YBS performance, everything else you do will be quite futile".
Following are some of the recommendations that ICBA offered. Several of these recommendations are further discussed in the subsequent text offering our views on the proposed rule. Our recommendations during the Kansas City hearing included:
ICBA Comments on FCA's Current Proposed YBS Rule
FCA disputes the FCC's claims stating that FCA lacks authority to regulate, enforce and give direction to the System's YBS programs and FCA notes it does have authority to pursue an oversight and regulatory role in administering the FCS's YBS program. ICBA agrees.
While the Farm Credit Banks do have a supervisory role in helping FCS institutions establish YBS lending programs, there is nothing under the Farm Credit Act that prohibits the FCA from issuing regulations regarding YBS lending policies. In fact, it is the FCA board's responsibility to supervise and regulate FCS institutions and make sure they are following their requirement of providing credit to YBS borrowers as well as credit to non-YBS agricultural borrowers.
Congress granted the FCA authority under Section 5.17(9) and (11)6 of the Farm Credit Act to "prescribe rules and regulations necessary or appropriate for carrying out this Act" and "exercise such incidental powers as may be necessary or appropriate to fulfill its duties and carry out the purposes of this Act".
This authority, while it should never be abused by FCA or used as a justification for expanding the lending powers of the FCS, is well suited to address programs that were clearly intended by Congress to be implemented, such as the YBS program, and which are mandated in statute.
To achieve better compliance in offering YBS programs, FCA proposes several elements including: establishing minimum components for YBS programs; coordination with other sources of credit; and developing quantitative targets based on YBS demographic data.
Generally, ICBA appreciates the FCA's efforts to place more emphasis on the System's YBS programs in an effort to get FCS institutions to actually implement YBS programs. However, we feel the basic issue in determining whether these programs are implemented in an effective manner is basic accountability in determining whether individual FCS institutions are serving individual borrowers. Our basic concern is not to recommend FCS make an ever increasing numbers of YBS loans, but whether the information reported accurately reveals the trends of YBS borrowing to individual YBS farmers without distortion or inflated numbers.
Community banks already serve the YBS market quite well. Whether individual FCS lenders decide to serve this market won't be based on performance data that is inflated and hidden from the public's eyes. FCA and FCS lenders should not mislead Congress or the public by suggesting they are doing a great job serving YBS farmers when they actually aren't. Our recommendations are necessary to ensure basic accountability and transparency.
Our bottom line is: FCA can't expect to have a successful YBS program if the agency avoids accurate reporting at the individual FCS association level that reflects numbers of YBS borrowers served. If FCA decides ultimately to avoid such transparency, then the agency should refrain from telling the public that regulation of the YBS program has been enhanced because such a representation would not be truthful.
Disclosure by Individual Associations FCA emphasizes in its proposed rule, for example, that it is being consistent with the GAO's recommendation to provide public disclosure of YBS program performance, but this information is not available from individual associations. Instead, it is aggregated at the district bank level and then made available in a summarized form with no traceability back to individual associations. Of any type of financial institution that should provide public disclosure, a GSE with retail lending functions should take the lead and provide the public with an understanding of how its' members' programs function and how successful they really are. The proposed rule fails to do this in a major way and it raises enormous credibility issues for the FCA and the FCS and the proposed rule itself.
FCA notes that the GAO "recommended that the agency strengthen its oversight role of the System's YBS lending, promote YBS compliance, and highlight the System's efforts to provide services to YBS farmers and ranchers by: . . . 3. Publicly disclosing the results of the examinations for YBS compliance for individual System associations (emphasis added).
Clearly, by allowing this information to be aggregated at the district level, FCA's proposal does not follow the GAO's recommendation, even though FCA suggests it does. As FCA is well aware, the district bank level is not the same as the direct lender association level. The result is that FCA's proposal allows individual direct lender associations to evade any real responsibility and accountability to the public, despite the FCA's attempt at justifying this blatant loophole.
FCA apparently suggests the reason for not requiring individual institutions to report their YBS performance to the public is because the agency believes "it is not necessary to disclose confidential examination report information" and the additional transparency provided by the enhanced reporting will "give the public a sound understanding of the System's YBS performance results and will therefore preclude the need for disclosing FCA examination reports on System YBS performance." ICBA strongly disagrees, believing again that FCA's justification is totally without merit.
We note, for example, that banks must comply with the Community Reinvestment Act (CRA) and other regulations. Banks must make the results of their CRA performance available to the public. This does not require the release of confidential examination information but it does require that information on each individual institution's CRA compliance be available to interested members of the public.
In addition, each bank receives a CRA rating which is much more extensive than what FCA proposes either a "pass" or "fail" grade for FCS entities. ICBA believes FCA needs to similarly rate FCS entities in order to have a meaningful grading system for YBS programs.
For example, CRA ratings are given on a four-part scale: Outstanding, Satisfactory, Needs Improvement and Substantial Noncompliance. The financial regulatory agencies also make a distinction within the lending test for large banks between High Satisfactory and Low Satisfactory which can then affect the overall rating.
The CRA ratings are published by the different supervisory agencies (which can be accessed at www.ffiec.gov). Each institution must also make available what is called its "public CRA file" for inspection by interested members of the public. Among other things, the file must include the bank's most recent CRA evaluation. If commercial banks that are both publicly and privately held must release their CRA performance data, then individual FCS associations should be required to do so as well, especially since these entities are GSEs who compete with banks at the retail level.
In addition, we point out that the Office of the Comptroller of the Currency (OCC), for example, releases each quarter a list of national banks to be examined for compliance with the CRA in the next calendar quarter. This announcement allows interested parties to file public comments about the banks' performance under the Act. All public comments received prior to the close of the CRA examination is considered by the OCC in its evaluation. The FCA should follow the same procedure, which may in the long run be more useful than only relying on comparisons of demographic data, because it would allow the agency and its examiners to get direct feedback from farmers and ranchers on how successfully YBS programs are being offered in their area.
Both the CRA and the Home Mortgage Disclosure Act of 1975 (HMDA), require financial institutions to disclose to the public their performance ratings in serving low- and moderate-income needs. The Federal Reserve Bank of Kansas City published a recent report stating that the overhaul of CRA requirements in 1995 was an effort to create a performance-based system that included a quantitative approach to measuring CRA compliance.7
In regards to HMDA, this act required disclosure of lending information by mortgage lenders serving urban areas, in an effort to give their regulators and the public an ability to measure lending activity and how it meets community housing needs. Today, the HMDA applies to most institutions involved in home lending in metropolitan areas, including banks, savings associations, credit unions, subsidiaries or affiliates of these institutions, and independent mortgage companies.
As a result of these two acts, the lending information reported by such institutions is available to the general public from both lenders and their regulators. Requiring similar public disclosure by FCS institutions of YBS program data would help to bring the regulatory and compliance function of the FCA in line with other regulators of financial institutions. Since commercial banks must comply with CRA and often HMDA disclosure procedures as retail lenders, the FCS should enforce comparable disclosure regulations if it is to continue its retail lending function.
The direction for creating the YBS program was given by Congress, reflecting a public purpose for such a program and a need for public awareness of how the program is operating. Therefore, ICBA believes individual FCS institutions must be required to provide YBS program status, activities, and definitions in a clear manner on a regular basis and ensure that such information is available and accessible to the public.
Double & Triple Counting Loan Volume Since the FCA wants to double and triple count loans as part of the YBS data reported to the public, ICBA believes it is essential for FCA to include a separate category that also counts only the number of actual, individual YBS borrowers.
Obviously, these borrowers should only be counted once, regardless of whether they qualify for more than a single YBS category. Congress intended that the YBS program serve "borrowers" that happen to be young farmers, beginning farmers or small farmers. To only count the loan types without an indication of the number of people served over a period of time, for example over a one, three, five and ten year period, defeats the whole purpose of trying to measure YBS performance.
FCA's proposal will still mask what is actually being done or not being done in terms of YBS performance. Congress intended that the YBS program should serve "farmers", not just count loans multiple times. Our recommendation makes perfect sense given that FCA would require FCS associations to include the definitions of young "farmers", beginning "farmers" and small "farmers". The emphasis needs to be on the actual number of people served, not categories of loans that can easily be distorted, manipulated and inflated.
There are other definitional issues that need to be addressed in an effort to further refine the category of true YBS farmers and ranchers. For example, accurately reporting loans made to father/son operations should require differentiating loans to a true partnership, where the son actually contributes to the operation, versus an operation where the son is involved in name only.
Further, multiple loans to the same individual should be aggregated to present a true picture of small loans being made; if an individual's total loan amount exceeds $250,000, that individual should not be counted in the small category.
We note that under CRA, banks are not allowed to count loans more than once. For example, banks cannot count a loan that it originates and then also sells into a loan pool as part of a mortgaged back security as being two loans. Yet, FCA's proposal would redefine "credit" to include "all loans and interests in participations . . .".
This appears to inflate the number of loans made to YBS farmers since several associations participating in a loan could count the same loan two, three, or more times. It also allows FCS associations to participate in larger loans, claiming that their participated amount is a loan to a YBS producer when in actuality the total loan size could be several million dollars. This redefinition of the term "credit" is obviously ripe for abuse by System lenders reporting their YBS data. It is just another example of why a separate category of actual YBS borrowers is necessary to result in credible performance data.
FCA should also establish separate categories of part-time and full-time farmers served, with these categories being outside the YBS program per se, although this data could be reported along with the YBS data as well as in other places. Obviously, if almost all of the YBS loans are shown to be part-time farmers who have no intention of ever having farming as their primary vocation, then it would suggest the YBS programs need more clear direction.
Designating these types of improved YBS categories and data would assist FCA in designing a better YBS program. To avoid implementing such changes suggest the attempt to enhance the focus on YBS lending is in name only, and if that's the case, why waste the public's time?
Below Market Pricing As ICBA pointed out to FCA in our Kansas City testimony, to adequately address the YBS issue FCA needs to prohibit, as the statute states, FCS institutions from engaging in below-market pricing of loans in order to steal customers away from commercial banks. FCA consistently refuses to acknowledge this statutory mandate and consistently creates a variety of excuses for not enforcing the statute.
In the proposed rule, FCA attempts to explain its rationale for allowing FCS institutions to engage in below-market pricing activities that are now occurring by noting that "interest rates should be at the lowest reasonable cost on a sound business basis taking into consideration the lender's cost of funds, necessary reserves, and the cost of providing services to its members . . ." (emphasis added). FCA then suggests that the agency examines interest rates charged during their examination process to see if they are appropriate.H
owever, the results of this information never get reported publicly, again showing there is no accountability or transparency within the FCS on such basic issues. For comparison, the Federal Reserve reports the average rates charged by commercial lenders on agricultural loans quarterly. Recently, FCS associations were sending solicitations to producers offering loans at 1.95%. Obviously such low rates do not cover the associations' cost of funds, reserves, overhead and cost of doing business. Will the public ever know the FCA's views whether this rate level is appropriate? Obviously the public won't hear anything. Why? Because the FCA is an enabler of the System's practice of offering below-market pricing and the FCA never wants to be publicly critical of an FCS institution, for fear that questions would be raised about the privileged GSE status the FCS enjoys.
Addressing this fundamentally unfair practice of offering below market interest rates in a responsible manner would assist FCA in its efforts to place more emphasis on YBS farmers instead of the current encouragement through the FCA's acquiescence to focus on cherry picking prime credits as a way to grow rapidly. With the wide-spread practice of cherry-picking prime credits, no new loans are being made that would not otherwise be made and this undercuts, in the minds of many, any rationale for keeping the FCS in place.
Risk Bearing Capacity ICBA notes the FCA and FCS lenders often refer to pursuing YBS initiatives based on the institution's risk bearing capacity. Obviously loans to YBS producers can be risky. But community banks lend to this category extensively. Citing risk as a factor, while obvious, appears to give FCS associations an excuse for not pursuing YBS loans. We note that the average size of FCS institutions is now over $750 million, much larger than the average sized community bank serving agriculture. This suggests that FCS institutions have a broader base of assets over which to spread such risks. Citing higher risk should not be an excuse for FCS institutions to avoid making loans to YBS farmers and ranchers.
We appreciate the efforts that FCA has taken in the proposed rule to bring greater emphasis on YBS programs in terms of establishing minimum guidelines and general internal standards for measuring performance by FCS institutions. However, we believe the proposed rule falls apart because it grants the System's wish, contrary to Congressional intent, to avoid any real accountability by not disclosing performance of individual FCS associations and by not focusing on the actual numbers and trends of individual borrowers served.
Allowing FCS associations to get away with only providing a general performance report on the System as a whole, or on a district-by-district basis, means that the performance data ends up being hidden behind the veil of district banks, which will aggregate and summarize the data of individual associations.
FCA's proposal is completely contrary to what the GAO called for in terms of public disclosure. This is completely unjustifiable since banks disclose CRA and HMDA information publicly on an individual basis. This disclosure is also necessary for the FCS to achieve accountability and program integrity. These issues must be addressed in the final rule.
Nor does the rule prevent the double or triple counting of loans. Such inflated numbers say nothing about the numbers and trends of actual borrowers being served. This is a gross oversight and defeats the whole purpose of the proposed rule.
We thank the FCA for the opportunity to comment on this proposed rule. Again, we urge the FCA to include our recommendations in the final rule for the YBS program. ICBA reserves the right to make additional comments and raise additional concerns regarding this rule. If you have any questions regarding this comment letter, please feel free to contact Mark Scanlan, ICBA's director of agricultural finance, or Reece Langley, ICBA's assistant director of agricultural finance, at 202-659-8111.
Camden R. Fine
1 General Accounting Office, Farm Credit Administration: Oversight of Special Mission to Serve Young, Beginning, and Small Farmers Needs to be Improved. March 28, 2002
3 Written Testimony submitted by the Farm Credit Council, presented to FCA on November 13, 2002, Kansas City, Missouri public meeting on YBS issues.
4 12 U.S.C. 2207
5 12 U.S.C. 2252
6 12 U.S.C. 2252 (9) and (11)
7 Harvey, James; Kenneth Spong. Low- and Moderate-Income Home Financing: What are the Trends in Kansas City? Financial Industry Perspectives 2003. Federal Reserve Bank of Kansas City, October 2003, pages 3-4