Nature of the Problem
Despite the claims provided by FCS witnesses at FCA's YBS public meeting held in Kansas City, Missouri on November 13, 2002, if you travel the country talking to community bankers you will find that FCS is not attempting to serve YBS farmers as Congress intended. Instead, typically the community banker takes the risks on the YBS farmers and ranchers. As a typical example, the community banker works with the producer, (dairy - in this example) putting in substantial staff time and several years of effort to help the YBS producer grow his operation to the where he is milking 300 cows and has built up considerable equity. Then the FCS comes along and engages in predatory pricing and steals the customer away - even though they weren't there for the customer during the early years of struggle. The FCS can do this because they pay few taxes and have a lower cost of funds - GSE advantages that community banks don't have.
Community banks see themselves therefore as the lenders taking the risks with YBS farmers while FCS focuses on cherry picking the commercial lenders' best customers, including the former YBS farmers once they become more profitable. What purpose does this cherry-picking serve for the agricultural industry? This scenario - which is played out every day all over the country - suggests that current FCA YBS policies need to be combined with regulations placing constraints on the FCS to prevent cherry picking and predatory pricing activities.
Congress put into statute a mandate for FCS institutions to serve YBS farmers, but they also put into statute a mandate against predatory pricing. They are opposite sides of the same coin. The FCS engages in predatory pricing of well-established farmers because that's where they see the profits and because the FCA doesn't regulate against predatory pricing. If FCA did regulate to constrain predatory pricing, then FCS would be forced to focus more efforts on serving YBS farmers - so these issues are intertwined. We point this out because constraining predatory pricing will help your efforts to enhance service to YBS farmers.
FCS' representatives suggest they are adequately serving YBS farmers, but local bankers, the GAO, and USDA disagree. USDA studies suggest FCS is not addressing the issue adequately and the GAO report recommends specific standards and better documentation as well as public disclosure.
FCS Not Serving the Need of YBS Farmers and Ranchers
Although FCS institutions suggest that "Farm Credit has been and will be the most important lender to young and beginning producers"1, the data from USDA economists reflects otherwise.
According to an October 1999 analysis by USDA economists, the FCS has made very few Farm Service Agency (FSA) loans to these farmers while commercial banks have made heavy use of the FSA guaranteed loan program. In fact, findings from their analysis revealed the following:
- FCS made very few guaranteed beginning farmer loans in the Midwest;
- FCS makes very few guaranteed loans to socially disadvantaged farmers;
- Since 1993, FCS made no guaranteed loans to socially disadvantaged farmers in Ohio, Indiana, Illinois, Iowa, Nebraska, South Dakota, Wyoming, Utah and Pennsylvania; and
- Commercial banks were the largest supplier of guaranteed loans to targeted groups.
The lack of service provided by FCS institutions to high-risk borrowers is often cited in conversations with bankers around the country, who consistently relate that FCS ignores these types of borrowers and focuses on the larger, wealthier borrowers. GAO found weaknesses and incomplete documentation to support FCA examination findings for YBS compliance by FCS institutions.
FCS More Likely to Lend to Larger Farms
Data collected by USDA throughout the 1990s shows the FCS targeted larger, wealthier farm operations over smaller, less affluent farm operations. This troubling scenario has continued in recent years as well. USDA's Agricultural Income & Finance - Situation and Outlook Report issued in February 2001 shows that FCS credit is concentrated in fewer and larger operations, while commercial bank lending was spread evenly among different sales classes. For example, the report shows that a disproportionate percentage of FCS loans were to farmers with sales over $500,000 with an average net worth of over $2 million. This USDA report showed the following:
- At the end of 1999, nearly 36 percent of total FCS lending to farm operations went to large farms with over $500,00 in sales. In contrast, farmers with under $100,000 in sales that considered farming to be their primary occupation had less than 15 percent of their outstanding debt provided by FCS, and loans to these operations accounted for less than 11 percent of FCS lending volume;
- FCS borrowers had an average net worth exceeding $650,000, based on their reporting of owned assets valued at almost $810,000 and about $156,000 in debt. Bank borrowers had an average net worth of less than $415,000 based on ownership of assets valued at about $250,000 and total debt of less than $110,000; and
- FCS had 35.8 percent of the sales class share of total debt owed by farmers with value of sales over $500,000 compared to 21.4 percent for commercial banks.
The trend in agriculture is towards fewer and larger farmers and fewer YBS farmers. FCA appears to be trying to benefit from these trends, rather than provide leadership to attract more YBS farmers into agriculture. This raises the question whether they are fulfilling a meaningful social role, given their privileged status as a GSE and a unique retail lender in competition with private-sector, tax-paying community banks. Any improvement in FCS service to YBS farmers and ranchers will only come about by improved regulatory approach from the FCA.
FCA Has Statutory Authority to Implement YBS Farmer Regulations
In testimony presented to the FCA board by the Farm Credit Council (FCC) at the YBS public meeting, the FCC witness disputed a critical report issued by the General Accounting Office (GAO)2 relating to current FCA oversight of the System's YBS lending and claimed that FCS is "doing absolutely everything they are supposed to be doing under the Farm Credit Act."3
FCC representative said that GAO's suggestions are inconsistent with the clear language in Sections 4.194 and 5.176 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 Farm Credit System (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". This clearly shows the FCA is to take an oversight and regulatory role in administering the System's YBS program.
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 and constructive credit to agriculture.
Congress granted the FCA broad 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 seems well suited to address programs that were clearly intended by Congress to be implemented, such as the YBS program, which is mandated in statute.
In 1980, Congress correctly saw that FCS institutions were not putting forth enough of an effort to meet the credit needs of YBS farmers so they included provisions to ensure they made "conscious and coordinated efforts to meet the unique credit needs" 7 of YBS farmers and ranchers. It was also the intent of Congress that FCS institution's YBS programs "would include coordination with other Farm Credit institutions and government and private sources of credit in the territory."8 Clearly FCS institutions do an inadequate job in serving the needs of YBS borrowers and are not working well with private sources of credit as intended by Congress. There has been two decades of inaction by the System.
FCC's proposition that FCA is to act only as a data collection point for issuing an annual report to Congress regarding YBS lending policies is inconsistent with both the law and the Congressional record surrounding passage of the pertinent legislation impacting the System's YBS program. We note that when FCA issued its YBS policy statement and general guidance in late 19989 FCC did not claim that FCA had no authority take this action.
FCS' YBS Borrower Recommendations for 2002 Farm Bill?
At FCA's YBS public meeting another witness for the FCC discussed an Internet-based survey concerning young and beginning farmers, entitled Barriers to Success, conducted between March 1 and September 1, 2001. The FCC witness said the study, which supposedly had just under 700 useful responses, was "still in process and the results and recommendations are being prepared."10 The fact that FCC is still putting the results of this survey together a year later indicates that YBS borrowers are not a high priority for System representatives.
The Farm Credit System Foundation11 claims that the survey was to provide "direct input that will be fashioned into recommendations for the 2002 Farm Bill…may result in new policies or programs that specifically benefit young and beginning farmers and ranchers." However, the new farm bill (P.L. 107-171) was signed by President Bush on May 13, 2002. There is no indication that the FCC or the Foundation ever provided Congress and/or FCA with any YBS borrower recommendations, aside from a few minor, miscellaneous items.
Maintain Current Restrictions on Eligibility and Scope of Financing for Farmers
Under the guise of helping YBS farmers and ranchers, the FCS institutions are requesting FCA further expand their lending authorities outside the scope of the Farm Credit Act and away from production agriculture, which would only exacerbate the problem of fewer YBS farmers and ranchers.
FCC witnesses, in an obviously coordinated lobbying effort, urged FCA to eliminate the current eligibility lending restrictions for part-time farmers, allow System institutions to create subsidiaries with lax underwriting standards, and expand authorities in offering credit for non-agricultural purposes, such as investing in high-tech companies that deliver Internet access.
These requests will only worsen FCS institution's acts of predatory lending and cherry-picking of prime credits from community banks to the detriment of rural communities and YBS borrowers. FCS institutions are allowed to provide full credit only to "bona fide farmers and ranchers ",12 entities whose primary business and vocation is production agriculture, rather than offering non-agricultural credit to hobby or part-time farmers.
FCA wisely decided on January 7, 1997 to maintain FCA Regulation 613.3005(a), which outlines the scope of financing distinction between full- time and part-time farmers and ranchers.13 This issue was settled then and should not be reopened now. Doing so would only reward the failure of FCS institutions to service YBS farmers and is completely inappropriate for the numerous reasons outlined in comments to the FCA at that time.
Congress did not create the FCS with the intent of allowing System institutions to invest in high-tech companies such as AT&T, AOL, and Bell South in the name of helping farmers and ranchers and clearly there is adequate private-sector capital to address the credit needs of America's largest corporations. Such focus by FCS is a clear departure from their mission and only invites criticism of the public policy role and goals of the FCS.
ICBA Recommendations For Ybs Program
In FCA's ANPR, three basic questions were asked: 1) what type of guidelines should FCA use?; 2) how should FCA measure FCS performance?; and 3) should FCA publicly disclose the results of examinations on YBS compliance?
ICBA believes the initial focus has to be on the second question - how to measure YBS service. Unless FCA properly define what is meant by the YBS categories and unless FCA has accurate data on YBS performance, everything else FCA does is quite meaningless.
ICBA believes the FCA has relaxed the loan YBS definition much too far by removing the requirement that applicable loans have to be tied to those who are primarily responsible for the executive management decisions. It is simply way too lax to simply require the loan to have some "benefit" to a young, or beginning farmers or someone who may have only a miniscule ownership interest in the farming entity.
Tie Definition To Actual Managers
FCA should return to the previous requirement tying application of the YBS definition to those who are primarily responsible for executive management decisions. Otherwise you are allowing a major loophole that obviously allows FCS to suggest they have increased YBS loans when the reality is that you've simply loosened the definition.
More Clearly Define YBS Categories & Definitions
The primary purpose of YBS measurement criteria should be to identify small loans made to young and beginning farmers. That is what we need to encourage in agriculture for the future. Therefore, the Small farmer category should be the umbrella category that only includes the Young and Beginning farmer categories for purposes of this program.
If FCA wants to establish a separate Small farm category for loans that don't go to young and beginning farmers, then FCA could do so, but the data shouldn't be reported as part of the YBS program. This would prevent, for example, counting loans to 65 year-old retired and part-time farmers as YBS loans. FCA could create a separate "Non-YB Small" category to account for small loans to farmers who are not young and beginning farmers. But the focus needs to be on young and beginning farmers, who will likely be small farmers. This approach would be consistent with intent of Congress and where our focus needs to be in terms of bringing more young people into agriculture.
Prevent Double or Triple Counting of YBS Loans
Tied to this issue is that current FCA directions to FCS institutions that state "each loan may be reported in more than one category." This, in effect, allows the double or even triple counting of loans for these categories and distorts the numbers that FCS reports because the same loans are being counted more than once. As the GAO stated in its report, "The totals for loans provided to YBS are not mutually exclusive, and depending on characteristics, a borrow may be counted in two or even all three categories."
If the YBS program is to be credible, then it should not allow for double and triple counting or at least also have a combined category where double or triple counting of loans is not allowed, in addition to the separate categories. The combined category would report small farm loans to young and beginning farmers as a single category instead of breaking all three of these out separately. If FCA wants to break categories out separately and double or triple count loans, that should be clearly stated in the information reported to the public and, as stated, a separate combined category should be used that does not count loans more than once. Otherwise, the YBS data lacks the credibility necessary for a GSE that is uniquely competing in the retail sector, which requires greater accountability.
Accurately Report Father/Son Combinations
Another definitional issue is that FCS can count loans made to the father if the son is also working on the farm and has less than ten years experience. If the father is the primary manager, is sixty years old, and the son simply works on the farm, is this really a young, beginning farmer loan? There should at least be a category that states this is an "YB-Other" loan to show that it is also largely outside the "YB" category.
Modify Beginning Farmer Definition
We also ask you to limit the category of "Beginning" farmers to between 0 to 5 years. If someone has been in farming a decade, they're not really a beginning farmer.
Aggregate Dollar Amounts of Multiple Loans to Individuals
Regarding the definition of "Small", FCA needs to aggregate the dollar amount of multiple loans to the same individual so that two $250,000 loans don't count as two YBS loans. Also, loans less than $5,000 should not be included in the totals since they are not likely to contribute in a significant way to operating a full-time farm. For example, a farm with $500 of sales should not be counted, but current FCA rule appear to allow this, even though USDA loosely defines a farm as producing $1,000 annually in agricultural sales. Therefore this would modify the smallest category by changing the size from "0 to $50,000 to "$5,000 to $50,000".
The larger issue, however, is that FCA now counts loans of $250,000 and less as "small" farmer loans, when in reality, these loans are to commercial farm enterprises. Therefore, we encourage FCA to not count loans above $100,000 in the YBS category.
Distinguish Between Full-Time and Part-Time Farmers
Finally, in terms of definitions, we believe FCA should consider the net worth and total assets of the producers receiving these loans and determine if the producers are full-time, part-time or hobby farmers and whether their main income is from farming on non-farming activities. YBS should not include hobby farmers or part-time farmers who primarily depend on non-farm jobs. Earning a majority of income from off-farm sources should disqualify producers as YBS. Part-time producers should be counted in the new category we recommended above - the "Non YB Small" category and this category should be broken out to distinguish between full time small farmers and part-time farmers who are not young and beginning farmers.
If FCA does not adequately define the YB categories and breakout the data correctly, then the data can be manipulated to say almost anything and everyone who follows these issues closely will see the program's reported data as not being credible.
YBS Reporting Requirements
Make Examination Results Publicly Available
FCA should break out all of this data as described into a single table in the institution's annual report and it should be made available to the public and placed on the internet and available by mail if requested by the public. FCS institutions should be required to report this information annually.
Report Data Annually & On Individual FCS Institution Basis
Reporting of examination results should be available on an individual FCS institution basis, not just aggregated and sent to the District banks. The individual institutions should also be required to make their YBS program publicly available. The reporting results should be available to everyone, not just FCS shareholders, since the FCS is a GSE and should be publicly accountable. FCS data already reports YBS loans by percent of FCS's overall portfolio and volume of loans, but this information needs to be individualized, available to the public, and with definitions that are credible.
FCA asks whether FCA should require FCS to conduct demographic studies on YBS farmers. Any studies of this type would more appropriately be handled by independent researchers, such as universities and the Extension Service professors with no financial ties to FCS institutions.
Predatory YBS Lending
Implement Regulations Prohibiting Predatory Pricing
FCA asked whether FCS should give concessions or special credit treatment, lower fees or rates to YBS farmers. This smacks again of engaging in predatory pricing and should be avoided. The government already provides loan guarantees under special terms for these farmers and the FCS can use these programs just like community bankers can.
Meaningful YBS Guidelines
FCA has stated the objective in the ANPR to develop clear meaningful and results-oriented guidelines for System YBS policies. FCA has asked whether they should institute a YBS performance rating system. This is a worthy objective, but we emphasize that without adequate definitions, as stated above, the value of any potential "guidelines" FCA develops will be insignificant. If the definitions are insufficient, then the value of guidelines are debatable since their effectiveness will be driven by the definitions FCA uses.
Enhancing the OFI Program
Improve OFIs But Don't Unduly Burden
FCA asks about using outreach activities and more effectively using OFIs. We suggest the FCA direct FCS institutions to develop a program that would encourage the formation of more OFIs.
ICBA would oppose attempts by FCA or FCS to further burden the OFI program especially since the OFI program has been allowed to deteriorate, contrary to the intent of Congress. Commercial banks with OFIs already comply with numerous regulations and CRA. Banks don't establish OFIs for the purpose of CRA and YBS lending, rather, they establish OFIs as a funding source for agricultural credits. Suggesting that commercial bank OFIs should also have a YBS component, when the parent commercial banks already have numerous regulatory compliance burdens, ends up discriminating against OFIs.
OFIs, even though they pay capital into the System, are already discriminated against because they are not treated as equal partners, with equal pricing, board representation, and the same capital treatment as FCS institutions receive.
FCA's goals, again, should be to enhance the OFI program and therefore, FCS institutions should have to comply with an outreach program to establish OFIs with specific guidelines, similarly to they type of regulatory reforms FCA is contemplating for the YBS program. These suggestions are appropriate in the context of FCA's consideration of a YBS proposal because there is an outstanding OFI ANPR that was never finalized and incorporating the OFI proposals and our recommendations on improving the OFI program would help address additional ways to meet credit needs in agriculture.
ICBA appreciates FCA's consideration of revising YBS regulations and guideance in terms of performance, standards and reporting. It's important to look at this sector of American agriculture. Meaningful definitions, credible data and transparency are important to an authentic YBS program. These aspects of a YBS program would allow is an accurate look at what is really happening and would enable FCA to determine what the best course of action should be on an ongoing basis.
ICBA believes FCA needs to broaden this inquiry by considering some meaningful predatory pricing constraints, since this is the flip-side of the coin in terms of the YBS program and also enhance the OFI program.
1 Written Testimony of John Hayes, Vice President - National Programs, Farm Credit System Foundation on 11/13/2002
2 Farm Credit Administration: Oversight of Special Mission to Serve Young, Beginning, and Small Farmers Needs to be Improved. General Accounting Office, March 28, 2002
3 Written Testimony of Kenneth Auer, President & CEO, Farm Credit Council submitted to FCA on 11/13/2002
4 12 U.S.C. 2207
5 12 U.S.C. 2252
6 12 U.S.C. 2252 (9) and (11)
7 P.L. 96-592, the Farm Credit Act Amendments of 1980, Legislative History, p. 23
8 P.L. 96-592, the Farm Credit Act Amendments of 1980, Legislative History, p. 42
9 Farm Credit Administration, Farm Credit Service to Young, Beginning, and Small Farmers and Ranchers, Policy Statement-75, December 10, 1998
10 Written Testimony of John Hayes, Vice President - National Programs, Farm Credit System Foundation on 11/13/2002
1212 U.S.C. 2075(a)(1)
13 12 CFR Parts 613, 614,615,618, 619, 620 and 626. Final FCA Regulations on Capital Adequacy and Customer Eligibility adopted by FCA Board on 1/9/1997.