Time to fact check this letter to Congress from The Farm Credit Council

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1 February 5, 2015 The Honorable Michael Conaway Chairman House Committee on Agriculture 1301 Longworth House Office Building Washington, D.C The Honorable Collin Peterson Ranking Member House Committee on Agriculture 1305 Longworth House Office Building Washington, D.C Time to fact check this letter to Congress from The Farm Credit Council! Dear Chairman Conaway and Ranking Member Peterson: It has come to our attention that the American Bankers Association (ABA) recently sent a letter to you that once again does what they have consistently done, describe in misleading and inaccurate ways the Farm Credit System and how it serves agriculture and rural America. Today s FCS has veered far from its original charter We find it particularly ironic that ABA, representing the banks that caused one of the most costly financial crises and economic downturns in our Nation s history, is maligning the efforts of the Farm Credit System to serve agriculture and rural America as Congress intended. While the banking industry s failings caused a severe contraction in the rest of the economy, agriculture enjoyed a period of sustained growth and stability as Farm Credit institutions stood with the sector to ensure that credit was reliably available at competitive rates and terms. (Banks have always stood w/ the We are understandably proud of the Farm Credit System s record of service. The System s nearly 100 year history of serving farmers, ranchers, agricultural cooperatives, rural electric and telephone cooperatives, farm-related businesses, rural homeowners and others in rural America we are authorized to serve with competitive credit and financially related services speaks for itself. We would prefer to spend our time talking about this record of success and to work to identify more ways Farm Credit can help rural America thrive economically. Unfortunately, because of the ABA s apparent continued disconnection from the truth when it comes to the Farm Credit System and their efforts to mislead Members of Congress, we are compelled to respond to their letter. ABA believes that banks are facing an uneven playing field when it comes to competing with the private, cooperatively-owned Farm Credit System. We ve never really raised the issue of Farm Credit institutions having to compete with the taxpayer subsidized commercial banking sector. T HE F ARM C REDIT C OUNCIL 50 F S TREET, NW S UITE 900 W ASHINGTON, DC P HONE: WEB: WWW. FCCOUNCIL. COM GSE s are not truly private, they re government-backed Correction: inform, educate Since when is oversight a bad thing ag sector) Who is this Verizon Cracker Barrel Huh Commercial banks do not receive taxpayer subsidies

2 If commercial The ABA conveniently overlooks the fact that commercial banks have far greater taxpayer backing than does Farm Credit. The taxpayer subsidized commercial banking sector has direct access to GSE funding through Fannie Mae, Freddie Mac, Farmer Mac, and they even are the majority owner of a GSE, the Federal Home Loan Bank System. The taxpayers directly back their deposit gathering mechanism that provides them loanable funds and banks have direct access to the Federal Reserve for low cost loanable funds and liquidity. Commercial banks a bank organized as Sub S institutions pay no taxes at the corporate level no matter what line of business generates those profits. Not surprisingly, the majority of Sub S banks are agricultural banks. We could go on, providing details regarding the trillion dollars of backing taxpayers provided banks during the most recent crisis, but we find it more productive to focus on finding better ways to serve our customers and rural America. banks have such a big advantage, why doesn t Farm Credit become Sub S shareholders pay taxes similar to Sub C institutions 2 False. Banks pay the full cost of FDIC insurance and supervision - no taxpayer monies go into the FDIC fund. The Farm Credit Act sets out the mission charge to the System in part by saying, It is the objective of the Act to continue to encourage farmer- and rancher-borrowers participation in the management, control, and ownership of a permanent system of credit for agriculture which will be responsive to the needs of all types of agricultural producers having a basis for credit, and to modernize and improve the means for furnishing such credit and credit for housing in rural areas The Act also makes clear the role of the System in serving agricultural cooperatives, farm-related businesses and rural infrastructure. Agriculture both contributes to and depends on a healthy rural economy and that economy requires a modern infrastructure to be successful. Farm Credit is committed to helping achieve this consistent with its mission. The recent ABA letter raised several specific complaints. The following responds to each directly: Similar entity lending -- ABA pointed to several recent lending transactions that Farm Credit System institutions have participated in with commercial banks and suggested that the System was never intended to use its taxpayer supported money to participate in corporate lending. These transactions do not involve any taxpayer-supported funding. Further, they are exactly what the Congress contemplated when the authority to engage in these types of transactions was provided to the System in 1992 as a part of the Farm Credit Banks and Associations Safety and Soundness Act of 1992, P.L and then expanded in 1994 by the Farm Credit System Agricultural Export and Risk Management Act of 1994, P.L In providing this authority to Farm Credit institutions, the Congress recognized the growing credit needs of agriculture even as they existed over twenty years ago. At that time the Congress recognized that in order for agriculture and rural America to have their credit needs met, Farm Credit System institutions and commercial banks would need to work together by jointly sharing participations in loans back and forth allowing for risk to be spread and shared. ABA may want to rewrite history to fit their narrow purposes, but the words spoken by the leaders in the Senate upon final passage of the 1994 legislation expanding the similar entity lending authority within the Farm Credit System are the ones that really matter in explaining this authority. Senator Patrick Leahy (D-VT), who chaired the Senate Agriculture Committee at the time, described these provisions as follows, The act will accomplish something additional that I believe both the Farm Credit System and private banks have been seeking for some time and will find mutually beneficial. It creates the opportunity for Farm Credit institutions and private banks This is incorrect. Commercial banks serve the same mission as FCS - there s nothing the FCS does that banks cannot do. FCS has stretched these Acts beyond any reasonable interpretation of congressional intent.

3 The senators likely did not anticipate that Verizon to manage and reduce their concentration of loan loss risk in terms of geography, industry, and account exposure by expanding the System's ability to purchase and sell loan participations from would receive commercial banks and other non-system lenders. funding through this... Oh, how things have changed #missioncreep 3 Senator Lugar (R-IN) added to Senator Leahy s explanation providing additional detail regarding how this authority would help the Farm Credit System manage the risk associated with the large NOTE: loans it was involved with to support agriculture and rural America. Senator Lugar said, these changes will enhance the System's ability to reduce its concentration of risk in terms of geography, industry, and account exposure. System institutions both purchase and sell participations from and to other lenders, a practice that is important particularly in the case of larger loans. For example, CoBank recently administered a $650 million syndication for Farmland Industries, Inc., a major farmer-owned marketing and supply cooperative. Seven commercial banks joined CoBank to provide funding for the syndication, illustrating the growing number of cases where banks and System institutions are working together harmoniously to meet the credit needs of rural America. this was Congress s intent. Senator Lugar went on to say, It is important to note that the legislation will not give System institutions an unfair advantage over the commercial banking industry. For example, in the case of loans to agricultural entities that are similar to System borrowers, the System would be prohibited from providing 50 percent or more of the funds for such loans, ensuring that the System's use of loan participations will be limited to those cases where commercial lenders desire to involve the System, and that the System still will not be able to originate loans of this type. As noted by Senator Lugar, the similar entity lending authority contains very specific limitations. No Farm Credit institution can hold a majority of one of these loans. No Farm Credit institution can have these types of transactions be a major portion of its total assets. The law limits these to no more than 15% of total assets of the participating System institution. Commercial banks hook for a must be a part of these transactions. ABA s members work with Farm Credit institutions to bailout. enhance the agricultural and rural economy through these transactions. It is unfortunate that ABA egregiously misleads about this authority and how it is used. Indirect lending -- ABA complains that Farm Credit institutions work with many manufacturers of farm equipment including tractors, harvesters, irrigation equipment and other implements to provide financing to farmers through the dealers that sell this equipment. Farm Credit institutions have made major investments in information technology systems that allow for fastpaced credit analysis, loan decision-making and delivery of loan documents often within minutes of a loan application being taken. For farmers this means efficient, point-of-sale financing that is convenient and competitive. Decades of experience in providing this type of financing means Farm Credit understands the risks in these credits and can manage that risk appropriately while providing excellent service to farmers. One can only speculate as to why ABA would oppose farmers having access to competitive, convenient financing. These programs do not conceal the fact that they are operated by Farm Credit institutions. Why should they They provide quality service and a great product. Quite the opposite.... ABA opposes FCS There s no public policy justification for this The FCS did not bring any unique skill or financing capacity to this transaction, and it s hard to believe... maybe that was true in Here s what Rep. Stuztman said in 2014: on the The Council Retained Mineral Rights -- Since 1985 Farm Credit institutions have been prohibited by law from retaining mineral rights when selling foreclosed property. Previously, mineral rights were non-farmers. eligible borrowers. providing loans to taxpayers could be cannot assure that loans are only going to

4 Where The website couldn't be more opaque 4 retained as a means for the financial cooperative and its member borrowers to recuperate losses experienced when a loan failed. If this were not done, the remaining members of the cooperative would have to invest more in the institution so that it could maintain its regulatory capital levels and continue to make credit available. The websites of those institutions that have mineral rights contain extensive information regarding the holdings and the location of those holdings. In recent years these retained mineral rights have provided significant income to System institution which in turn has helped to pay the cost of operations, adding to profitability and allowing more earnings to be returned through patronage distributions to the farmers and ranchers that own these institutions. Farm Credit has become a land speculator So it s ok to drill on farmers land if it helps FCS members Crop Insurance Farm Credit institutions strongly support the Federal Crop Insurance program. It is a critically important risk management tool for System borrowers. Farm Credit employees that sell crop insurance must meet all of the same licensing and regulatory requirements as any other crop insurance agent. System institutions are prohibited from linking the purchase of crop insurance from a System institution as a precondition to obtaining credit from that institution. Similarly patronage payments may not be linked to crop insurance purchases. If ABA has specific evidence of any valid regulatory or legal challenges regarding how System institutions conduct their crop insurance business, they should be referred to and not one has appropriate authorities. We are not aware of any. We value the professional working rebating relationship Farm Credit has with the Risk Management Agency and our mutual efforts to find better ways to bring the program to young and beginning farmers and to extend coverage to insurance crops newly grown in parts of the country. premiums - Shadow banking activities The Farm Credit Act in its opening paragraphs (Section 1.1 (a)) makes clear that System institutions are to provide both constructive credit and closely related services (emphasis added) to their customer/owners. These services include cash management and other services including farm record keeping, tax preparation assistance and financial Several insurance departments have filed complaints against FCS for engaging in illegal of crop Many of these services are free and why does FCA refuse to work w/ state insurance regulators planning. Some System institutions do work with commercial banks to make available credit cards. And we are guilty as charged in terms of providing customers on-line access to their accounts to check loan balances, make payments, submit applications and a host of other things. These are not shadow banking activities for if they were we would be charging a whole lot of fees for them just like banks! These activities are what System institutions do to provide quality service to those borrowers that own their institution. System institutions believe strongly in serving their customers how they want to be served whether it is over the internet, at their farm or office or in one of their offices. The System would be failing to fulfill its mission if it were not making state of the art technological solutions available to customers. System customers are not confused about whether they are dealing with a commercial bank or a Farm Credit institution, the financial institution that they own. The fact that customers are dealing with a cooperative is made clear to them when they get to nominate, vote for or run for election as a director of THEIR institution and it is certainly made clear when the earnings of THEIR institution get distributed to them as a patronage check. interest rebate, not patronage The Farm Credit System has always recognized the value of the commercial banking sector and the role it plays. While ABA is loath to mention it, their members and Farm Credit institutions are working together every day. The fact remains that the credit needs in rural America are greater than either the commercial banks or the Farm Credit System can finance alone. Perhaps Millions of $ been investigated Does not include checking or savings accounts Note: Some FCS institutions illegally accept and hold deposits

5 someday ABA will find that it is more productive to join with us in promoting new ways to support and enhance the rural economy. 5 Beyond lending, System institutions have joined together to put in place a Rural Business Investment Company that is helping rural businesses bring more jobs to rural communities. The authority to do this was first provided in the 2002 Farm Bill. System institutions also are working with USDA to support the infrastructure needs that are vitally important for agriculture and other rural businesses. Perhaps instead of pointing fingers, suggesting that others have more advantages than they do, ABA could instead join us in figuring out more innovative ways that both commercial banks and System institutions can benefit agriculture and rural America. Thank you for your continued support of agriculture and rural America. Sincerely, Asking for oversight is not unreasonable. Why is FCS so afraid of oversight Kenneth E. Auer President and CEO cc: Members of the House Committee on Agriculture Among these many misstatements, one thing s certain: the FCS pays a lower tax rate than most Americans. Luckily, there s nothing unique that FCS brings to ag + rural finance, so oversight + reform is bound to go a long way toward reducing risk to the economy.