Farm Credit Administration
Oversight of Special Mission to Serve Young, Beginning, and Small Farmers Needs to Be Improved Gao ID: GAO-02-304 March 8, 2002GAO reviewed the Farm Credit Administration's (FCA) regulation of the Farm Credit System (System) to ensure compliance with its statutory mission to serve young, beginning, and small farmers (YBS). FCA has issued YBS-related policies and guidance, designed and implemented a YBS examination protocol, and examined institutions for compliance with YBS requirements. However, FCA has not promulgated regulations to define standards and clarify what constitutes an acceptable YBS program. GAO also found that FCA failed to follow examination procedures and document examination conclusions in the YBS program. Slightly more than half of the institutions in the System had a YBS program or service in place. Nearly one third had set numerical goals for YBS service, although most were not conducting demographic studies. Half had YBS marketing and outreach efforts in place, and most were coordinating their YBS offerings with federal, state, or other governmental or private credit sources.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-02-304, Farm Credit Administration: Oversight of Special Mission to Serve Young, Beginning, and Small Farmers Needs to Be Improved
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United States General Accounting Office:
GAO:
Report to the Ranking Minority Member, Committee on Agriculture,
Nutrition, and Forestry, U.S. Senate:
March 2002:
Farm Credit Administration:
Oversight of Special Mission to Serve Young, Beginning, and Small
Farmers Needs to Be Improved:
GAO-02-304:
GAO Highlights:
Highlights of GAO-02-304, a report to the Ranking Minority Member,
Committee on Agriculture, Nutrition, and Forestry, U.S. Senate.
Why GAO Did This Study:
Why GAO Did This Study Congress is concerned about the availability of
credit to young, beginning, and small farmers (YBS). Because of this
concern, GAO was asked to review the Farm Credit Administration‘s (FCA)
oversight of the Farm Credit System‘s (System) compliance with its
statutory requirement to serve YBS. GAO reviewed, among other things, a
representative sample of 30 fiscal year 2001 FCA examinations of System
institutions. GAO also identified characteristics of YBS programs at
System institutions. GAO compared YBS program requirements and
oversight to that of other regulators who oversee compliance with the
special mission or service requirements of government-sponsored
enterprises and banks.
What GAO Found:
FCA has issued policies and guidance that are consistent with the
statutory mission to serve YBS and FCA‘s oversight responsibilities,
and it has developed and relied on examination procedures to assess
compliance with the mission requirement to serve YBS. FCA has not,
however, promulgated a regulation with specific YBS program activities
and standards it expects of System institutions. FCA‘s regulation
restates the broad statutory requirement, which is open to
interpretation and results in some System institutions taking no
specific actions toward YBS. GAO identified weaknesses in FCA‘s 2001
examinations that limited the agency‘s ability to effectively oversee
YBS mission compliance. Generally, these weaknesses were incomplete
execution of examination procedures and incomplete documentation to
support examination conclusions.
The FCA examination reports indicated that just over half of the
institutions‘ YBS programs had features designed to target services
specifically to YBS farmers. These features ranged from educational
training programs to special loan underwriting standards. Most
institutions coordinated with other governmental or private credit
sources and nearly a third had established a measurable goal for YBS
service. FCA has identified data for System institutions to use in
assessing the extent of their YBS service, but the data are limited in
important ways.
With the exception of FCA, other regulators with special mission or
service requirements issued regulations with specific standards
describing what constituted an acceptable program to comply with
statutory special mission requirements or service obligations. FCA and
all the other regulators monitored program compliance or performance
through examinations or reviews and all required reporting. Unlike FCA,
other regulators publicly disclosed information on the performance of
individual institutions they regulate or required the regulated
entities to do so, which could provide an incentive for institutions to
improve their programs.
Illustrative YBS Program Activities:
* Special underwriting standards, risk parameters, risk pools;
* Educational training programs ó Marketing and outreach;
* Numeric goals for YBS loans set by individual System institutions.
What GAO Recommends:
GAO recommends that the FCA Board:
* promulgate a regulation that outlines specific activities and
standards that constitute an acceptable program to implement the YBS
statutory requirement;
* ensure that examiners fully execute and document examinations, and;
* publicly disclose the results of individual YBS compliance
examinations.
FCA agreed with the report findings and agreed to address the issues
raised.
This is a test for developing highlights for a GAO report. The full
report, including GAO's objectives, scope, methodology, and analysis is
available at [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-02-304].
For additional information about the report, contact Davi M. D'Agostino
(202-512-8678). To provide comments on this test highlights, contact
Keith Fultz (202-512-3200) or e-mail HighlightsTest@gao.gov.
[End of section]
Contents:
Letter:
Background:
FCA Has Issued YBS Policies and Guidance and Monitors Compliance
through Examinations but Has Not Set Standards in Regulation:
Weaknesses in Examinations for YBS Compliance Limited FCA‘s Ability to
Effectively Oversee Institutions‘ YBS Programs:
System Efforts to Serve YBS Varied:
The System‘s Special Mission Requirements Are Less Specific Than Those
of Housing GSEs:
Conclusions:
Recommendations:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Farm Credit Administration:
Table:
Table 1: Comparison of GSE Statutory Missions and Special Mission
Requirements:
Figures:
Figure 1: YBS Examination Steps, as Provided by the YBS Examination
Leadsheet:
Figure 2: Percent of Weaknesses in FCA‘s Examinations of System
Institutions:
Figure 3: Extent of Completion of Examination Procedures for Statutory
Compliance by Percent:
Figure 4: Illustrative YBS Program Activities:
Abbreviations:
AHP: Affordable Housing Program:
CIP: Community Investment Program:
CRA: Community Reinvestment Act:
FCA: Farm Credit Administration:
FCC: Farm Credit Council:
FCS: Farm Credit System:
FHFB: Federal Housing Finance Board:
FSA: Farm Service Agency:
HUD: U.S. Department of Housing and Urban Development:
USDA: U.S. Department of Agriculture:
YBS: young, beginning, and small farmers:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
March 8, 2002:
The Honorable Richard Lugar:
Ranking Minority Member:
Committee on Agriculture, Nutrition, and Forestry:
United States Senate:
Dear Senator Lugar:
This report responds to your request that we review the activities of
the Farm Credit Administration (FCA), the regulator of the Farm Credit
System (System), to help ensure the System‘s compliance with its
statutory mission requirement to serve young, beginning, and small
farmers (YBS).[Footnote 1] The System is a government-sponsored
enterprise (GSE)[Footnote 2] created by Congress to provide a
dependable and affordable source of credit and related services to the
agricultural industry.
This report discusses (1) how FCA seeks to ensure that System
institutions fulfill the YBS statutory mission, (2) the extent to which
FCA examiners follow FCA requirements in conducting examinations for YBS
compliance, (3) the characteristics of YBS programs at selected System
institutions, and (4) how the requirements for System institutions to
serve YBS compare to the special mission or service requirements of
other GSEs and banks.
To address these objectives, we reviewed the Farm Credit Act of 1971, as
amended, to identify statutory requirements for System institutions‘
service to YBS. We also reviewed FCA regulations implementing the YBS
requirement and a variety of FCA documents that set forth YBS-related
requirements for System institutions. In addition, we identified
relevant FCA examination protocols for service to YBS. We also
identified a representative sample of reports of examinations of System
lending associations that FCA issued in fiscal year 2001. Using the
reports in our sample and a data collection instrument, we evaluated
examiners‘ compliance with FCA protocols. On the basis of our review of
the examination reports and System banks‘ annual reports on YBS
service, we identified the characteristics of YBS programs. Finally, we
reviewed laws and other relevant regulatory documents to compare
special mission or service requirements of other GSEs and banks to the
System‘s YBS lending requirement.
We conducted our review from July 2001 through March 2002 in accordance
with generally accepted government auditing standards. Appendix I
contains a detailed description of the scope and methodology of our
work.
Background:
As of November 1, 2001, the System‘s nationwide network of lenders
included:
* Six Farm Credit Banks;
* One Agricultural Credit Bank;
* 114 associations of the Farm Credit Banks and Agricultural Credit
Bank.
The entities within the System that make loans directly to farmers and
ranchers are referred to as direct lending institutions”agricultural
credit associations, federal land credit and production credit
associations”the associations of the Farm Credit Banks. The Farm Credit
Banks raise operating funds by selling Systemwide consolidated debt
securities to investors. As of September 30, 2001, the System held
approximately $99 billion in assets.
FCA is an independent regulatory agency responsible for supervising,
regulating, and examining System institutions operating under the Farm
Credit Act of 1971, as amended. As the System regulator, FCA is
responsible for examining System institutions for safe and sound
banking practices and compliance with applicable laws and regulations,
including the special mission requirement of providing credit and
related services to YBS. To fulfill this responsibility, FCA is to
examine System institutions at least every 18 months. FCA provides
guidance to System institutions through the issuance of regulations and
other types of documents that set forth official policies.
The Farm Credit Act of 1971 was amended in 1980 to require System
institutions to serve YBS. Regarding YBS, the act requires the Farm
Credit Bank for each district[Footnote 3] to:
* annually obtain, from associations under its supervision, reports of
activities under programs developed to serve YBS and;
* on the basis of these reports, provide to FCA an annual report
summarizing the operations and achievements in its district of programs
developed to serve YBS.
The act requires direct lending associations to:
* prepare a program for furnishing sound and constructive credit and
related services to YBS and;
* make YBS programs available in coordination with other governmental
and private sources of credit.
Commercial banks and other private lenders serve as significant sources
of credit to YBS, as do numerous other governmental sources of credit.
The largest governmental source of coordination for the System is the
Farm Service Agency (FSA), part of the U.S. Department of Agriculture
(USDA), which supports YBS through its guaranteed loan and direct loan
programs.
FCA Has Issued YBS Policies and Guidance and Monitors Compliance
through Examinations but Has Not Set Standards in Regulation:
FCA has issued YBS-related policies and guidance, designed and
implemented a YBS examination protocol, and examined System
institutions for compliance with YBS requirements. However, FCA has not
promulgated regulations to define standards and clarify what
constitutes an acceptable YBS program. The existing regulation on YBS
restates the broad statutory requirement and does not provide
additional guidance or standards. FCA policies and guidance as of
January 1, 2002, require each System bank to fulfill annual reporting
requirements. The policies and guidance also require System
institutions to adopt clearly stated policies for serving YBS and to
develop and use a variety of management controls[Footnote 4] over
program operations to help ensure the effectiveness of their YBS
programs. Among other things, FCA required System institutions to
evaluate the performance of their YBS programs in part by using certain
available data on YBS. However, FCA officials and others view the
usefulness of these data as limited. According to FCA officials, the
lack of quantitative data, along with other factors, makes it
challenging for them to ensure System compliance in serving YBS. The
protocol for YBS examinations includes a 10-step examination process
that reflects YBS mission-related requirements set forth by the Farm
Credit Act, as amended, and implemented by various FCA policies.
Current FCA Regulation Restates YBS Statutory Requirement:
Following the 1980 enactment of the statutory provisions establishing
the System‘s YBS service mission, the System experienced a financial
crisis; and Congress mandated a number of reforms.[Footnote 5]
According to an FCA official that we interviewed, the agency‘s focus
was concentrated for many years on safety and soundness issues because
of the crisis. A regulation on YBS, issued in 1981 and amended in 1990,
instructed the board of directors of each of the System‘s direct lender
institutions to adopt policies to establish programs that would provide
credit and related services to YBS.
The amended regulation essentially restates the statutory requirement”
it does not provide specific guidance or standards for the YBS policies
or programs to be established.
FCA Has Issued YBS Policies and Guidance:
FCA became more focused on YBS issues in late 1998 when the FCA Board
adopted a policy statement and general guidance in the form of a
’bookletter.“ [Footnote 6] In 1999, FCA‘s Office of Examination issued
an informational memorandum that informed the System institutions that
service to YBS would be one of four focus areas for examinations
conducted during fiscal years 1999 and 2000.[Footnote 7]
The 1998 FCA Board policy statement,[Footnote 8] issued on December 10,
1998, again, like the amended regulation, required the System
institutions to adopt policies that establish programs to provide
credit and related services to YBS borrowers. The policy statement also
required the System institutions to establish certain management
controls over YBS program operations. These were to include:
* goals and objectives,[Footnote 9]
* evaluation of the results of their YBS program, and,
* risk parameters for YBS lending that are appropriate in relation to
the institutions‘ risk-bearing capacity and their YBS program
objectives.
The policy statement also encouraged System institutions to better
serve YBS borrowers by developing innovative and sound programs, and
taking better advantage of coordination opportunities with other
parties, including guarantors, such as USDA and the Small Business
Administration.
In coordination with the issuance of the policy statement, the Board
also issued a bookletter on December 11, 1998, providing guidance for
new reporting procedures related to serving YBS. According to the
former chairman of FCA, these new procedures were the ’culmination of a
year long effort by FCA in coordination with System representatives to
help the System fulfill its mission of service to YBS customers.“
[Footnote 10] The bookletter affirmed FCA‘s commitment to examining
System institutions for their service to YBS. The bookletter advised
System institutions to have clearly stated policies for serving YBS and
to include in the policies a description of how the programs would be
coordinated with other System institutions and with governmental and
private sources of credit, consistent with the statutory requirement.
The bookletter further advised System institutions to:
* set measurable goals, such as the dollar volume of aggregate YBS
lending and the number of new and existing YBS served;
* provide specifically designed credit programs and service for YBS
borrowers, including loan underwriting standards and the use of
guarantees or other credit enhancements that can be conducted in a safe
and sound manner;
* establish which program authorities are to be delegated to management
and any authorities retained by the board of the institution; and;
* detail outreach opportunities available from the institution or other
sources.
The bookletter also provided guidance on revised definitions of YBS, as
well as how institutions should define loans, categorize loans to YBS
borrowers, and report on the number of loans. FCA provided a phase-in
period that required System institutions to comply with these three
reporting changes by January 1, 2001. In April 1999, FCA‘s Office of
Examination issued an informational memorandum informing associations
that they should analyze the demographics of the territory they served
to determine the potential YBS market. It suggested that associations
should evaluate how well their lending programs service those markets
by determining the market penetration for YBS categories. The
memorandum further suggested that the data from the USDA Census of
Agriculture might be helpful in conducting this demographic analysis.
FCA senior officials told us that although they were asking System
institutions to analyze the demographics of their territory using the
USDA data, they understood that the usefulness of these data was
limited. The data include the number of YBS living in a region, but not
the number seeking or in need of credit. Officials from the FSA and the
Economic Research Service, both within USDA, concurred that documenting
the unmet credit needs of YBS is difficult.
According to FCA senior officials, FCA intends the market penetration
determination to serve as a guide for a System institution in
evaluating the adequacy of its service to YBS, but not to serve as a
strict measure of success of the institution‘s YBS program. Moreover,
FCA officials stated that year-to-year comparisons of an institution‘s
service to YBS may be the best available indicators of the
institution‘s performance in that regard, given the lack of meaningful
data on the unmet credit needs of YBS.
As the result of a year-long effort in 1998, FCA officials created an
examination ’leadsheet,“ which is essentially a map for examiners to
follow, as discussed in detail later in this report. According to FCA
officials, some System institutions resist FCA monitoring for
compliance with the special mission requirement to serve YBS. However,
the director of the System‘s President‘s Planning Committee stated that
most System institutions were making good-faith efforts to serve YBS
and cooperating fully with FCA‘s examination efforts related to
YBS.[Footnote 11] Our interviews with institution officials generally
supported the director‘s comments. Most institution officials said that
they had no particular issues with FCA examination protocols for YBS.
The director said that he wished FCA‘s examinations of YBS could be
more focused. He also said that some parts of FCA‘s YBS examination
should not be repeated every year, once FCA had established that an
institution was in compliance in certain areas.
FCA Has Established YBS Reporting Policies:
FCA has issued several memorandums to the System banks about their
responsibilities to report on YBS activities, as required by the
amended Farm Credit Act of 1971. A January 8, 2002, FCA memorandum
required banks to provide districtwide reports summarizing quantitative
information about YBS business activity, including:
* volume and number of all loans meeting YBS definitions and;
* volume and number of new loans and number of new loans meeting YBS
definitions.
The memorandum also required banks to provide a districtwide summary
presenting qualitative data on YBS business activity, including
narrative that describes any districtwide YBS initiatives. FCA uses
those reports to compile Systemwide information for its publicly
available annual report to the Congress, according to FCA officials.
Each System bank is required to submit its 2001 YBS report to FCA by
February 28, 2002. The banks are to collect qualitative data on the YBS
efforts of each of the associations in their respective districts. FCA
provides a questionnaire for the banks‘ use in collecting the
qualitative data from the associations. This survey focuses on program
management, credit components and noncredit components, and outreach
activities. The program management components section of the survey
includes questions on whether the institution has established
performance targets or goals for their service to YBS. It also asks
about the market penetration of the institution‘s service to YBS. The
credit component section includes questions about the existence of
special underwriting standards and the types and extent of coordination
with other governmental or private sources of credit. The last section
of the survey includes questions on the types of training or services
offered by the institutions, as well as the types of outreach
activities for YBS at the institutions.
FCA Sees Challenges to Ensuring System Compliance with Serving YBS:
FCA officials told us that they feel challenged to enforce YBS-related
policies and procedures. They cited the broad nature of the YBS
statutory provision, which is repeated in the FCA‘s regulation;
limitations of available data on unmet credit needs; and resistance
from some System institutions as concerns (as described later in this
report). However, the officials also acknowledged that FCA has adequate
authority as a regulator to promulgate specific standards to implement
the YBS statutory provision and to use its enforcement powers if needed
to ensure compliance. According to FCA officials, the current practice
has been to avoid requiring institutions to take specific actions to
address issues in YBS program performance that arise in the course of
compliance examinations.[Footnote 12] Instead, in 1998 to 2001”which
officials termed as a period of evolution for the programs and FCA
oversight”FCA encouraged institutions to further develop and improve
their initiatives and programs to serve YBS through policies, guidance,
and the examination program.
A broad regulation, such as the current FCA regulation on YBS, is open
to broad interpretation. FCA‘s expectations for YBS program elements
and performance are unclear in the current language of the regulation.
Alternatively, regulation that provides specific guidance or standards
for YBS programs would afford FCA and System institutions greater
certainty about what is appropriate and adequate for YBS programs.
Regulations are legally enforceable by FCA and, under the
Administrative Procedure Act, are subject to a process of public notice
and comment. Such a process would facilitate review and input from the
institutions regulated and other parties affected by the
regulation”including YBS in this instance. As we will discuss later in
this report, other regulators, operating under both specific and broad
statutes, have promulgated regulations with standards for fulfilling
their statutory special mission or service requirements.
FCA Office of Examination Formalized Oversight of YBS through Creation
of Examination Leadsheet:
As shown in figure 1, the leadsheet itemizes 10 steps for examiners to
follow in evaluating an institution‘s YBS mission compliance. Each of
the steps may involve a number of procedures for example, the first
step involves three procedures. As stated in the FCA Examination
Manual, examiners are to summarize pertinent information gathered
during examination work; these tasks are often best achieved through a
leadsheet. According to FCA officials, leadsheets have been used
successfully in other examination segments. The leadsheet is available
electronically and may be used to create an electronic workpaper record
of the examination. The Examination Manual states that the extent of
workpaper documentation should vary, depending on factors such as
examination scope, risk present in the institution, and experience
level of examiners. At a minimum, according to the Examination Manual,
workpapers should demonstrate completion of each examination objective
and substantiate all conclusions reached in the Report of Examination.
When an examination is completed, the examiner is to write the report
of examination, which is to be provided to the examined institution. A
meeting for discussion of the examination findings may also be held
with officials of the examined institution.
Figure 1: YBS Examination Steps, as Provided by the YBS Examination
Leadsheet:
[See PDF for image]
1. Determine if the institution had clearly stated YBS policy, numeric
goals for serving YBS, and if the board of the institution is receiving
periodic reporting on service to YBS and is evaluating the results of
these programs.
2. Determine what specific programs or service are in place to serve
YBS and the soundness of those programs. Determine if the programs have
been adjusted based on results of demographic studies and related
portfolio and territorial analysis.
3. Determine if the institution uses special loan underwriting
standards, risk parameters, or risk pools for extending credit to YBS
market segments.
4. Determine to what extent the institution is using its Web site,
Internet, advertising, etc. to reach YBS.
5. Determine if demographic studies have been completed and analyzed
for the lending area and the loan portfolio and what plans or
strategies have been developed to address disparities, if any.
6. Determine to what extent the institution coordinated with federal,
state, or other governmental or private credit sources to service YBS,
such as loan guarantee programs or joint lending or credit enhancements
to ensure safe and sound extensions of credit.
7. Evaluate and test the institution's processes and internal controls
over verifying the designation of YBS, the accuracy of the
institution's database, and the quality of reporting to the board and
FCA in accordance with FCA's program definitions.
8. Complete a chart or graph to analyze the market, current market
penetration, trends and overall program effectiveness. Make conclusions
on the effectiveness of program administration and participation and
select an appropriate chart or graph for use in the report of
examination.
9. Complete a Summary Conclusions Table and make conclusions on the
overall results and effectiveness of program administration.
10. Develop report-ready overall conclusions on the institution's
administration and reporting of its YBS lending programs and its
effectiveness in meeting the credit needs of these market segments
within its industry.
Source: FCA Examination Leadsheet for YBS.
[End of figure]
Properly Executed, YBS Leadsheet Should Provide Useful Information to
FCA:
As a result of our analysis, we found the examination leadsheet for YBS
to be a useful tool for FCA in examining institutions for compliance
with the special mission requirement of serving YBS. If properly
executed, the examination process set up by FCA, including the use of
the leadsheet, should provide FCA with useful information on a System
institution‘s service to YBS.
In analyzing the leadsheet, we traced each of the procedures in each of
the steps to requirements of the Farm Credit Act and FCA regulation,
policy, and guidance. For example, we noted that in completing the
first procedure in step 2 and the procedure in step 6, examiners would
be determining the institution‘s extent of compliance with explicit
statutory YBS requirements. For this reason, we refer to these as
examination procedures for statutory compliance. We found that the
procedures in steps 1 to 7 otherwise focus on (1) determining if the
institution has in place FCA-required management controls over program
operations, (2) evaluating those controls, or (3) determining if the
YBS program is sound and whether it is meeting its stated objectives.
We refer to these as examination procedures for regulatory compliance.
Steps 8, 9, and 10 are procedures intended to help the examiner
accurately summarize conclusions and develop report-ready conclusions
on the institution‘s service to YBS. We refer to these as
administrative examination procedures.
Weaknesses in Examinations for YBS Compliance Limited FCA‘s Ability to
Effectively Oversee Institutions‘ YBS Programs:
In our review of a representative sample of 30 recent FCA reports of
examinations issued in fiscal year 2001, we found weaknesses that
limited FCA‘s ability to effectively oversee YBS programs. Generally,
these weaknesses can be described as not fully following examination
procedures and not completely documenting examination conclusions. FCA
senior officials said that examiners may not have followed examination
procedures because they used a risk-based approach in determining the
scope of their examination, did not have time due to limited resources,
or met with resistance from System institution officials.
Examiners Usually Did Not Complete All Examination Steps:
As shown in figure 2, of the 30 examinations reports we reviewed, none
had completely executed all examination procedures, and 27 (90 percent)
had inadequate support for conclusions. As shown in figure 3, as a
result of our analysis of the extent of completion of examination
procedures for statutory compliance, we found that in 29 reports (97
percent), the examiner completed the first examination procedure for
statutory compliance, which required examiners to determine what
specific programs or service are in place to serve YBS. However, only
12 reports (40 percent) showed completion of the second examination
procedure for statutory compliance, which requires the examiner to
determine the extent to which the institution coordinated with federal,
state, or other governmental or private credit sources.[Footnote 13]
Figure 2: Percent of Weaknesses in FCA‘s Examinations of System
Institutions:
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Incomplete execution of procedures: 100%;
Inadequate support for conclusions: 90%.
Source: GAO analysis.
[End of figure]
Figure 3: Extent of Completion of Examination Procedures for Statutory:
[See PDF for image]
This figure is a vertical bar graph depicting the following data:
Completion of first procedure: 100%;
Completion of second procedure: 40%.
Source: GAO analysis.
[End of figure]
In further analyzing the incompleteness of the reports, we found at
least a third of the reports had no review of 7 (54 percent) of the 13
examination procedures for regulatory compliance. The procedures
concerning regulatory compliance that were most frequently not
completed included:
* evaluation of the quality of reporting to the board and FCA in
accordance with FCA‘s program definitions (80 percent of examinations);
* determination of whether the program is accomplishing its objectives
for reaching YBS (53 percent of examinations), and;
* determination that the program has been adjusted on the basis of
results of demographic studies and related portfolio and territorial
analysis (47 percent of examinations).
The procedures that were most consistently completed included
determining if an institution used special underwriting standards or
risk pools for extending credit to YBS, and determining if an
institution conducted a demographic study of its service to YBS.
In our view, the number of examination procedures for regulatory
compliance that were not completed in a substantial number of instances
indicates improvements are needed in FCA oversight to better ensure the
effectiveness and efficiency of System operations related to YBS
programs.
Examiners Did Not Provide Supporting Examination Workpapers:
In the 30 examination reports we reviewed, we found that examination
workpapers often did not include documentary support for findings. In
nine reports we reviewed (30 percent), examiners concluded that regular
reporting to the institution‘s Board of Directors had occurred, but the
workpapers provided no documentation to support that finding. In 21 of
the reports (70 percent), examiners either relied exclusively on
interviews with association officials or provided no workpapers to
support findings related to data quality.
The data quality findings that lacked support were those corresponding
to item seven of the leadsheet, which focuses on evaluating and testing
the institution‘s processes and internal controls for verifying (1) the
designation of YBS, (2) the accuracy of the institution‘s database, and
(3) the quality of the reporting to the board. Inadequate evaluation of
the management controls for classifying loans to YBS and accurately
reporting to the board undermines FCA‘s ability to help ensure the
effectiveness and efficiency of System operations related to YBS
programs. FCA‘s efforts in this area are particularly important, in
that accurately reporting on the number of loans made to YBS directly
relates to the usefulness of any market penetration studies of YBS, and
comparisons of service to YBS from one year to the next.
The examiners‘ inadequate supporting documentation raises questions
about the credibility of their conclusions and the quality of
evaluations. For example, in the examination workpapers of one
institution, an examiner concluded, on one hand, that the association‘s
designation of YBS in its database was inaccurate but, on the other
hand, that the association had processes to ensure that YBS loans were
appropriately designated in the database. The workpapers provided no
supporting documentation for either of these conclusions. In three
examination reports, we found that the only support provided for a
finding that YBS-related definitions and database systems were accurate
were statements that the institutions‘ chief of operations or chief
executive officer had said this in an interview. Professional standards
do not support testimonial evidence from the auditee as sufficient
support for the finding.
FCA Senior Officials Said Examiners May Not Have Followed All
Examination Procedures for a Number of Reasons:
FCA senior officials offered several explanations for incomplete
execution of procedures in YBS examinations. Primarily, they said that
some examiners may have exercised a risk-based approach to YBS
examinations, which would lead examiners to focus selectively on
operations that are most important in their material impact on the
extent of service to YBS. We recognize that a risk-based approach can
be appropriate and useful for regulators. However, we question whether
a risk-based approach to the YBS compliance examination would have been
appropriate in 2001, the first full year of FCA‘s expanded examinations
for YBS compliance. Examiners need to establish a baseline of knowledge
about an institution‘s YBS efforts before deciding where to focus an
examination effort.
FCA senior officials also noted that examiners may not have been able
to complete all examination steps due to limited time and resources.
They also stated that examiners encountered resistance from some System
institutions during the YBS portion of the examination. According to
these officials, examiners would not typically document such resistance
in examination workpapers. Regarding constraints on examinations
imposed by limited time and resources or by some System officials‘
resistance, we note that professional standards require examiners to
report such constraints to avoid misunderstandings concerning the work
that was and was not done to achieve the examination objectives.
However, in our review of examiners‘ workpapers, we found no
explanations for examination procedures that were not executed.
System Efforts to Serve YBS Varied:
The sample of examination reports we reviewed indicated that the
characteristics of YBS programs at institutions in the System varied
significantly (e.g., the program activities shown in fig. 4).[Footnote
14] Slightly more than half had some type of specific YBS program or
service in place. Nearly a third of the institutions in the sample had
established some type of numerical goal for YBS service, although most
institutions were not conducting demographic studies. Half had YBS
marketing and outreach efforts in place and a majority were
coordinating their YBS offerings with federal, state, or other
governmental or private credit sources, as required by the Farm Credit
Act. Most commonly, System institutions coordinated with the Farm
Service Agency (FSA) Guaranteed Farm Loan program. All of the System
institutions support YBS activities through the Farm Credit System
Foundation (Foundation), which was formed in 1991 with contributions
from System banks. In fiscal year 2000, the System provided billions of
dollars in loans to YBS, according to annual reports that the System
banks submitted to FCA.
Figure 4: Illustrative YBS Program Activities:
[See PDF for image]
Illustrative YBS Program Activities:
* Special underwriting standards, risk parameters, risk pools.
* Educational training programs;
* Numeric goals for YBS loans set by individual System institutions.
Source: GAO analysis.
[End of figure]
Slightly More Than Half of the Institutions Had Some Type of Specific
YBS Program or Service:
FCA examination reports indicated that although all of the institutions
had a policy statement for serving YBS, slightly more than half of the
institutions (16) had some type of specific program or service in place
to serve these groups. Specific programs included special underwriting
standards, targeted educational training, and outreach programs to
attract YBS. For example, one institution offered loans to individuals
in which it waived the coverage ratio of greater than 125 percent, and
borrowers with limited equity as low as 20 percent may be considered.
[Footnote 15] Another institution offered the New Generation Loan
Program, which provided reduced interest-rate spreads for the first 5
years and underwriting standards to accommodate the financial needs of
YBS loan applicants. Some other institutions, though, did not use any
special loan underwriting standards, risk parameters, or risk pools for
extending credit to YBS market segments. YBS borrowers were generally
required to meet the same underwriting standards as other applicants,
although in some cases exceptions were permitted.
Nearly a Third of the System Institutions Had Some Type of Numeric
Goals for Their Service to YBS:
Of the 30 institutions‘ examinations we reviewed, 9 had measurable
goals for their service to YBS. System institutions established
measurable goals in different ways. One institution incorporated
lending to YBS as a key performance area. Managers at this institution
would earn higher ratings as the volume of new YBS lending increased.
Another institution included in their business plan a goal for YBS
lending of 5 percent of the volume of new loans. A third institution
set a goal of 20 percent of outstanding loans to young farmers and 20
percent of outstanding loans to beginning farmers, by number and
volume.
Half of the Institutions Have Made Marketing and Outreach Efforts:
According to FCA examinations that we reviewed, System institutions
have made a variety of efforts to market credit opportunities to YBS.
They have utilized Web sites with specific links to special YBS
programs, met with Young Farmer chapters, offered educational programs,
and used radio and television advertisements. Eleven of the
institutions in our sample had no formal marketing or outreach efforts
to YBS.[Footnote 16]
Farm Service Administration Loan Guarantees Represented System
Institutions‘ Most Significant Coordination Efforts:
Most of the institutions in our review coordinated with federal, state,
or other governmental or private credit sources to provide credit to
YBS, as explicitly required by the Farm Credit Act. Most commonly,
System institutions coordinated with the FSA Loan Guarantee program.
FSA will guarantee loans made by the Farm Credit System and other
conventional lenders in amounts up to 95 percent of the principal loan
amount. FSA is required by law to target 25 percent of its guarantees
for farm ownership loans to beginning farmers. Similarly, 40 percent of
its guarantees for farm operating loans must be targeted to beginning
farmers. Beginning farmers are generally defined as farmers or ranchers
who have not operated a farm or ranch for more than 10 years, and who
will substantially participate in the operation of the farm or ranch.
The extent of use of FSA loan guarantees by System institutions varied.
According to our review of examinations, one institution reported 334
loans to YBS, totaling over $26 million, with outstanding FSA
guarantees. Another institution had FSA guaranteed loans to 32 YBS
borrowers, for a total of $2.3 million. This represented 74 percent of
the total number of guaranteed loans made by the institution and 78
percent of the dollar volume. One institution was reportedly the
largest user of FSA-guaranteed loans in the state, with 377 borrowers
and $42 million in such loans. For this institution, FSA-guaranteed
loans to YBS represented 80 percent of the total number of its FSA-
guaranteed loans and 75 percent of the dollar volume of its FSA
guaranteed loans. Other institutions, however, made far less use of the
FSA loan guarantees. According to the results of a special review by
one institution‘s management group, only 8.8 percent of the loans
reviewed at that institution had an FSA guarantee.
System Associations Support Programs for YBS:
System institutions also support YBS activities through the Farm Credit
System Foundation (Foundation), which grew out of the Farm Credit
Council, the System‘s trade group. The Foundation‘s mission is to help
YBS and ranchers to thrive. The Foundation was formed in 1991 with
contributions from System banks. The director of the Foundation told us
that its ongoing activities include sponsoring organizations with
programs that benefit agriculture‘s youth and provide development
opportunities for those pursuing a career in agriculture. For example,
the Foundation provides financial support and or scholarships for
agriculture-related training that is provided by groups like the Future
Farmers of America, 4-H Clubs, and the Progressive Farmer Foundation.
It also sponsors research on issues important to YBS farmers. A ’major
step“ for the Foundation, according to the director, has been an
Internet-based survey of YBS conducted in 2001. The survey was designed
to obtain information about the credit needs of YBS, their experiences
obtaining credit, and other issues. The director told us that he
expected a final report, titled Barriers to Success, to be available in
2002 and that it may include policy options for improving access to
credit for YBS.
The System Provided Billions of Dollars in Loans to YBS in Fiscal Year
2000:
The amended Farm Credit Act of 1971 requires Farm Credit banks for each
district to submit to FCA reports of activities under programs
developed to serve YBS for the associations under their supervision.
The act also requires that an annual report summarizing the operations
and achievements in its district for these programs be submitted to
FCA.
According to YBS reports that were submitted to FCA for fiscal year
2000,[Footnote 17] the associations made close to $3 billion in loans
to beginning farmers and ranchers in fiscal year 2000, approximately $2
billion in loans to young farmers and ranchers, and nearly $5 billion
in loans to small farmers and ranchers.[Footnote 18] In the annual
reports, some of the banks reported that they did very little to
sponsor YBS activities in their district and deferred to their
associations for these activities. Other banks reported having jointly
sponsored YBS initiatives with their associations, as well as having
supported individual state programs. Some of the types of activities
sponsored by banks included state cooperative councils, and the
National Young Farmer Education Institute.
The System‘s Special Mission Requirements Are Less Specific Than Those
of Housing GSEs:
Like the System, the housing GSEs”the Federal National Mortgage
Association (Fannie Mae), the Federal Home Loan Mortgage Corporation
(Freddie Mac),[Footnote 19] and the Federal Home Loan Bank System
(FHLBank System)[Footnote 20]”were created by Congress to provide a
continuing source of credit nationwide to a specific economic sector.
However, the special mission obligations of the GSEs, with the
exception of the YBS obligation of the System and the Community
Investment Program (CIP) obligation of the FHLBank System, are
established by statutory language that includes measurable numeric
goals or requirements or establishes a goal-setting mechanism. Without
measurable goals or specific qualitative standards to help define
compliance with mission requirements, System institutions and FCA face
challenges similar to those faced by banks and thrifts and their
regulators in connection with their obligations under the Community
Reinvestment Act (CRA) of 1977. CRA requires regulators of banks and
thrifts to encourage those financial institutions to help meet credit
needs in all areas of the communities they serve”including low-and
moderate-income areas, consistent with safe and sound operations.
Neither the CRA nor CIP requirements set numeric goals or provide a
goal-setting mechanism. Regulators who oversee compliance with CRA and
CIP, however, make an overall assessment about the regulated entities‘
performance efforts. In addition, those regulators publicly disclose
their assessment and/or make information available about the
performance of individual entities that they regulate.
Housing GSE‘s Have More Specific Special Mission Requirements than
System:
As part of our review, we compared the System‘s YBS mission
requirements to special mission requirements of other GSEs”
specifically, the housing GSEs, Fannie Mae, Freddie Mac, and the
FHLBank System. We found that the GSEs generally operated under
statutory language that provides numeric goals or requirements or a
goal-setting mechanism, as shown in table 1. The exceptions to this
included the YBS service obligation of the System and the obligation of
the FHLBank System to establish a Community Investment Program.
Table 1: Comparison of GSE Statutory Missions and Special Mission
Requirements:
GSE: Fannie Mae and Freddie Mac;
Statutory mission: To provide stability, increase liquidity, and
improve the distribution of capital in housing credit markets.
Special statutory mission requirements: The U.S. Department of Housing
and Urban Development is required to establish regulatory numeric goals
for these GSEs to meet in purchasing mortgages serving targeted groups,
including low-and moderate-income borrowers.
GSE: Farm Credit System;
Statutory mission: To provide a dependable and affordable source of
credit and related services to the agricultural industry;
Special statutory mission requirements: Each association is to prepare
a program for furnishing sound and constructive credit and related
services to YBS borrowers and make YBS programs available in
coordination with other governmental and private sources of credit.
Reports of program activities and progress toward objectives are to be
made to the regulator.
GSE: FHLBank System;
Statutory mission: To extend mortgage credit by loans, called advances,
to its member institutions who in turn may use such advances to support
home mortgages, small business, community development and agricultural
loans.
Special statutory mission requirements: Each FHLBank is required, under
the Affordable Housing Program making (AHP) to provide subsidized
advances to members to support the financing of housing for low-or
moderate-income households. Each FHLBank is required generally to
contribute annually to the AHP 10 percent of its net earnings or its
prorata share of a FHLBank Systemwide aggregate of $100 million. Each
FHLBank is also required to establish a Community Investment Program to
provide advances at cost plus administrative fees to members to support
the financing of housing and economic development activities that
benefit low-and moderate-income households and neighborhoods.
Source: GAO analysis of GSE documents and statutes.
[End of table]
The Federal Housing Enterprises Financial Safety and Soundness Act of
1992 required the secretary of Housing and Urban Development to issue
regulations to establish, monitor, and enforce housing goals for Fannie
Mae and Freddie Mac. The act mandated that the secretary establish
targeted goals for low-and moderate-income mortgage purchases as well
as mortgage purchases for very-low income families and low-income
families living in low-income areas and mortgages on housing in
geographically underserved areas. After an interim period in 1993 to
1995, during which time goals were set by Congress, the secretary
published a regulation in 1995 that established new goals effective in
1996. By subsequent regulation dated October 2000, the secretary raised
the goal levels effective in 2001. The goals are to be based on six
factors, including the ability of the GSEs to lead the industry in
making mortgage credit available for very-low, low-and moderate-income
families, and families living in underserved areas.
The FHLBank System‘s special mission requirements, found in statute,
include the requirement that FHLBanks make specified annual
contributions of earnings to the AHP, and the CIP requirement, which
does not mandate any specific quantitative requirements or goals. An
additional statutory provision authorizes but does not require the
FHLBanks to offer additional Community Investment Cash Advance (CICA)
programs, and does not mandate any specific quantitative requirements
or goals for such programs. The FHLBanks‘ regulator, the Federal
Housing Finance Board, has promulgated regulations implementing all
three statutory provisions.
The System‘s YBS Mission Requirement Creates Challenges Similar to
Those Created by CRA:
In certain respects, the challenge that FCA faces in overseeing the
System‘s compliance with its statutory YBS mission requirement is
similar to the challenge that bank and thrift regulators[Footnote 21]
face in assessing CRA compliance for banks and thrifts. Enacted in
1977, CRA requires these regulators to encourage banks and thrifts to
help meet credit needs in all areas of the communities they
serve”including low-and moderate-income areas”consistent with safe and
sound operations. Without specifying a credit allocation goal or any
mechanism to set such a goal, CRA also requires the regulators to
assess institutions‘ CRA performance during examinations, taking into
account an institution‘s individual circumstances. Bank and thrift
regulators also are to take an institution‘s CRA performance into
account when approving applications for, among other things, mergers of
bank and thrift organizations.
In implementing CRA, bank and thrift regulators have been challenged to
find an effective approach, as evidenced by the many concerns expressed
by banks and thrifts over the years and repeated major revisions of the
CRA examination procedures. For example, in a broad 1993 review of
issues identified in many studies of bank regulation and its effects on
the banking industry, we found that bankers expressed more concern
about the burden associated with CRA than about any other single area
of bank regulation. One of the many specific concerns of bankers, we
reported then, was that the vagueness of the statute and the
subjectivity of the examination process made compliance difficult.
[Footnote 22]
The current CRA regulations (which are now being reviewed for possible
revision to improve the efficacy of the regulations) provide several
approaches, based in part on lender size, that lenders can use to
illustrate their compliance with CRA regulations. Large retail
institutions can opt to be assessed by their regulator with regard to
their lending record, investments in community development activities,
and systems for delivering retail banking services. Another option
allows banks to develop a strategic plan detailing how the bank
proposes to meet its CRA obligations. The institution tailors the plan
to the needs of the community by informally seeking suggestions from
the public during plan development. Once the plan is developed, the
institution must publish notice of the plan and solicit written public
comment for at least 30 days. After the comment period, the institution
is to submit the plan to its regulator for review and approval. Small
institutions (not over $250 million in aggregate assets or if
affiliated with a holding company, with total assets of less than $1
billion) are evaluated under a streamlined test that focuses primarily
on lending.
All Regulators, Except FCA, Issued Regulations for Special Mission
Requirements and Disclose or Require Disclosure of Information on
Performance of the Individual Regulated Institutions:
In reviewing FCA‘s oversight of the special mission to service YBS
borrowers, we compared their efforts with those of other regulators
responsible for overseeing special mission or service obligations: the
Department of Housing and Urban Development (HUD), the mission
regulator of Fannie Mae and Freddie Mac;[Footnote 23] the Federal
Housing Finance Board (FHFB), the regulator and supervisor of the
FHLBank System; and bank and thrift regulators. All of the regulators
conducted some type of periodic examination or review of performance
and required periodic reporting on program status. All of the
regulators except FCA had issued regulations with specific standards
describing what constituted an acceptable program and/or setting
quantifiable goals. In addition, all of the regulators except FCA
publicly disclosed information about the special mission or service
obligation performance of individual institutions, or required the
regulated entities to do so.
Oversight obligations of each regulator are described as follows:
* FCA, as discussed earlier, issues policy and guidance and conducts
periodic examinations that include reviews of System institutions‘
compliance with YBS requirements. FCA collects information from System
banks about YBS programs and reports on YBS programs, in aggregate
form, in its annual report to the Congress.
* HUD has statutory authority to obtain the necessary data from Fannie
Mae and Freddie Mac for monitoring their compliance with the goals HUD
sets. According to a HUD official, HUD has a number of procedures in
place to assess the data supplied by Fannie Mae and Freddie Mac.
[Footnote 24] Analyses of Fannie Mae‘s and Freddie Mac‘s performance,
based on the GSE‘s data, are periodically published in HUD reports. HUD
also releases annually a public-use database containing the
nonpropietary portions of the data. According to HUD officials,
analyses of data submitted by each GSE under HUD‘s final rule,
effective for 1996 through 2000, showed that both GSEs achieved their
housing goals during this period.
* FHFB, as required by law, promulgated regulations that, among other
things, specify eligible program activities and establish uniform
standards for subsidized advances to finance homeownership and
affordable rental housing for low-or moderate-income families under the
Affordable Housing Programs (AHP). The law required each FHLBank to
establish an advisory council to advise the FHLBank on the AHP. Through
regulation, FHFB required each FHLBank to adopt a written AHP
implementation plan and have its advisory council review the plan. Each
FHLBank reports annually to the FHFB, which conducts compliance reviews
of each AHP, and reports on the AHP to the Congress annually. FHFB also
publicizes actions that FHLBanks take under their programs, as do the
FHLBanks themselves.
The law does not require the FHLBanks to make a specified contribution
of funds to the required CIP. Through regulation, however, FHFB, has
set standards for assessing FHLBanks‘ compliance with CIP requirement.
For example, the regulation authorizes the FHLBanks to provide CIP
advances to members for, among other things, funding loan originations
and purchasing mortgage revenue bonds, as long as the loans financed by
such bonds meet CIP-eligibility requirements. CIP advances generally
are made available at cost plus administrative fees to FHLBank members
(banks, thrifts, credit unions, and insurance companies) which, in
turn, make loans for CIP-eligible purposes.
The law also authorizes FHLBanks to offer CICA programs in addition to
their CIP and AHP programs. FHFB issued regulations to provide the
FHLBanks with an array of specific standards for housing and economic
development projects, targeted beneficiaries, and targeted income
levels that the FHFB determined support community lending under CICA
programs. While CICA programs are optional for the FHLBanks, the FHFB
determined that establishing clear and specific CICA standards would be
more likely to increase economic development activities in targeted
communities; and they would also make CICA programs easier to implement
and monitor.
Bank and thrift regulators, as noted previously, conduct periodic on-
site examinations that include assessments of CRA performance. CRA
compliance reports and performance ratings are released publicly and
are available on the Internet sites of the bank and thrift regulators
as well as a centralized Internet site. [Footnote 25] In reviewing Bank
Holding Company merger and other applications, regulators have a
statutory responsibility, established by the Bank Holding Company Act
of 1956 and CRA to take into account an institution‘s record of
community credit performance when evaluating the application.
Regulators also have similar responsibilities under the Gramm-Leach-
Bliley Act of 1999 when considering bank permission to engage in
activities newly authorized under the act. However, CRA does not
provide regulators with enforcement authority on the basis of their
compliance examination findings.
Conclusions:
As the regulator of the System, FCA is to ensure that the System
appropriately fulfills its statutory mission requirements, including
the requirement to serve YBS. The guidance that FCA has issued
represents a constructive effort to direct System institutions to
comply with the YBS mission requirement and set general standards to
use in examining compliance. FCA has issued a regulation on YBS, but it
essentially restates the statutory provision and does not provide the
level of detailed guidance found in the applicable FCA Board policy
statement, bookletter, and informational memorandums. FCA‘s efforts to
guide System institutions in establishing and implementing meaningful,
result-oriented YBS programs, and clarify its expectations for System
performance would be strengthened by setting clear, qualitative
standards in regulation. Given the challenge of identifying any unmet
need for credit to YBS and the limited data on YBS, it would seem
appropriate for FCA to focus on qualitative rather than quantitative
standards. For example, such standards could include requiring System
institutions to establish or participate in educational and community
outreach programs for YBS and to use FSA guarantees where appropriate.
In addition, clear standards set forth in regulation would facilitate
FCA‘s ability to render an overall assessment of each System
institutions‘ performance in complying with the mission to serve YBS.
As a result of our analysis of FCA reports of examination for YBS
compliance, we found weaknesses due to incomplete execution of
examination of procedures and incomplete documentation to support
examination findings. These weaknesses impair FCA‘s ability to oversee
System compliance in meeting the mission requirement of serving YBS.
The System mission to serve YBS is more like the CRA requirement
imposed on banks and thrifts and the CIP requirement imposed on
FHLBanks than the special requirements for affordable housing set for
Fannie Mae, Freddie Mac, and the FHLBanks. Regulators who oversee
compliance with CRA and CIP, however, make an overall assessment about
the regulated entities‘ performance efforts. In addition, those
regulators publicly disclose their assessment and/or make information
available about the performance of individual entities that they
regulate, or require that the entities do so. Such disclosure can
afford an incentive for the entities to better their performance while
providing privacy for individuals. In contrast, FCA does not disclose
the results of its assessments of individual System institutions‘
performance in serving YBS. FCA does disclose information on System
service to YBS, but only in aggregate form.
Both FCA and the System itself have taken steps to promote service to
YBS and to attempt to measure that service. Clear program expectations
and standards set in regulation, thoroughly complete and well-documented
examination reports, and disclosure of the performance of System
institutions would enhance FCA‘s oversight and support the System‘s
efforts to govern itself in achieving its special mission to serve YBS.
Recommendations:
To strengthen FCA in its oversight role of the System, promote
compliance, and highlight the System‘s efforts to provide service to
YBS, we recommend that the FCA Board:
* promulgate a regulation that outlines specific activities and
standards that constitute an acceptable program to implement the YBS
statutory requirement;
* ensure that examiners follow the guidance and complete the appropriate
examination procedures related to YBS, and adequately document the
work performed and conclusions drawn during examinations; and;
* publicly disclose the results of the examinations for YBS compliance
for individual System institutions.
Agency Comments:
We provided FCA a draft of this report for their review and comment. FCA
agreed with the information presented in the draft report and agreed to
address the issues we raised. FCA‘s letter is reprinted in appendix II.
FCA provided technical clarifications, which we have incorporated into
this report where appropriate.
We are sending copies of this report to the chairman of the Senate
Committee on Agriculture, Nutrition, and Forestry; the chairmen and
ranking minority members of the Senate Committee on Banking, Housing,
and Urban, Affairs; the House Committee on Financial Services; the
House Committee on Agriculture; and the chairman and chief executive
officer of the Farm Credit Administration. The report will be available
on GAO‘s Internet home page at [hyperlink, http://www.gao.gov].
If you have any questions about this report, please contact me or M. Kay
Harris at (202) 512-8678. Andy Pauline and Desiree Whipple were major
contributors to this report.
Sincerely yours,
Signed by:
Davi M. D‘Agostino:
Director:
Financial Markets and Community Investment:
[End of section]
Appendix I: Scope and Methodology:
As agreed with our requestor, the objectives of this report were to
study (1) how the Farm Credit Administration (FCA) seeks to ensure that
requirements for the Farm Credit System (System) institutions fulfill
the mission of serving young, beginning, and small farmers (YBS); (2)
the extent to which FCA examinations follow FCA requirements in
evaluating System compliance in serving YBS; (3) the characteristics of
YBS programs at selected System institutions; and (4) how the
requirements for System institutions to serve YBS compare to the
special mission or service requirements of other government-sponsored
enterprises and banks.
To study FCA‘s requirements for the System to fulfill the mission of
serving YBS, we reviewed the Farm Credit Act of 1971, as amended, to
identify requirements for the System institutions‘ service to YBS. We
reviewed FCA‘s regulations implementing the YBS requirement, its
examination program, including the Examination Manual, policies,
bookletters, and informational memorandums. We compared FCA‘s
requirements with provisions of the act. We interviewed officials from
FCA, System institutions, the System‘s President‘s Planning Council,
the System‘s Farm Credit Foundation, and the Farm Credit Council to
obtain their views on the requirements and FCA‘s interpretations. We
also interviewed officials of the U.S. Department of Agriculture‘s
Economic Research Service and Farm Service Agency, regarding
agricultural credit and special programs to serve YBS.
To study the extent to which FCA examiners followed FCA requirements in
evaluating System compliance in serving YBS, we analyzed selected
examinations and compared them with FCA‘s own examination requirements.
In addition, we reviewed the supporting examination workpapers for the
selected associations. We documented whether examination questions were
completed, the extent to which the examiners included supplemental
information in their workpapers, and whether the examiner followed the
procedures specified by FCA policies. We met with FCA officials and
examiners to discuss our findings and observations about the
examinations reviewed and to clarify any questions we had about FCA
policies and procedures. We randomly selected our sample of 30
examinations from the universe of 69 examinations of associations
issued during fiscal year 2001. We limited our selection of examination
reports to those issued in fiscal year 2001, since 2001 was the third
year that System institutions had been expected to comply with FCA‘s
revised examination procedures for assessing compliance with serving
YBS. Reports issued in fiscal year 2001 were also the most recent
available for our review. We selected two additional examinations for
our sample. We had to replace 2 of the original 30 examinations because
2 of the examinations had actually not been issued in fiscal year 2001.
To obtain information on the characteristics of YBS programs at
selected System institutions, we documented the existence of specific
YBS programs and services as reported by FCA examiners in our sample of
examination reports and related workpapers. We also reviewed the annual
YBS reports submitted to FCA by the System banks. We did not contact
individual System institutions to verify this information or inquire
about other services they might offer YBS.
To study how the requirements for System institutions to serve YBS
compared to the special mission requirements of other government-
sponsored enterprises and banks, we reviewed laws, other relevant
regulatory documents, and our past work on these entities and their
regulators. We analyzed the requirements and enforcement mechanisms as
specified in law and implemented by regulators‘ policies to make our
comparison.
Our work was done in accordance with generally accepted government
auditing standards. We did the work for this report between July 2001
and March 2002 at FCA offices in McLean, Virginia.
[End of section]
Appendix II: Comments from the Farm Credit Administration:
Farm Credit Administration:
1501 Farm Credit Drive:
McLean, Virginia 22102-5090:
(703) 883-4000:
February 25, 2002:
Ms. Davi M. D'Agostino:
Director, Financial Markets and Community Investment:
General Accounting Office:
441 G Street, NW:
Washington, D.C. 20548:
Dear Ms. D'Agostino:
Thank you for the opportunity to review and comment on your draft
report entitled Farm Credit Administration: Oversight of Special
Mission to Serve Young, Beginning, and Small Farmers Needs to Be
Improved.
We find the report to be factually correct and believe it accurately
reflects Farm Credit Administration's (FCA) current policies and
practices. Our agency is committed to an effective program of financial
and regulatory oversight of the Farm Credit System. As such, we will
address the issues your report raises regarding the need for a more
specific regulation on Young, Beginning, and Small Farmers' programs.
Furthermore, we will ensure that our examination guidance relative to
this important area is followed and work performed and conclusions
reached are fully documented by FCA examiners.
We appreciate the effort of your staff in conducting this review.
Technical comments were provided to your evaluators separately. If you
have any questions, please call me at (703) 883-4005.
Sincerely,
Signed by:
Michael M. Reyna:
Chairman and Chief Executive Officer:
cc: Ann Jorgensen:
FCA Board Member:
[End of section]
Footnotes:
[1] FCA defines young borrowers as farmers, ranchers, or producers or
harvesters of aquatic products who are age 35 or younger as of the loan
transaction date and beginning borrowers as those who have 10 years or
less farming or ranching experience as of the loan transaction date.
Small borrowers are those who normally generate less than $250,000 in
annual gross sales of agricultural or aquatic products.
[2] As used in this report, a GSE is a federally chartered, privately
owned corporation established by Congress to provide a continuing
source of credit nationwide to a specific economic sector.
[3] System banks generally serve a specific geographic area or
district.
[4] Management controls, in the broadest sense, include the plan of
organization, methods, and procedures adopted by management to ensure
that its goals are met. Management controls include the processes for
planning, organizing, directing, and controlling program operations.
They include the systems for measuring, reporting, and monitoring
program performance.
[5] The System experienced severe financial stress in the mid-1980s,
which led Congress to enact reforms to promote the System‘s safety and
soundness, including changing the role of FCA to an independent ’arms-
length“ regulator. We evaluated FCA as a regulator in 1994 and
concluded that FCA‘s examination and monitoring of a selected sample of
banks was generally comprehensive and addressed issues of safety and
soundness. U.S. General Accounting Office, Farm Credit System: Farm
Credit Administration Effectively Addresses Identified Problems,
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-94-14]
(Washington, D.C.: January 7, 1994).
[6] Bookletters are communications from FCA to System institutions.
Bookletters must be reviewed by the FCA Board before distribution, and
they can transmit a policy adopted by FCA and clarify FCA positions or
expectations regarding examinations.
[7] Informational memorandums are official communications from senior
FCA officials to System institutions. They do not communicate agency
policy, and they do not require review by the FCA Board, but they can
provide information on revised examination criteria and procedures.
[8] Farm Credit Administration, Farm Credit Service to Young,
Beginning, and Small Farmers and Ranchers, Policy Statement-75,
December 10, 1998.
[9] Although the Farm Credit Act requires no specific targets for
service to YBS, some System institutions establish their own goals,
including numeric goals, for providing credit to YBS.
[10] Farm Credit Administration, Policy and Reporting Changes for
Young, Beginning, and Small Farmers and Ranchers Programs, Bookletter-
040, December 11, 1998.
[11] According to the director of the President‘s Planning Committee,
this committee consists of a group of System representatives that
comprises district bank presidents, and representatives from some of
the larger System associations. The committee meets regularly to
discuss policy issues for the System and represents the System‘s
interests in various task forces.
[12] In general, according to FCA policy and on the basis of our
discussions with FCA officials, when an FCA examiner identifies a
compliance problem, FCA is to respond in several ways, depending on the
circumstances. First, an examiner identifies a violation of YBS
compliance”for example, the lack of an institution board policy. FCA
may cite the violation in an examination report and require the
institution to take specific corrective action, such as requiring that
the board adopt a policy for YBS within 60 days. If the institution
fails to take corrective action, the FCA can institute a formal
enforcement action to obtain a cease and desist order or civil money
penalties.
[13] We found incomplete responses in 13 of the examination reports; no
response in 4 reports; and in 1 report, the examiner noted that the
procedure was not applicable.
[14] We did not independently verify the existence of YBS programs at
System institutions.
[15] A coverage ratio is determined by dividing a lender‘s projected
net income by the costs of loan debt service. This ratio should be over
1 because it means the property is generating enough income to pay its
debt obligations. In the eyes of the lender, the higher the coverage
ratio, and therefore the more net operating income from which the owner
can make debt service payments, and the lesser the loan risk, the
greater the cash flow to the owner.
[16] It was not clear from the examination workpapers whether or not
four institutions had marketing or outreach efforts to YBS.
[17] YBS reports for fiscal year 2001 were not yet available at the
time of our review.
[18] FCA officials told us that they review the quantitative data
submitted by the System banks to identify any obvious mistakes, and
they discuss any inconsistencies with the banks. 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.
[19] Fannie Mae and Freddie Mac buy mortgages from a variety of
institutions that lend money directly to home buyers such as mortgage
companies, banks, and credit unions. They retain some mortgages in
portfolios and pool others to create mortgage-backed securities (MBS)
that are sold to investors in the secondary mortgage market. They raise
money to purchase mortgage assets by selling bonds and MBS to investors
throughout the world.
[20] The FHLBank System raises the money it uses to lend to members
(advances) in three ways: by issuing bonds known as consolidated
obligations (CO), by accepting deposits from member institutions, and
by selling capital stock to members. The FHLBank System members
(commercial banks, savings institutions, credit unions, and insurance
companies) may use advances generally to support home mortgages, small
business, community development, and agricultural loans.
[21] These regulators include the Federal Reserve Board, the Office of
the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, and the Office of Thrift Supervision.
[22] U.S. General Accounting Office, Regulatory Burden: Recent Studies,
Industry Issues, and Agency Initiatives, [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-94-28] (Washington, D.C.:
December 13, 1993).
[23] The Federal Housing Enterprises Financial Safety and Soundness Act
gave HUD general regulatory authority over Fannie Mae and Freddie Mac
in all areas other than the GSEs‘ safety and soundness. This same act
also created the Office of Federal Housing Enterprise Oversight, an
independent office within HUD, which has authority exclusive of the
secretary, with regard to the GSE‘s financial safety and soundness.
[24] We recommended in a 1998 report that HUD develop a program to
assess the data. See U.S. General Accounting Office, Federal Housing
Enterprises: HUD‘s Mission Oversight Needs to Be Strengthened,
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO/GGD-98-173]
(Washington, D.C.: July 28, 1998).
[25] The statute provides for both a public and a confidential section
to protect the privacy of individuals.
[End of section]
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