Feds restrict 15 farm lenders

Feds restrict 15 farm lenders

By MATEUSZ PERKOWSKI

Capital Press

The federal government is more closely scrutinizing the operations of 15 farm lenders due to the deterioration of their credit rating.

Of the 15 lenders that the Farm Credit Administration has placed under special supervision, four have been subjected to enforcement actions by the agency.

The administration oversees institutions within the Farm Credit System, a network of 95 lenders across the U.S. charged with serving the agricultural industry.

By placing a lender under special supervision, the Farm Credit Administration basically increases its oversight and provides the institution with a "road map back to normal supervision," said Roger Paulsen, director of risk supervision at the agency.

"We needed to be more formal about it than just sitting across the table and telling them that," Paulsen said.

The administration does not disclose the names of lenders subject to special supervision or enforcement action.

Enforcement action signals an even higher level of involvement.

The administration takes such actions against lenders that have been unwilling or unable to make suggested improvements under special supervision.

As part of an enforcement action, the administration can issue civil penalties and order the dismissal of employees or directors.

The four most recent actions required the institutions to enter into contracts delineating operational steps they must take, Paulsen said.

Increased supervision of Farm Credit System lenders coincides with the overall downturn in the agricultural economy, Paulsen said.

In early 2007, only one institution had a credit rating low enough to justify special supervision, according to an agency document.

At that point, more than 80 percent of FCS lenders had a top credit rating under the administration's review system.

The percentage of top-rated institutions has since dropped below 30 percent.

"In periods of stress, there are going to be things that show up that you weren't expecting," Paulsen said.

The Farm Credit Administration has identified several factors that contributed to unsatisfactory credit ratings among some lenders, including "rapid, unplanned and unbalanced growth," according to a list developed by the agency.

When commodity prices were booming, some lenders allowed their increasing volume and complexity of loans to outpace internal controls, Paulsen said.

Other problems included submitting untimely or inaccurate information to shareholders, setting aside insufficient funds for loan losses and underestimating risk levels.

"We have very little tolerance for an unreliable internal credit review process," Paulsen said. "It would be something we would take immediate action on."

The current deterioration in agricultural credit quality is, in some respects, a miniature version of what happened in the 1980s, said Steve Blank, an agricultural economist at the University of California-Davis who specializes in risk management.

In the 1970s, commodity prices rose along with currency inflation, he said.

When that bubble popped in the 1980s, land prices plummeted and led to credit deterioration, since so many loans were based on high property values, Blank said.

"The rules of banking changed then," he said.

Rather than basing loans on equity, lenders became focused on farm income, Blank said.

That worked well for about 20 years, until market speculation artificially drove up commodity prices in the latter half of the past decade, he said.

Loans were basically made on inflated projections of farm income growth, Blank said.

"When you're in the middle of one of those speculative bubbles, you don't realize it," he said.

Now, lenders may try to counteract previously lax standards by becoming more restrictive, said Thorsten Egelkraut, an agricultural economist at Oregon State University.

Loan volume within the Farm Credit System remained basically flat in 2009, due to lower demand among farmers and increased lender controls, according to an agency document.

"If you scrutinize the bank, you can't tell the institution to lend a lot," Egelkraut said.