Pub. 4 2015 Issue 4

June 2015 25 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s The FCA’s double-standard on enforcement actions Like the bank regulators, the Farm Credit Administration (FCA) takes enforcement actions against FCS institutions for various reasons. Unlike the bank regulators, though, the FCA does not publish its enforcement orders nor does it even name the FCS institutions subject to those orders. However, these institutions (usually FCS direct-lending associations) do disclose the existence of those orders in their quarterly and annual reports to their members. It takes a lot of work, though, to identify those institutions. Presumably the FCA fears dire consequences if it names names, yet the FCA does not hesitate to name the individuals it has barred from serving, without the FCA’s consent, “as a director, officer, or employee of any FCS institution.” Rarely, though, are individuals prohibited from working in the FCS – over the last decade, just four persons have been subject to a prohibition order. Although the FCA does not name the institutions subject to enforcement orders, it does provide some data regarding those orders. That data, though, is not clear-cut. For instance, the FCS’s 2014 annual Information Statement reported that at the end of 2014, the FCA “had entered into written agreements with three Associations who assets totaled $1.191 billion, as compared with eight Associations whose assets totaled $4.803 billion as of December 31, 2013.” On the surface, that decline looks pretty good. However, a March 31, 2015, report issued by the FCA’s Inspector General (IG) on the FCA’s special supervision and enforcement processes paints a more disturbing picture. According to the FCA’s IG, during the fiscal year ended September 30, 2014, eight FCS institutions were under enforcement orders and three were subject to “special supervision,” which is one step away from an enforcement action. Assuming all eleven are FCS associations, this means that approximately one of every seven FCS associations experienced supervisory issues during fiscal year 2014, a time of exceptionally good economic conditions in American agriculture. Ten of the eleven associations’ “areas of concern” involved management issues and nine related to asset quality. Clearly some associations generated both management and asset quality concerns. Especially troubling is how long it takes the FCA to resolve supervisory issues. Eight institutions falling within the scope of the IG’s report were “under enforcement [that] ranged from one and a half to five years, with an average of 39 months” – over three years! It appears from data in the FCS annual Information Statements that most of these associations are relatively small – well under $1 billion in total assets, which raises this question: Why does it take the FCA so long to get these problems resolved? Further, the FCA has had to take numerous formal supervisory actions against some of these associations – six over 46 months in one case and five over 60 months in another case. Possibly some of these associations have been resolved through mergers with stronger associations. Putting a spotlight on these problem associations, by publicizing their enforcement orders, would help greatly to reduce these problems. The new FCA Chairman, Ken Spearman, should so order. The FCS Southwest saga continues FCS Southwest, which serves most of Arizona plus California’s Imperial Valley, announced last October that due to “a sudden significant increase in the level of delinquent loans” it would have to restate its financial results. At the same time, the FCA removed from its website all call reports Southwest had filed since 2010. That financial restatement process still has not been completed. The FCA website simply states that a “data correction is underway [for Southwest] and data not available at this time.” In February, Southwest announced its intent to merge with Farm Credit West, a large California FCS association. Shortly thereafter, Farm Credit West’s CEO assumed the CEO position at Southwest and the two associations began “operating under a joint management agreement.” Almost certainly, the FCA engineered a shotgun marriage of Southwest into Farm Credit West, but that deal cannot be closed until each association’s borrower/stockholders approve it; August 1, 2015, is the anticipated merger date. However, they cannot vote on the deal until due diligence has been completed and “detailed disclosure documents [have been] provided to each stockholder.” Of course, Southwest’s financial restatement must be completed before the disclosure documents can be finalized. In the meantime, a criminal investigation reportedly is underway at Southwest related to fraudulent transactions that led to the “sudden significant increase” in delinquent loans. Join ABA in celebrating 140 years of helping make Americans’ financial dreams come true. Learn more: aba.com/140