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[House Hearing, 114 Congress]
[From the U.S. Government Publishing Office]

                HEARING TO REVIEW THE FARM CREDIT SYSTEM

=======================================================================

                                HEARING

                               BEFORE THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                    ONE HUNDRED FOURTEENTH CONGRESS

                             FIRST SESSION

                               __________

                            DECEMBER 2, 2015

                               __________

                           Serial No. 114-35

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov

                                   ______

                         U.S. GOVERNMENT PUBLISHING OFFICE 

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                        COMMITTEE ON AGRICULTURE

                  K. MICHAEL CONAWAY, Texas, Chairman

RANDY NEUGEBAUER, Texas,             COLLIN C. PETERSON, Minnesota, 
    Vice Chairman                    Ranking Minority Member
BOB GOODLATTE, Virginia              DAVID SCOTT, Georgia
FRANK D. LUCAS, Oklahoma             JIM COSTA, California
STEVE KING, Iowa                     TIMOTHY J. WALZ, Minnesota
MIKE ROGERS, Alabama                 MARCIA L. FUDGE, Ohio
GLENN THOMPSON, Pennsylvania         JAMES P. McGOVERN, Massachusetts
BOB GIBBS, Ohio                      SUZAN K. DelBENE, Washington
AUSTIN SCOTT, Georgia                FILEMON VELA, Texas
ERIC A. ``RICK'' CRAWFORD, Arkansas  MICHELLE LUJAN GRISHAM, New Mexico
SCOTT DesJARLAIS, Tennessee          ANN M. KUSTER, New Hampshire
CHRISTOPHER P. GIBSON, New York      RICHARD M. NOLAN, Minnesota
VICKY HARTZLER, Missouri             CHERI BUSTOS, Illinois
DAN BENISHEK, Michigan               SEAN PATRICK MALONEY, New York
JEFF DENHAM, California              ANN KIRKPATRICK, Arizona
DOUG LaMALFA, California             PETE AGUILAR, California
RODNEY DAVIS, Illinois               STACEY E. PLASKETT, Virgin Islands
TED S. YOHO, Florida                 ALMA S. ADAMS, North Carolina
JACKIE WALORSKI, Indiana             GWEN GRAHAM, Florida
RICK W. ALLEN, Georgia               BRAD ASHFORD, Nebraska
MIKE BOST, Illinois
DAVID ROUZER, North Carolina
RALPH LEE ABRAHAM, Louisiana
JOHN R. MOOLENAAR, Michigan
DAN NEWHOUSE, Washington
TRENT KELLY, Mississippi

                                 ______

                    Scott C. Graves, Staff Director

                Robert L. Larew, Minority Staff Director

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                             C O N T E N T S

                              ----------                              
                                                                   Page
Conaway, Hon. K. Michael, a Representative in Congress from 
  Texas, opening statement.......................................     1
    Prepared statement...........................................     3
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, opening statement...................................     3
Scott, Hon. Austin, a Representative in Congress from Georgia, 
  submitted letter...............................................    49
Scott, Hon. David, a Representative in Congress from Georgia, 
  submitted letter...............................................    49

                                Witness

Spearman, Hon. Kenneth A., Chairman of the Board and Chief 
  Executive Officer, Farm Credit Administration, McLean, VA; 
  accompanied by S. Robert Coleman, Director, Office of 
  Examination, FCA; Hon. Charles R. Rawls, J.D., General Counsel, 
  FCA............................................................     4
    Prepared statement...........................................     5
    Submitted questions..........................................    57

                           Submitted Material

Auer, Kenneth E., President and Chief Executive Officer, Farm 
  Credit Council, submitted letter...............................    49
Independent Community Bankers of America, submitted statement....    55

 
                HEARING TO REVIEW THE FARM CREDIT SYSTEM

                              ----------                              

                      WEDNESDAY, DECEMBER 2, 2015

                          House of Representatives,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Committee met, pursuant to call, at 10:00 a.m., in Room 
1300, Longworth House Office Building, Hon. K. Michael Conaway 
[Chairman of the Committee] presiding.
    Members present: Representatives Conaway, Goodlatte, Lucas, 
King, Thompson, Gibbs, Austin Scott of Georgia, Crawford, 
DesJarlais, Hartzler, Benishek, LaMalfa, Davis, Yoho, Walorski, 
Bost, Rouzer, Abraham, Moolenaar, Newhouse, Kelly, Peterson, 
David Scott of Georgia, Costa, Walz, Fudge, McGovern, DelBene, 
Vela, Lujan Grisham, Kuster, Nolan, Kirkpatrick, Aguilar, 
Plaskett, Adams, Graham, and Ashford.
    Staff present: Caleb Crosswhite, Jessica Carter, Josh 
Maxwell, Matt Schertz, Scott C. Graves, Stephanie Addison, John 
Konya, Anne Simmons, Lisa Shelton, Liz Friedlander, Matthew 
Mackenzie, Robert L. Larew, Nicole Scott, and Carly Reedholm.

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE 
                     IN CONGRESS FROM TEXAS

    The Chairman. Good morning, everyone. We will call the 
hearing to order. I will ask Rick Crawford to open us with a 
prayer.
    Rick?
    Mr. Crawford. Thank you, Mr. Chairman.
    Father, I bow humbly before you, thankful for every 
blessing of life, Lord, and thankful for this country that You 
have blessed us with. Father, I would just ask that You be with 
each Member here and be with our nation. And I would ask that 
You give each Member a spirit of discernment today, Lord, that 
all that we say and do will be pleasing to You.
    I ask it in Jesus' name. Amen.
    The Chairman. Thank you, Rick. Well, good morning. This 
hearing of the Committee on Agriculture to review the Farm 
Credit System, will come to order.
    Providing credit to America's farmers and ranchers is a 
necessary and serious challenge for many lenders in the United 
States. After a recent period of record highs, crop prices have 
declined due to record plantings and strong production. Input 
costs have risen. And some of our biggest foreign competitors 
are sharply increasing their subsidies, tariffs, and non-tariff 
barriers to trade.
    Meanwhile, farmland values are on a downward trend. And 
while livestock producers are rebounding on the balance sheet 
with lower feed costs, our western producers are still 
struggling with consecutive years of drought.
    Unfortunately, the U.S. Government has added to the 
challenges faced by America's farmers and ranchers. The EPA 
continues to push for new and costly regulations. And then 
there are those issues standing in the way of critical tax 
relief, ranging from a permanent section 179 and bonus 
depreciation to repeal of the death tax. It is times like these 
that our farmers and ranchers are most in need of reliable 
sources of credit at competitive rates. I am thankful we have a 
network of commercial and community banks, USDA loan programs, 
and a Farm Credit System, that each plays a critical role in 
providing that access.
    The importance of the Farm Credit System is largely unknown 
to those outside the agricultural community, often leaving it 
prone to political attacks. So I am thankful that we have an 
opportunity today to highlight the System and its century-long 
mission of providing credit to agriculture and rural America 
during the good times and the bad, as well as the Farm Credit 
Administration in ensuring the soundness of the System and its 
lending practices.
    While Congress has generally outlined the authority by 
which the Farm Credit System may fulfill its ultimate mission 
of ensuring a dependable source of credit for agricultural and 
rural America, I realize that authority is not necessarily 
delineated with bright line rules. Therefore, we largely rely 
on FCA as the regulator to ensure that the System banks are 
doing their part to stay within the bounds of the Farm Credit 
Act. In that vein, there has been much scrutiny of System bank 
financing deals with major telecommunication networks that I am 
sure a number of our colleagues will be eager to discuss again 
today. I look forward to a healthy discussion of similar-entity 
lending authority that provides greater clarity for all 
involved.
    On the whole, I believe that the Farm Credit System is 
fundamentally safe and sound and in a position to weather the 
challenges that it is likely to face in the times ahead. 
Together with commercial banks, community banks, and the Farm 
Service Agency, the Farm Credit System will continue to play a 
crucial role in maintaining the success of the American 
agriculture.
    Today, we will hear from the Farm Credit Administration, 
the regulator of the Farm Credit System. Before we begin, I 
would like to thank our witness, Ken Spearman, for being here 
today. Mr. Spearman has had a recent medical procedure. And 
that is the reason why he is wearing his chapeau this morning. 
He is not being disrespectful but saving us from whatever is 
going on under there. So we will get that off the table right 
now. We are happy to hear he is recovering well.
    And I appreciate you making the time to be here this 
morning. And is it Maria? Your wife is also here backing him 
up. So I appreciate that.
    [The prepared statement of Mr. Conaway follows:]

  Prepared Statement of Hon. K. Michael Conaway, a Representative in 
                          Congress from Texas
    Good morning, and welcome to today's hearing.
    Providing credit to America's farmers and ranchers is a necessary 
and serious challenge for many lenders in the United States. After a 
recent period of historic highs, crop prices have declined due to 
record plantings and strong production, input costs have risen, and 
some of our biggest foreign competitors are sharply increasing their 
subsidies, tariffs, and non-tariff barriers to trade.
    Meanwhile, farmland values are on a downward trend, and while 
livestock producers are rebounding on the balance sheet with lower feed 
costs, our western producers are struggling with consecutive years of 
drought.
    Unfortunately, the U.S. Government has added to the challenges 
faced by America's farmers and ranchers. The EPA continues to push for 
new and costly regulations, and then there are those standing in the 
way of critical tax relief, ranging from a permanent section 179 and 
bonus depreciation to repeal of the death tax.
    It is in trying times like these that our farmers and ranchers are 
most in need of reliable sources of credit at competitive rates. 
Thankfully we have a network of commercial and community banks, USDA 
loan programs, and the Farm Credit System that each play a crucial role 
in providing that access.
    The importance of the Farm Credit System is largely unknown to 
those outside the agricultural community, often leaving it prone to 
political attacks. So I am thankful that we have an opportunity today 
to highlight the System and its century-long mission of providing 
credit to agriculture and rural America during the good times and the 
bad, as well the role of the Farm Credit Administration in ensuring the 
soundness of the System and its lending practices.
    While Congress has generally outlined the authority by which the 
Farm Credit System may fulfill its ultimate mission of ensuring a 
dependable source of credit for agriculture and rural America, I 
realize that authority is not necessarily delineated with bright line 
rules. Therefore we largely rely on FCA as the regulator to ensure that 
System banks are doing their part to stay within the bounds of the Farm 
Credit Act.
    In that vein, there has been much scrutiny of System bank financing 
deals with major telecommunications networks. I am sure a number of my 
colleagues will be eager to discuss that topic again today, and I look 
forward to a healthy discussion of ``similar-entity lending authority'' 
that provides greater clarity for all involved.
    On the whole, I believe that the Farm Credit System is 
fundamentally safe and sound and in a position to weather the 
challenges that it is likely to face in the times ahead. Together with 
the commercial banks, community banks, and the Farm Service Agency, the 
Farm Credit System will continue to play a crucial role in maintaining 
the success story of American agriculture.

    The Chairman. With that, I will turn to our Ranking Member 
for any comments that he would like to make.

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE 
                   IN CONGRESS FROM MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman.
    And good morning, everybody.
    I would like to welcome today's witness, as well as, Mr. 
Coleman and Mr. Rawls.
    The topic of today's hearing is very timely given what is 
happening across the countryside right now. Commodity prices 
have fallen and will likely continue to fall. And land values, 
for some reason, continue to increase. This has a lot of 
farmers asking if they will have access to the financing they 
need for the next planting season. Access to credit is one of 
the most important tools that we can provide to our farmers and 
ranchers. And the farm bill's commodity programs work hand in 
hand with crop insurance to provide a safety net to ensure 
continued access to credit. Having a crop insurance policy in 
place gives lenders the certainty to know that farmers will 
make good on their commitment and pay back their loans even 
during difficult times. So I appreciate the opportunity to have 
this hearing today.
    And I yield back the balance of my time.
    The Chairman. Thank you, Collin.
    The chair would request that other Members submit their 
opening statements for the record so that our witness may begin 
his testimony to ensure there is ample time for questions. I 
would like to welcome to our witness table today, Mr. Ken 
Spearman, Chairman of the Board and CEO of the Farm Credit 
Administration, from McLean, Virginia. He is joined this 
morning by Robert Coleman, who is the Director of the Office of 
Examination, Farm Credit Administration, and Mr. Charles Rawls, 
the General Counsel for the Farm Credit Administration. And his 
other two Commissioners are in the audience as well. And I have 
it on good authority they are not in violation of any kind of 
Open Meetings Act by having all of them in one room.
    This is not the first time the FCA has been here. We have 
had conversations with them at the Committee at least every 
term since I have been here. And it is good to have the 
Chairman here to talk to us directly about a variety of things.
    So, Mr. Spearman, the 5 minutes is yours. And then we will 
get to our questions.

 STATEMENT OF HON. KENNETH A. SPEARMAN, CHAIRMAN OF THE BOARD 
   AND CHIEF EXECUTIVE OFFICER, FARM CREDIT ADMINISTRATION, 
                 McLEAN, VA; ACCOMPANIED BY S.
  ROBERT COLEMAN, DIRECTOR, OFFICE OF EXAMINATION, FCA; HON. 
          CHARLES R. RAWLS, J.D., GENERAL COUNSEL, FCA

    Mr. Spearman. Thank you, Mr. Chairman and Ranking Member 
Peterson.
    Chairman Conaway, Ranking Member Peterson, and Members of 
the Committee, it is a privilege to appear before you to report 
on the mission of the Farm Credit Administration. I have a 
written statement to submit for the record.
    President Obama appointed me to the FCA Board on October 
13, 2009. On March 13 of this year, the President designated me 
FCA Chairman and CEO. I have the pleasure of serving on the 
board with two distinguished colleagues, Dallas Tonsager and 
Jeff Hall, who are here today.
    FCA is an independent Federal agency that regulates and 
examines the banks, associations, and related entities of the 
Farm Credit System, including the Federal Agriculture Mortgage 
Corporation or Farmer Mac. Our responsibility is to ensure that 
the System meets its Congressional mission to provide a 
dependable source of credit for agriculture and rural America.
    FCA was created by an Executive Order of President Franklin 
Roosevelt in 1933. During the agriculture credit crisis of the 
1980s, this Committee restructured the FCA, giving it 
regulatory and enforcement powers similar to those of other 
Federal financial regulators. FCA is not an appropriated 
agency. We are funded primarily through assessments paid by 
System institutions.
    The Farm Credit System, which was established in 1916, is 
the nation's oldest government-sponsored enterprise. It is a 
nationwide network of borrower-owned cooperative financial 
institutions and affiliated service organizations. Currently, 
the System includes four banks and 75 direct-lending 
associations. The banks provide loan funds to the associations, 
which in turn provide operating loans and long-term real estate 
loans to farmers, ranchers, and other eligible borrowers. One 
of the System banks also has authority to lend to agriculture 
cooperatives and to rural utilities.
    Farm Credit banks and associations cannot take deposits. 
The System obtains loan funds by selling securities on the 
national and international money markets. The securities are 
not guaranteed by the Federal Government. The System is the 
only GSE that makes loans at the retail level. It was 
established to provide a dependable source of competitive 
credit to farmers, ranchers, and farm cooperatives. The System 
was not established to be the lender of last resort. Its 
mission is to serve American agriculture in good times and bad. 
By providing competitive credit, the System has helped our 
farmers provide abundant, affordable food and fiber to people 
at home and around the world. I am pleased to report that the 
System's banks and associations are fundamentally safe and 
sound. They are well capitalized, with solid earnings and 
strong credit quality. Farmer Mac, and the System, is well-
positioned to meet this challenge.
    And FCA is taking steps to make sure the System remains 
safe and sound. We are updating capital rules, emphasizing 
internal controls, and monitoring emerging risks. We are also 
emphasizing mission fundamentals. The System must serve all 
eligible creditworthy potential borrowers regardless of race or 
gender, and regardless of the size of the producer's operations 
or the commodities they produce. In addition to serving large 
production operations, we want to make sure the System 
institutions serve small operations that produce organic and 
value-added foods for local markets.
    As you know, the farm economy is cyclical. That is why 
Congress long ago created a safety net to help farmers survive 
downturns in the agricultural economy. In a recent hearing, 
Chairman Conaway noted that agriculture is the backbone of the 
economy. He said: ``America has been able to not only survive 
but thrive because our agricultural safety net helps farmers 
weather the bad times.'' I cannot agree more. And the Farm 
Credit System is an important part of that safety net.
    Thank you, and I would be happy to answer your questions.
    [The prepared statement of Mr. Spearman follows:]

 Prepared Statement of Hon. Kenneth A. Spearman, Chairman of the Board 
  and Chief Executive Officer, Farm Credit Administration, McLean, VA
Introduction
    Chairman Conaway, Ranking Member Peterson, and Members of the 
Committee, I am Kenneth A. Spearman, Farm Credit Administration (FCA) 
Board Chairman and Chief Executive Officer. On behalf of my colleagues 
on the FCA Board, Dallas P. Tonsager of South Dakota, Jeffery S. Hall 
of Kentucky, and all the dedicated men and women of the agency, it is a 
privilege to appear before you today.
    FCA is an independent agency responsible for examining and 
regulating the banks, associations, and related entities of the Farm 
Credit System (FCS or System), including the Federal Agricultural 
Mortgage Corporation (Farmer Mac). The banks and associations of the 
FCS form a nationwide network of borrower-owned financial institutions 
that provide competitive credit to all creditworthy farmers, ranchers, 
and other eligible borrowers.
FCA Mission
    As directed by Congress, FCA's mission is to ensure a safe, sound, 
and dependable source of credit and related services for agriculture 
and rural America. We accomplish this mission in two important ways.
    First, we protect the safety and soundness of the FCS by examining 
and supervising all FCS institutions, including Farmer Mac, and we 
ensure that they comply with applicable laws and regulations. Our 
examinations and oversight strategies focus on an institution's 
financial condition and any material existing or potential risk, as 
well as on the ability of its board and management to direct its 
operations. We also evaluate each institution's compliance with laws 
and regulations to ensure that it serves all eligible borrowers, 
including young, beginning, and small farmers and ranchers. If a System 
institution violates a law or regulation or operates in an unsafe or 
unsound manner, we use our supervisory and enforcement authorities to 
take appropriate corrective action.
    Second, we develop policies and regulations that govern how System 
institutions conduct their business and interact with customers. Our 
policies and regulations protect System safety and soundness; implement 
the Farm Credit Act; provide minimum requirements for lending, related 
services, investments, capital, and mission; and ensure adequate 
financial disclosure and governance. We approve the corporate charter 
changes of System institutions, System debt issuance, and other 
financial and operational matters.
    Through the oversight and leadership of the House and Senate 
Agriculture Committees, many important reforms were made to the Farm 
Credit Administration and the FCS as a result of the agricultural 
credit crisis of the 1980s. This included restructuring FCA as an 
independent arm's-length regulator with formal enforcement powers, 
providing borrower rights to System borrowers with distressed loans, 
and establishing the Farm Credit System Insurance Fund (Insurance Fund) 
to protect System investors.
    Since then, the Farm Credit System has restored its financial 
health and the public trust. Using our authority as an arm's-length 
regulator, we have contributed to the System's success by ensuring that 
System institutions adhered to safety and soundness standards. The 
Insurance Fund also helped by restoring investor confidence.
    Both the System and FCA learned much during the crisis of the 
1980s, and those lessons helped build a much stronger Farm Credit 
System, as well as a stronger regulator. We will continue to focus on 
ensuring that the System remains safe and sound by promulgating 
regulations, providing appropriate guidance, and maintaining strong and 
proactive examination and supervisory programs. With the dynamics and 
risks in the agricultural and financial sectors today, we recognize 
that FCS institutions must have the appropriate culture, governance, 
policies, procedures, and management controls to effectively identify 
and manage risks. Today the System is a dependable provider of credit 
to agriculture and rural America as intended by Congress.
Farm Credit System Mission
    The FCS is a government-sponsored enterprise (GSE) created by 
Congress in 1916 to provide American agriculture with a dependable 
source of credit. The System's banks and associations form a nationwide 
network of cooperatively organized lending institutions that are owned 
and controlled by their borrowers, serving all 50 states and the 
Commonwealth of Puerto Rico.
    The System provides credit and other services to agricultural 
producers, aquatic producers or harvesters and farmer-owned 
agricultural and aquatic cooperatives. It also makes loans for 
agricultural processing and marketing activities, rural housing, farm-
related businesses, rural utilities, and foreign and domestic companies 
involved in international agricultural trade. In addition, the System 
provides funding and discounting services to certain ``other financing 
institutions'' and forms partnerships with commercial banks to provide 
credit to agriculture and rural America through participations and 
syndications.
    As required by law, System borrowers own stock or participation 
certificates in System institutions. The FCS had nearly one million 
loans and approximately 500,000 stockholders in 2014. Approximately 85 
percent of the stockholders were farmers or cooperatives with voting 
stock. The remaining 15 percent were nonvoting stockholders, including 
rural homeowners and other financing institutions that borrow from the 
System. The U.S. Department of Agriculture's latest data show that the 
System's market share of farm debt was 39 percent, compared with 41 
percent held by commercial banks.
    One of FCA's oversight roles is to ensure that the System, with its 
mission devoted to agriculture and rural America, maintains its 
presence in the agricultural marketplace to provide competitive and 
dependable credit for all eligible and creditworthy farmers, ranchers, 
aquatic producers or harvesters and agricultural cooperatives. In fact, 
the System has maintained its mission service during the difficult 
markets of the past years to help producers and rural America. When 
commodity prices soared in early 2008, System institutions stepped 
forward to meet the critical financing needs of the grain elevator 
industry. They met increased demands for financing machinery and higher 
input costs for producers. The FCS also helped Midwest borrowers 
affected by floods and worked with livestock producers, especially 
dairy and hog producers, as they made difficult decisions during 
stressful market conditions. Overall the System continued to have 
access to funds and was able to increase its lending to agriculture and 
rural America during a financial crisis and severe recession.
Condition of the FCS
    The FCS remains fundamentally safe and sound and is well positioned 
to withstand the challenges facing U.S. agriculture during the current 
cyclical downturn. The depth and duration of market weakness is 
unknown, which will continue to present challenges for the System until 
markets rebound.
    The U.S. Department of Agriculture is forecasting lower net cash 
income in 2015 for the second consecutive year as receipts for crops 
and livestock decline in tandem. Continued weak farm prices stem 
primarily from large U.S. and global crop supplies and expanding 
livestock production. Average prices received by farmers for corn and 
soybean have dropped sharply from records posted in 2012 and remain 
near or below levels last received in 2007.
    As a consequence of lower prices, margins for many crop producers 
in 2015 remain low or negative for the third consecutive year. For 
livestock producers, lower crop prices translate into lower feed costs, 
but profitability has been adversely affected by lower protein product 
prices, particularly for the hog, dairy, and broiler sectors. Lower 
grain prices have also resulted in softening in some farmland markets, 
specifically in the Midwest.
    While the current credit stress level in the System's loan 
portfolio is well within its risk-bearing capacity, asset quality is 
expected to decline modestly in 2016 from relatively strong levels in 
2015. Supporting the overall condition of the FCS is moderate loan 
growth, adequate capital, and reliable access to debt capital markets.
    The System continues to grow at a moderate pace. As of September 
30, 2015, gross loans totaled $226.8 billion, up $18.8 billion or 9.0 
percent from September 30, 2014. Real estate mortgage lending was up 
$7.0 billion, or 7.2 percent, as demand for cropland continued in 2015. 
Overall, real estate mortgage loans represent 45.7 percent of the 
System's loan portfolio. Production and intermediate-term lending 
increased by $2.9 billion or 6.4 percent from the year before, and 
agribusiness lending increased by $4.2 billion or 13.9 percent.
    The System also continues to enhance its capital base, which 
strengthens its financial position as low or negative farm returns 
increase financial stress on borrowers. As of September 30, 2015, 
System total capital equaled $48.9 billion, up from $45.8 billion the 
year before. The System's total capital-to-assets ratio was 16.8 
percent as compared with 16.9 percent a year earlier. Moreover, more 
than 82 percent of total capital is in the form of earned surplus.
    The increase in total capital is due in large part to the System's 
strong earnings performance. For the first 9 months of calendar year 
2015, the System reported net income of $3.5 billion compared with $3.6 
billion for the same period of the previous year. The small decline 
results from slightly higher non-interest expenses and provisions for 
loan losses, which offset an increase in net interest income. The 
increase in net interest income stems from a higher level of average 
earning assets despite an eight-basis-point decline in net interest 
margin to 2.56 percent. Compression of net interest spread is expected 
to continue as interest rates change and borrowers prepay or reprice 
loans.
    Credit quality in the System's loan portfolio continues to be 
strong. In each calendar year since 2010, the amount of non-performing 
loans has declined, and capital has increased. In the most recent 
period, as of September 30, 2015, non-performing loans totaled $1.7 
billion, or 0.76 percent of gross loans, as compared with $1.8 billion, 
or 0.85 percent, for the same quarter a year ago. Relative to total 
capital, non-performing loans represented 3.5 percent at quarter-end. 
For historical comparison, at year-end 2010, non-performing loans as a 
percentage of capital was more than ten percent.
    Lenders expect an uptick in loan delinquencies and other indicators 
of loan repayment problems as they move into 2016, but a large increase 
in problematic loans is unforeseen at this point. With weak margins, 
more farmers are expected to change their operating structures to 
reduce production costs or rebalance their farm balance sheets by, for 
example, lengthening loan terms or selling unproductive assets.
    The System continues to have reliable access to the debt capital 
markets. Investor demand for all System debt products has been 
positive, allowing the System to continue to issue debt on a wide 
maturity spectrum at very competitive rates. Risk spreads and pricing 
on System debt securities remained favorable relative to corresponding 
U.S. Treasuries. Further strengthening the System's financial condition 
is the Insurance Fund, which holds just under $4.0 billion. 
Administered by the Farm Credit System Insurance Corporation, this fund 
protects investors in System-wide consolidated debt obligations.
    System banks also maintain liquidity reserves to ensure they can 
withstand market disruptions. As of September 30, 2015, the System's 
liquidity position equaled 183 days, significantly above the 90 day 
regulatory minimum required for each FCS bank.
A Changing Risk Profile in Agriculture
    U.S. farmers and ranchers are in the midst of serious belt-
tightening. Commodity prices have declined sharply while input costs 
have been slow to adjust downward. Both the crop sector and livestock 
sector are operating generally in price environments that are either 
squeezing margins or pushing them into negative territory for many 
producers.
    An extended downturn in the farm sector would be a major challenge 
for U.S. agriculture. In the past 2 years, many farmers have been 
coping with a declining market by using working capital generated 
during the previous period of strong earnings. As a result, the System 
has recorded relatively low loan losses and maintains a strong 
financial position to date. However, if commodity price weakness 
extends for another year or 2, we expect significant financial stress 
on borrowers as working capital erodes further and as farmers make 
additional cuts to capital expenditures, household spending, and 
operating costs.
    Weakness in commodity prices is due to both supply and demand 
factors. Globally, good weather in major producing regions has resulted 
in large supplies of grain and oilseeds. Expanding stocks have 
insulated many markets from significant price volatility, and in the 
absence of major weather shocks, commodity prices could remain subdued.
    In 2015, export demand for U.S. agricultural products has been 
slowed by the higher value of the dollar, which reduces U.S. price 
competitiveness in foreign markets. Also, while long-run trends are 
positive, modest economic growth tempers demand in major U.S. export 
markets, including China. Exports of high-value commodities, including 
meat, dairy, fruit, tree nuts, and vegetables, are particularly 
vulnerable to changes in income that drive export growth. Further 
strengthening of the U.S. dollar or a downturn in global economic 
growth would represent additional risk to U.S. farm receipts and loan 
repayment capacity.
    After rising rapidly in recent years, farmland values have leveled 
off generally, with markets either slightly higher or lower, depending 
on the type of acreage and region of the country. In fall 2015 relative 
to the year earlier, according to surveys conducted by several Federal 
Reserve Banks, the value of irrigated acreage declined in several 
producing areas, as did farmland in Illinois and Iowa. Farmland 
registered modest gains in the upper Midwest and West, as did ranchland 
in most regions. A positive sign for producers who cash-rent land is 
USDA data indicating a decline in cropland rents in the Midwest for the 
first time in 20 years.
    During the next year, many observers expect farmland values to 
weaken given the outlook for commodity markets. However, any downward 
movement could be limited by investors stepping into the market. 
Impacts of declining land values on the Farm Credit System would be 
mitigated by the System's underwriting procedures, which have been 
prudent during the recent run-up in land values.
    Anticipation for higher interest rates remains part of the economic 
landscape. Nevertheless, rates are expected to remain relatively low 
and increase very slowly over the next couple of years to maintain 
economic stability. Higher interest costs could put additional pressure 
on producers, especially those with liquidity problems, and any 
substantial rise in long-term rates would have negative effects on land 
values.
    Farm program payments for major crops will assist many grain and 
oilseed producers through at least next year. Farm financial health 
also benefits from the typical lender practice that requires borrowers 
to obtain crop insurance and use other risk-mitigating strategies for 
marketing. Over time, though, if market prices remain relatively weak, 
farm program payments will provide less assistance to corn, soybean, 
and other producers who selected Agriculture Risk Coverage as revenue 
guarantees begin to adjust downward.
Examination Programs for FCS Banks and Associations
    FCA is responsible for regulating and supervising the banks, 
associations, and related entities that compose the Farm Credit System. 
Our examination and oversight programs provide strategic, proactive 
risk supervision of the System. In conducting our institution-specific, 
risk-based oversight and examination activities, we assign highest 
priority to institutions that present the greatest risk.
    We also perform nationally focused examinations that target 
specific issues and operational areas to monitor the condition and 
operations of the System as a whole. We actively monitor risks that may 
affect groups of System institutions or the entire System, including 
risks from the agricultural, financial, and economic environment.
    Through our oversight, we require System institutions to have the 
programs, policies, procedures, and controls to effectively identify 
and manage risks. Our oversight program also requires compliance with 
laws and regulations. When institutions are either unable or unwilling 
to address unsafe and unsound practices or to comply with laws and 
regulations, we take appropriate supervisory or enforcement action. We 
use a comprehensive regulatory and supervisory framework to ensure the 
System's safety and soundness. FCS institutions, on their own and in 
response to our efforts, continue to improve their risk management 
systems.
    FCA uses the Financial Institution Rating System (FIRS) to assess 
the safety and soundness threats to each System institution. Similar to 
the systems used by other Federal financial regulators, the FIRS is a 
CAMELS-based system, with component ratings for capital, assets, 
management, earnings, liquidity, and sensitivity, all factoring into an 
overall composite rating. System institutions are assigned component 
and composite ratings based on FCA's evaluation of quantitative and 
qualitative factors. FIRS ratings range from 1 for a sound institution 
to 5 for an institution that is likely to fail.
    Although the System's financial condition remains sound, a small 
number of individual institutions display some weaknesses. These 
weaknesses stem from several factors that have adversely affected some 
System borrowers.
    As the System's regulator, we have increased supervisory oversight 
and dedicated additional resources to institutions experiencing stress. 
As of December 31, 2014, four System institutions had a composite FIRS 
rating of 3 or higher. While these institutions represent less than one 
percent of System assets and do not meaningfully affect the System's 
consolidated performance, they require significantly more resources to 
oversee.
    The chart below includes the System banks and their affiliated 
associations. The figures in the bars reflect the number of 
institutions by FIRS rating.
Farm Credit System FIRS Composite Ratings

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Source: FCA's FIRS Ratings Database.
Regulatory Activities
    Congress has given the FCA Board statutory authority to establish 
policy, prescribe regulations, and issue other guidance to ensure that 
System institutions comply with the law and operate in a safe and sound 
manner. We are committed to developing balanced, flexible, and legally 
sound regulations.
    Over the past few years, we have revised our regulations to 
accomplish the following objectives:

   To require each System institution's business plan to 
        include strategies and actions to serve all creditworthy and 
        eligible persons in the institution's territory. In addition, 
        the regulation encourages institutions to serve nontraditional 
        customers, such as women and minorities, who often operate 
        within local food systems by producing organic or specialty 
        crops on small farms. The regulation also seeks to achieve 
        diversity and inclusion in the workforce of System 
        institutions.

   To ensure that System funding and liquidity requirements are 
        appropriate and to ensure that the discounts applied to 
        investments reflect their marketability.

   To ensure that prudent practices are in place for the safe 
        and sound management of System investment portfolios.

   To establish a regulatory framework for the reporting of 
        System accounts and exposures to FCA. The revisions reaffirm 
        our authority to collect data on System institution accounts 
        and exposures, including data on shared assets.

   To establish standards for Farmer Mac's capital planning 
        process. The revised process emphasizes the quality and level 
        of capital and annual stress testing.

   To increase the level and quality of assets held in Farmer 
        Mac's liquidity reserve.

   To implement the requirements of the Dodd-Frank Wall Street 
        Reform and Consumer Protection Act by imposing margin 
        requirements on non-cleared derivatives transactions and 
        removing references to credit ratings.

   To implement Title III of the Terrorism Risk Insurance 
        Program Reauthorization Act of 2015 that grants exceptions from 
        the margin requirements of the final rule for non-cleared 
        swaps.

   To implement the provisions of the Biggert-Waters Flood 
        Insurance Reform Act of 2012, as well as the additional 
        provisions of the Homeowner Flood Insurance Affordability Act 
        of 2014.

   To revise regulatory requirements for mergers or 
        consolidations of banks and associations.

   To seek public input on FCA regulations that may duplicate 
        other requirements, are not effective in achieving the stated 
        objectives, are not based on law, or impose burdens that are 
        greater than the benefits received.

    Currently, we are working on regulatory projects to accomplish 
these additional objectives:

   To enhance our risk-based capital adequacy framework to more 
        closely align it with that of other Federal banking agencies 
        and the Basel Accord. We published a notice of proposed 
        rulemaking to solicit comments on amending our regulations to 
        replace the current core and total surplus capital standards 
        with a Tier 1/Tier 2 capital framework.

   To clarify and strengthen the standards-of-conduct 
        requirements for System directors, employees, and agents.

   To strengthen the safety and soundness of the investment 
        activities of System banks by more accurately reflecting the 
        risk in particular investments, and to comply with a provision 
        of the Dodd-Frank Act by replacing credit rating requirements 
        with other standards of creditworthiness.

   To clarify or change the loan amortization limits for 
        agricultural credit associations and production credit 
        associations.

   To amend FCA regulations applicable to System lending to 
        conform with the private flood insurance provisions of the 
        Biggert-Waters Flood Insurance Reform Act of 2012.

   To ensure appropriate and effective risk governance and 
        board oversight at Farmer Mac, and to clarify standards-of-
        conduct and conflict-of-interest requirements.

   To remove reliance on credit ratings from investment 
        eligibility regulations pertaining to Farmer Mac and to 
        maintain the quality and availability of Farmer Mac's liquid 
        investments.
Corporate Activities
    The number of FCS institutions has declined over the years as a 
result of bank and association mergers. Generally, System institution 
mergers result in larger, more cost-efficient and better-capitalized 
institutions with broad, diversified asset bases, both by geography and 
commodity.
    However, these mergers also increase the complexity of the 
continuing institutions. The increased complexity places greater 
demands on both FCA staff resources, as well as the level of expertise 
required of staff, particularly in areas of regulation, policy, 
examination, and legal interpretation. As of November 1, 2015, the 
System consisted of the following:

   Seventy-five direct-lender associations.

   Three Farm Credit Banks and one Agricultural Credit Bank.

   Five service corporations that provide support, technology, 
        leasing, human capital, and other services.

   A funding entity that markets the securities--chiefly bonds 
        and discount notes--that the banks sell in the capital markets 
        to raise loan funds.

   A GSE with the mission of providing a secondary market for 
        agricultural real estate and rural housing mortgage loans.
Federal Agricultural Mortgage Corporation
    Congress established Farmer Mac in 1988 to provide a secondary 
market for agricultural mortgage and rural home loans to improve the 
availability of cost-effective long-term credit and liquidity to 
America's farmers, ranchers, and rural communities. Farmer Mac creates 
and guarantees securities and other secondary market products that are 
backed by mortgages on farms and rural homes, including certain USDA 
guaranteed loans. Loan originators that participate in Farmer Mac's 
secondary market programs include community banks, Farm Credit System 
institutions, mortgage companies, commercial banks, insurance 
companies, and credit unions. The 2008 Farm Bill expanded Farmer Mac's 
program authorities by allowing it to purchase and guarantee securities 
backed by eligible rural utility loans made by cooperative lenders.
    Through a separate office required by statute (the Office of 
Secondary Market Oversight), FCA examines, regulates, and oversees 
Farmer Mac's operations and its safety and soundness. As the secondary 
market GSE devoted to agriculture and rural America, Farmer Mac has the 
statutory authority to, in extraordinary circumstances, issue 
obligations to the U.S. Treasury Department, not to exceed $1.5 
billion, to fulfill the guarantee obligations of its guaranteed 
securities. The Insurance Fund does not back Farmer Mac's securities, 
and the System is not liable for any Farmer Mac obligations.
    Farmer Mac continues to grow its business through an increasing 
network of rural lenders and to strengthen operations to advance its 
statutory mission. Farmer Mac's outstanding business volume reached 
$15.6 billion as of September 30, 2015, on a compound annual growth 
rate of 12 percent from 1999 to 2014. The number of institutions 
participating in Farmer Mac programs grew 47 percent, from 367 to 542, 
over the past 4 years. Farmer Mac recently reported that small farm 
loans contributed 38 percent of the loans related to its Farm & Ranch 
program. Despite the decreasing number of small farms, Farmer Mac has 
seen an overall increase in the dollar volume and number of small farm 
loans in its programs.
    Over the past several quarters, Farmer Mac has improved the quality 
of its capital base and risk-bearing capacity through healthy core 
earnings and capital restructuring. As of September 30, 2015, Farmer 
Mac's core capital totaled $558.2 million, $115.4 million above the 
minimum capital level required by Farmer Mac's statutory charter. As of 
September Farmer Mac's core capital level was $766.3 million, which was 
$345.0 million above the minimum requirement. The decrease in capital 
in excess of the statutory minimum capital level was due primarily to 
the redemption of $250.0 million of Farmer Mac II LLC preferred stock 
on March 30, 2015. Farmer Mac also issued an aggregate of $150.0 
million of non-cumulative preferred stock during the first half of 
2014.
    Lower-quality capital was replaced with higher-quality capital as 
part of Farmer Mac's capital restructuring initiative and new 
regulatory requirements. In accordance with FCA's capital planning 
rule, Farmer Mac has adopted a policy for maintaining a sufficient 
level of Tier 1 capital (consisting of retained earnings, paid--in 
capital, common stock, qualifying preferred stock and accumulated other 
comprehensive income allocated to investments not included in its four 
business lines). The preferred stock issued in 2014 qualifies as Tier 1 
capital whereas the Farmer Mac II LLC preferred stock that was redeemed 
did not qualify as Tier 1 capital. At September 30, 2015, Farmer Mac 
reported a Tier 1 capital ratio of 11.5 percent. Farmer Mac is also 
required to conduct stress tests to evaluate its ability to maintain 
sufficient capital under adverse economic conditions and develop 
possible strategies to address potential risks to capital in accordance 
with FCA regulations.
    Farmer Mac's credit quality metrics remain favorable. As of 
September 30, 2015, Farmer Mac's 90 day delinquencies increased over 
the 12 month period but remained low at $36.7 million, or 0.67 percent 
of Farm & Ranch volume, compared with $24.7 million, or 0.46 percent, 
as of September 30, 2014. The increase in delinquencies was related to 
an idiosyncratic borrower situation rather than an increasing trend 
related to a specific commodity or geographic region. Real estate owned 
as of September 30, 2015, was $1.4 million, up from $1.2 million a year 
earlier. Farmer Mac reported no delinquencies in its pools of rural 
utility cooperative loans. On September 30, 2015, Farmer Mac's 
allowance for losses totaled $10.3 million, compared with $10.6 million 
on September 30, 2014.
    Farmer Mac continues to enjoy reliable access to the debt capital 
markets to support its mission of providing financing and liquidity to 
agriculture and rural markets. To improve its financial flexibility in 
the event of a financial or market disruption, Farmer Mac has taken 
significant measures to increase the quality of its $2.0 billion 
liquidity investment portfolio.
Serving Young, Beginning, and Small Farmers and Ranchers
    As part of their mission to serve all eligible, creditworthy 
borrowers, System institutions are required to develop programs and 
make special efforts to serve young, beginning, and small (YBS) farmers 
and ranchers. In 2014, the System continued to show gains in loan 
dollars outstanding and loan numbers outstanding to YBS producers. From 
2013 to 2014, the number of new loans made to young and beginning 
farmers increased approximately two percent. However, the number of new 
loans made to small farmers declined 1.4 percent.
    For this past year, the total outstanding YBS loans by both number 
and dollar volume increased as a percentage of the System's total farm 
loans. These results are encouraging given the high costs of starting a 
farm, the declining number of people entering agriculture, and the 
rising average age of farmers.
    FCA issued a bookletter in August 2007 to encourage institutions to 
seek ways to better serve YBS borrowers. The bookletter provides 
institutions with more flexibility to lend to YBS borrowers and 
encourages them to use credit enhancements to allow more YBS borrowers 
to qualify for credit. Credit enhancements for YBS borrowers may 
include

   lower rates or fees for YBS borrowers,

   differential underwriting standards, and

   USDA loan guarantees.

    In response to this guidance, a higher percentage of institutions 
are committing capital to assist in their YBS lending and are using 
advisory committees to update YBS policies and procedures. In addition, 
many institutions have stepped up their YBS outreach efforts and their 
coordination with outside parties or organizations to serve YBS 
producers.
    In addition to providing credit to YBS borrowers, FCS institutions 
offer other financial services to YBS borrowers, and many institutions 
provide special training and educational programs for them.
    Our efforts to encourage System institutions to emphasize diversity 
and inclusion and to serve producers of local and regional foods also 
benefit YBS producers. In 2012, to ensure the System fulfills its 
Congressional mission to serve all eligible, creditworthy borrowers, we 
issued a regulation requiring institutions to develop human capital and 
marketing plans that promote diversity and inclusion. Because many 
small and beginning farmers belong to underrepresented groups, this 
regulation helps strengthen service to YBS borrowers. Likewise, a 
bookletter we issued in 2012 to provide guidance regarding service to 
local and regional foods producers also benefits YBS borrowers because 
many of these producers would be classified as young, beginning, or 
small.
Working with Financially Stressed Borrowers
    Risk is an inherent part of agriculture, and the causes of risk are 
many:

   Adverse weather.

   Changes in government programs.

   International trade issues.

   Fluctuations in commodity prices.

   Crop and livestock diseases.

   General increase in interest rate environment.

    These risks can sometimes make it difficult for borrowers to repay 
loans. The Farm Credit Act provides System borrowers certain rights 
when they apply for loans and when they have trouble repaying loans. 
For example, the act requires FCS institutions to notify borrowers of 
the right to seek restructuring of loans before the institutions begin 
foreclosure. It also provides borrowers an opportunity to seek review 
of certain credit and restructuring decisions. When a System 
institution acquires agricultural property through liquidation, the 
Farm Credit Act also provides borrowers the opportunity to buy or lease 
back their former properties.
    FCA enforces the borrower rights provisions of the Farm Credit Act 
and examines institutions to make sure they are complying with these 
provisions. We also receive and review complaints from borrowers who 
believe their rights have been denied. Through these efforts, we ensure 
compliance with the law and help FCS institutions continue to provide 
sound and constructive credit and related services to eligible farmers 
and ranchers.
Conclusion
    We at FCA remain vigilant in our efforts to ensure that the Farm 
Credit System and Farmer Mac remain financially sound and focused on 
serving agriculture and rural America. While we are proud of our record 
and accomplishments, we remain committed to excellence, effectiveness, 
and cost efficiency, and we will remain focused on our mission of 
ensuring a safe, sound, and dependable source of credit for agriculture 
and rural America. This concludes my statement. On behalf of my 
colleagues on the FCA Board and at the agency, I thank you for the 
opportunity to share this information.

    The Chairman. The chair will remind Members that they will 
be recognized for questioning in order of seniority for the 
Members who were here at the start of the hearing. After that, 
Members will be recognized in the order of arrival. I 
appreciate Members' understanding.
    And I recognize myself for 5 minutes. Again, Mr. Spearman, 
thank you for coming this morning. Can you look into your 
crystal ball and talk to us about next year and the year after 
that? I am concerned, given the stresses on the agriculture 
economy and the new regulations that are coming on the 
commercial banking side as well as across the System--will 
farmers next year be able to have access to the credit they 
need, given the hard results they are going to get this year? 
Will they have the access to that credit that they are going to 
need to get next year's crop in? What is your view on that?
    Mr. Spearman. Thank you, Mr. Chairman. That is a very good 
question. And with the looming cloud over agriculture as 
predicted by the USDA estimate of a 36 percent decline in farm 
income in the subsequent year, the System is fundamentally 
sound, well-positioned to be able to provide credit for 
America's farmers and ranchers and aquatic producers.
    The System is, again, in my opinion, only one part of being 
able to provide credit to the market. It needs to work with the 
other organizations that provide credit, such as the community 
bankers, other lenders, in order to be able to provide that 
credit. The good thing about the System is that it is a GSE, 
and it has a mission component that the System has to be there 
in bad times. And we, as the regulator, need to make sure that 
the System remains safe and sound so that it can be there.
    The Chairman. We have a lot of friends in the room. There 
are bankers in the room and Farm Credit Service folks in the 
room. Most of us on this panel have friends on both sides of 
every issue. And most of us try to stick with our friends. But 
your agency has the mission to make sure that the System stays 
within its lanes of authority. Can you talk to us a little bit 
about the similar-entity lending authority that has been used 
in some of the higher profile loans of late and how that 
mechanically works? And you may need to refer to one of the 
other witnesses to flesh that out. But if you could walk us 
through that.
    Mr. Spearman. Well, I will start and then I will turn it 
over to our General Counsel, who will be able to kind of 
explain some of the specifications of the Act and how they 
relate to similar entities. Similar entities were started as a 
risk-mitigation tool, if you will. Because the System is a 
monoline lender, their market is fairly limited. This risk-
diversification tool is necessary to be able to help them get 
involved with entities that they may not necessarily have been 
able to do without this particular rule. One of the key factors 
of that rule, and I am sure our General Counsel will get into 
that, is that these loans cannot normally be eligible loans 
that they can participate in. So I will turn it over to Charlie 
and let him get into some of the specifics of the similar-
entity rule.
    Mr. Rawls. Okay. Thank you, Mr. Chairman.
    And Chairman Spearman covered a lot of the most important 
points about the similar-entity authority. It did come into the 
Act first in 1992 as a risk-diversification tool. It is not a 
direct lending authority of System institutions. So it is a 
participation authority, which means that someone else, usually 
a commercial bank, would lead a transaction. It would typically 
be a multilender transaction. Some of these transactions are 
quite large. And System institutions have authority then to, in 
plain English, buy part of that credit, to participate in that 
credit, but only up to 50 percent of the credit. So there is 
that limitation.
    There are other portfolio limitations. For example, Farm 
Credit System institutions can only hold up to 15 percent of 
their portfolio in these types of credits. They are nowhere 
near that. I think the last time we looked at the numbers, they 
might be about six or seven percent System-wide. But that is 
one of the other limitations. So some of this, as we say, is 
not intuitive except from the very basic standpoint that this 
is a risk-diversification tool. This is not a mission-directed 
type of authority. There is no particular rural requirement on 
it or that kind of thing.
    The first requirement, as we say, of similar-entity lending 
is that it is a credit that is not eligible under the Farm 
Credit Act. And the second basic requirement is that it has to 
be an entity that is functionally similar to someone that is 
eligible. And so looking at that functional similarity is where 
our examiners and the legal staff would get involved in looking 
at these credits after they are made. We don't have any prior 
approval authority. I think that is the basics and I would be 
happy to follow up with questions.
    The Chairman. Well, other Members will maybe ask some 
follow-ups. My time has expired.
    I will turn to the Ranking Member for 5 minutes.
    Mr. Peterson. Thank you, Mr. Chairman. And I wanted to also 
focus in a little bit on the mission, Mr. Chairman, as we 
discussed. One of the main things that you are there to 
accomplish is to make sure that the System is safe and sound, 
and there is oversight over the System.
    But as the Chairman said, we keep getting complaints from 
constituents. For example, the Minnesota bankers sent me a 
letter last year that said that, ``the FCS engages in various 
activities that are well beyond the scope of its lending 
mission.'' And so there is a lot of confusion about what the 
mission is. So if you could just respond to that question or 
statement, and also talk about how you make sure that the 
System is staying within the parameters of its mission.
    Mr. Spearman. Thank you, Ranking Member Peterson, for that 
question. I am aware that there are issues about what we are 
about and how we relate to the Farm Credit System. I want to 
assure you that we are the regulator of the System. Our task is 
to make sure that the System remains safe and sound, is there 
in good times and bad times. There are issues that may come up 
within the Act, such as the similar-entity, which Charlie has 
kind of gone over, that may be somewhat controversial. We, as 
an agency, our folks do a great job of trying to read the 
mission and understand that the Farm Credit System is a GSE and 
that it has that mission component; that it must be there in 
good times and bad. I don't want to get into any specific 
areas. What I want to do is kind of turn it over to our chief 
examiner. And he can give you an idea of how an examiner pretty 
much goes in the field and makes that determination if 
something controversial comes up and how we handle that as an 
agency.
    Mr. Coleman. Thank you, Chairman Spearman. Our examination 
program looks at each institution to the safety and soundness 
and if they are operating within the parameters of the statute 
and the regulations. We look primarily to the risk-control 
systems of the institution. We come up with a financial 
institution rating system, 1 through 5, for each institution. 
That also includes looking at their asset portfolio as well as 
looking at if those loans are within the statutory and 
regulatory requirements in regards to mission and scope of 
financing, et cetera. The Farm Credit System also has some 
limited investment authority. So there are certain investments 
that Farm Credit System institutions work with USDA and other 
commercial banks in regards to certain aspects and local 
communities in that area. But the primary mission, as Chairman 
Spearman discussed, is providing credit to creditworthy 
borrowers, farmers and ranchers and rural residents within 
specific authorities.
    Mr. Peterson. Thank you. One of the other missions that you 
are charged with under the statute is young, beginning, and 
small farmers. And could you talk about what you are doing to 
promote and comply with that mission.
    Mr. Spearman. Thank you, Congressman.
    Yes. The YBS or the young, beginning, and small farmer 
facet of the Act has to do with mission component, if you will. 
American agriculture, all its statistics is showing that 
American farmers today are advancing in age. And the YBS 
Program, my understanding, was begun to help fill that pipeline 
of young farmers to come in and to be able to have a capital 
structure to become full-fledged farmers. As an agency, since 
it is a requirement that the System deal with the YBS program, 
our agency collects statistics. We require that certain things 
be done to make sure there is a strategic program.
    What I am going to do at this point is refer to Robert 
again there because he can kind of explain to you somewhat what 
our examiners do in the field.
    The Chairman. In order to give every Member a chance to ask 
a question, we are going to follow the 5 minute clock. So we 
will take that question for the record, or your answer for the 
record, or we will come around a second time.
    Mr. Lucas, for 5 minutes.
    Mr. Lucas. Thank you, Mr. Chairman.
    And coming from, being a good farmer from an old farm 
family, a multi-generation of debtors, we are always interested 
in our credit providers from every source. So I would like to 
continue down the vein of the discussion just a moment ago. I 
sit on Financial Services, as well as Agriculture, of course. 
And under Dodd-Frank, that amazing piece of legislation that 
affects the rest of the banking industry, banks are required to 
do stress testing. Can you explain, as we continue down this 
line of focus on the examinations, can you explain how the Farm 
Credit Administration does stress testing of the Farm Credit 
System? Because that is more than just, are you loaning it to 
eligible participants; you are staying within the guidelines of 
how those loans are structured. Stress gets down to the 
viability of the loans themselves.
    Mr. Chairman?
    Mr. Spearman. Thank you, Congressman Lucas.
    Yes, stress testing is a risk-mitigation tool that the 
System utilizes to put certain pressures on an operation to try 
and determine if A happens, what happens with B. The agency 
requires that the System do stress testing. And we did that in 
the form of an Information Memorandum. We require every year 
that they, at a minimum, that they put certain stresses on 
their operations.
    Mr. Lucas. So an annual basis. And could you explain, or 
one of your folks there, explain how the stress test that you 
apply or your agency applies compares with what, say, the 
commercial bankers are going through?
    Mr. Spearman. I am going to defer to Robert----
    Mr. Lucas. Please.
    Mr. Spearman.--on the stress testing.
    Mr. Coleman. In 2010, we put out, as Chairman Spearman 
mentioned, an Informational Memorandum that laid out our 
expectations for each and every Farm Credit System institution. 
And what we expect on an annual basis is the Farm Credit System 
institutions to stress test every significant portion of their 
balance sheet. With Farm Credit System institutions, obviously, 
the huge majority of that component is around loan assets. So 
what we ask institutions to do, we give lots of different 
parameters, but the institutions have some flexibility in 
looking at what they want to do.
    Over the last several years, obviously, there has been a 
lot of focus on land values, real estate values, and stress 
testing around significant drops if they were to occur in real 
estate values, most especially in the Midwest. We also look at 
other components around interest rates, around softening of 
commodity prices, et cetera. But those expectations were laid 
out. And we require the institutions to do that annually.
    Mr. Lucas. Mr. Coleman, if I could ask, in your last round 
of stress tests, did you have any surprises or any regions or 
particular commodity groups, any areas where the red flags went 
up?
    Mr. Coleman. I wouldn't say red flags, but areas of caution 
or concern, most especially in the Midwest, as recognized by 
other bankers and academics, starting to see flattening or 
softening of real estate in the Midwest, certainly with USDA 
projections for a 36 percent decline in net farm income. A lot 
of that is impacted in regards to grains. The Farm Credit 
System has about 18 percent of the total portfolio concentrated 
in grains. So those institutions in the Midwest are heavily 
concentrated in corn, soybeans, and wheat. We certainly have 
paid more attention to what they are doing and how, as Chairman 
Spearman mentioned, they have well positioned themselves over 
the last several years to deal with the borrowers and deal with 
the stress anticipated.
    Mr. Lucas. Chairman Spearman, one last question. In 
Oklahoma, we have a law that says that banks cannot hold real 
estate for more than 5 years. The logic is that banks should be 
collectors of capital, arbitrages of capital, make loans, they 
should not be in the long-term asset-holding business. But my 
understanding is that some of the Farm Credit institutions have 
some rather substantial mineral holdings around the country 
perhaps that generate substantial revenue. From an Oklahoma 
perspective, that would seem to me to be contrary at least to 
the spirit of the way we have always done things in our state. 
Is this correct? And if that is the case, do you know how long 
these assets have been on the books, mineral rights?
    Mr. Spearman. Yes, Congressman. Mineral rights are being 
held by some institutions in the System. Primarily, I believe, 
it is AgriBank that holds most of them. But this happened years 
ago. And, currently, System entities are no longer eligible to 
acquire mineral rights.
    Mr. Lucas. But we have not dispersed those old assets yet?
    Mr. Spearman. No. We have not.
    Mr. Lucas. Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    Mr. Scott, for 5 minutes.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    Welcome, Chairman Spearman. First of all, let me say that 
what an outstanding job you are doing, Mr. Chairman. You are 
doing a great job. And I wanted to call attention to you and 
the Farm Credit System under your leadership. First of all, 
what I would like to do, Mr. Chairman, I would like to submit 
this letter for the record. It is an important letter. It is 
from Fort Valley State University. As you know, Mr. Chairman, 
you and I have worked hard to address the issue of the 1890s, 
which are your African American colleges and universities. We 
had an outstanding hearing. It was remarkable. Farm Credit 
played an exciting role in that.
    But, Mr. Chairman, I would like to submit this letter for 
the record. Let me just state one little sentence out of here 
where it says: ``Over the past years, Farm Credit has not only 
provided financial support through internships and scholarships 
for FVSU students, but has also been actively involved in 
providing educational programs such as the AgAware program to 
our farmers in order to successfully prepare them for future 
endeavors.''
    The Chairman. Without objection.
    [The document referred to is located on p. 49.]
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    For beginning farmers and addressing this issue is 
paramount to us, and particularly with the age of our farmers 
now averaging about 60 years of age. Many of us realize it is 
not only an agriculture issue; it is a national security issue 
because we need to make sure we protect our food supply in our 
own hands. So our efforts on that are very, very important. And 
your support of the 1890s, our African American students, to 
get more African Americans into farming and into agriculture is 
very critical.
    Now, I want to go to one question, let me follow up here 
for a moment. I want to ask, Chairman Lucas, former Chairman 
Lucas brought up the stress testing. Let me just follow up with 
that for a moment. How would you compare your stress testing 
with commercial banks? Is it on an equal footing?
    Mr. Spearman. Again, stress testing, Congressman, is a 
risk-mitigation tool that is utilized. We have asked--I don't 
want to say ask. We expect, through this memorandum, for the 
System to perform certain stress testing on their institution 
financials at a minimum of once a year.
    I am not aware of any comparison that is done with 
commercial bankers. We are, our folks are aware of what areas 
that are more vulnerable than not. And the stress testing that 
is done on those areas, as Robert mentioned, such as interest 
rates----
    Mr. David Scott of Georgia. All right.
    Mr. Spearman.--they try to ensure that that stress testing 
is performed on those areas.
    Mr. David Scott of Georgia. Okay, Mr. Chairman. Let me ask 
you this question: The FCA has responsibility for ensuring the 
safety and soundness of the Farm Credit System institutions. 
Tell me, how many examiners do you currently employ to get this 
job done, and how frequently are FCA employees in the System 
institutions reviewing what they are doing?
    Mr. Spearman. Congressman, we currently employ roughly 300 
individuals. Since we are primarily a regulator, more than \1/
2\ of those folks are examiners.
    Mr. David Scott of Georgia. Yes.
    Mr. Spearman. And according to the Act, each institution 
must be examined at least once every 18 months.
    Mr. David Scott of Georgia. Yes.
    Mr. Spearman. We have one institution that, by our choice, 
we examine once a year.
    Mr. David Scott of Georgia. All right. Now, finally, Mr. 
Chairman, the Chairman opened up and he made a very profound 
statement that we have friends in the banking community and the 
Farm Credit community, and we love our friends. So I wanted to 
ask just briefly, because 42 percent of this market is handled 
by Farm Credit and 42 percent of this is handled by the banks. 
So it is important for us to communicate and harmonize here. 
So, finally, Mr. Chairman, can you give us an example of 
opportunities where both Farm Credit and the banks work 
together and harmonize?
    Mr. Spearman. One example I can think of off the top of my 
head that was brought up by our General Counsel here, the Farm 
Credit System does participate in investments in rural 
communities. I had an opportunity to go out and visit one 
project where there was a joint working between community 
bankers and the Farm Credit System. It was a hospital in 
Minnesota. And those folks were just thrilled to be able to 
have the capacity with this joint venture to be able to have 
that facility.
    Mr. David Scott of Georgia. Thank you, Mr. Chairman.
    The Chairman. Mr. King, 5 minutes.
    Mr. King. Thank you, Mr. Chairman. And especially I want to 
thank you for holding this hearing here today and giving us an 
opportunity to have this discussion and take a look at Farm 
Credit. I think if we don't have this hearing publicly and do 
so annually, we will just simply not do the examination that is 
necessary, the oversight that we have. So I appreciate having 
it today.
    And, Mr. Chairman, I appreciate your visit and the 
opportunity to hear your testimony here. I just looked back on 
the past hearing, and it is not clear to me the exact mission 
statement, that, to me, there are a number of different pieces 
along on this. But is there a compact, printed, published 
mission statement that we can look at that anchors us to the 
mission of Farm Credit? And could you deliver that to me 
please?
    Mr. Spearman. Our annual report, of course, annually 
publishes the mission of the Farm Credit Administration. And 
the Farm Credit System publishes a mission statement also in 
their annual report. And the mission statement primarily states 
that the Farm Credit System is to provide sound and dependable 
credit to America's farmers and ranchers, producers, and 
harvesters of aquatic products, their cooperatives, and limited 
types of farm-related businesses.
    Mr. King. Okay. Thank you. That actually is the one I am 
working with. I wanted to make sure we read the mission 
statement into the record. And then I wanted to expand a little 
further on some of the inquiry we have heard from the other 
Members with regard to is it your belief that Farm Credit has 
gone outside the boundaries of that mission statement you have 
just read?
    Mr. Spearman. No. It is not. My General Counsel says I 
shouldn't start out with a negative like that. But as a 
regulator, our primary function is to look at areas that have 
possibly gone outside of the mission.
    Mr. King. Thank you. And I did hear that answer earlier in 
one of your responses. And so I would ask you then, who is 
responsible for staying within the, let's say, the fences of 
the mission statement? Who is responsible to ensure that Farm 
Credit lenders stay within the boundaries of the mission 
statement?
    Mr. Spearman. The Farm Credit Administration.
    Mr. King. The Administration--that would be Article II, the 
Obama Administration?
    Mr. Spearman. The Farm Credit Administration, FCA.
    Mr. King. Okay. The Farm Credit Administration then does 
have the responsibility. And Congress has the responsibility of 
oversight.
    Mr. Spearman. That is correct.
    Mr. King. Could we imagine, if we backed up, say, 20 years 
and let's go back to the 1980s when we really did have a farm 
crisis, and could we imagine then that we would be having this 
conversation now about Verizon and other telecommunications 
companies and hundreds of millions of dollars that have gone 
into those particular endeavors? Let's just say if some Members 
of this Committee have a sense of mission creep, is that 
totally explainable? And I want to understand this. Is there a 
limit within the Administration, the Farm Credit 
Administration, that would say we are going outside our 
boundaries, and is that boundary in the definition of the 
mission, or is it in the concern that Congress will look in and 
look at that definition of the mission?
    Mr. Spearman. Well, we have the mission, Congressman, and 
we also have the Act that we have to follow. So we have legal 
guidance whenever we look at any product that the System kind 
of brings before us. And what we do is we follow the guidance 
of what we believe that the----
    Mr. King. But we agree that we would not have imagined this 
mission statement to encompass, say, back during the farm 
crisis years, we would never imagine this mission statement to 
encompass some of the lending that has taken place, especially 
with regard to telecommunications. And I would add to that 
acquiring private-sector businesses, such as crop insurance 
companies that look like they are being used as leaders, that 
opens up the doors to direct that into Farm Credit. And I 
brought this up the last hearing we had--I bring it up at this 
hearing too--is that the language in the mission statement 
seems to me to confine Farm Credit to a narrower set of 
boundaries than those that you have adhered to. And I like what 
Farm Credit has done. I look around my neighborhood, and I have 
neighbors I wouldn't have if it weren't for Farm Credit. But it 
behooves us all to stay within those boundaries. I think the 
mission statement is fine. But you have overstretched it. So I 
appreciate your testimony and the hearing.
    And I yield back the balance of my time.
    The Chairman. The gentleman yields back.
    Mr. Walz, 5 minutes.
    Mr. Walz. Thank you, Mr. Chairman.
    And thank you, Chairman Spearman, for being here.
    As you are constantly looking at risk in lending to farmers 
and ranchers, this might be more for our colleagues who aren't 
here, could you explain to me how important crop insurance is 
to lenders as they make decisions?
    Mr. Spearman. Thank you, Congressman, for that question. 
Crop insurance, again, is a risk-mitigator. There are two 
issues that come to mind about the availability of crop 
insurance. One would be that, without crop insurance, would a 
potential borrower be able to get a loan? And the other issue 
would be, would they be able to repay the loan? So crop 
insurance is very important.
    Mr. Walz. Well, I ask this question. I think it is 
important. I would like to thank Chairman Conaway, Ranking 
Member Peterson, and all the Members of this Committee, along 
with Speaker Ryan, have ensured crop insurance will remain 
strong. The promise that we made will be kept. And hopefully 
that makes our lending work for people.
    One more question from me. In speaking of this mission, and 
you heard a concern that comes from a lot of our folks of 
trying to stay within that mission, my concern is, do you have 
the tools necessary--you heard a little bit from Mr. Scott 
dealing with this--but do you have all the tools necessary to 
make those loans to small, beginning farmers and ranchers? This 
is something that we have taken an interest in, we passed 
legislation in the last farm bill to do that. Do you have the 
tools to make that happen?
    Mr. Spearman. Congressman, yes, we believe that we have the 
tools to make that happen. Could they be better? Yes. And we 
are open to working with the staff of the Committee to help to 
improve some of those areas. But for me personally, the YBS 
program is an excellent program. And there are areas that we 
could improve upon.
    Mr. Walz. I think we will take you up on that because we 
all know that barriers to credit are what stops people from 
getting in this. It is not their desire. They have to be able 
to, as you heard the Ranking Member say, land prices continue 
to go up as crop prices go down. But we have people out there 
who want to take advantage of this. We want to get them 
educated. We want to make sure we are making good loans and 
they are well thought out and we have the tools necessary. So I 
appreciate that. And I thank you for your testimony.
    I yield back.
    The Chairman. The gentleman yields back.
    Mr. Gibbs, 5 minutes.
    Mr. Gibbs. Thank you for holding this hearing.
    And thank you for being here. As a previous borrower of 
Farm Credit--my first loan was in the 1970s--and also managing 
a local--on the board, working at a co-op bank, was a good 
experience, very supportive of the organization. I want to 
follow up a little bit more on the mission. And it is clear by 
my colleague from Iowa's questions. But here in the second 
quarter of 2015, we saw that Farm Credit Service increased 
their risk exposure level to $1.5 billion. That is double the 
limit it was 2 years ago. What precipitated that change? And 
how many farmers and ranchers need a $1.5 billion loan?
    Mr. Spearman. Thank you, Congressman, for that question. I 
am going to defer to Robert, who is our chief examiner, to be 
able to talk specifically about the particular size of loans.
    Mr. Coleman. Thank you, Congressman. The Farm Credit System 
has almost 17 percent capital today, significantly larger than 
it was 20 or 30 years ago. And those increased limits are 
reflective of the risk-bearing capacity of the Farm Credit 
System and the institutions. Primarily those larger loans are 
going to be farmer co-ops, processing co-ops, and rural 
utilities, all authorized under different titles of the Farm 
Credit Act.
    Mr. Gibbs. In my past life borrowing experience, when I 
went in and talked about a loan, we kind of had to put out what 
the line of credit, kind of what the purpose was or if it was 
buying property or building a facility, it was pretty well 
spelled out. And one issue, first of all, I guess I have to ask 
the question: It has been reported to me that the Farm Credit 
System made a $700+ million loan to Verizon. Is that true?
    Mr. Coleman. Last year, that is correct.
    Mr. Gibbs. Okay. And it also has been brought to my 
attention that that was really to buy the final stake in a 
European cell phone company, Vodafone. Is that correct?
    Mr. Coleman. I am not aware of the details. I believe that 
is correct.
    Mr. Gibbs. So that is where we really get back to the 
mission. I am sure anybody would make the argument that we want 
to expand broadband and get fiber optic out there and those 
kinds of loans. But how could the regulators sign off on a deal 
like that that really has nothing to do with the mission? I am 
really struggling with that. And this is almost $\3/4\ billion. 
How does that help my farmers in Ohio?
    Mr. Coleman. If I may, our General Counsel mentioned 
earlier today, the similar-entity authority was provided for 
risk-mitigation. Since Farm Credit System institutions are 
limited to agriculture, there was a provision added in the Act 
about 20 years ago that allowed Farm Credit System institutions 
to participate in loans that were originated, led by others, 
commercial banks primarily, so they have to be invited in, and 
their participation in those loans is for risk mitigation. One 
of the first requirements in the Act for similar-entity 
participation is that it is an ineligible loan. We would all 
recognize, up front, that those are ineligible loans, but they 
are authorized in the Act by the similar lending authority.
    As our General Counsel mentioned earlier, two other 
requirements are that either the assets of the company or the 
income generated by the company have to be functionally similar 
to an entity that the Farm Credit System could make an eligible 
loan for.
    Mr. Gibbs. Okay. I will follow up a little bit more on the 
loans made to--just certain conditions to make loans to build 
houses in rural areas, 5 acres or whatever. Because I am 
running out of time here, I want to mention my concern to make 
sure that they keep in the light the mission. We have to be 
careful because they have access to money that the private-
sector doesn't have. And they have a competitive advantage. In 
the spirit of the mission, the regulators have to keep that in 
mind. And I kind of agree with the previous comments that the 
spirit of the mission and what is actually happening is a 
concern and the effect it has on the other part of the banking 
sector, especially my community banks, the competitive 
advantages or disadvantages. And that needs to be addressed.
    And I appreciate the Chairman for the oversight hearing. I 
think this is something we need to delve into to make sure that 
you, as the regulators, are making sure that the spirit of the 
mission is complied with and not kind of mission creep. And 
that is my concern.
    And I yield back.
    The Chairman. The gentleman yields back.
    Ms. Adams, 5 minutes.
    Ms. Adams. Thank you, Mr. Chairman.
    And thank you, Chairman Spearman, for being here. As a 
member of the Farm Credit System, Ag Credit North Carolina is 
using its corporate mission fund to provide grants to 
scholarships that support beginning farmers and connect local 
producers to food retailers, including in the 12th District 
that I represent. Ag Credit North Carolina is also providing 
scholarships to poor students from my alma mater, North 
Carolina A&T, which is also one of the schools that the Ranking 
Member spoke about. The services provided by the Farm Credit 
System are very important for residents to receive rural 
housing and farming loans. Some credit options, such as 
guaranteed loans, reduce lender risk and make lending possible 
to beginning farmers who might otherwise have difficulty 
accessing credit. When utilizing such a lending program for 
beginning farmers, what kind of education and support do you 
provide to beginning farmers that increases their chance of 
successful loan repayment?
    Mr. Spearman. Thank you, Congresswoman, for that question. 
As I mentioned previously, the YBS program is a special 
interest of mine because when I came to the FCA, I noted that 
there was a lack of information about what the Farm Credit 
System was all about. I was hearing things that we were part of 
USDA; we were the lenders of last resort in the USDA. A lot of 
my job, the way I see it, is to go out, when I do have an 
opportunity to give a speech, is to sort of educate people 
about what the Farm Credit System is about and how FCA relates 
to that System. We are the regulators of the System. There are, 
within the statute, rules that the System has to follow 
regarding YBS programs. They have to have a plan within their 
strategic operation on how they are going to implement the YBS 
program. And our examiners evaluate that plan. We do not set 
specific rules. It is up to the particular institutions to come 
up with what their marketing plan is going to be for their YBS 
program. We just evaluate it to make sure that they do have a 
plan and that plan is being executed.
    Ms. Adams. Thank you. In the 12th District, there is a 
significant level of interest in developing regional food 
systems to provide more fresh food options for constituents 
that live in food deserts. And you may know that in North 
Carolina, in my district, we are actually ranking very high as 
it relates to food insecurity. And so that is a concern. How is 
the Farm Credit Administration shaping its policies and 
regulations to encourage more lending to young farmers and 
small farmers that serve a regional food system?
    Mr. Spearman. Congresswoman, a big interest of mine since I 
came to the FCA is urban agriculture and being able to make 
sure that, as you mentioned, that food deserts don't exist. The 
System has capacity to be able to get involved with programs at 
the urban level. That is sort of a mission of mine to be able 
to come up with a plan, to see if we can, as an agency, help 
them to be able to help mitigate some of the deficiencies in 
under-served areas.
    Ms. Adams. Okay. Thank you, Chairman Spearman. And I would 
certainly like to have my staff follow up with you at some 
point in time to work on this very serious issue in North 
Carolina, particularly in the 12th District. So thank you very 
much for your testimony.
    I yield back, Mr. Chairman.
    The Chairman. The gentlelady yields back.
    Mr. Austin Scott, 5 minutes.
    Mr. Austin Scott of Georgia. Thank you, Mr. Chairman. And 
I, too, had questions about the young, beginning, and small 
farmers. They have been answered. And I also have a letter to 
submit on behalf of Fort Valley State as my colleague, 
Congressman Scott from Georgia.
    The Chairman. Without objection.
    [The document referred to is located on p. 49.]
    Mr. Austin Scott of Georgia. Gentlemen, Mr. Spearman 
especially, thank you for being here today.
    And virtually every Member of this Committee has mentioned 
the concerns about certain banks, I would suggest, in the 
System or a certain bank in the System getting outside of the 
scope of what Farm Credit is supposed to be about.
    And I would just read from your annual statement: ``The 
Farm Credit System is a network of borrower-owned, cooperative, 
financial institutions and service organizations servicing all 
50 states and the Commonwealth of Puerto Rico created by 
Congress in 1916 to provide American agriculture with a 
dependable source of credit. The FCS is the oldest government-
sponsored enterprise.''
    When you look through your annual report, cows, chickens, 
everything in your annual report is farm-oriented. There is not 
a picture of a Verizon shop in there. I want to be maybe a 
little more blunt than some of my other colleagues have. You 
are the regulator. I think the Farm Credit System is extremely 
important to the parts of the country that I represent. Certain 
people getting outside of the parameters of what the Farm 
Credit System was set up for, I believe, are putting the whole 
System at risk. As the regulator, I do think when you have an 
organization who is putting the System at risk, you do have the 
ability then to step in and stop that.
    And while what they are doing might be technically legal, 
it is certainly, in my opinion and apparently in the opinion of 
the majority of the Members of this Committee, who are your 
greatest advocates in Congress, that it is outside the scope 
and the intent of the Farm Credit System. I will just be honest 
with you. I don't think CoBank is going to stop until someone 
stops them. And I hope that you, as regulators, will work to 
get them back into what the scope of the Farm Credit System was 
set up for.
    Mr. Rawls, you have been with the Farm Credit System for a 
long time. Is that correct?
    Mr. Rawls. I have been with FCA a little over 12 years.
    Mr. Austin Scott of Georgia. And you are one of the ethics 
officers?
    Mr. Rawls. There is a Chief Ethics Official that is within 
my office. And I function as essentially an alternate or Deputy 
Ethics Official.
    Mr. Austin Scott of Georgia. Are you aware of one of your 
institutions accessing confidential and proprietary information 
from a password-protected extranet of its competitor?
    Mr. Rawls. I am aware a number of years ago of probably the 
incident that you are referring to, yes.
    Mr. Austin Scott of Georgia. If that happened to a private-
sector institution, what do you think the consequences for the 
executives of that institution would be?
    Mr. Rawls. I really couldn't say. It depends so much on the 
facts and circumstances of any particular incident like that.
    I would say the agency in this case did follow up with our 
supervisory activities that we found appropriate at that time.
    Mr. Austin Scott of Georgia. I think that bank would 
probably be shut down in the private-sector. What was the 
monetary payment for that conduct?
    Mr. Rawls. I would have to get the details on that and get 
back with you. I just don't recall.
    Mr. Austin Scott of Georgia. I would appreciate it very 
much if you could get back to me with the details of the whole 
event and whether or not the people, the individuals whose 
information was accessed, were notified properly that their 
information had effectively been taken without authorization.
    And, again, the Farm Credit System is extremely important. 
I think that, I hope that you guys, as regulators--and I mean 
this with all sincerity--can keep within the scope of the 
original intent of the Act that was written. If not, I worry 
that the System may not exist in the future. And it is 
important to me and my community that it does exist and that it 
function as it was originally intended to.
    With that, I yield the remainder of my time.
    The Chairman. The gentleman yields back.
    Mr. Costa, for 5 minutes.
    Mr. Costa. Thank you, Mr. Chairman.
    The credit lending and agriculture throughout the country 
has changed over the decades, as we all know, American 
agriculture has changed. The note that you made, Mr. Chairman, 
in your opening statement about President Roosevelt's Executive 
Order, there used to be more than a thousand, several thousand 
institutions around the country. And, today, there are around 
80 if my numbers are correct. A lot of that has resulted in the 
changing of the lending practices that have taken place over 
the decades for agriculture communities. But, also, 
consolidation has been a part of that effort.
    In California, we have perhaps one of the largest 
portfolios in terms of farm credit, with over $20 billion in 
lending activity that takes place. Consolidation, and mergers, 
as I have met and spoken with my local institutions, have been 
a part of that change. Do you foresee additional mergers taking 
place, Mr. Chairman? And do you think by and large the approval 
of those, as the Board looks at each one on an individual 
basis, is done in a way that protects the fiscal integrity of 
the institutions?
    Mr. Spearman. Thank you, Congressman, for that question. 
Mergers come up from the System. Our role primarily is to 
evaluate the merits of it. As you mentioned, there is the 
impact on safety and soundness of the System. There is, as an 
agency, we do what is called a preliminary review in our Office 
of Regulatory Policy. And our General Counsel office reviews 
each application as it comes in very thoroughly. We give what 
might be called provisional approval. Then it goes back to the 
banks. And the banks end up, the stockholders actually vote on 
whether the merger ought to take place or not.
    Mr. Costa. How long does that process, since you have been 
Chairman in 2009, typically take, the mergers that you have 
supervised?
    Mr. Spearman. My experience since I have been there has 
varied. It depends upon the complication. We had two banks that 
merged. It took a substantial amount of time.
    Mr. Costa. So it is not simply a process where a couple of 
institutions get together in an area or within two different 
states or whatever and say, ``we are going to do this,'' and 
then there is a thorough review that has to happen?
    Mr. Spearman. It is a very thorough review. And to your 
point, if the two institutions are not contiguous that is even 
a factor that is considered.
    Mr. Costa. Okay. I want to get some clarity because a 
number of the questions, of course, that many of us have 
thought about have already been raised. But I wanted to get 
some clarity.
    When you and I spoke, we talked about the issue of--this 
has been termed mission creep and the constraints upon the 
System on a 15 percent of nontraditional loans, as it is put. 
But now that 15 percent cap, as I understand it, is both per 
institution and System-wide. And now there is also a 
distinction between lending activity and participatory loans as 
well. And I want to be clear or let you clarify the 
distinctions within that constraint.
    Mr. Spearman. That is a statutory question, and I am going 
to refer to Charlie to be able to respond.
    Mr. Rawls. Thank you, Mr. Spearman. The 15 percent 
referenced is a portfolio limitation System-wide on the 
similar-entity participations that we talked about. And that is 
right from the statutory language.
    Mr. Costa. So that is participatory? It doesn't include 
lending activity?
    Mr. Rawls. As we have talked about this, that is not what 
we call a direct lending authority. Those are our 
participations, yes.
    Mr. Costa. And that is locally and System-wide?
    Mr. Rawls. The System-wide would be 15 percent on the 
participations through a similar-entity. To further confuse 
things, but the System engages in other participations that 
would be outside of that, much more cooperating with commercial 
banks and more traditional loan makings.
    Mr. Costa. So that would be outside of the 15 percent?
    Mr. Rawls. Yes, yes.
    Mr. Costa. So a local institution could have more than 15 
percent?
    Mr. Rawls. In participations, it could. I would have to ask 
Robert if he has any numbers. But it could, yes.
    Mr. Costa. All right.
    Mr. Chairman, I would like them to respond back to the 
Committee.
    The Chairman. And we will get a clarification of that. It 
is confusing. If the System went to 15, how would you then 
scale it back in any one individual entity? So I will ask you 
for a written response on that issue.
     Mr. Crawford.
    Mr. Costa. Thank you, Mr. Chairman.
    Mr. Crawford. Thank you, Mr. Chairman.
    I want to thank the gentlemen for appearing today.
    I really hate to beat a dead horse here, but I have to go 
down this road and take a little bit of a different turn here. 
We have addressed at some length in detail the issue with 
CoBank and the acquisition or the help in Verizon acquiring 
Vodafone. Two things here. Number one, I would like if you can 
identify any ancillary benefits to our rural communities here 
in the United States, I would love to give you the opportunity 
to do that right now and then let me follow up with another 
question that relates to that.
    Do you see any ancillary benefit to that, to our rural 
constituencies across the United States?
    Mr. Spearman. Congressman, are you referring to the 
similar-entity program, ancillary program?
    Mr. Crawford. I am referring to the CoBank participation in 
the Verizon-Vodafone activity.
    Mr. Spearman. I am going to refer to Robert on that.
    Mr. Coleman. Thank you, Mr. Spearman.
    As we had mentioned, there is a 15 percent limit on 
similar-entity lending. The System has about five or six 
percent of its total loan volume out. So the other 95 percent 
are either----
    Mr. Crawford. Okay. And let me stop you there because I 
know that was the answer basically that was given earlier. But 
you are threading a needle there.
    What I am trying to get to is: That is good for CoBank, but 
how is this good for rural constituencies? And this leads to my 
second question.
    And a quick background, I started my business literally 
under the roof of Farm Credit. I rented space from them. I have 
a longstanding relationship with the Farm Credit lenders in my 
district. These are not just my constituents; they are my 
friends. Also, the bankers are my friends because I borrowed 
money from them to start my business. So I have a pretty vested 
interest in both of those, in the soundness of those in ag 
lending. But what has happened here with CoBank, they have done 
considerable damage to the Farm Credit brand. And I am 
wondering what can be done, what you are doing actively to 
repair that damage because risk reputation is what has 
transpired as a result of that. And I am hearing this--the day 
after this became public, I went into my Farm Credit office in 
my hometown, and they stood there with their hands up, with no 
explanation. And the damage that that has done in my community 
to the Farm Credit brand is something that I don't see being 
resolved or addressed at this level.
    Can you comment on that?
    Mr. Coleman. Two points, if I may. How does it benefit?
    With a monoline lender, diversification of an income stream 
is important, just like when we were talking earlier about corn 
producers, if they also have other income, that other component 
of income is helpful in diversifying the risk-management 
component. I think that was the original intent. It continues 
to be the intent today in regards to similar-entity 
participation authority.
    In regard to the issue over how that transaction was dealt 
with, we had conversations with the institution that purchased 
a portion of that similar-entity loan, and that no longer 
exists in that institution today.
    There are three of the four other banks, as well as a 
handful of other Farm Credit System institutions, that do the 
majority of the similar-entity lending in the Farm Credit 
System. And we have looked at more closely over the last 
several years those types of transactions and actually worked 
with the System on guidance around some of the very issues that 
you are visiting with us today on. And we have found instances 
in the past where we have required Farm Credit System 
institutions to actually divest of some of those similar-entity 
participations where we thought that there was some 
reputational risk or other areas where they shouldn't be doing.
    Unfortunately, we just see the Verizon account a little bit 
differently in regards to compliance with the law.
    Mr. Crawford. Okay. Let me interject something right there. 
The optics of this, the fact that we are spending so much time 
on this and the amount of energy that is being devoted to 
defending it probably means that it is one of those kinds of 
things that has done some severe damage to the brand.
    Let me suggest this in the time that I have remaining, that 
if CoBank wants to help Farm Credit restore the damage that 
they did to the Farm Credit brand, they might want to be very 
forthright and proactive in helping to engage rural utilities 
to deliver rural broadband across this country. So we actually 
could see the tangible benefits accrue to rural constituents to 
the extent that they did help Verizon and Vodafone.
    Thank you. I yield back.
    The Chairman. The gentleman's time has expired.
    Mr. Aguilar, for 5 minutes.
    Mr. Aguilar. Thank you, Mr. Chairman.
    Mr. Spearman, thank you for being here today and for your 
update on Farm Credit Administration.
    CRS has forecasted that the agricultural industry net 
income would decline over 52 percent from 2013. You talked a 
little bit earlier from urban farming, and I represent an area 
that is more urban, and it has taken off as a grassroots 
movement, as you discussed.
    What is the Administration doing to kind of forecast or 
project urban farming demands? And where might you be able to 
offer help? Where do you envision this market in the next few 
years? And could this be an opportunity for growth within the 
Administration?
    Mr. Spearman. Thank you, Congressman, for that question.
    We just recently had a strategic planning session as an 
agency. And expanding the pie is one of the issues that we are 
discussing, during those sessions. Urban agriculture is a 
personal interest of mine, as I mentioned, because of the fact 
that this is one way to expand the pie.
    My staff and I, we had an opportunity to go and visit a 
small operation in Austin, Texas. This young fellow started his 
agricultural farm, in his backyard, on very small plot. And he 
took his crop and he sold it at a farmers' market. Today, as a 
result of YBS and the Farm Credit System, today he has over 200 
acres of agriculture that he is growing, and he has developed a 
CSA program.
    This is something that if I can do as Chairman of the Farm 
Credit Administration, I can go out and see these things and 
promote them and share that with other institutions, I see that 
as a growth area.
    Mr. Aguilar. What tools did that individual use? What areas 
in your discussions with them and when you and your staff 
visited, what areas did you walk away thinking this was working 
or this could be expanded? Could you expand on that a little 
bit more?
    Mr. Spearman. Well, one of the tools that this young fellow 
was using there was through a YBS program. And he worked with 
his institution because he didn't have--this was not a legacy 
farm. He was able to, through that program, get some mitigation 
of an underwriting standard to allow him to be able to get a 
loan that he normally would not have been able to get through 
some other area. So it was the change in the underwriting 
standard that helped him.
    Mr. Aguilar. What other programs do you think would help 
more urban borrowers?
    Mr. Spearman. Programs like the YBS program.
    Mr. Aguilar. Do you think that they are aware of the YBS 
program sufficiently? Or do you think that efforts can be 
expanded to raise that to their awareness?
    Mr. Spearman. I think both. I think raising it to their 
awareness and expanding the program would be great for the 
farming community.
    Mr. Aguilar. Thank you.
    I will yield back, Mr. Chairman.
    The Chairman. The gentleman yields back.
    Mr. DesJarlais, for 5 minutes.
    Mr. DesJarlais. Thank you, Mr. Chairman.
    Gentlemen, thank you so much for appearing before us today.
    I share with my colleagues, when they say that they are 
supportive of the work that the Farm Credit System does. 
Tennessee is very appreciative and benefits greatly from the 
services you provide. However, it is always concerning when you 
hear stories of a quasi-government entity potentially expanding 
beyond what appears to be its statutory authority.
    I had the privilege yesterday of sitting down with some of 
our Tennessee bankers, Mr. Tim Amos, the Executive Vice 
President of Tennessee Bankers Association, and also Mr. John 
Barker, a community banker from my district. And as important 
as you all are, our small town community banks are also very 
important.
    We have heard some examples of Verizon and Vodafone and you 
talked about the risk-mitigation clause, if you will.
    I was getting more and more concerned as we heard the 
questions and answers this morning about the expansion beyond 
your charter, if you will. They are going outside the fence. 
Because what they brought to me was a list of e-mails from all 
over the State of Tennessee from small town community banks. 
And I won't burden you with the 20 or so different examples I 
was given. But let me share a few: One was a loan for a car 
wash in a small town in Tennessee. Another was funding a 
vacation home on the Gulf Coast for a local farmer. There was 
funding to acquire a property for an exotic animal hobby farm. 
And there was even funding for a local restaurant chain. So I 
guess I would ask if you could elaborate on how these lending 
practices support farmers in their rural communities.
    Mr. Spearman. Thank you, Congressman, for that question.
    If you earn 100 percent of your income from farming, there 
are broad authorities under the Farm Credit Act. The car wash 
and the items that you have mentioned, I am not aware of any. I 
know that our examiners examine for loans when they are 
reviewing loan portfolios at the institutions. And if anything 
comes to our attention there, we immediately indicate that they 
need to divest of it. We do have those authorities and the 
powers to do that. And if you are aware of any specific ones, 
please let me know.
    Mr. DesJarlais. Yes, because I was going to say, there is 
probably no justification for those types of loans if they are 
at face value of what I shared today. You would be concerned 
about that and think that probably goes beyond your scope, 
assuming that what I am telling you is accurate, that these 
loans were made.
    Mr. Spearman. Assuming that is accurate and it is outside 
of the scope of lending.
    Mr. DesJarlais. Okay. And you agree that is probably not 
what Congress envisioned when it passed the Farm Credit Act?
    Mr. Spearman. Well, you are asking me to make a personal 
assumption here.
    Mr. DesJarlais. I get that. But what I would like to do is 
get some specifics to you. Again, a hearing is a tough place to 
give you specific examples. But if, indeed, what I read through 
is correct, it would be very concerning to you and certainly is 
not fair to the small community bankers.
    They are as willing to accept healthy competition as anyone 
else. But if the playing field is that unlevel, it threatens 
the small town community banks. And we want to see the Farm 
Credit System do what it is intended to do. But if it is 
hurting small community banks because of these types of loans, 
then that is certainly something that y'all would want to look 
into. Would you agree?
    Mr. Spearman. I would agree.
    Mr. DesJarlais. Okay. So let me do this, let me get some 
specific examples that are in writing and then we can 
correspond further.
    I yield back.
    Mr. Spearman. Great. Thank you.
    The Chairman. The gentleman yields back.
    Mr. Ashford, for 5 minutes.
    Mr. Ashford. Thank you.
    I think the issues involving mission and loans outside of 
the mission have been covered. I would second your answers to 
questions about the markets in urban areas. I think that is 
significant. It is very significant in Omaha, where I live. In 
some low-income areas, we are making significant progress and 
the Farm Credit is a partner in that.
    I just have a hypothetical, and it may be very simplistic. 
But in Nebraska, we are trying to develop our dairy industry. I 
mean, we are not in the top 20 or so in dairy. Just how would 
the Farm Credit approach that? I mean, we have producers who 
would like to expand their operations. We just don't have 
anybody to sell the milk to. And we are losing that capacity. 
Even what we did have, we have lost up in the northeast 
Nebraska area.
    Could you just generally answer that? What can we do in 
Nebraska? What can you do to help us expand already existing 
operations on the dairy side?
    Mr. Spearman.
    Mr. Spearman. Thank you for that question, Congressman.
    I spent some time in visiting Farm Credit Services of 
America there. They have a very dynamic institution.
    One suggestion I would have is that some of those folks 
probably need to be talked to about, they are going to be very 
knowledgeable about what System can lend to.
    I can't think off the top of my head of anything that I 
could suggest to you right at this point of what dairy farmers 
can do in Nebraska. I will turn to one of my colleagues to see 
if they have any comments.
    Mr. Ashford. Yes.
    Mr. Spearman. Robert?
    Mr. Coleman. Thank you, Chairman Spearman.
    As Mr. Spearman mentioned, FCS of America, which operates 
out of Omaha, a large institution, a lot of different 
borrowing. And I would agree with him in regards to looking for 
ideas there for additional programs or additional lending 
capacity that may help in that expansion either in dairy or in 
any other areas where it will help further diversification.
    In addition to that, USDA is obviously a contact point as 
well as others in regards to other Farm Credit System 
institutions. I know that in the upper tier in the United 
States, a couple Farm Credit System institutions up there that 
have been very active in the dairy industry and the expansion 
of dairy not only there but also down in California. So it is 
quite a bit of a knowledge base in several different Farm 
Credit System institutions that could be helpful.
    Mr. Ashford. Let me just ask one other follow-on.
    It would seem to me that in the area of expanding an 
existing product line--dairy, for example--in a state like 
Nebraska that has a rich agriculture tradition, that is an area 
where collaboration between the private-sector banks and the 
Farm Credit could make a significant difference. Would that be 
your thought as well?
    Mr. Coleman. I would absolutely agree, yes.
    Mr. Ashford. Good. That is all I have. I yield back.
    The Chairman. The gentleman yields back.
    Mr. Abraham, for 5 minutes.
    Mr. Abraham. Thank you, Mr. Chairman.
    And I thank the witness for being here.
    Everybody in this room wants the young and beginning 
business man or woman to succeed. So I guess my first question 
is, what percentage of those applications that fall on that YBS 
heading are actually approved? Do we have that number?
    Mr. Spearman. Congressman, I don't have that number in 
front of me here.
    Mr. Abraham. And if you could get it, I would be 
interested.
    So I will follow up with that. Of your total loan 
portfolio, what percentage falls under the YBS heading?
    Mr. Spearman. Robert, do you have that number?
    Mr. Coleman. Yes, sir. We require institutions to report to 
us in each category. In the young category, beginning, and 
small. And for the number of loans outstanding in the Farm 
Credit System, about one in six go to young farmers; about one 
in four go to beginning farmers; and almost \1/2\ are in the 
category of small farmers.
    Mr. Abraham. I am doing the math. So maybe under that whole 
heading, 28, 29 percent.
    Mr. Coleman. I apologize. I didn't hear you.
    Mr. Abraham. I said, under the whole YBS heading then, I am 
guessing 28 to 30 percent.
    Mr. Coleman. We don't add those numbers together. When we 
look at what we believe is best recorded in our annual report 
to Congress, we try to keep each one of those categories 
separate.
    Mr. Abraham. I will echo my colleagues' statements on the 
CoBank.
    I live in rural--my district is rural Louisiana. And I 
certainly have many areas where I can't get cell phone service, 
certainly not Internet. And we know that without these 
instruments today, you can't have a business. You literally 
cannot. And I appreciate the transparency of the Farm Credit 
System that allows us to talk about these issues, about the car 
wash and the condos and the CoBank. So to that aspect, kudos to 
you guys for having your system in place that allow those areas 
to come up for discussion and for us to talk.
    My final question. I read your testimony. And since 2010, 
your non-performing loans have been decreasing steadily. Now we 
are done to $1.7 billion in non-performance loans.
    Give me both the region and the sectors that are still your 
hot spots for those non-performing loans.
    Mr. Coleman. Mr. Spearman, if I may?
    Mr. Spearman. Yes, go ahead.
    Mr. Coleman. I mentioned earlier California, a significant 
state for agricultural production as well as loan volume in the 
Farm Credit System.
    Mr. Abraham. But they are still one of your top non-
performers?
    Mr. Coleman. Correct. So the non-performing would basically 
track where the loan volume is; California and Texas being the 
largest ones. There is no other particular geographic 
concentration or commodity concentration.
    Mr. Abraham. I looked at the pie chart where most of your 
loans come from, ag production, ag business, real estate, and 
it looked like that is a good 60 percent of the whole pie.
    Are those two states that are non-performing more, is that 
basically due to climate, drought? Why?
    Mr. Coleman. In those two states, the non-performing, the 
numbers would just be higher just because that is where the 
larger portion of the volume is within the Farm Credit System. 
They are the largest states.
    Mr. Abraham. Okay.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentleman yields back.
    Ms. Lujan Grisham, for 5 minutes.
    Ms. Lujan Grisham. Thank you, Mr. Chairman. I appreciate 
your holding this hearing. And thanks to the panelists.
    As we try to strike the balance between looking at your 
mission and making sure that we are not competing 
inappropriately with independent banks and community banks that 
have their lending portfolio priorities; and making sure that 
we protect small and young farmers and rural access, we want to 
make sure that they have access to capital, which I appreciate 
that you will include in your oversight and administration 
efforts, that they do outreach.
    I am also clear that in the context of your evaluating--it 
seems to me that based on this hearing, I am clear--that your 
mission does not include doing outreach or requiring that 
outreach is an effective component for access to capital by 
disadvantaged or minority farmers. Is that correct?
    Mr. Spearman. Thank you, Congresswoman, for that question.
    Since I have been on the Board at FCA there, I have noticed 
that there are areas that the System could do better. 
Traditionally, my observation has been that loan officers would 
sit in their office and wait for people to come to them.
    One of the issues that is important to me is that the 
System live up to its mission. That its credit is available to 
all creditworthy borrowers, no matter what the size or what 
have you, even though I am putting more emphasis on the smaller 
urban and rural areas for me personally.
    Ms. Lujan Grisham. Well, that is terrific because it seems 
to me that has been separated in terms of who does what. And I 
would agree with you that arguably if we are not reaching out 
to those disadvantaged farmers, it is another layer of 
discrimination, given the way in which we are not focusing on 
making sure they have access to capital. And, in fact, 
discrimination for this subset of farmers is well documented in 
USDA by themselves internally. Externally, I would tell you, 
given the number of settlements--although we are not anywhere 
close to getting that, Mr. Chairman, addressed by USDA--that it 
is clear that we are still having those issues. And in a 
minority-majority state with real issues with small and young 
and disadvantaged minority farmers, if we are not clear about a 
pathway, a significant pathway investment, which includes 
outreach and real access to capital--recognizing that it is not 
a universal issue, right? Not everyone is going to be eligible. 
But if they never get in the door, I can tell you this, that my 
state, which relies significantly--and so, therefore, the rest 
of the country--on our agricultural investments, will cease to 
be able to make them if we don't figure out a way to be clear 
that everyone should be addressing outreach and access to 
capital in the appropriate lending institutions for not just 
the small and rural farmers, but also those disadvantaged and 
minority farmers.
    How can we help you to make sure that that occurs?
    Mr. Spearman. Well, as an agency, we are always willing to 
work with the Committee to help us to strengthen the areas 
within the Act. Our examiners are in the field daily, and they 
are seeing what is actually happening on the firing line. So we 
would be a wealth source to help the Committee come up with 
some future improvement in the Act to help that area.
    Ms. Lujan Grisham. I really appreciate that.
    And, Mr. Chairman, maybe we can get that in writing and ask 
for a couple of things, given that you appropriately--I am not 
sure if it was teasing or chastising me. I am okay with either. 
But let's get the data from this group to show who has access 
and who doesn't; get it separated by those minority and 
disadvantaged farmers, as well as the young and small farmers. 
And then let's come up with some ideas from the Committee that 
is a bipartisan effort to make sure that we are reaching, 
universally, the folks who were intended to have access to this 
capital.
    The Chairman. Well, certainly, we will put that question 
before the witnesses so they can give us that information.
    But as we have said earlier in the hearing, it is about 40 
percent of the lending commercial banks; 40 percent. FSA is in 
the fight. So there is a broad spectrum of lenders that need to 
be a part of that solution.
    Ms. Lujan Grisham. I am in.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. The gentlelady yields back.
    Mr. Newhouse, for 5 minutes.
    Mr. Newhouse. Thank you, Mr. Chairman.
    Gentlemen, thank you for being with us this morning. As a 
farmer, I certainly appreciate the credit being made available 
to agriculture around the country. Currently my loan balance is 
zero, but that is due to change here dramatically shortly.
    Someone said ``at the risk of beating a dead horse,'' maybe 
there is a little life left in that horse.
    I wanted to ask one more question about mission. You have 
talked quite a bit about that this morning. There is quite a 
bit of interest, obviously, on the Committee about that 
subject. And you have talked about some of the regulatory 
measures in place to ensure that financing falls within the 
lines of the mission.
    So let me ask your opinion. Do you see any additional 
mechanisms that would help FCA or FCS preserve that mission? Is 
there something else that you could use to help alleviate some 
of the concerns and make sure we stay on track and, as one of 
my colleagues said, preserve the ability of Farm Credit to have 
financial credit available in the future?
    Mr. Spearman. Thank you, Congressman, for that question. 
There are probably always things that can be improved upon. The 
Act, as it is stated now, has provisions. We do have authority, 
as an agency, to put regulations out. We also have the 
authority to put various memorandums out to the System that may 
not have the authority of a regulation. We believe at this 
point that we have the authorities to be able to keep the 
System safe and sound. Again, I would offer that if there is 
something that the Committee has in mind that they would like 
for us to assist them in, we would be more than glad to do 
that.
    Mr. Newhouse. So you have everything you need? All the 
tools in place?
    Mr. Spearman. I don't want to say we have everything we 
need but we have adequate kinds of authorities to be able to 
make sure the System remains safe and sound.
    Mr. Newhouse. Okay. Another question in opening comments 
talked about the downturn in the ag economy, and certainly that 
places a lot of stress on farmers but also on lending 
institutions.
    Could you talk a little bit about the impact that has had 
so far across the System and the ability for people to pay back 
their loans? Is there enough capital within the System to 
protect against losses? And also, as kind of a follow-up to 
that, what is in place to work with farmers who may have 
difficulty in making payments? I am not sure who to direct that 
to, Mr. Chairman.
    Mr. Spearman. Well, to answer your first question, there is 
record low, as was mentioned previously, about non-performing 
loans in the System right now. Some of this could be due to the 
good times that ag has experienced in previous years, but we 
all are reading the tea leaves now that there are some clouds 
on the horizon.
    The System is well postured, I believe, right now--and not 
just me, the staff also--to weather some downturn in the 
economy. But we are vigilant, and our examiners are constantly 
making us aware of some of the clouds that may be on the 
horizon. And we are taking action.
    Mr. Newhouse. So there are things in place to help farmers 
who may be having difficulty making those payments?
    Mr. Spearman. There are some. There are some. But we have 
borrower rights that are part of the mission component there to 
be able to work with--and that is another mission component of 
the Farm Credit System there--to work with institutions there 
to make sure that they get the right of first refusal, 
restructuring some of the tools that are available under the 
borrowers' rights provisions.
    Mr. Newhouse. Right. Okay. I see my time is up. I 
appreciate very much your responses. Thank you.
    The Chairman. The gentleman yields back.
    Mr. Kelly, for 5 minutes.
    Mr. Kelly. Thank you, Mr. Chairman.
    And I thank the witnesses for being here and all our other 
people who came here that are interested in this.
    I want to go back to the 15 percent. The individual entity, 
are they bound by the 15 percent of their loans rule, the 
individual entity, not as a System but as each bank held by 
that?
    Mr. Spearman. Charlie?
    Mr. Rawls. The 15 percent that we have talked about, is 
also by implication, a System-wide limitation on the similar-
entity participations. So at the individual institution level, 
overall for participations, I am not sure that there is a 
limit.
    Mr. Kelly. All right. I am a pretty simple guy. But, I 
mean, it is a simple question. Is the individual entity held to 
the 15 percent? Because we have had this question asked several 
times. And I want to know, is each bank or each lending 
institution held to the 15 percent limit in that institution?
    Mr. Rawls. The answer is no for all types of participants. 
Yes, for similar-entity only.
    There is a separate ten percent limit on how much of that 
institution's capital can be devoted to similar-entity. I am 
sorry if we have not been clear. The 15 percent would apply to 
the institution level.
    Mr. Kelly. And I, like everyone else--and the Chairman 
started out right. We have friends on both sides of this. And I 
am talking about really good friends.
    Self-regulation is very, very important. It is very, very 
important. And we all are parents or we deal with soldiers or 
deal with employees and those kinds of things. And when we fail 
to do those things ourselves, okay--sometimes they are right. 
Sometimes they are legal and lawful. I am a lawyer too, so I 
understand that sometimes they are legal and lawful, but they 
are still not right. Okay? They are not morally, or they are 
not the honorable, or integrity, or trustworthy thing to do.
    I would just ask our banker friends, your banker friends, 
our banker friends if they like all the regulations that came 
with Dodd-Frank. Okay? And most of those guys did not, as 
individuals, do anything wrong that caused those regulations to 
come down on them. They were a part of the System.
    I see you guys as a System. Just remember, if you don't 
regulate those things which may be lawful, that you ask for an 
outside entity to do that. And I would just add extreme caution 
that maybe if 15 percent does apply across the System, then 
maybe it should apply to each individual entity so that they 
are not able to use that or certain ones, certain bad actors, 
because 95 percent of the people that you represent are doing 
the right things for the right reasons. I would ask, what can 
we do to make sure that those five percent don't disparage the 
other 95 percent?
    Mr. Spearman. Well, Congressman, one thing that we are 
doing is that, there has been an Informational Memorandum that 
went out to the particular institution that I believe you are 
addressing, where some of these issues are arising. The 
memorandums centered around getting the Board directly involved 
because, as an agency, we don't have prior approval for a lot 
of these. So we are seeing them--the way the Act works--we are 
seeing them afterwards. As an agency, we have to turn them down 
and ask them to divest after the fact. We have asked the Board 
to review these items.
    As an individual, I am concerned about reputational risk 
for the System, and I don't think that I am the only one. I 
think the System's funding corporation--because they have to go 
out to the market in order to sell the paper for the System. 
The market may be concerned about that, exactly what you are 
saying. So we are trying to do the things that we can do as an 
agency.
    Again, we would be willing to work with you if there is 
anything you see that might be able to assist us.
    Mr. Kelly. Thank you. And I appreciate that. And like I 
said, I am a huge friend. But I am just telling you, the best 
person to regulate you is you.
    The final point I would just like to make--and I don't have 
time really to ask a question.
    Young, beginning, small farmers, if it is a priority--
Congress obviously said, ``We want you to lend money to these 
folks,'' okay. And I would suggest, if you are not tracking 
that, it cannot be a priority or it cannot be something you are 
focused on if you are not tracking what you are doing with 
that. And I would just suggest that maybe you look at or you 
put that as a data point that you look at to make sure that you 
are carrying out what Congress intended the right percentages.
    I yield back, Mr. Chairman.
    The Chairman. The gentleman yields back his time.
    G.T., for 5 minutes.
    Mr. Thompson. Mr. Chairman, thank you.
    Gentlemen, thank you for being here.
    I have a number of questions. Let me jump right into them.
    How do you measure creditworthiness risk in terms of the 
regulatory pressure on agriculture? Because agriculture is 
somewhat unique with the pressures. And, specifically, I mean, 
there is a long list I could give you.
    But like Waters of the U.S.: Where someone is applying for 
a loan, if Waters of the U.S. is in place, what is their number 
one asset, their soil, all of a sudden becomes off-limits 
unless you get EPA permitting.
    Do you measure that in terms of your consideration or 
creditworthiness risk?
    Mr. Spearman. Thank you, Congressman, for that question. I 
am going to defer to Robert to give some of the specific CAMELS 
and FIRS ratings type of processes that our examiners follow 
and measure and rate.
    Robert?
    Mr. Coleman. Thank you, Mr. Spearman.
    We require each Farm Credit System institution to have loan 
policies and procedures that guide their underwriting 
standards.
    Mr. Thompson. I understand that. I want to zero in because 
I have a couple questions.
    Robert, I am really looking for the question of: Do you at 
this point take into consideration pending, looming regulatory 
pressures that fall on the backs of the agriculture industry, 
our farmers, when it comes to--does that play a role in 
determining creditworthiness, those potential risks?
    Mr. Coleman. The short answer is, yes, absolutely. And 
uncertainties around any of those areas, crop margin, 
compression pressures, et cetera.
    Mr. Thompson. Okay. Great. And I appreciate that because 
that should be given as some of the advantages that Farm Credit 
has, that is one of those things that makes sense to be part of 
the mission, trying to mitigate some of those undue pressures 
and appropriate pressures as well, however you want to describe 
them.
    With that said then, with your exposure of the differences 
in terms of between 1980s and today, I mean congratulations. 
Your portfolio looks like--the number I read, $217 billion in 
2013 in terms of loans that are out there or were out there at 
that point. But, also, if there is a potential decline in the 
agriculture economy--and just for the record, the Chairman and 
the rest of us are doing our best to make sure that does not 
occur with the good work that we are trying to do--but also the 
regulatory threats that are there, is FCS prepared to handle 
possible loan defaults, given the size of your portfolio? Where 
are your reserves, and how is FCS better prepared than in the 
1980s to deal with that situation?
    Mr. Spearman. Robert?
    Mr. Coleman. Thank you, Mr. Spearman.
    As I mentioned earlier, Congressman, the System overall has 
about almost 17 percent capital, as compared to total assets. 
If you go back to the 1980s, that is almost twice of what it 
was. If you look at the System earnings overall, about $4.5 
billion generated last year, on track probably to exceed $4 
billion this year.
    Another very important component, most especially after the 
2008 financial crisis, is liquidity. We came up with new rules 
that require the banks to hold at least 90 days of liquidity. 
They have more than twice that now, as an average. So there are 
very good levels of liquidity in regards to that.
    Credit quality, as you mentioned, over 96 percent of the 
loans outstanding in the Farm Credit System are currently 
classified as acceptable. And just over \3/4\ of 1 percent on 
total non-performing. So the System is very well positioned to 
handle adversity or areas where we anticipate some stress over 
the next several years.
    Mr. Spearman also mentioned the Farm Credit Act added in 
the late 1980s the borrower rights. So if there are 
difficulties with borrowers, Farm Credit System institutions 
are required to look at restructuring plans and the ability to 
keep the farmers on the ranch and keep them in production 
agriculture, if at all possible.
    Mr. Thompson. Great. One suggestion, I guess, and then a 
quick question.
    I think we are all looking for outcomes when it comes to 
mission. So doing that in a transparent way--maybe a dashboard 
or something where we can look at the percentage of young, 
beginning farmers--anything that can provide greater 
transparency to us is helpful since there is a specific 
mission.
    And then my other question--and I am not going to have time 
for a verbal response, but I would appreciate one for the 
record--what safeguards do you have in place to prevent mission 
creep? Because mission creep in government is well known and 
certainly in quasi-government agencies as well. I think it is a 
human nature tendency. And I would love, for the record, if you 
could send the Committee a list of, what are the safeguards you 
have in place to keep you within the lines of what Congress 
envisioned when this authorizing legislation was passed?
    Once again, thank you, gentlemen, for being here.
    The Chairman. The gentleman's time has expired.
    Mr. Yoho, for 5 minutes.
    Mr. Yoho. Thank you, Mr. Chairman.
    Gentlemen, I appreciate your being here.
    Mr. Spearman, I appreciate your work with the Florida 
citrus industry and everything you have done with that. You 
know the plight we have in Florida with the citrus industry.
    In agriculture, when times are good, everybody wants to 
lend money to the farmers. And we know that is a good thing. 
But when the economy turns and the ag sector takes a big hit, 
there are not as many people out there willing to lend. They 
like to ride that wave of good fortune. And in today's 
situation, especially in Florida, the way I understand it, just 
in two regions with the Farm Credit System, there is about $200 
million owed in the citrus industry or lent out.
    Would that happen or would that be possible or would you 
have credit available in a situation like today if there wasn't 
a Farm Credit System? How difficult would it be to get that 
money?
    Mr. Spearman. The short answer: It would be very difficult.
    Mr. Yoho. So I mean, the service that you provide, the 
ability to borrow the money in times like this is, it is 
imperative that we have that.
    And being a veterinarian for over 30 years, working in the 
ag sector with food animals, we have so many clients that are 
members of the Farm Credit System. And I commend you for what 
you do.
    What do you anticipate in the future, say in the next 5 
years, if the economy and the ag industry stay a little bit 
lean? Do you see anything that Congress can do to either help 
or stay out of your way so that you can perform the job that 
you need to perform for our farmers?
    Mr. Spearman. Congressman, there is nothing I can see 
directly. Again, I would mention that there are certain 
authorities that could probably be improved upon that we have. 
But that is something that, as I mentioned previously, we would 
be willing to work with the Committee on to shore those up.
    I would defer to Robert to see if he has any comments.
    Mr. Yoho. Mr. Coleman, anything you want to add to that?
    Mr. Coleman. I have nothing to add. We stand ready to work 
with the Committee on any specific areas.
    Mr. Yoho. Well, that is good.
    Again, when you look at all this stuff and the lending 
portfolios that you guys deal with and you look at the 
breakdown of that, it is just nice to know that it is there, it 
is available for the farmers when they need it--whether it is 
real estate, whether it is equipment or planting the next crop. 
And that is the stability that we need. And I commend you for 
the work that you have done.
    Mr. Rawls, do you have anything you want to add, any of the 
challenges you see coming up in the ag community in the next 
couple of years?
    Mr. Rawls. Congressman, it has been pretty well covered. We 
are just very vigilant now about what is going to be happening 
with commodity prices and the issues that seem to be coming 
into view now with farmers, going forward. Hopefully this will 
not be a long downturn.
    Mr. Yoho. Yes. We hope that. And I hope that the citrus 
greening gets taken care of real quick, and I appreciate your 
work.
    Mr. Chairman, I yield back. Thank you.
    The Chairman. The gentleman yields back.
    Mr. Benishek, for 5 minutes.
    Mr. Benishek. Thank you, Mr. Chairman.
    I have been listening to all this for quite some time. And 
one of the things that comes to my mind--I am from Michigan. I 
represent the northern half of Michigan. And we have a very 
diverse agricultural economy in Michigan. I am familiar with 
our local credit agency GreenStone, and there may be, because 
of that diversity, there is more stability. Of course, in 
states like Iowa that have a lot of corn, these issues can lead 
to crisis, I think.
    I would like to delve into that a little bit more. I have a 
couple of questions about this stuff that, we have been hearing 
all this mission creep stuff, and it is something that comes to 
my mind. What is this mineral rights issue that Mr. Lucas 
talked about? I mean, that seems to be a mission creep to me. 
One of your institutions is holding mineral rights as an asset. 
Is that correct?
    Mr. Spearman. Well, as I mentioned, Congressman, this goes 
back a ways.
    Mr. Benishek. Don't you look at that and say, ``Well, this 
is an inappropriate asset to be holding, and you should 
diversify''?
    Mr. Coleman, is this one of the things that you would 
consider as a diversification?
    Mr. Spearman. Well, that Act, it was changed so that these 
mineral rights cannot be held. But I will defer to Robert there 
because they actually examine those.
    Mr. Coleman. Thank you, Mr. Spearman.
    The Farm Credit System was allowed by statute to hold 
mineral rights for land that was foreclosed upon because of 
nonpayment and default. So those mineral rights track back to 
many, many years ago when those Farm Credit System institutions 
acted under the statutory authority to acquire those and not 
transfer them with the surface rights.
    Later--in the 1980s I believe it was--there was a 
requirement that any mineral rights would attach to the surface 
rights when that acquired property was sold. So some of the 
Farm Credit System institutions who had mineral rights in their 
portfolio or on their balance sheet chose to sell those. Other 
institutions chose to keep those. But since the mid-1980s, no 
new mineral rights----
    Mr. Benishek. All right. Let me ask you this: Are there any 
transactions that you would look at and say, ``This is not 
appropriate from the Farm Credit Administration''? I mean, I 
understand are you saying there is like a 15 percent cap maybe. 
But is there any transaction that one of your members would 
make that you would look at and say, ``Well, this is not 
appropriate''?
    Mr. Coleman. We have regulatory requirements in regards to 
eligibility.
    Mr. Benishek. Could you give me an example of something you 
would say, ``This is not an appropriate transaction''?
    Mr. Coleman. We have to make sure the loan is extended to 
an eligible borrower and for an eligible purpose.
    Mr. Benishek. But, as I understand it, there is no 
completely eligible purpose as long as it leads to what you 
call the more stability of the System.
    Mr. Coleman. I believe you are now talking about the 
similar-entity transactions. Is that correct?
    Mr. Benishek. Well, is there any transaction that you would 
reject when somebody did it because it was inappropriate?
    Mr. Coleman. Absolutely. I think the point that was----
    Mr. Benishek. Give me an example of that.
    Mr. Coleman. If we looked at a loan that a Farm Credit 
institution extended and we believed that it was outside of the 
eligibility or outside of the scope of lending, then we would 
tell that institution, you need to divest of that loan.
    Mr. Benishek. But I haven't heard anything like that. I 
mean, everything that I have heard today is that this Verizon 
loan seems to be outside the scope, except that it is a 
similar-entity, and there are all kinds of reasons to stabilize 
the economy or to stabilize the loan portfolio.
    You haven't told me of an example that you would reject.
    Mr. Coleman. Well, there is another example of a similar-
entity loan that a Farm Credit System institution entered into 
where we did not agree that it was authorized, and we required 
the institution to divest of it, and they divested of that 
similar-entity transaction. So there are loans that fall 
outside of that we would look at on a----
    Mr. Benishek. Could you give me an example of what that 
would be?
    Mr. Coleman. There was a loan made to Cracker Barrel by a 
Farm Credit System institution, and we did not agree with the 
conclusion by the institution that it was----
    Mr. Benishek. What percentage of loans does that occur to, 
that type of thing?
    Mr. Coleman. It is extremely small from a percentage basis. 
As we mentioned earlier, there is only about five percent of 
the loan volume in similar-entity transactions across the Farm 
Credit System.
    Mr. Benishek. Thank you. I am out of time.
    The Chairman. Mr. LaMalfa, for 5 minutes.
    Mr. LaMalfa. Thank you, Mr. Chairman.
    And thank you, Chairman Spearman, for being here with your 
colleagues today. It is good to see you.
    We have much praise for the Farm Credit System in America 
and in California, again, one of the largest states. And I hope 
today's hearing doesn't sound too much like a flogging or 
whatever. But, the same questions keep coming up over and over 
again, but they are good questions, good points about the 
mission.
    So, as you know, in California, over \1/2\ of our state's 
farms are under 50 acres in size. So we are concerned with the 
small operations continuing to be viable and that is where Farm 
Credit comes in and provides alternatives where we haven't 
necessarily had them in the past, especially going back to the 
1980s, when things were going bad with other types of 
financing. So I guess some of my questions would revolve 
around--one of the important ones right now, obviously, we are 
in a huge drought in California and in much of the West. So do 
you see your focus being able to help directly with drought 
relief efforts on that? Not just infrastructure or typical farm 
loans but being able to go directly to alleviate some of the 
crisis on that?
    Mr. Spearman. Thank you, Congressman, for that question.
    We receive reports periodically. They are mainly quoted 
from our economists and also from our examiners, as board 
members.
    Mr. LaMalfa. Pardon me. Let me have the focus be on 
restructuring existing loans. Pardon my interruption.
    Mr. Spearman. Well, that is part of it. If it was ever to 
get to that point, to where there was potential for some 
foreclosure on a loan. But there is attention that we, as an 
agency, pay to risks within the System. The drought in 
California definitely is a risk that I am sure you would 
appreciate also to agriculture and to farmers' abilities to 
repay their loans. It is something that, as an agency, we 
definitely are aware of. How can we help you to mitigate that? 
I don't know off the top of my head what the agency could do, 
other than mitigation in loans or something of that nature 
there, if they were to run into financial trouble.
    Mr. LaMalfa. Well, restructuring and more patience. I mean, 
we are all banking on, to use the term, the end of the drought 
someday.
    Mr. Spearman. Yes.
    Mr. LaMalfa. If we don't want to bet on the end of the 
drought, then we are in bigger problems than anything we are 
talking about here today.
    So does Farm Credit have the ability or have the patience, 
the longer view, to say, ``Yes, we have to help these guys and 
gals through this crisis and maybe bend in a way we haven't 
bent before on that''?
    Mr. Spearman. Well, Congressman, we are getting back to the 
mission component of the System, where we need to be there. The 
System needs to be there in bad times.
    Mr. LaMalfa. Yes, we do expect that from Farm Credit for 
the farm sector. And in your statement here on mission, it is 
to ensure a safe and sound, dependable source of credit for ag 
and rural America.
    Now, do you think that, given the line of questions today, 
that the rural America portion--due either to restructuring or 
something that happened in previous legislation 20 years ago or 
whenever--that there has been a greater emphasis done on the 
portion called rural America and less from agriculture; the 
other things that are ancillary to what people typically think 
of the mission. Is the rural America part becoming too big a 
part of your portfolio and less from ag? And is it something 
that legislatively we have caused or you feel pressured to do?
    Mr. Spearman. Well, I am not sure if I totally understand 
your question. But rural America is very important. I think 
that there is----
    Mr. LaMalfa. But if it is not farm-related things so much. 
If that is the mission creep that keeps coming up, do we need 
to have kind of a snapback on that to get more focused? Has 
that been caused by pressure put on by this Committee or by 
Congress? We have heard other priorities here brought up today, 
pressuring you guys to do certain things. Is that a result of 
legislation that we are having a bigger rural America focus and 
less on ag?
    Mr. Spearman. I don't foresee that. I believe that the 
agency has adequate powers to be able to take care of the 
System in bad and good times. I don't perceive any pressure 
from the Committee that we need to do some----
    Mr. LaMalfa. Or for other certain types of loans, et 
cetera?
    Mr. Spearman. I beg your pardon?
    Mr. LaMalfa. Or for other certain types of loans, there is 
not Congressional pressure to do things that don't make sense 
to you?
    Mr. Spearman. No.
    Mr. LaMalfa. I yield back, Mr. Chairman, thank you.
    The Chairman. The gentleman yields back.
    Former Chairman Goodlatte, 5 minutes.
    Mr. Goodlatte. Thank you very much, Mr. Chairman. I 
appreciate you holding this hearing.
    Mr. Spearman, you testified that non-performing loans have 
decreased each year since 2010 and currently total $1.7 
billion. Is the non-performing loan portfolio dominated by any 
certain sector of the agriculture industry?
    Mr. Spearman. I am going to let Robert answer that 
directly. But in my opinion, it is not because it is more 
related to the capital asset management of the institution and 
not necessarily a particular segment. But I will let Robert, as 
our chief examiner, respond also.
    Mr. Coleman. Thank you, Mr. Spearman.
    The one area that is a bit higher than all the other 
sectors is horticulture. That area suffers from the continuing 
housing weaknesses. That is a very, very small portion of the 
total overall, one or two percent.
    Mr. Goodlatte. Can you explain that? How is horticulture 
affected by housing weaknesses?
    Mr. Coleman. Primarily, they would be greenhouses that 
produce either turf or nursery products and so forth, 
landscaping, production agriculture of those components.
    Mr. Goodlatte. I have you. Okay. And is there any region of 
the country that contributes to this non-performing loan total 
more than others?
    Mr. Coleman. The regional areas are more focused from a 
non-performing standpoint in the two largest states where the 
loans are outstanding, in California and in Texas. So that is 
just a function of where the loan volume is.
    Mr. Goodlatte. Thank you.
    Mr. Spearman, agriculture continues to evolve and change. 
And, yet, the law that you administer has not really received 
any major overhaul since the mid-1980s or earlier. Is the 
current law constraining the Farm Credit System's ability to 
fulfill its mission?
    Mr. Spearman. The short answer, again, would be no, 
Congressman. I think that the authorities that we have as an 
agency are adequate for us to be able to ensure the safety and 
soundness of the System. They can always be improved upon.
    Mr. Goodlatte. I have heard complaints from farmers and 
from people with Farm Credit that they can lend to farmers but 
they can't lend to the people who do business with farmers. 
What would you say about that?
    Mr. Spearman. Again, we would have to refer back to the Act 
and what the Act allows and----
    Mr. Goodlatte. I know what the Act allows. What I would 
like to know is whether it allows enough.
    Mr. Spearman. Again, that question is almost relative, what 
we would do, that needs to be pondered. Enough? Enough for 
whom? It is an issue where we, as regulators, focus on pretty 
much what the Act is right now. To answer your question, is 
there something that we would personally recommend to add to 
the Act to be able to improve the lending ability to those who 
sell to farms.
    Mr. Goodlatte. I am talking about farm implement dealers, 
other folks who could use financing to be able to maintain the 
inventory they have on their business lots. Are you able to 
loan to those folks?
    Mr. Spearman. There is a provision in the Act, I believe, 
where we are to, the System is able to lend to equipment 
dealers. And I will defer to Robert to----
    Mr. Goodlatte. Because I am running out of time, let me ask 
you to respond in further detail after you have a chance to 
more carefully examine what the current practices are and what 
the law allows. But I am sure you would agree that the Farm 
Credit System has certain advantages and benefits that small 
community banks don't have. Alternatively, what advantages do 
community banks have over the Farm Credit System? That may be 
one of them. The small community bank can lend to that 
implement dealer but Farm Credit cannot.
    Mr. Spearman. Well, when you talk about, Congressman, when 
we talk about advantages and disadvantages, both sides have 
certain advantages and disadvantages. Community banks can't 
take--they take deposits; the System cannot. When you start 
weighing the advantages and disadvantages, the way that I look 
at it personally is that the ag market needs all concerned. It 
needs the Farm Credit System. It needs community bankers. And 
it needs those to be able to provide credit for it.
    Mr. Goodlatte. Thank you very much.
    Thank you, Mr. Chairman.
    The Chairman. The gentleman's time has expired.
    Mr. Spearman, you are almost through. Good job this 
morning.
    Let me follow up with some quick nits and nats that are out 
there. Tax structure for these entities, as I understand it, on 
the real estate portfolio, the entities do not pay tax but on 
all the rest of the portfolio, they do pay tax. Is that 
accurate? Mr. Rawls?
    Mr. Spearman. That is, I believe, accurate. Charlie, go 
ahead.
    Mr. Rawls. Yes, fundamentally.
    The Chairman. All right. Are there any real issues between 
how the banks apply that rule, and is there anything we need to 
do there in terms of the allocation of overhead and anything 
else? Mr. Coleman, are there any issues when you examine the 
banks on the way they do their taxes?
    Mr. Coleman. Mr. Chairman, we look at each Farm Credit 
System institution. And we have a requirement that they have 
audited financial statements. So we rely heavily on the outside 
auditors to help address that----
    The Chairman. I got you.
    Mr. Rawls, you have a bad actor out there, somebody that is 
doing something that is against the rules. Could you bring 
charges against them? Could you do anything to a particular 
loan officer or anything? What is your authority to go after a 
bad actor?
    Mr. Rawls. We have very broad enforcement authorities under 
the Act.
    The Chairman. That is against the bank. What do you have 
against the individuals who actually do the bad stuff?
    Mr. Rawls. It is limited on individuals. And that would be 
one area that probably could be improved.
    The Chairman. The way I understand it is once they leave 
the employment of the bank, you really have no authority, 
unless you refer it to Justice.
    Mr. Rawls. That is correct.
    The Chairman. In the circumstances where you have referred 
a case to Justice, what actually happened there?
    Mr. Rawls. That is a mystery. In working with the 
prosecution, they have to decide that it is something worth 
their time to take up. And oftentimes, it is not.
    The Chairman. Right. Several times, Mr. Spearman, you 
mentioned that banks or that your entities don't take deposits. 
However, it seems that the System has some scheme--that is 
probably a harsh word--but of holding funds in an account that 
looks and acts like a checking account. Can you walk us through 
the mechanics of how that is not a deposit and how you are 
complying with the rule that they don't take deposits? Mr. 
Coleman?
    Mr. Coleman. Yes, sir. Mr. Chairman, Farm Credit System 
institutions are allowed to hold advanced conditional payment 
accounts. So if you have a Farm Credit System loan, and let's 
say it is a real estate loan and you have two payments to make 
during the year, you can deposit that payment, future payment, 
and then have it held by the institution until the payment is 
actually due. Farm Credit System institutions are authorized to 
have those.
    The Chairman. Can you write checks on that? How does that 
customer access that advanced payment?
    Mr. Coleman. They would have to come back to the 
institution and request that those funds be released.
    The Chairman. Come back. Okay. Do you pay them interest on 
that, on those deposits? Does the System pay interest?
    Mr. Coleman. On that advanced conditional payment account, 
there would be funds paid, correct.
    The Chairman. Okay.
    Mr. Rawls, any indication that the similar-entity lending 
arrangements, the 15 percent, which you say is about five 
percent, has that come at the expense of all the other lending 
things that more directly relate to your core businesses? So 
are there instances where but for a similar-entity loan, the 
bank would have had the capacity to make other loans to small 
businesses and small farmers and others? Any sense of that?
    Mr. Rawls. No, sir. Based on everything we have heard, 
there is no credit rationing or limitations in the System right 
now.
    The Chairman. Okay. Back in my banker days, 6 years of my 
life, we had a restriction on what is called a tying act. That 
may not have been the proper name. But as a banker, I couldn't 
make a loan to somebody and require them to do something else 
in exchange for that. Buying credit, buying crop insurance and 
getting a better rate, is that going on? If it is, is it okay 
under the regulations to allow credit or Farm Credit System 
banks to require customers buy the insurance from a particular 
insurance agency or agent?
    Mr. Rawls. Mr. Chairman, that is not okay. And that is 
specifically disallowed under our regulations and policies and 
so on and so forth. And that would be something that examiners 
would follow up on, any concerns with that.
    The Chairman. I got you.
    Ms. Plaskett, you were not here earlier, so 5 minutes.
    Ms. Plaskett. Yes, hi. Thank you very much, Mr. Chairman, 
Mr. Ranking Member.
    Thank you, gentlemen, for being here today. I know that 
most of my colleagues have probably asked the bulk of the 
questions. I am thankful that my staff has been keeping me 
apprised while I was in another hearing.
    But I did have a question about the Farm Credit 
institutions. So your examiners are out looking at Farm Credit 
institutions and what they are doing every day. Do you see Farm 
Credit institutions and commercial banks working together to 
serve rural communities in agriculture? And, more importantly, 
can you give us specific examples of how that has been 
effective and how that has worked in some of those communities?
    Mr. Spearman. Thank you, Congresswoman, for that question. 
Yes, I have had an opportunity to go out and visit programs and 
projects where the two entities have worked together on. And it 
was primarily through the Investment in Rural America Projects. 
And I had an opportunity to visit a hospital, a nursing home. 
And, in my opinion, that really works favorably toward the 
mission aspect of the Farm Credit System.
    Ms. Plaskett. And how do you feel that it fits within the 
mission to accomplish that?
    Mr. Spearman. It fits within the mission because the Farm 
Credit System's mission deals with the fact that they need to 
be there in good times and bad times for America's farmers and 
ranchers.
    Ms. Plaskett. That is really interesting to me because in 
the Virgin Islands, we are considered a rural area. And we 
have, after many, many years not really, at one point actually, 
about 100 years ago, we were considered the bread basket of the 
Caribbean. And we have moved completely away from farming, with 
other industries falling off, our farmers are beginning to once 
again try and revamp themselves, modernize, become much more 
technical and businesslike in their work.
    And one of the things that I wanted to understand was we 
realize that the Virgin Islands are excluded from seeking 
credit through FCS. And I just wanted to know if you could 
explain to me, any of you, why that is and what can be done to 
rectify that.
    Mr. Spearman. My understanding is that the Farm Credit 
System does lend to the Commonwealth of Puerto Rico. The Virgin 
Islands, I believe, my understanding is that, it is different 
from yours, that they could possibly do it. But I will refer to 
Charlie on that.
    Mr. Rawls. Just quickly if I can, there is authority under 
the Farm Credit Act for lending activities in the Virgin 
Islands. But a charter has never been issued or expanded for 
that area.
    Ms. Plaskett. And who would be responsible for that 
charter?
    Mr. Spearman. The Farm Credit Administration issues 
charters.
    Ms. Plaskett. So we would need to petition the Farm Credit 
Administration to issue a charter to support the farmers of the 
Virgin Islands.
    Mr. Spearman. That is correct.
    Ms. Plaskett. And how long does that take? What are the 
impediments to that happening?
    Mr. Spearman. I am not sure personally.
    Ms. Plaskett. More often than not, what happens is that 
people think that it is in Puerto Rico, so it is covering the 
Virgin Island. But we are two completely different animals. And 
when you have a population of three million people and then a 
separate jurisdiction with 100,000, you know where most of the 
interest and the resources go. So to encourage Farm Credit 
banks to do business in the Virgin Islands, then we need to now 
do the charter. But does there need to be any legislative 
changes? Or is it strictly a regulatory or an agency matter?
    Mr. Spearman. I believe it is just a regulatory matter. I 
can get back to you on the length of time.
    Ms. Plaskett. I will get with you. You won't have to get 
back with me. I will be getting back with you. Okay. Well, 
thank you. That was pretty much the bulk of my questions.
    So thank you very much for your responses and for the 
information, which will be really helpful to us.
    And thank you, Mr. Chairman and Ranking Member.
    The Chairman. The gentlelady yields back.
    I will turn to David Scott for the closing statement of the 
ranking Minority Member. And I would like to also recognize 
that David is also on the Financial Services Committee, which 
has the other set of friends in the room.
    So, David, any remarks?
    Mr. David Scott of Georgia. Yes, indeed, I am on both of 
those committees, Mr. Chairman. That is why in conclusion and 
summary of this hearing, it can be summed up in six words: We 
have two trains running here. One train is financial, the Farm 
Credit System. And the other train is our banks. And our task 
here is you get these two trains on these two tracks; we can't 
let one train jump over the other track or we have a big wreck 
coming. And our farming system cannot handle that. And this is 
why this has been such an extraordinary hearing.
    And it will be good, Mr. Chairman, if we just reviewed for 
a moment why, back in 1994, we, in Congress, added the similar-
entity lending language to the Farm Credit Act. It was put in 
there to provide greater diversity at a very, very serious time 
for this reason, so that we could add to the portfolio of the 
Farm Credit Council for risk management. It was very much 
needed. Now, but we also put in there some very important 
language, that it could not exceed 15 percent of the Farm 
Credit entity lending portfolio, and it could not exceed over 
50 percent of the total individual loan. And that is why we are 
here. And we are going to have to modulate that a bit.
    We have to make sure we keep both trains running. And it is 
very interesting that the train for the Farm Credit System has 
42 percent of the loans and the train of the community banks 
and the commercial banks has 40 percent of the loans.
    And so that is why this is so important, Mr. Chairman, why 
this is such an important hearing. And it may do good for us, 
as we summarize, to see--and from the banking community and 
from the Farm Credit System--if there is any need for 
legislation to continue to smooth it or if, so to speak, we can 
keep that oil in there on both of these trains so we don't have 
a train collision.
    So this has been a wonderful hearing. Thank you very much, 
Mr. Chairman.
    The Chairman. The gentleman yields back.
    I, too, want to thank Mr. Spearman, Mr. Coleman, and Mr. 
Rawls for this morning. I think all of us operate better with 
the facts as opposed to misinformation we might have. I have 
had some things clarified this morning and that has been very 
helpful. I appreciate your testimony today. This is not the 
first time the agency has been up for a review, and we will 
continue to do this.
    I had an analogy that I was going to use that I used with 
the Texas Farm Credit System in Albuquerque earlier this year, 
but the train issue that my colleague from Georgia just talked 
about is probably a better one. You are the referee in this 
deal. And you have great responsibility to make sure that the 
mission for the Farm Credit System is met and that it is safe 
and sound and all the tools are available. If we need to relook 
at those tools, that is fine. But the tools are in place to 
keep the System safe because if it is safe, it continues to 
make loans in the bad times. And that is really what this is 
all about, to keep a program there. It is pretty instructive 
that about \1/2\ the loans are done by commercial bankers and 
community bankers, and about \1/2\ are done by the Farm Credit 
System. And our farmers and ranchers and small, by the way, is 
there a height and weight limit on a small farmer? At any rate, 
I guess probably not.
    I want to thank our witnesses again. Great job this 
morning. Thank you for being here.
    I appreciate your wife being here and the other 
Commissioners.
    It is hard, sometimes, to get folks to come testify. And it 
is great that you had your whole team here this morning. And I 
appreciate that.
    Before we close, under the rules of Committee, the record 
of today's hearing will be open for 10 calendar days to receive 
additional material and supplementary responses. I think there 
were a couple of questions that Members had. I got some head 
nods behind you that they have those ready, that you will get 
those responses to us.
    And this hearing on the Committee of Agriculture is 
adjourned. Thank you.
    [Whereupon, at 12:17 p.m., the Committee was adjourned.]
    [Material submitted for inclusion in the record follows:]
      Submitted Letter by Hon. Austin Scott and Hon. David Scott, 
                Representatives in Congress from Georgia
November 30, 2015

  Hon. Austin Scott,
  Member of Congress,
  U.S. House of Representatives,
  Washington, D.C.;

  Hon. David Scott,*
---------------------------------------------------------------------------
    * Editor's note: Identical letter sent to Mr. David Scott. For the 
purposes of publishing this letter, both Representatives are listed 
here to avoid duplication.
---------------------------------------------------------------------------
  Member of Congress,
  U.S. House of Representatives,
  Washington, D.C.

    Dear Representative Scott:

    It is my understanding that a House Agriculture Committee oversight 
hearing will be taking place on December 2, 2015 on the Farm Credit 
Administration. In this regard, as Dean of the College of Agriculture, 
Family Sciences and Technology at Fort Valley State University (FVSU), 
I would like to ask that my views about the Farm Credit System be added 
to this hearing record.
    As an 1890 land-grant university, FVSU has provided 120 years of 
service to communities throughout Georgia and beyond. We have a proud 
tradition of conducting outreach as well as providing a productive 
environment for cutting-edge academic and practical research in 
agriculture, animal science, biotechnology, energy, the environment as 
well as other fields. While we understand that Farm Credit makes loans 
to young, beginning and small farmers, it's important to also recognize 
that they do more than just make loans. Over the past years, Farm 
Credit has not only provided financial support through internships and 
scholarships to FVSU students, but has also been actively involved in 
providing educational programs such as the AgAware Program to our 
farmers in order to successfully prepare them for future endeavors. The 
AgAware Program is available through AgSouth Farm Credit and is 
designed to assist young, beginning, small and minority farmers through 
educational workshops, community projects and more.
    We appreciate Farm Credit's partnership with Fort Valley State 
University and the vital role they play in supporting agriculture in 
our state. I appreciate the opportunity to submit this letter for the 
hearing record.
            Sincerely,
           
           
           
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]            

Govind Kannan, Ph.D.,
Dean.

CC:

Hon. David Scott.
                                 ______
                                 
  Submitted Letter by Kenneth E. Auer, President and Chief Executive 
                      Officer, Farm Credit Council
December 11, 2015

  Hon. K. Michael Conaway,
  Chairman,
  House Committee on Agriculture,
  Washington, D.C.;

  Hon. Collin C. Peterson,
  Ranking Minority Member,
  House Committee on Agriculture,
  Washington, D.C.

    Dear Chairman Conaway and Ranking Member Peterson:

    We appreciate the opportunity to submit this testimony to be made a 
part of the record of the oversight hearing held on December 2, 2015 on 
the Farm Credit System.
    The Farm Credit System supports rural communities and agriculture 
with consistent, reliable credit and financial services, today and 
tomorrow. Farm Credit finances the farmers, ranchers, and agricultural 
marketing, processing and supply cooperatives, and other agricultural 
businesses that make American agriculture a pillar of our nation's 
economy and help feed a growing world. Farm Credit finances the rural 
infrastructure that is so vital to the quality of life for rural 
families and the economic lifeblood of agriculture and rural businesses 
as they create jobs and compete in a global marketplace. Farm Credit 
also finances rural families who want quality, affordable homes in 
rural communities. Farm Credit finances the export of U.S. agricultural 
products to overseas markets; markets that are vital to our nation's 
farmers and ranchers as well as the growth of the U.S. economy. Most 
importantly, Farm Credit does all of these things through good times 
and bad--ensuring a continued supply of affordable credit to many 
important segments of the rural economy.
    Congress gave Farm Credit this specific mission and everything the 
System does is designed to make sure that mission is fulfilled. Farm 
Credit's success in fulfilling its mission is demonstrated by the 
loyalty of its customers and the strong support of groups that advocate 
for a thriving rural America.
    Thank you for calling attention to Farm Credit and its mission 
during last week's hearing. We are grateful for the continued support 
of the House Agriculture Committee and fully commit to working with the 
Committee to address the many issues facing our nation's farmers, 
ranchers, and rural communities.
Farm Credit Is Financially Strong
    We agree completely with the testimony provided by the Chairman of 
the Farm Credit Administration that the Farm Credit System is 
fundamentally safe and sound, with strong capital, strong earnings and 
a moderate pace of loan growth. Farm Credit is very proud of the fact 
that its financial performance was such that Farm Credit institutions 
returned in 2014 over $1 billion in earnings through cooperative 
dividends back to the farmers, ranchers and cooperatives that own the 
System.
    These are matters of public record with System institutions 
publicly disclosing their financial results individually and on a 
combined basis quarterly. These disclosures contain detailed 
information regarding not only the present position of the System but 
also include discussions regarding conditions in agriculture and the 
economy which can impact on the financial safety and soundness of Farm 
Credit institutions. In addition, the Farm Credit Administration posts 
summary performance information on their website. They provide a 
detailed annual report to the Congress that includes a discussion about 
what Farm Credit is doing to meet its mission. While the numbers speak 
for the success of the Farm Credit System; the customers and other 
beneficiaries of the Farm Credit System tell a powerful story of 
alignment of interests to build and protect an important part of 
America--rural America.
Farm Credit's Mission--Supporting Rural Communities and Agriculture
    The Farm Credit System has a very clear mission--to support rural 
communities and agriculture with reliable, consistent credit and 
financial services today and tomorrow. There is no mission creep in 
either Farm Credit's service to rural communities or agriculture. The 
Farm Credit Act specifically authorizes what Farm Credit can do to 
accomplish its mission and System institutions operate within those 
boundaries. The purpose statement for the Farm Credit Act of 1971, as 
amended, makes perfectly clear that the mission of the System is not 
exclusively agriculture. That purpose statement reads as follows, ``To 
further provide for the farmer-owned cooperative system of making 
credit available to farmers and ranchers and their cooperatives, for 
rural residences, and to associations and other entities upon which 
farming operations are dependent, to provide for an adequate and 
flexible flow of money into rural areas, and to modernize and 
consolidate existing farm credit law to meet current and future rural 
credit needs, and for other purposes.''
    The policy and objectives section of the Farm Credit Act recognizes 
the ``growing credit needs of rural areas'' and that the Farm Credit 
System be, ``designed to accomplish the object of improving the income 
and well-being of American farmers and ranchers by furnishing sound, 
adequate, and constructive credit and closely related services to them, 
their cooperatives, and to selected farm-related businesses necessary 
for efficient farm operations.'' It also states that the Act is 
intended to ``modernize and improve the authorizations and means for 
furnishing . . . credit for housing in rural areas.''
    But in order to fully understand the breadth of Farm Credit's 
mission and whom Farm Credit is intended to serve, you need to look 
beyond the broad introductory language of the Act to the specific 
lending authority set out in the law itself. The law makes clear that 
the System is expressly authorized to lend to everything from rural 
home buyers to the companies that provide rural areas with electricity, 
broadband and other telecommunications services, water and waste 
services, agricultural cooperatives and many other rural businesses.
    More recently, Farm Credit was called upon to provide financing to 
renewable energy which is a growing part of our country's power supply. 
Our country's rural infrastructure providers have come to rely on Farm 
Credit as a significant provider of credit as well as an important 
partner in the development of our rural communities as good places for 
people to start businesses and raise families. And our rural 
communities are increasingly looking to Farm Credit to provide credit 
for community facilities that are essential to a quality of life that 
rural residents deserve.
    Farm Credit institutions are authorized to serve farmers and 
ranchers both for their farming and non-farming credit needs and to 
serve farm-related businesses that support agricultural producers. 
Those that suggest Farm Credit was never intended to serve anything 
beyond farmers and ranchers ignore over eighty years of history since 
the Banks for Cooperatives were first authorized in the 1930's as well 
as the plain language of the Farm Credit Act as it was put in place in 
1971. These services are critical to the future of our rural 
communities.
    While the ``farm'' in Farm Credit remains the focus of the majority 
of the System's loan volume, it is far from the only focus or the only 
area in the rural economy that is positively impacted by Farm Credit's 
activities. Farm Credit has demonstrated itself to be a highly 
efficient and dependable mechanism for rural America to tap into both 
domestic and international money markets in order to attract capital 
for rural America's benefit. When many other sectors of the economy 
struggled to have access to capital in late 2008 due to the mess made 
by some financial institutions, the agricultural sector and rural 
infrastructure providers continued to have access and performed far 
better than other sectors throughout the resulting recession. Farm 
Credit was at the front and center of those institutions that could be 
relied upon, and we are very proud to have helped ensure that capital 
was available.
Managing Risk Through Participating in Loans With Commercial Banks
    There also has been great confusion regarding the concept of the 
Farm Credit's System's participation with commercial banks in loans to 
what are known as ``similar entities'', a concept unique to the Farm 
Credit System. Participating with commercial banks in similar-entity 
loans helps Farm Credit accomplish its mission of supporting rural 
communities and agriculture. These partnerships with commercial banks 
help ensure that credit is available in rural areas in difficult 
economic times. Back in the 1990's the Congress recognized that with so 
much of its loan portfolio concentrated in agriculture and rural 
America, the Farm Credit System was vulnerable to prolonged downturns 
in the agricultural or rural economy. Congress understood that when 
times got tough in agriculture, commercial banks reduced their lending 
to agriculture and pursued other less vulnerable credits. But with part 
of Farm Credit's mission being to serve agriculture and rural 
communities during both good times and bad, even when commodity prices 
won't cover the cost of production or financing a rural infrastructure 
project is not in vogue, the Farm Credit System is expected to figure 
out a way to continue to make credit available to those that produce 
the food and support the rural communities on which our nation and many 
around the world rely for their quality of life. Producers must have a 
reliable, timely source of credit available to them to use to purchase 
the inputs necessary to grow a crop. Rural infrastructure providers 
need the same dependability and rural communities need an advocate that 
is there day in and day out.
    To help the System have a more diversified portfolio that will help 
generate income to help cover the operating costs of continuing to 
serve farmers and ranchers while agriculture weathers tough times, 
Congress authorized the Farm Credit System to participate with 
commercial banks in loans to entities that would not otherwise be 
eligible to directly borrow from the System but which are engaged in 
activities that are ``similar to'' what an eligible borrower may engage 
in.
    This same basic principle applies to Farm Credit's rural 
infrastructure mission. Farm Credit is charged providing financing so 
rural communities have modern power, telecommunications, and water and 
wastewater services and facilities. Participating with commercial banks 
in loans made to the more urban infrastructure services providers, or 
to those companies that are large enough and have the capacity to 
provide rural areas with the same quality of services such as high-
speed broadband that our urban and suburban residents enjoy, 
diversifies Farm Credit's risk and helps ensure they can still support 
rural infrastructure providers through inevitable economic cycles.
    Importantly, similar-entity participation authority was not 
provided as an open-ended authority that would overtake serving the 
needs of directly eligible customers. Very specific limits restricting 
the use of this ``similar-entity'' authority are built right into the 
law. The most important limitation is that similar-entity 
participations must be done in partnership with non-Farm Credit 
commercial lenders. The System is prohibited from holding the majority 
share of any ``similar-entity'' loan. Each individual Farm Credit 
institution may not have more than 15% of its assets dedicated to 
similar-entity participations and the total amount of similar-entity 
loans to one borrower made by all institutions in the System may not 
exceed 10% of total System capital. The use by the System of this 
diversification authority is not close to reaching any of these limits.
    It is critically important that the Committee understand that every 
similar-entity loan that the System makes, by definition, has to have a 
commercial bank or banks holding the majority of the credit. In 
virtually every one of these deals, commercial banks bring the credit 
to the System asking that Farm Credit participate with them in the 
credit as a result of our deep knowledge and lending capacity. If banks 
did not want Farm Credit to be involved in these credits, Farm Credit 
would not be involved in them. In fact, clearly stated in the 
legislative history surrounding this authority is the desire to 
encourage commercial banks and Farm Credit institutions to work 
together more--and there are many examples of strong partnerships that 
have been formed between commercial banks and Farm Credit institutions 
as a result.
    We want you to know that we have heard the concerns raised by 
Committee Members about the use of this authority. Farm Credit is 
addressing this internally, conducting an assessment of involvement in 
similar-entity participations by Farm Credit institutions, how they are 
using this authority, and making sure that its use is closely tied to 
supporting the System's mission and being used as Congress intended to 
diversify risk. While making adjustments may help address the 
reputational risk issues that surround some of these credits, if Farm 
Credit has to step back from effectively using this authority this will 
mean less diversity in the System's loan portfolio and could result in 
the need for a more cautious approach in serving agriculture especially 
in tough economic times.
Serving All Sizes and Types of Agricultural Producers
    The Farm Credit Act is very clear that the Farm Credit System 
exists to serve ``. . . all types of agricultural producers having a 
basis for credit.'' (see Sec.1.1 of the Farm Credit Act of 1971, as 
amended). America's farming and ranching operations are very diverse in 
their size, scope and in the types of enterprises they operate. A quick 
review of USDA's report ``Structure and Finances of U.S. Farms: Family 
Farm Report, 2014 Edition'' published in December, 2014, illustrates 
throughout its more than 60 pages the diversity that is U.S. 
agriculture. It highlights how the majority of farmland in the U.S. is 
owned by small farmers and that those small farmers are highly 
dependent on off-farm employment and the success of the rural economy 
to stay on their farms. It also illustrates how 8% of farms are 
responsible for 60% of the value of all agricultural production in the 
country. Farm Credit serves all of these differing operations and 
everyone in between.
    Farm Credit is intensely committed to serving the next generation 
of agricultural producers. Every local Farm Credit association has 
programs in place specifically targeted at supporting young, beginning 
and small farmers. Every Farm Credit institution reports the results of 
their programs annually to the Farm Credit Administration and every 
year FCA reports the results directly to the Congress.
    The facts are plain and we will compare our record of service to 
young, beginning and small producers to anyone's. For 2014, over 21% of 
the new loans made by System institutions went to beginning farmers, 
about 17% were made to young farmers and over 40% were provided to 
small farmers. These categories are not additive. Each is considered a 
separate category and a borrower can fit into multiple categories at 
the same time. Farm Credit institutions are required by regulation to 
track and report this data in this manner. No other lenders can report 
at this level of detail and no other financial regulator outside of the 
Farm Credit Administration requires this level of specificity in 
reporting on service to these groups.
    The Farm Credit Act specifically makes clear that full time farmers 
and ranchers can come to Farm Credit to meet their other financing 
needs. When it comes to working with small farmers for this same 
purpose however, regulations limit what the System can do to support 
them as they work to generate sufficient income to cover their family 
living expenses from off-farm activities.
    The System has created specific outreach programs to support young, 
beginning, small, and minority agricultural producers as well as 
programs to support small and minority cooperatives, small rural water 
and wastewater systems, and emerging renewable energy projects. As 
authorized by law, the System invests in Rural Business Investment 
Companies that make equity financing available to rural businesses, 
particularly smaller and agriculture related entities. We also actively 
cooperate, collaborate and partner with others who serve rural 
communities and agriculture, including community banks, USDA, and other 
lenders. The System delivers on this mission at no direct cost to the 
American taxpayer or support from the government, while making an 
important difference as a socially responsible corporate citizen. We 
are standalone cooperative institutions that are owned by our customer-
members and heavily regulated by the Farm Credit Administration who 
maintain a strong financial and business profile so the System is 
resilient and able to serve its mission throughout the inevitable ups 
and downs of the economic, financial, and agriculture business cycles.
Banks Benefit From Direct Government Backing and GSE Benefits
    One of the greatest myths that commercial banks continually put 
forward is that the Farm Credit System somehow enjoys taxpayer backed 
access to the financial markets while they have to rely on the private 
sector. The truth of the matter is quite the opposite. Commercial banks 
enjoy direct taxpayer backing whereas the Farm Credit System does not.
    If you doubt the veracity of this statement, we refer you to a 
regular study produced by the Federal Reserve Bank of Richmond, not 
known as an apologist for the Farm Credit System. The Federal Reserve 
Bank of Richmond publishes on a regular basis a report detailing the 
taxpayer backstopping of financial institutions and the risk to 
taxpayers that is created. Their report called the ``Bailout 
Barometer'' was last updated in May, 2015. Always on the top of their 
list for the greatest amount of ``explicitly guaranteed liabilities'' 
by U.S. taxpayers are banking and saving firms--to the tune of just 
over $6 trillion (see https://www.richmondfed.org/safetynet/). In 
comparison, the number for explicitly guaranteed liabilities of the 
Farm Credit System is $0!!! This does not fit the narrative that the 
bankers put forward in their characterization of the relationship they 
have with the government versus what Farm Credit has. $6 trillion 
versus $0 is a rather stark difference and the lack of validity in 
their claims doesn't stop there.
    Beyond the direct taxpayer guarantee of their liabilities enjoyed 
by the banks, they also have direct access to GSE funding through 
Fannie Mae and Freddie Mac to make housing loans, and through Farmer 
Mac to make agricultural loans. Commercial banks also are the majority 
stockholders of the Federal Home Loan Bank System through which they 
have access to advances of GSE funds that can be used to support 
housing, small business and agricultural loans by banks. They even can 
gain access to funds to be used for operating loans for farmers by 
creating a funding relationship with Farm Credit institutions. It is 
important that Committee Members be reminded of this picture in order 
to better understand the competitive landscape among various financial 
institutions.
    Direct backing to their liabilities by the U.S. Government and 
virtually unfettered access to GSE funding for loan making--these are 
the facts regarding banks. We have never heard of a bank wanting to 
become a Farm Credit System institution. That alone should tell you 
something.
Stress Testing Is an Important Part of Understanding Risk
    Farm Credit System institutions undertake a variety of stress 
testing exercises as a critical component of both their annual and ad 
hoc business and financial planning. The shock variables which are 
applied to a given entity's portfolio are designed to identify and 
stress the particular combinations of credit, market, and economic 
conditions to which that institution is most vulnerable. The results of 
these stress tests then form part of the management information 
provided to each institution's leadership team and board of directors 
to help direct business and contingency planning. These exercises 
supplement scenario analysis and related disclosure elements required 
and examined by the Farm Credit Administration. All Farm Credit 
institutions are required to create capital adequacy plans that support 
their portfolio strategy and engage in regular analysis and stress-
testing of their loan portfolios. Each institution is unique based on 
the part of the country they serve and the composition of their 
portfolio in terms of the businesses they serve and the risks inherent 
to those businesses. Farm Credit stress testing, while having many 
similarities to the CCAR testing completed by banks, would not match 
specifically that done by banks due to the operating differences 
between banks and Farm Credit institutions.

    In summary, Farm Credit is accomplishing its mission to support 
rural communities and agriculture, staying within the boundaries 
Congress set for it and bringing great benefits to agricultural 
producers, rural infrastructure providers, rural families, and rural 
communities. The support Farm Credit has across agriculture and rural 
America was evidenced earlier this year when over forty farm, commodity 
and rural organizations wrote to the President of the American Bankers 
Association (ABA) expressing their opposition to the ABA's stated goal 
of eliminating the Farm Credit System. A copy of the letter sent by 
these groups is attached.

    Thank you for providing us the opportunity to elaborate on a number 
of these key issues discussed at the recent hearing. If at any time 
you, your staff or any Member of the Committee has an issue or concern 
about the operations of the Farm Credit System, please do not hesitate 
to reach out and we will be happy to respond.
            Sincerely,
          
  
  [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
  
Kenneth E. Auer,
President and CEO.

CC: Members of the House Committee on Agriculture
                               attachment
May 1, 2015

  Frank Keating,
  President,
  American Bankers Association,
  Washington, D.C.

    Dear Mr. Keating:

    Your radio actuality release dated April 13 calling for the 
elimination of the Farm Credit System (FCS) has been brought to our 
attention. As organizations representing farmers, ranchers and rural 
communities, we want to register our strong objection to your goal to 
eliminate the FCS.
    Credit availability is absolutely critical to our members. The FCS 
as well as rural and other commercial banks play vital roles in 
ensuring that farmers, ranchers and other rural Americans have access 
to constructive, competitive credit on an ongoing basis. The array of 
credit products offered by both Farm Credit and commercial banks--often 
in a collaborative, cooperative manner--ensures that agricultural 
producers and their industry sector partners have access to financial 
tools that are vital to their success and economic sustainability.
    The suggestion that the FCS and/or commercial banks and other 
lending institutions should be further constrained or even eliminated 
from the marketplace would be unwelcome and injurious to those who live 
and work in rural America. Rather than calling for the elimination of 
the FCS, we believe it would make more sense to find improved ways to 
work collaboratively with Farm Credit and other credit providers for 
the benefit of farmers, ranchers and rural communities.
    The stakes are simply too high for rural America to have fewer 
financing options to meet the challenges of advancing rural economic 
growth. We want you to know that your effort to reduce competition is 
not supported by those of us whose members live, work and form the 
economic foundation in rural areas. We would appreciate the opportunity 
to work constructively with your organization and others, including the 
Farm Credit System, to improve and expand farmers', ranchers' and rural 
businesses' access to competitive and stable credit offerings to meet 
the challenges rural America faces in our still-recovering economy.
            Sincerely,

 
 
 
American Agri-Women;                 National Council of Farmer
                                      Cooperatives;
American Association of Farm         National Farmers Union;
 Managers and Rural Appraisers;      National Milk Producers Federation;
American Farm Bureau Federation;     National Pork Producers Council;
American Feed Industry Association;  National Potato Council;
American Honey Producers             National Rural Electric Cooperative
 Association;                         Association;
American Horticulture Industry       National Rural Water Association;
 Association;
American Mushroom Institute;         National Sorghum Producers;
American Soybean Association;        National Sunflower Association;
American Sugar Alliance;             NTCA--The Rural Broadband
                                      Association;
Association of Equipment             Rural and Agriculture Council of
 Manufacturers;                       America;
California Association of Winegrape  Society of American Florists;
 Growers;
Florida Fruit and Vegetable          Southern Peanut Farmers Federation;
 Association;
National Association of State        United Egg Producers;
 Departments of Agriculture;         USA Rice Federation;
National Association of Wheat        U.S. Apple Association;
 Growers;
National Barley Growers              U.S. Canola Association;
 Association;
National Black Growers Council;      U.S. Cattlemen's Association;
National Cattlemen's Beef            U.S. Dry Bean Council;
 Association;
National Christmas Tree              U.S. Rice Producers Association;
 Association;
National Corn Growers Association;   Western Growers;
National Cotton Council;             WTA--Advocates for Rural Broadband.
 

                                 ______
                                 
    Submitted Statement by Independent Community Bankers of America
    On behalf of the more than 6,000 community banks represented by the 
ICBA, thank you for convening today's hearing: ``To Review the Farm 
Credit System.'' When Chairman Conaway convened the House Agriculture 
Committee on January 21 of this year he pledged to ``focus on 
aggressive oversight of all policies and programs under the Committee's 
jurisdiction.'' On September 15, Chairman Conaway referenced once again 
his ``commitment to hold a top-to-bottom review of a full range of 
issues and policies within our jurisdiction.''
    This type of review is especially important in regards to the Farm 
Credit System (FCS), a government sponsored enterprise (GSE) that has 
run amuck of the law and its historical mission. ICBA noted in our 
June, 2014 statement on credit availability in rural America: ``we 
could raise a number of additional issues regarding FCS abuses. We 
believe these types of issues and questions warrant a series of 
separate hearings. There are many concerns Congress should explore in 
their oversight capacity over the FCS.'' We continue to urge this 
Committee and its Senate counterpart to conduct a series of in-depth 
hearings on the FCS's questionable and secretive activities.
Adrift from its Historic Mission
    Congress created the FCS to specifically serve bona fide farmers 
and ranchers, farmer cooperatives and a narrow group of businesses that 
provide on-farm services. However, the FCA in recent years has become a 
willing accomplice in FCS's efforts to expand into non-farm financing 
and has derived creative ways to circumvent the law to accommodate 
FCS's desires. FCS has sought to morph from a GSE with a narrowly 
targeted mission into a generalized rural lender serving all types of 
borrowers in rural credit markets and even non-farm borrowers in non-
rural areas. In this sense, the FCA, quite frankly, has become a 
captive regulator, often willing to do the System's bidding at the drop 
of a hat while claiming to be an independent regulator.
    Illegal Investment Schemes: One example of FCA's capitulation to 
FCS's expansionist agenda to engage in non-farm lending is the agency's 
tortured effort to implement its `Investments in Rural America' 
program. The FCA allowed FCS lenders to create a series of pilot 
programs which often included non-farm lending projects. FCA also 
released a major proposed regulation to allow FCS non-farm lending if 
such lending was characterized as ``investments.''
    FCS lenders could, for example, extend credit for hospitals, 
commercial offices (doctors, lawyers, and dentists), manufacturing 
facilities, apartment complexes in cities, hotels and motels, trucking 
and towing companies, auto dealerships, etc.). Any limitations would 
primarily be based on the FCA/FCS's lack of imagination.
    After 5 years, the FCA announced it was withdrawing its proposed 
rule and ending its allowance of FCS rural investment pilot programs. 
However, these actions were just a sleight of hand by the regulator. 
While eliminating the pilot programs, the FCA allowed the financed 
projects to continue through the term of the financing which in some 
cases will last for decades. The FCA then briefly published on its 
website a guidance memo instructing FCS lenders on how to apply and 
gain approval to engage in investment programs that included financing 
for non-farm businesses, communities, rural areas and infrastructure 
projects. In other words, even though the FCS lobbied Congress for 
years to receive expanded powers--appeals that were mostly rejected by 
Congress--the FCA has suddenly and quietly decided to just allow FCS 
lenders to do whatever they want as long as FCA provides their rubber 
stamp of approval.
    ICBA submitted several letters with comprehensive questions to FCA 
asking for details on FCA's intentions based on the guidance memo. FCA 
refused to answer the questions. This raises a further question--why is 
the FCA adamantly against transparency and accountability to the 
outside world?
    FCA finally responded to a few of the questions after pressure from 
the Senate Agriculture Committee. The gist of FCA's response was that 
its investment authorities appeared in a separate section of the Farm 
Credit Act (Act) and therefore financing of FCS investments were 
virtually unlimited and could go beyond the constraints that Congress 
put in place in the loan making sections of the Act. ICBA adamantly 
rejects this preposterous interpretation and notes the complete lack of 
legislative history supporting FCA's position. Congress did not intend 
to limit the purposes of FCS loan making in one section of the Act but 
then allow unlimited purposes for FCS financing in another section of 
the Act. ICBA seeks further answers to the questions we have submitted 
to FCA and we believe the non-farm financing envisioned by the guidance 
memo should be halted immediately.
    $725 Million Verizon Loan: It appears the FCA was initially unaware 
that CoBank, the FCS's large lender to cooperatives, had made a $725 
million loan to Verizon to buyout Vodaphone's interest in a joint 
venture. Verizon and Vodaphone are headquartered in New York City and 
London and this extremely large loan was not rural in nature nor would 
it be allowed under the provisions of the Act. However, CoBank and the 
FCA hid behind a provision referred to as ``similar entities'' lending, 
but this provision was never meant to allow CoBank or any FCS lender to 
make ineligible loans. FCA is again abandoning their regulatory 
oversight responsibilities in an effort to go to any length necessary 
to allow FCS lenders to make whatever types of non-farm loans they 
desire.
    During debate on the 2008 Farm Bill, ICBA noted that the FCS's 
Horizon's Project proposals were loosely worded and would allow FCS 
lenders to engage in financing large Fortune 500 companies. FCS 
representatives derided this contention and claimed it was misleading. 
But what has happened since, even though Congress rejected the 
misguided Horizons proposal?
    CoBank has provided major financing to Verizon, AT&T, U.S. 
Cellular, Frontier Communications and other very large corporations. In 
the Verizon example, CoBank's financing did not target a ``rural'' 
telecommunications cooperative. Vodafone is a British multinational 
telecommunications company headquartered in London and ranks as the 
world's second-largest mobile telecommunications company in terms of 
revenues and number of subscribers. Verizon Communications, 
headquartered in New York City, had just reported quarterly profit of 
over $2 billion and revenues of over $30 billion and hardly represented 
a rural telephone cooperative in need of financing by a government 
sponsored enterprise.
    CoBank's newly found lending activities appear to be an effort to 
leverage their GSE advantages deeply into the realm of multi-national, 
non-agricultural, non-rural and non-cooperative corporate financial 
deals. This is not the purpose for which CoBank and other FCS lenders 
were created.
    Keep in mind that the FCA has recently raised the lending limit for 
FCS entities to $1.5 billion and the FCS already has several very large 
loans in their portfolio. Congress should require a list of these large 
borrowers and the amounts financed.
    $10 Billion Line of Credit: On September 24, 2013, the Treasury 
Department, through its Federal Financing Bank, entered into a $10 
billion note purchase agreement with the Farm Credit System Insurance 
Corporation (FCSIC) to establish a standby line of credit to provide 
FCS funds at the Treasury's cost of funds. This line of credit, which 
the FCA sought in secret, raises a number of serious questions. For 
example, why did the FCA seek a $10 billion line of credit at a time 
when FCS lenders were reporting record profits of $4.64 billion in 
2013?
    Why did the FCA not seek Congressional approval? When the FCS 
failed in the 1980s, the farmland values which the FCS utilized as 
collateral had collapsed. Yet, the $10 billion line of credit, 
according to FCA, is ``collateralized'' meaning the collateral backing 
this line of credit could be dramatically reduced. If the FCS were to 
collapse, as it did in the 1980s, American taxpayers would be on the 
hook once again for a sizeable bailout.
    The FCSIC was created to collect premiums from FCS institutions as 
a backstop in the event of financial deterioration within the System. 
Why then did the FCA seek and obtain a line of credit from the 
Treasury's FFB as additional protection? A report to the FCSIC prepared 
by the Brookings Institution stated: ``FCS should be required to 
approach the Congress and the Administration for legislative help'' in 
seeking a line of credit. Yet, FCA did not go to Congress but secretly 
went to the Treasury to obtain the line of credit. There should have 
clearly been hearings on a GSE seeking a $10 billion line of credit. 
This is another example of FCA/FCS seeking to avoid transparency and 
accountability.
FCA and FCS Diminishing Ag Credit Markets
    When ICBA surveyed bankers about their experiences with the FCS the 
responses were quite informative. Bankers complained about the FCS 
cherry-picking activities and stated FCS almost exclusively targets top 
borrowers, offers these targeted borrowers below market rates and is 
willing to set those below market rates at longer terms.
    By taking top borrowers from community banks, FCS weakens the 
overall community bank portfolios and leaves the less seasoned/younger 
borrowers and higher leveraged borrowers with community banks. 
Similarly, if community banks stretch to keep top borrowers, community 
banks must accept less return and assume more interest rate risk by 
fixing the rate for a longer period which is difficult to do based on 
the short term nature of their deposits. Bankers typically stated the 
FCS largely ignores young, beginning and small farmers. As one banker 
stated, ``FCS wants us to get these types of farmers started first and 
then later attempts to take them away once they become financially 
stronger.''
With Farm Financial Stress on Horizon FCS Needs to Focus on Farm Sector
    The USDA has noted farm sector profitability is projected to 
decline again this year with net cash farm income forecast at $93 
billion, down about 28 percent from 2014 levels. Net farm income is 
forecast to be about $56 billion in 2015, down 38 percent from 2014's 
estimate of $90 billion. If realized, the 2015 forecast for net farm 
income would be the lowest since 2002 in both real and nominal terms 
and a drop of 55 percent from the recent high of $123 billion in 2013.
    With low prices expected to continue next year and potentially 
greater financial stress over the next year and possibly beyond, this 
is not the time for the FCS to dilute its emphasis on farmers and 
ranchers by seeking to finance non-farm borrowers. FCS needs to remain 
focused on its mission as a GSE intended to serve the narrow niche of 
production agriculture.
Conclusion
    We thank the Committee for conducting this initial review of the 
FCS by questioning the FCA. The FCA has clearly lost respect for the 
Act's boundaries established to keep the FCS a narrowly targeted GSE. 
By thumbing their noses at the Act, the FCA and FCS are also thumbing 
their noses at Congress and the history and legislative intent of the 
Act. If FCA believes the Act is so loose as to allow it to grant any 
type of financing desired by FCS lenders, then the Act needs to be 
tightened. Congress never intended for FCS to be a general purpose 
rural lender. If the FCA and FCS do not want to play by the rules, 
there are many other lenders that would welcome the heavy subsidies 
enjoyed by the FCS as a government sponsored enterprise with tax and 
funding advantages.
    A series of hearings focused on FCS abuses and FCA's complicity in 
circumventing the law and intent of Congress would be a welcomed next 
step. We look forward to discussing these issues in more depth with 
Congress in coming months. Thank you again for holding this hearing and 
for the opportunity to submit this statement for the record.
                                 ______
                                 
                          Submitted Questions
Response from Hon. Kenneth A. Spearman, Chairman of the Board and Chief 
        Executive Officer, Farm Credit Administration
Questions Submitted by Hon. K. Michael Conaway, a Representative in 
        Congress from Texas
    Question 1. When was the last audit of the Federal Farm Credit 
Banks Funding Corporation? Who conducts the audit and is it available 
to the public?
    Answer. Under Farm Credit Administration (FCA) regulations, each 
Farm Credit System (FCS or System) institution must, at least annually, 
have its financial statements audited by a qualified public accountant 
in accordance with generally accepted auditing standards. In addition, 
FCA examines each FCS institution at least every 18 months. The last 
examination of the Funding Corporation occurred for the 18 month period 
ended March 31, 2015. FCA examination reports are shared with the 
institutions' boards of directors, but not with the public.

    Question 2. Could you explain the role of the Farm Credit System 
Insurance Corporation in providing oversight of the Farm Credit System 
and whether any taxpayer funds are involved in its operation?
    Answer. FCA is the government entity primarily responsible for 
oversight of the System. The Farm Credit System Insurance Corporation 
(FCSIC) insures the timely payment of principal and interest on System-
wide debt obligations issued to investors on behalf of the System 
banks. By protecting investors, the Insurance Corporation helps to 
maintain a dependable source of funds for farmers, ranchers, and other 
System borrowers. As of December 30, 2015, investors held $243 billion 
in insured System debt obligations. To minimize risk to investors and 
the Insurance Fund's exposure to potential losses, the Insurance 
Corporation actively monitors and reviews key ratios and financial 
trends throughout the System and has the authority to require troubled 
System institutions to undergo special examinations, if needed.
    The Insurance Corporation assesses and collects premiums from 
System banks and manages the Insurance Fund. The Insurance 
Corporation's costs are paid out of the Insurance Fund, and no taxpayer 
funds are involved in the operation of the Insurance Corporation. 
Congress also gave the Insurance Corporation certain other specific 
statutory responsibilities, such as the authority to regulate golden 
parachute and indemnification payments made by System institutions.
    The Insurance Corporation's basic statutory authorities are modeled 
on those of the Federal Deposit Insurance Corporation, including the 
responsibility to act as conservator or receiver of a System 
institution. However, unlike the FDIC and other Federal entities with 
receivership authority, the Insurance Corporation's resolution 
authorities have never been updated and modernized, creating potential 
legal uncertainty in the event of a System institution failure.

    Question 3. The Farm Credit System has the authority to lend to 
rural infrastructure projects--rural electric, telephone, broadband, 
water and sewer, these types of things. Are you seeing the System 
working closely with USDA on these types of efforts?
    Answer. Yes. CoBank works closely with the Rural Development (RD) 
agency in USDA on rural utility lending. In addition, the entire System 
works with RD on investments in rural infrastructure projects and the 
Rural Business Investment Company (RBIC) program.

    Question 4. How is the agency working to control its costs?
    Answer. We are a small agency, with the majority of our operating 
costs in human capital and travel expenses for our examiners to 
complete onsite examinations. While we work hard to manage costs on 
travel expenses, it is very important for our examiners to spend time 
onsite in the institutions we regulate. As you know, FCA is not 
taxpayer supported, but funded by assessments on the System 
institutions we regulate. We are proud that FCA's cost to System 
borrowers equates to only 1.8 basis points on outstanding assets--a 
measure of our productivity that has reflected an improving trend for 
the past 30 years.
    We are controlling travel costs by taking such measures as using 
video-conferencing, issuing cost-saving travel procedures, and 
controlling conference expenses. We have leveraged technology to 
maintain examination effectiveness (e.g., workflow programs, electronic 
files, loan database, extending equipment lifecycles when appropriate). 
Finally, FCA has carefully managed its resources. We have managed the 
cost of service providers, standardized equipment purchases, increased 
electronic distribution and publication of material, and shared 
resources across the organization.

    Question 5. Why does the FCA not disclose the names of the 
institutions that have corrective or enforcement actions taken against 
them?
    Answer. Under Board Policy Statement PS-34, FCA only discloses the 
following information about enforcement actions to the public: (1) the 
date and type of enforcement action taken; (2) the type of institution 
that is subject to the enforcement action or, if the action is against 
an individual or entity, the relationship between the person or entity 
and the institution; and (3) a description of the essential facts 
pertaining to the action, excluding information that would identify the 
institutions or persons involved. Some enforcement actions have 
required FCS institutions to disclose a summary of the enforcement 
actions in their annual reports to shareholders.
    In contrast to other Federal regulators of financial institutions 
that take deposits, Congress has not mandated that FCA disclose the 
identities of FCS institutions that have been subject to enforcement 
action. The Freedom of Information Act (FOIA) explicitly exempts 
information ``contained in or related to examination, operating, or 
conditions reports prepared by . . . an agency responsible for the 
regulation or supervision of financial institutions'' from disclosure 
in response to a FOIA request.
    We believe that publicly disclosing the identity of FCS 
institutions that have been subject to an enforcement action would 
adversely affect the ability of FCA to promptly and effectively correct 
violations of law or unsafe and unsound conditions in the System, as it 
would adversely impact the willingness of System institutions' boards 
of directors to enter into formal written agreements with FCA.

    Question 6. It is my understanding that the CFTC has exempted Farm 
Credit System institutions from swap dealer registration requirements 
regardless of their level of swap dealing activity. In the absence of 
this exemption, are you aware of any System institutions that would 
currently exceed the CFTC's de minimis registration threshold of $8 
billion in swap dealing activity?
    Answer. Currently, no Farm Credit System institution is required to 
register as a swap dealer with the CFTC. This is because no System 
institution, at this time, meets the criteria of a swap dealer under 
the applicable provisions of the Commodity Exchange Act and CFTC 
regulations. Currently available information indicates that no Farm 
Credit System institution (1) holds itself out as a dealer in swaps, 
(2) makes a market in swaps, (3) regularly enters into swaps with 
counterparties in the ordinary course of business for its own account, 
or (4) engages in activity causing itself to be commonly known in the 
trade as a dealer or market maker in swaps. In addition, a CFTC 
regulation grants System banks and associations an exception from 
registering as swap dealers because they are cooperatives that deal in 
swaps on behalf of their borrower-members. Separately, the CFTC granted 
an exemption to depository institutions in connection with originating 
loans to their customers.
    In further response to your question, CoBank, ACB, has a notional 
amount of derivatives totaling over $25 billion of which over $22 
billion notional is in interest rate swaps as of September 30, 2015. 
The vast majority of these derivatives are not cleared through a 
clearinghouse. Farmer Mac has swaps totaling about $8 billion notional, 
the majority of which are cleared through a clearinghouse.

    Question 7. With USDA projecting continued softness in commodity 
prices, how important is it for Farm Credit institutions to be able to 
have a diversified loan portfolio? Are there things that the agency can 
do to help institutions achieve more diversity in their loan 
portfolios?
    Answer. As the System's safety and soundness regulator, we believe 
it is very important for System institutions to diversify their loan 
portfolios. By law, the System is restricted to lending to agriculture, 
rural utilities, farm-related service businesses, and certain rural 
homeowners. System institutions will be better able to manage risks and 
meet the credit needs of eligible and creditworthy borrowers if they 
have a flexible and appropriate set of tools to diversify their loan 
portfolios.
    FCA does several things to help System institutions achieve greater 
diversity in their loan portfolios. We routinely evaluate and assess 
the concentration and individual lending limits at FCS institutions. 
When we identify through our oversight process that an institution has 
an unsafe level of exposure (relative to its risk-bearing capacity) to 
a particular commodity, market segment, industry, or obligor, we 
require the institution to take corrective action, such as developing 
plans to effectively reduce the concentration within a certain period 
of time. Risk must be properly managed, and institutions must hold 
adequate capital.
    FCA regulations and policy encourage System institutions to use 
their statutory authorities to buy and sell loan participation 
interests with each other and non-System lenders so they can achieve 
greater geographic and agricultural sector diversification in their 
loan portfolios. Another way that System institutions can diversify 
their loan portfolios is to buy whole loans and assignment in loans 
from each other. Also, we encourage System institutions to consider 
loan guarantees and Farmer Mac credit protection programs as risk 
management strategies to manage concentration risk.
    Similar-entity participations with commercial lenders provide an 
avenue for System institutions to diversify their loan portfolios. This 
was the intent when the Farm Credit Act was amended to authorize these 
credits in 1992. There are limits on the total amount of similar-entity 
participations that may be purchased or held by System institutions. 
One such limit is a 15 percent portfolio limit on each institution. At 
the hearing, Congressman Costa and Congressman Kelly asked specifically 
about how this limit is applied. Our answer and the discussion of the 
issue may have been confusing. To clarify, the 15 percent portfolio 
limit on similar-entity participations applies at the institution 
level.

    Question 8. The FCA withdrew a proposed ``Rural Community 
Investments'' pilot project program and a related proposed rule in 
2013. But in September of 2014, the FCA released an informational memo 
providing guidance for investment requests. As I understand it, a key 
question relating to the investments issue is whether the financing is 
labeled as a loan or as an ``investment.''
    Can you explain the distinctions between loans and investments?
    Answer. We review each investment request on a case-by-case basis 
and evaluate the underlying characteristics of the investment to 
determine whether the requested investment would be considered an 
investment from legal, accounting, and market recognition perspectives. 
In making this determination, we analyze applicable case law, Federal 
securities laws, accounting guidance, and knowledge of market norms 
regarding investment products versus loan products. Case-by-case 
investment requests require FCA Board approval and are subject to 
specific conditions of approval, including requirements that the 
investments must be accounted for as investments under GAAP and be 
securities under Federal securities laws.

    Question 8a. Since the release of the investments guidance memo 
last September, can you provide examples of the investment projects FCA 
has approved that are non-farm in nature and whether any of these 
projects would be illegal if considered as loans?
    Answer. Since the release of the investments guidance memo, FCA has 
approved four investment requests. The first and second requests 
approved an investment by two institutions in a rural hospital located 
in Minnesota. FCA has clear statutory authority to approve investments 
on a case-by-case basis and does so as provided by regulation  
615.5140(e). A rural hospital would not be eligible to obtain loans 
from the System under the lending authorities provided by the Farm 
Credit Act. The two institutions invested in the rural hospital by 
purchasing debt securities issued by the hospital.
    The third investment request was for an institution that invested 
in a bond issued by an agribusiness--with the proceeds used to expand a 
grain milling company in rural Indiana. While this financing was 
completed through the association's investment authority, the borrowing 
entity is eligible to obtain loans from the association, and grain 
milling is an activity that the System can finance under its statutory 
lending authorities.
    The fourth investment request was for an institution to purchase 
rural housing mortgage-backed securities. This type of mortgage-backed 
security is an eligible investment for liquidity purposes. However, 
this investment was approved as a mission-related investment under  
615.5140(e) because of the Farm Credit Bank's intention to hold the 
investment to maturity and not make it available for sale for liquidity 
purposes. The underlying rural housing mortgages were extended by 
commercial lending institutions serving rural areas and this secondary 
market activity serves to improve liquidity to that marketplace.

    Question 9. Are you finding that credit is generally available for 
production agriculture? Are there any areas where the market is not 
being adequately served by FCS and commercial banks?
    Answer. Yes. We are finding that traditional and nontraditional 
agriculture is being well served by the System and community bankers, 
and other commercial lenders. At our recent strategic planning session, 
we heard from a number of experts and lenders who indicated that the 
agricultural credit market is highly competitive, and for the most part 
is well served by FCS and commercial lenders. Nonetheless, through 
other venues, we have also heard some evidence that there are pockets 
of areas that are less well served--such as microcredit to start-ups 
for highly specialized commodities and nontraditional producers and 
urban agriculture. We are committed to identifying and removing any 
regulatory or other barriers that would prevent System institutions 
from providing creditworthy producers in these markets with necessary 
financial services.

    Question 10. Many assume that as a GSE, the Farm Credit System has 
an ``implicit guarantee,'' similar to Fannie Mae and Freddie Mac. Thus, 
in the late 1980s when the Farm Credit System was in trouble, the U.S. 
Government bailed it out. Do you agree that GSEs, including the Farm 
Credit System, are provided an implicit guarantee that the Federal 
Government will not allow them to default on their obligations? In 
other words, are they too big to fail?
    Answer. A determination of whether the System is too big to fail 
would ultimately be made by Congress. Congress would need to consider 
various financial, economic, and political factors when it decides 
whether or not to provide assistance to a GSE. In our regulation, 
examination, and supervision of the System, we do not in any way assume 
that Congress would act to provide financial assistance to the System. 
The assumption of an implicit guarantee is just that--an assumption. 
Although the rating agencies often reference the ``implicit 
guarantee,'' those references refer to the expectations of investors, 
not those of FCA.
    FCA uses all of the examination, regulatory, and supervisory tools 
at its disposal to ensure that the FCS always operates in a safe and 
sound manner. For this reason, FCA does not ever consider implicit 
guarantees a backstop to its safety and soundness authorities. As far 
as the System is concerned, much has changed since the 1980s. 
Legislation in 1985, 1986, and 1987 converted FCA into an arm's-length 
safety and soundness regulator, established FCSIC to insure System-wide 
bonds, restructured the FCS, created Farmer Mac as a secondary market 
for agricultural loans, and enacted other reforms that substantially 
reduce the risk that Congress would need to consider a bail-out of the 
FCS in the future.

    Question 11. In September of 2013, the Farm Credit System Insurance 
Corporation secured a $10 billion line of credit from the Federal 
Financing Bank, an arm of the U.S. Treasury. What is the current asset 
base of the Farm Credit System Insurance Corporation and why was this 
$10 billion line of credit obtained? Should we be concerned?
    Answer. Currently, the Insurance Corporation has $4 billion in 
assets. Those assets are invested only in U.S. Treasury securities. 
Unlike other financial institutions, the System does not have 
guaranteed access to the Federal Reserve, the U.S. Treasury, or any 
other lender of last resort leaving it vulnerable to a market crisis 
similar to what occurred in 2007 and 2008. The Insurance Corporation 
has statutory authority to provide financial assistance to System 
institutions, including during a liquidity crisis in which external 
market conditions have jeopardized the System's ability to fund itself. 
The Insurance Corporation obtained the credit line to provide more 
assistance to System banks in such a market crisis than would otherwise 
be available in the Insurance Fund to protect investors and taxpayers 
from losses.

    Question 12. Your testimony highlights the Farm Credit Insurance 
Fund. Do other GSEs have similar insurance funds or reserves?
    Answer. The three housing GSEs do not have similar insurance funds. 
Treasury may provide direct financial assistance to them by purchasing 
their debt obligations. (Separately, Treasury has injected capital into 
Fannie Mae and Freddie Mac, which are currently under U.S. Government 
conservatorship, so they have sufficient capital to meet their 
obligations.)
    In further answer to your question, we note that Farm Credit System 
debt is ultimately backed by the joint and several liability of the 
System banks, not the full faith credit of the United States. The 
obligations of Farmer Mac are not insured by FCSIC. However, Farmer Mac 
can issue obligations (not to exceed $1.5 billion at any time) to the 
Secretary of Treasury, the proceeds of which may be used by Farmer Mac 
solely for the purpose of fulfilling its obligations under any 
guarantee it provides under the Farm Credit Act.

    Question 13. From 1998 to 2013, the USDA defined small farms as 
those farms with gross sales less than $250,000. In 2013 the USDA 
raised the cutoff to $350,000 to better reflect price increases for 
farm commodities. According to the FCA's 2014 annual report, the FCA 
still uses the old cutoff. Why is the FCA using the more limited 
threshold and how many small farmers might be left out as a result?
    Answer. FCA has formed a workgroup that is studying whether we 
should adopt USDA's Economic Research Service's new threshold of 
$350,000.

    Question 14. Regarding the Farm Credit's equipment financing 
program AgDirect, how do you ensure that the borrowers are credit 
worthy? Additionally, if any equipment dealer can use AgDirect, how do 
you guarantee that the borrower meets the qualifications to be a Farm 
Credit customer?
    Answer. FCA does not determine the creditworthiness of the 
borrower. The FCS institution must do this through its underwriting 
standards, which we review during our examinations. Likewise, AgDirect 
has controls to ensure that the borrowers meet qualifications to borrow 
from the System. We review these controls during our examinations.

    Question 15. The FCA held a series of symposia in January and 
February of this 2014 to discuss future FCS consolidations and mergers. 
We understand that the symposia were by invitation only, and not open 
to the general public. Why were these meetings not open to the public? 
Was this in violation of Federal open meeting laws?
    Answer. The symposia were held with interested parties, including 
representatives from academia, the System, and former Members of 
Congress to gather information on past experiences and future thoughts 
on FCS consolidations and mergers. Invitations were limited to allow 
FCA to hold the briefings at FCA's headquarters and manage expenses. 
The symposia were informational briefings in nature and not designed to 
gather input on any regulatory or policy proposal. The FCA Board did 
not conduct policy deliberations, and for this reason, the symposia 
were not meetings under the Government in the Sunshine Act. Transcripts 
of the symposia were provided to the public via FCA's website. 
Accordingly, we believe that attendance at the symposia was 
appropriately limited, and that the symposia were conducted in full 
compliance with all relevant Federal laws.
Questions Submitted by Hon. Collin C. Peterson, a Representative in 
        Congress from Minnesota
    Question 1. I know that one of the major distinctions between Farm 
Credit banks and commercial banks is the ability to take deposits. 
However, there is information on the Farm Credit Services of America's 
website that promotes something called CashPlus that says, ``CashPlus 
offers a convenient way to handle your cash flow through one interest-
bearing account--make deposits and pay bills anytime without penalty or 
fee.'' During the hearing it was indicated that an account such as this 
is allowed and that it can be interest bearing. I just wanted to 
clarify on the interest bearing ability as well as the ability to write 
checks from such an account. Are these actions allowed?
    Answer. Yes, such accounts are authorized for customers who have 
outstanding loans with an association. We refer to these accounts as 
Voluntary Advanced Conditional Payment (VACP) accounts. VACP accounts 
are expressly authorized by sections 1.5(6) and 2.2(13) of the Farm 
Credit Act. In addition, section 4.37, 12 U.S.C. 2219b, requires funds 
in a borrower's VACP account to ``be immediately applied as payment 
against the indebtedness of any outstanding loans of such borrower'' if 
the institution is placed in liquidation. VACP accounts are subject to 
the FCA's regulatory and supervisory authority under the current 
statutory framework. Currently, FCA regulation  614.4175 and an FCA 
bookletter, BL-30, apply to VACP accounts at FCS institutions.
    Funds received from customers with VACP accounts, such as CashPlus 
accounts, are either applied to the borrower's outstanding loan 
balances or held for future payments and interest is paid on funds 
held. Appropriate disclosures are made to the borrowers that funds 
placed in these accounts are not federally insured. FCS institutions 
pay interest on VACP accounts. Drafts, which function similar to a 
check, are not written directly on the VACP account, but on established 
lines of credit. System borrowers have been using drafts to access 
their lines of credit for several decades.

    Question 2. A question was asked regarding lending ability to 
qualified borrowers in the U.S. Virgin Islands. I wanted to clarify 
whether an existing System institution could ask to have their charter 
expanded to begin lending in the USVI. Is that how it would work? Could 
an existing entity ask to serve the islands? Or would you need to 
charter a new bank?
    Answer. Under section 1.2(b) of the Farm Credit Act, 12 U.S.C. 
2002(b), FCA may extend the FCS to the USVI if the agency first 
determines that extending credit and providing other authorized 
services to farmers and other eligible borrowers there is feasible. In 
the past, FCA has studied this issue and concluded that it would not be 
economically feasible for the System to extend credit and provide other 
financial services in the USVI If FCA were to determine that providing 
credit in the USVI would be feasible, it would first assign the USVI to 
one of the Farm Credit districts, as the statute requires. Afterwards, 
FCA could either charter a new association to serve the USVI in 
accordance with several provisions of the Farm Credit Act, or it could 
modify the charter of an existing association so its territory would 
include the USVI In the absence of an active association in the USVI, 
the Farm Credit bank could make mortgage loans there in the interim. We 
would gladly work with interested parties to evaluate the possible 
scenarios and circumstances involved.

    Question 3. There was discussion during the hearing regarding the 
ability to track participation in Farm Credit System lending beyond the 
current categories of size, time in farming and age of borrower. Are 
you able to legally track borrowers by race/ethnicity or age?
    Answer. As with all creditors, the Equal Credit Opportunity Act 
(ECOA) generally prohibits System institutions from asking the race or 
ethnicity of loan applicants or borrowers. The ECOA permits creditors, 
including System institutions, to ask the age of applicants; this 
information can be used only for limited purposes in credit decisions, 
as specified in the ECOA. System institutions may consider age when 
determining if an applicant or borrower is a ``young'' farmer (aged 35 
or younger) who may qualify for favorable lending treatment. In certain 
residential lending, the ECOA requires creditors, including System 
institutions, to ask each applicant his or her race, ethnicity, and age 
for monitoring purposes, but the applicant is not required to provide 
this information and a creditor may not use this information in making 
credit decisions.

    Question 4. The FCA had a proposed rule on ``Rural Community 
Investments'' and withdrew it. FCA also had a pilot program on these 
investments and withdrew it. FCA then issued a guidance memo that 
allowed approval of projects being considered in the proposed rule and 
pilot program on a case by case basis.
    Did all or most of the pilot projects being financed continue even 
though the program was ended? How many, if any, pilot projects were 
discontinued?
    Answer. To our knowledge, no pilot projects were discontinued, and 
FCA did not direct any institutions to discontinue funding any 
projects. System institutions were specifically allowed to continue 
funding projects where commitments were extended prior to December 31, 
2014. The FCA Board permitted System institutions holding investments 
on December 31, 2014, under the Pilot Programs to continue to hold 
those investments subject to the conditions imposed by FCA for the 
applicable Pilot Program. Those investments could be held only through 
the date of maturity that existed as of December 31, 2014, without 
renewal or extension, except as approved on a case-by-case basis by 
FCA. After December 31, 2014, institutions could fund commitments for 
Pilot Program investments only if the commitments were made prior to 
that date.

    Question 4a. Does the guidance memo basically allow FCA to approve 
financing categorized as an investment for virtually any purpose if 
it's a viable credit? Is the entire proposed investment program 
approved or is approval granted to individual investments?
    Answer. FCA evaluates the merits of each request on a case-by-case 
basis. In addition to the risk characteristics, investment requests 
must detail the purpose and objectives of the investment. Each request 
must demonstrate that the proposed investment is mission related, and 
it must address factors such as supplementary liquidity and earnings 
diversification. Since the end of the pilot programs, FCA has approved 
requests from four institutions to make investments under strictly 
defined conditions of approval.

    Question 4b. How are these investments structured?
    Answer. Three of the investment requests were structured as bonds. 
The fourth investment request was for the purchase of rural housing 
mortgage-backed securities.

    Question 5. CoBank's gotten a lot of attention for making a $725 
million loan to Verizon and other large loans to large 
telecommunication companies under the ``similar-entity'' provision of 
the Act. Can you describe the circumstances regarding the Verizon, U.S. 
Cellular and AT&T lending interactions with System institutions?
    Answer. The Farm Credit Act authorizes CoBank to lend to rural 
telecommunications utilities. Rural utilities are eligible to borrow 
from CoBank if they either have a loan, loan commitment, or loan 
guarantee from the Rural Utilities Service (RUS) or the Rural Telephone 
Bank (RTB), or are eligible for credit from the RUS or RTB under the 
Rural Electrification Act of 1936, as amended. Wireless carriers 
(including U.S. Cellular) that qualify for credit under the Rural 
Electrification Act are eligible to borrow from CoBank. Since the 
wireless communication industry's infancy, CoBank has been lending to 
wireless carriers serving customers located in rural areas. As the 
industry has matured, most of the rural startup cellular companies have 
been purchased by larger companies, such as Verizon or AT&T. 
Telecommunication carriers that are not rural utilities under the Rural 
Electrification Act may qualify as similar entities under section 
3.1(11)(B) of the Farm Credit Act. Both Verizon and AT&T qualify as 
similar entities. Also, each has an extensive wireless network in rural 
areas.
    CoBank often acts as the System's lead lender for similar-entity 
participations, utilizing its statutory authority to lend to rural 
utilities. The lead commercial bank(s) on the $13 billion syndicated 
loan transaction for Verizon offered CoBank, as the System lead, the 
opportunity to purchase a portion of the credit, which CoBank completed 
(approximately six percent of the total syndication) on its own behalf 
as well as other System partners.
    FCA's review of the Verizon participation purchase (as well as the 
AT&T deal) found that the legal authority exists for this participation 
activity and the risk management benefits achieved through balance 
sheet and earnings diversification are consistent with the intent of 
the authority granted by Congress. Similar-entity authority also 
provides opportunities for commercial lenders and the Farm Credit 
System to work together to meet the needs of agriculture and rural 
America by mitigating risk.
    Under the Farm Credit Act, the System can only participate in 
similar-entity loans when a commercial lender is involved. Commercial 
lenders must retain 50 percent or more of the credit. Congress also 
imposed limits on the extent of this activity to no more than 15 
percent of an institution's portfolio. At this time, similar-entity 
volume is less than ten percent of the System's outstanding loan 
volume.

    Question 6. What is the status of the merger between the failed FCS 
Southwest and their merger with California's Farm Credit West? Has this 
been voted on by shareholders and if so what was the outcome? Can you 
provide a written summary of what led to the failure of this 
association?
    Answer. FCS Southwest was not failing before it merged with Farm 
Credit West. An incident involving possible fraud by an employee 
occurred that led to substantial losses, but the association continued 
to meet all regulatory capital requirements. Upon discovery of the 
fraud incident, we were onsite immediately and took appropriate actions 
to ensure the association addressed the incident in a timely and 
appropriate manner. The Agriculture Committees were notified, and the 
FCS in its report to investors reported the incident and the potential 
cause. The Board of FCS Southwest elected to pursue merger with Farm 
Credit West. The voting stockholders approved the merger of FCS 
Southwest with Farm Credit West, the funding bank approved the merger, 
and FCA granted its approval. The merger became effective on November 
1, 2015.
Question Submitted by Hon. Bob Goodlatte, a Representative in Congress 
        from Virginia
    Question. But I am sure you would agree that the Farm Credit System 
has certain advantages and benefits that small community banks don't 
have. Alternatively, what advantages do community banks have over the 
Farm Credit System?
    Answer. The advantages that community banks have over the Farm 
Credit System stem largely from their broader charters, which allow 
them to accept deposits, offer more financial services, and allow for a 
broader range of lending authority. The following provides a brief 
summary of some of those advantages:
    The deposits of community banks are insured by the Federal Deposit 
Insurance Corporation, and the deposit insurance fund is backed by the 
full faith and credit of the United States. The FDIC has a line of 
credit with the U.S. Treasury, which it has utilized during recent 
banking crises. FDIC insurance provides community banks with a stable, 
low-cost source of funding. The existence of FDIC insurance greatly 
lessens the impact of the bank's financial condition on the cost and 
stability of its funding.
    Community banks are authorized to offer a broad range of financial 
services to its customers. This provides community banks the 
opportunity to attract low-cost funds for lending, and to diversify 
earnings sources.
    In contrast to the System, community banks are not restricted by 
law to lending primarily to a single sector of the economy. As a 
result, community banks may lend to a full range of businesses, 
industries, and consumers for all types of purposes and needs. 
Community banks may also offer consumers and businesses a broad array 
of financial services and products that the System cannot offer its 
customers. As a result, community banks have greater flexibility than 
the System to manage loan portfolio concentration risks.
    Community banks have the option of becoming a member of the Federal 
Reserve Bank in their district. The Federal Reserve Banks are lenders 
of last resort to their member banks, and they provide discount and 
other services to such banks, much like those that banks provide for 
their customers. These services include collecting checks, 
electronically transferring funds, and distributing and receiving cash 
and coin.
    An independent study titled ``Lending Competition of Community 
Banks and the Farm Credit System'' was published in August 2009 by the 
Federal Reserve Bank of Kansas City. This study provides an excellent 
discussion of the advantages and disadvantages of commercial banks and 
the System. It can be found on the Federal Reserve Bank of Kansas 
City's website at https://www.kansascityfed.org/publicat/fip/
LendingCompetition08-09.pdf.
Questions Submitted by Hon. Frank D. Lucas, a Representative in 
        Congress from Oklahoma
    Question 1. Do you agree that the Farm Credit System should not be 
in the business of holding on to long-term assets, such as oil and gas 
and other minerals?
    Answer. The Federal Land Banks, which were predecessors to the Farm 
Credit banks, and the defunct Farm Mortgage Corporation, which was a 
wholly owned government corporation that was a System institution until 
Congress dissolved it in 1961, acquired mineral rights through 
foreclosures on farms starting in the Great Depression of the 1930s. 
Thus, it became common practice for the former Federal Land Banks and 
the Farm Mortgage Corporation to retain the mineral rights on 
foreclosed farms and sell the surface rights. The 1961 statute that 
dissolved the Farm Mortgage Corporation transferred its mineral rights 
to the Department of the Interior. The Farm Credit Amendments Act of 
1985 added section 4.35 to the Farm Credit Act of 1971 to require Farm 
Credit System institutions that acquire real property through 
foreclosure to sell both the surface and the mineral rights to the same 
buyer. However, this statutory amendment does not apply retroactively 
to mineral rights that System institutions previously acquired. Mineral 
rights that System institutions acquired before 1985 and continue to 
hold do not violate the law, do not pose a safety and soundness risk to 
the System, and are consistent with long-term assets held by FCS 
institutions.

    Question 2. Does the FCA know the cost basis and present value of 
AgriBank's mineral assets? If so, can you provide that information to 
the Committee?
    Answer. AgriBank's mineral rights currently have no book value; 
these intangible assets have no recorded value on the bank's Statement 
of Condition. AgriBank (successor to the Federal Land Banks and Farm 
Credit Banks of St. Paul, St. Louis, Louisville, and AgAmerica) 
acquired all of its mineral rights before Congress enacted the 1985 
statute. The majority of revenue-producing mineral deposits are located 
in North Dakota and Arkansas (the bank holds mineral interests in 13 
states). Upon acquisition, the rights were likely recognized at fair 
value and amortized over the estimated useful life. FCA does not have 
the information necessary to determine what the cost basis was when 
acquired, nor do we have sufficient information to calculate the 
present value. AgriBank's mineral income in 2015 was $56.5 million.

    Question 3. Will the FCA require AgriBank to dispose of its mineral 
assets, which the bank has held for over 5 years? If not, please 
explain.
    Answer. As noted above, mineral rights that AgriBank acquired 
before the Farm Credit Amendments Act of 1985 do not violate the law, 
and they do not impair the safety and soundness of the bank. Under the 
circumstances, FCA has no legal basis to require AgriBank to dispose of 
these assets.
Question Submitted by Hon. Glenn Thompson, a Representative in Congress 
        from Pennsylvania
    Question. And then my other question--and I am not going to have 
time for a verbal response, but I would appreciate one for the record--
what safeguards do you have in place to prevent mission creep? Because 
mission creep in government is well known and certainly in quasi-
government agencies as well. I think it is a human natural tendency. 
And I would love, for the record, if you could send the Committee a 
list of, what are the safeguards you have in place to keep you within 
the lines of what Congress envisioned when this authorizing legislation 
was passed?
    Answer. The System's mission is defined by the Farm Credit Act. 
Essentially, the Farm Credit Act authorizes the Farm Credit System to 
lend to agricultural producers and their cooperatives, rural utilities 
that meet certain requirements, exporters of agricultural products and 
capital equipment, farm-related service businesses, and certain rural 
homeowners. In addition, System institutions have authority to 
participate in loans that non-System lenders originate to entities that 
are not eligible to borrow directly from the System, but engage in 
activities that the System routinely finances. FCA has promulgated 
regulations pertaining to eligibility, scope of financing, and similar 
entities that provide adequate safeguards against mission creep. A list 
of those eligibility regulations is provided as follows:

        PART 613--ELIGIBILITY AND SCOPE OF FINANCING

        Subpart A--Financing Under Titles I and II of the Farm Credit 
        Act

                  613.3000  Financing for farmers, ranchers, and 
                aquatic producers or harvesters
                  613.3005  Lending objective
                  613.3010  Financing for processing or marketing 
                operations
                  613.3020  Financing for farm-related service 
                businesses
                  613.3030  Rural home financing

        Subpart B--Financing for Banks Operating Under Title III of the 
        Farm Credit Act

                  613.3100  Domestic lending
                  613.3200  International lending

        Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) 
        and 4.18A of the Act

                  613.3300  Participations and other interests in loans 
                to similar entities

    FCA examinations routinely evaluate System institutions' compliance 
with the above eligibility criteria. The System's statutory authority 
is broader than the System's competitors acknowledge. FCA is proud of 
the job our staff has done to ensure the System stays within its 
mission while fully recognizing that agriculture continues to evolve 
and the System must continue to evolve as well to meet the vast credit 
needs of producers and the agribusinesses on which they are dependent. 
In supervising the System, FCA constantly strives to strike the proper 
balance so System institutions stay within the parameters of the 
statute while, at the same time, ensuring that they are always able to 
furnish adequate and affordable credit to American agriculture.
Questions Submitted by Hon. Jackie Walorski, a Representative in 
        Congress from Indiana
    Question 1. We all want to ensure access to credit for our farmers. 
However, as the hearing demonstrated, there are concerns about mission 
creep and whether the Farm Credit System is becoming a competitor 
rather than a complementary source of credit. I received an e-mail from 
a local banker talking about a situation where a local, well-
established farmer bought a couple hundred acres at auction. He already 
owned a sizable plot of land and had no debt. Farm Credit offered him a 
3.15% fixed rate for 15 years while a Treasury bill was yielding 2.2%. 
The best the local banker could offer was 4.16% over 15 years. The 
farmer did what any sane person would do and took the lower rate. I 
can't blame him and the banker couldn't either. He is concerned that 
the System is prioritizing loan growth targets above all and that, in 
order to meet those targets, they are seeking out large, established 
farmers to grow the portfolio, potentially at the expense of small and 
beginning farmers. And an anecdote like that certainly does raise 
eyebrows. What does the FCA do to maintain a complementary role in the 
credit market? Does the FCA give any guidance on portfolio growth rates 
and targets and incentives to meet the rates and targets to ensure that 
it's not undercutting banks, who do not enjoy the tax benefits that 
Farm Credit does?
    Answer. The statute does not designate the Farm Credit System as 
lender of last resort that lends only to borrowers who cannot obtain 
credit elsewhere. Similarly, the Farm Credit Act does not specify that 
the System is a complementary source of credit to commercial banks and 
other agricultural lenders. Instead, the FCS has authority to compete 
with commercial banks and other lenders in making loans to eligible 
borrowers. Accordingly, the System operates in a very competitive 
agricultural credit market, and it competes for business against 
commercial banks, life insurance companies, and companies providing 
trade credit. The Farm Credit Act directs the institutions of the Farm 
Credit System to ``provide equitable and competitive interest rates to 
eligible borrowers.'' For this reason, FCA examinations routinely 
evaluate the pricing practices of System institutions to ensure that 
all loans cover the cost of funds, including the operating costs of the 
institution--provisions for loan losses, costs of servicing, and the 
need to retain earnings and provide for adequate capitalization.
    Aside from the tax benefits that the System's competitors often 
highlight, the System has evolved into an efficient business model. The 
System's efficient business model was highlighted in an independent 
study completed by staff of the Federal Reserve Bank of Kansas City: 
``Lending Competition of Community Banks and the Farm Credit System.'' 
It can be found on the bank's website at https://www.kansascityfed.org/
publicat/fip/LendingCompetition08-09.pdf.

    Question 2. Have you been contacted by the Government 
Accountability Office to provide information for a study they are 
conducting on the Farm Credit System? If so, what information were you 
asked to provide?
    Answer. No, we have not been contacted recently by the Government 
Accountability Office to provide information for a study it is 
conducting on the Farm Credit System.
Questions Submitted by Hon. Mike Bost, a Representative in Congress 
        from Illinois
    Question 1. According USDA, 49% of Illinois farmers hold jobs off 
of the farm and view agriculture as their secondary occupation. This 
shows why rural economic development is so important to supporting 
agriculture. FCA recently completed a pilot program called 
``Investments in Rural America'' where Farm Credit institutions worked 
with community banks and other rural stakeholders to broaden access to 
capital to support rural communities. Could you briefly discuss the 
results of that pilot program and whether there are other initiatives 
at the agency to encourage Farm Credit institutions to work with local 
community banks on financing rural projects in a collaborative manner?
    Answer. The pilot programs were determined to be successful and 
informative in evaluating the appropriate scope of rural investment by 
System institutions. Consistent with the finding of the pilot programs, 
FCA issued a proposed rule to codify the authority for System 
institutions to make certain types of mission-related investments. 
However, a final rule was not pursued. Subsequently, in September of 
2014, FCA released an Informational Memo providing guidance for 
investment requests. As was the case prior to the pilot programs, we 
review each investment request on a case-by-case basis and evaluate the 
underlying characteristics of the investment to determine whether the 
requested investment would be considered an appropriate mission-related 
investment from legal, accounting, and market recognition perspectives. 
One of the key criteria used in this evaluation is whether the System 
institution is working with local community banks to partner in the 
rural project. While we evaluate these investment requests by System 
institutions, FCA is not leading any initiatives to encourage Farm 
Credit institutions to work with local community banks on financing 
rural projects in a collaborative manner.

    Question 2. Can you please explain what actions the FCA is taking 
to ensure that FCS institutions are complying with state insurance laws 
when it comes to the licensing and regulation of FCS employees selling 
crop insurance?
    Answer. FCA examinations routinely include FCS employees' 
compliance with all applicable laws concerning the sale of crop 
insurance. Our examinations have not found any instances of wrongdoing, 
and as a result, no enforcement actions have been taken.

    Question 3. Can you explain AgDirect to me? How do you ensure that 
the borrowers are credit worthy? Additionally, if any equipment dealer 
can use AgDirect, how do you guarantee that the borrower is a farmer or 
at least meets the qualifications to be a Farm Credit customer?
    Answer. AgDirect is an equipment financing program offered by 
participating Farm Credit System associations of AgDirect, LLP, through 
representative equipment dealers. The program uses standardized 
underwriting practices to determine creditworthiness of the borrower. 
It has controls that ensure borrowers meet the qualifications to be a 
Farm Credit customer. AgDirect, eligibility controls, and the 
underwriting standards are subject to ongoing FCA examination.

    Question 4. If a borrower uses AgDirect, do they have to buy the 
$1,000 worth of stock to become a Farm Credit customer? Do they have 
voting rights in the Farm Credit Association that offered the AgDirect 
loan?
    Answer. If a borrower uses AgDirect to finance the purchase of 
equipment, he or she does not buy stock in an association. The 
equipment purchase is completed using a retail installment sales 
contract with the equipment dealer. AgDirect borrowers are obtaining 
credit from the dealer, not the FCS association. The FCS association 
then purchases a participation interest in the sales contract. The FCS 
association is participating in the credit but is not the lender of 
record. For this reason, the borrower does not buy stock in the 
association. If that is the borrower's only relationship with Farm 
Credit, then he or she does not have voting rights. However, the 
majority of farmers and ranchers using AgDirect own stock in a Farm 
Credit association because of another loan product that affords the 
borrower voting rights.

    Question 5. What was the total asset size of AgDirect at the end of 
2013? How much new loan volume did AgDirect book in 2013?
    Answer. AgDirect volume is pooled on an annual basis through 
participations sold to AgriBank. At year-end 2013, total volume 
reported at AgriBank was $2.5 billion. During 2014, AgDirect booked an 
additional net increase of $500 million, resulting in total volume 
reported at AgriBank of $3.0 billion at year-end 2014. Outstanding 
AgDirect volume will be reported at year-end 2015 in AgriBank's 
financial statements.

    Question 6. Is there any concern with the AgDirect program since 
equipment sales are down and there are some potential struggles on the 
horizon for equipment dealers?
    Answer. There is reason for concern in any lending relationship 
with farmers during difficult economic conditions. AgriBank reported 
that it added $5 million during the third quarter of 2015 to its 
allowance for loan losses for exposure related to AgDirect volume.
Questions Submitted by Hon. John R. Moolenaar, a Representative in 
        Congress from Michigan
    Question 1. Can you expand on the process of mortgage and homeowner 
lending? What is the default rate for home and commercial loans across 
the Farm Credit System?
    Answer. The credit quality of homeowner loans and commercial loans 
extended by the System is excellent. At September 30, 2015, just 0.9 
percent of rural residential real estate loans and 0.8 percent of 
commercial loans were non-performing.

    Question 2. In your view, what are the competitive advantages and 
disadvantages of the Farm Credit System compared to community banks?
    Answer. It is our view that Congress provided the System with 
certain advantages in the marketplace to allow the System to meet its 
mission through good times and bad. We believe that, likewise, 
commercial banks are provided distinct advantages to meet the needs of 
its customers. The System has two distinct advantages. First, it sells 
bonds with spreads close to Treasuries. Second, its cooperative 
structure means that System institutions are owned by their farmer-
borrowers, rather than investors, which means profits generated by the 
System institutions go back to the farmer-borrowers instead of 
investors. Community banks have three distinct competitive advantages 
over the System. First, the assets and liabilities of community banks 
are more diverse than those of the FCS. In contrast to the FCS, 
community banks are not required to primarily lend to a single sector 
of the economy. Their investment authorities are also broader. They 
also have more funding sources than the FCS. Second, the low-cost 
deposits of community banks are expressly backed by the full faith and 
credit of the United States whereas System bonds are not. Also, many 
community banks (but not all) have a lender of last resort, which is 
their Federal Reserve Bank. In contrast, the FCS has no guaranteed 
lender of last resort.
    The agricultural credit marketplace is competitive, with commercial 
banks and the System each maintaining about 40 percent market share, 
while insurance companies and trade creditors together have a 20 
percent market share. This competition directly benefits the farmers 
and ranchers of America. For a more complete and unbiased discussion of 
the advantages and disadvantages of the System and community banks 
serving the agricultural marketplace, we refer you to a study published 
in August 2009 by the Federal Reserve Bank of Kansas City, titled 
``Lending Competition of Community Banks and the Farm Credit System.'' 
It can be found on the bank's website at https://www.kansascityfed.org/
publicat/fip/LendingCompetition
08-09.pdf.

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