Farm Credit Administration: Oversight of Special Mission to Serve
Young, Beginning, and Small Farmers Needs to Be Improved
(08-MAR-02, GAO-02-304).
GAO reviewed the Farm Credit Administration's (FCA) regulation of
the Farm Credit System (System) to ensure compliance with its
statutory mission to serve young, beginning, and small farmers
(YBS). FCA has issued YBS-related policies and guidance, designed
and implemented a YBS examination protocol, and examined
institutions for compliance with YBS requirements. However, FCA
has not promulgated regulations to define standards and clarify
what constitutes an acceptable YBS program. GAO also found that
FCA failed to follow examination procedures and document
examination conclusions in the YBS program. Slightly more than
half of the institutions in the System had a YBS program or
service in place. Nearly one third had set numerical goals for
YBS service, although most were not conducting demographic
studies. Half had YBS marketing and outreach efforts in place,
and most were coordinating their YBS offerings with federal,
state, or other governmental or private credit sources.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-02-304
ACCNO: A02872
TITLE: Farm Credit Administration: Oversight of Special Mission
to Serve Young, Beginning, and Small Farmers Needs to Be Improved
DATE: 03/08/2002
SUBJECT: Agricultural assistance
Agricultural programs
Farm credit
Farm credit banks
Government sponsored enterprises
Regulatory agencies
Farm Credit System
FHLB Affordable Housing Program
FHLB Community Investment Cash Advance
Program
FHLB Community Investment Program
FmHA Guaranteed Farm Loan Program
FSA Loan Guarantee Program
New Generation Loan Program
******************************************************************
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GAO-02-304
United States General Accounting Office
GAO Report to the Ranking Minority Member, Committee on Agriculture,
Nutrition, and Forestry, U.S. Senate
March 2002
FARM CREDIT ADMINISTRATION
Oversight of Special Mission to Serve Young, Beginning, and Small Farmers
Needs to Be Improved
GAO-02-304
United States General Accounting Office March 2002
Accountability Integrity Reliability Oversight of Special Mission to Serve
Young,
Beginning, and Small Farmers Needs to Be
Highlights Improved
Highlights of GAO-02-304, a report to the Ranking Minority Member, Committee
on Agriculture, Nutrition, and Forestry, U.S. Senate.
Why GAO Did This Study
Congress is concerned about the availability of credit to young, beginning,
and small farmers (YBS). Because of this concern, GAO was asked to review
the Farm Credit Administration's (FCA) oversight of the Farm Credit System's
(System) compliance with its statutory requirement to serve YBS. GAO
reviewed, among other things, a representative sample of 30 fiscal year 2001
FCA examinations of System institutions. GAO also identified characteristics
of YBS programs at System institutions. GAO compared YBS program
requirements and oversight to that of other regulators who oversee
compliance with the special mission or service requirements of
government-sponsored enterprises and banks.
What GAO Found
FCA has issued policies and guidance that are consistent with the statutory
mission to serve YBS and FCA's oversight responsibilities, and it has
developed and relied on examination procedures to assess compliance with the
mission requirement to serve YBS. FCA has not, however, promulgated a
regulation with specific YBS program activities and standards it expects of
System institutions. FCA's regulation restates the broad statutory
requirement, which is open to interpretation and results in some System
institutions taking no specific actions toward YBS. GAO identified
weaknesses in FCA's 2001 examinations that limited the agency's ability to
effectively oversee YBS mission compliance. Generally, these weaknesses were
incomplete execution of examination procedures and incomplete documentation
to support examination conclusions.
The FCA examination reports indicated that just over half of the
institutions' YBS programs had features designed to target services
specifically to YBS farmers. These features ranged from educational training
programs to special loan underwriting standards. Most institutions
coordinated with other governmental or private credit sources and nearly a
third had established a measurable goal for YBS service. FCA has identified
data for System institutions to use in assessing the extent of their YBS
service, but the data are limited in important ways.
With the exception of FCA, other regulators with special mission or service
requirements issued regulations with specific standards describing what
constituted an acceptable program to comply with statutory special mission
requirements or service obligations. FCA and all the other regulators
monitored program compliance or performance through examinations or reviews
and all required reporting. Unlike FCA, other regulators publicly disclosed
information on the performance of individual institutions they regulate or
required the regulated entities to do so, which could provide an incentive
for institutions to improve their programs.
This is a test for developing highlights for a GAO report. The full report,
including GAO's objectives, scope, methodology, and analysis is available at
www.gao.gov/cgi-bin/getrpt?GAO-02-304. For additional information about the
report, contact Davi M. D'Agostino (202-512-8678). To provide comments on
this test highlights, contact Keith Fultz (202-512-3200) or e-mail
[email protected].
Contents
Letter
Background FCA Has Issued YBS Policies and Guidance and Monitors Compliance
through Examinations but Has Not Set Standards in Regulation Weaknesses in
Examinations for YBS Compliance Limited FCA's
Ability to Effectively Oversee Institutions' YBS Programs System Efforts to
Serve YBS Varied The System's Special Mission Requirements Are Less Specific
Than Those of Housing GSEs Conclusions Recommendations Agency Comments
1 2
4
12 16
20 26 27 27
Appendix I Scope and Methodology
Appendix II Comments from the Farm Credit Administration
Table
Table 1: Comparison of GSE Statutory Missions and Special Mission
Requirements
Figures
Figure 1: YBS Examination Steps, as Provided by the YBS Examination
Leadsheet 11 Figure 2: Percent of Weaknesses in FCA's Examinations of System
Institutions 13 Figure 3: Extent of Completion of Examination Procedures for
Statutory Compliance by Percent 14 Figure 4: Illustrative YBS Program
Activities 17
Abbreviations
AHP Affordable Housing Program
CIP Community Investment Program
CRA Community Reinvestment Act
FCA Farm Credit Administration
FCC Farm Credit Council
FCS Farm Credit System
FHFB Federal Housing Finance Board
FSA Farm Service Agency
HUD U.S. Department of Housing and Urban Development
USDA U.S. Department of Agriculture
YBS young, beginning, and small farmers
United States General Accounting Office Washington, DC 20548
March 8, 2002
The Honorable Richard Lugar
Ranking Minority Member,
Committee on
Agriculture, Nutrition, and Forestry
United States Senate
Dear Senator Lugar:
This report responds to your request that we review the activities of the
Farm Credit Administration (FCA), the regulator of the Farm Credit
System (System), to help ensure the System's compliance with its
statutory mission requirement to serve young, beginning, and small
farmers (YBS).1 The System is a government-sponsored enterprise (GSE)2
created by Congress to provide a dependable and affordable source of
credit and related services to the agricultural industry.
This report discusses (1) how FCA seeks to ensure that System
institutions fulfill the YBS statutory mission, (2) the extent to which FCA
examiners follow FCA requirements in conducting examinations for YBS
compliance, (3) the characteristics of YBS programs at selected System
institutions, and (4) how the requirements for System institutions to serve
YBS compare to the special mission or service requirements of other GSEs
and banks.
To address these objectives, we reviewed the Farm Credit Act of 1971, as
amended, to identify statutory requirements for System institutions'
service to YBS. We also reviewed FCA regulations implementing the YBS
requirement and a variety of FCA documents that set forth YBS-related
requirements for System institutions. In addition, we identified relevant
FCA examination protocols for service to YBS. We also identified a
1 FCA defines young borrowers as farmers, ranchers, or producers or
harvesters of aquatic products who are age 35 or younger as of the loan
transaction date and beginning borrowers as those who have 10 years or less
farming or ranching experience as of the loan transaction date. Small
borrowers are those who normally generate less than $250,000 in annual gross
sales of agricultural or aquatic products.
2 As used in this report, a GSE is a federally chartered, privately owned
corporation established by Congress to provide a continuing source of credit
nationwide to a specific economic sector.
representative sample of reports of examinations of System lending
associations that FCA issued in fiscal year 2001. Using the reports in our
sample and a data collection instrument, we evaluated examiners' compliance
with FCA protocols. On the basis of our review of the examination reports
and System banks' annual reports on YBS service, we identified the
characteristics of YBS programs. Finally, we reviewed laws and other
relevant regulatory documents to compare special mission or service
requirements of other GSEs and banks to the System's YBS lending
requirement.
We conducted our review from July 2001 through March 2002 in accordance with
generally accepted government auditing standards. Appendix I contains a
detailed description of the scope and methodology of our work.
Background
As of November 1, 2001, the System's nationwide network of lenders included
* Six Farm Credit Banks,
* One Agricultural Credit Bank,
* 114 associations of the Farm Credit Banks and Agricultural Credit Bank.
The entities within the System that make loans directly to farmers and
ranchers are referred to as direct lending institutions-agricultural credit
associations, federal land credit and production credit associations-the
associations of the Farm Credit Banks. The Farm Credit Banks raise operating
funds by selling Systemwide consolidated debt securities to investors. As of
September 30, 2001, the System held approximately $99 billion in assets.
FCA is an independent regulatory agency responsible for supervising,
regulating, and examining System institutions operating under the Farm
Credit Act of 1971, as amended. As the System regulator, FCA is responsible
for examining System institutions for safe and sound banking practices and
compliance with applicable laws and regulations, including the special
mission requirement of providing credit and related services to YBS. To
fulfill this responsibility, FCA is to examine System institutions at least
every 18 months. FCA provides guidance to System institutions through the
issuance of regulations and other types of documents that set forth official
policies.
The Farm Credit Act of 1971 was amended in 1980 to require System
institutions to serve YBS. Regarding YBS, the act requires the Farm Credit
Bank for each district3 to
* annually obtain, from associations under its supervision, reports of
activities under programs developed to serve YBS and
* on the basis of these reports, provide to FCA an annual report summarizing
the operations and achievements in its district of programs developed to
serve YBS.
The act requires direct lending associations to
* prepare a program for furnishing sound and constructive credit and related
services to YBS and
* make YBS programs available in coordination with other governmental and
private sources of credit.
Commercial banks and other private lenders serve as significant sources of
credit to YBS, as do numerous other governmental sources of credit. The
largest governmental source of coordination for the System is the Farm
Service Agency (FSA), part of the U.S. Department of Agriculture (USDA),
which supports YBS through its guaranteed loan and direct loan programs.
3 System banks generally serve a specific geographic area or district.
FCA Has Issued YBS Policies and Guidance and Monitors Compliance through
Examinations but Has Not Set Standards in Regulation
FCA has issued YBS-related policies and guidance, designed and implemented a
YBS examination protocol, and examined System institutions for compliance
with YBS requirements. However, FCA has not promulgated regulations to
define standards and clarify what constitutes an acceptable YBS program. The
existing regulation on YBS restates the broad statutory requirement and does
not provide additional guidance or standards. FCA policies and guidance as
of January 1, 2002, require each System bank to fulfill annual reporting
requirements. The policies and guidance also require System institutions to
adopt clearly stated policies for serving YBS and to develop and use a
variety of management controls4 over program operations to help ensure the
effectiveness of their YBS programs. Among other things, FCA required System
institutions to evaluate the performance of their YBS programs in part by
using certain available data on YBS. However, FCA officials and others view
the usefulness of these data as limited. According to FCA officials, the
lack of quantitative data, along with other factors, makes it challenging
for them to ensure System compliance in serving YBS. The protocol for YBS
examinations includes a 10-step examination process that reflects YBS
mission-related requirements set forth by the Farm Credit Act, as amended,
and implemented by various FCA policies.
Current FCA Regulation Restates YBS Statutory Requirement
Following the 1980 enactment of the statutory provisions establishing the
System's YBS service mission, the System experienced a financial crisis; and
Congress mandated a number of reforms.5 According to an FCA official that we
interviewed, the agency's focus was concentrated for many years on safety
and soundness issues because of the crisis. A regulation on YBS, issued in
1981 and amended in 1990, instructed the board of directors of each of the
System's direct lender institutions to adopt policies to establish programs
that would provide credit and related services to YBS.
4 Management controls, in the broadest sense, include the plan of
organization, methods, and procedures adopted by management to ensure that
its goals are met. Management controls include the processes for planning,
organizing, directing, and controlling program operations. They include the
systems for measuring, reporting, and monitoring program performance.
5 The System experienced severe financial stress in the mid-1980s, which led
Congress to enact reforms to promote the System's safety and soundness,
including changing the role of FCA to an independent "arms-length"
regulator. We evaluated FCA as a regulator in 1994 and concluded that FCA's
examination and monitoring of a selected sample of banks was generally
comprehensive and addressed issues of safety and soundness. U.S. General
Accounting Office, Farm Credit System: Farm Credit Administration
Effectively Addresses Identified Problems, GAO/GGD-94-14 (Washington, D.C.:
January 7, 1994).
The amended regulation essentially restates the statutory requirement-it
does not provide specific guidance or standards for the YBS policies or
programs to be established.
FCA Has Issued YBS Policies and Guidance
FCA became more focused on YBS issues in late 1998 when the FCA Board
adopted a policy statement and general guidance in the form of a
"bookletter." 6 In 1999, FCA's Office of Examination issued an informational
memorandum that informed the System institutions that service to YBS would
be one of four focus areas for examinations conducted during fiscal years
1999 and 2000.7
The 1998 FCA Board policy statement8, issued on December 10, 1998, again,
like the amended regulation, required the System institutions to adopt
policies that establish programs to provide credit and related services to
YBS borrowers. The policy statement also required the System institutions to
establish certain management controls over YBS program operations. These
were to include
* goals and objectives,9
* evaluation of the results of their YBS program, and
* risk parameters for YBS lending that are appropriate in relation to the
institutions' risk-bearing capacity and their YBS program objectives.
The policy statement also encouraged System institutions to better serve YBS
borrowers by developing innovative and sound programs, and taking better
advantage of coordination opportunities with other parties, including
guarantors, such as USDA and the Small Business Administration.
6 Bookletters are communications from FCA to System institutions.
Bookletters must be reviewed by the FCA Board before distribution, and they
can transmit a policy adopted by FCA and clarify FCA positions or
expectations regarding examinations.
7 Informational memorandums are official communications from senior FCA
officials to System institutions. They do not communicate agency policy, and
they do not require review by the FCA Board, but they can provide
information on revised examination criteria and procedures.
8 Farm Credit Administration, Farm Credit Service to Young, Beginning, and
Small Farmers and Ranchers, Policy Statement-75, December 10, 1998.
9 Although the Farm Credit Act requires no specific targets for service to
YBS, some System institutions establish their own goals, including numeric
goals, for providing credit to YBS.
In coordination with the issuance of the policy statement, the Board also
issued a bookletter on December 11, 1998, providing guidance for new
reporting procedures related to serving YBS. According to the former
chairman of FCA, these new procedures were the "culmination of a year long
effort by FCA in coordination with System representatives to help the System
fulfill its mission of service to YBS customers."10 The bookletter affirmed
FCA's commitment to examining System institutions for their service to YBS.
The bookletter advised System institutions to have clearly stated policies
for serving YBS and to include in the policies a description of how the
programs would be coordinated with other System institutions and with
governmental and private sources of credit, consistent with the statutory
requirement. The bookletter further advised System institutions to
* set measurable goals, such as the dollar volume of aggregate YBS lending
and the number of new and existing YBS served;
* provide specifically designed credit programs and service for YBS
borrowers, including loan underwriting standards and the use of guarantees
or other credit enhancements that can be conducted in a safe and sound
manner;
* establish which program authorities are to be delegated to management and
any authorities retained by the board of the institution; and
* detail outreach opportunities available from the institution or other
sources.
The bookletter also provided guidance on revised definitions of YBS, as well
as how institutions should define loans, categorize loans to YBS borrowers,
and report on the number of loans. FCA provided a phase-in period that
required System institutions to comply with these three reporting changes by
January 1, 2001.
In April 1999, FCA's Office of Examination issued an informational
memorandum informing associations that they should analyze the demographics
of the territory they served to determine the potential YBS market. It
suggested that associations should evaluate how well their lending programs
service those markets by determining the market penetration for YBS
categories. The memorandum further suggested that the data from the USDA
Census of Agriculture might be helpful in
10 Farm Credit Administration, Policy and Reporting Changes for Young,
Beginning, and Small Farmers and Ranchers Programs, Bookletter-040, December
11, 1998.
conducting this demographic analysis. FCA senior officials told us that
although they were asking System institutions to analyze the demographics of
their territory using the USDA data, they understood that the usefulness of
these data was limited. The data include the number of YBS living in a
region, but not the number seeking or in need of credit. Officials from the
FSA and the Economic Research Service, both within USDA, concurred that
documenting the unmet credit needs of YBS is difficult.
According to FCA senior officials, FCA intends the market penetration
determination to serve as a guide for a System institution in evaluating the
adequacy of its service to YBS, but not to serve as a strict measure of
success of the institution's YBS program. Moreover, FCA officials stated
that year-to-year comparisons of an institution's service to YBS may be the
best available indicators of the institution's performance in that regard,
given the lack of meaningful data on the unmet credit needs of YBS.
As the result of a year-long effort in 1998, FCA officials created an
examination "leadsheet," which is essentially a map for examiners to follow,
as discussed in detail later in this report. According to FCA officials,
some System institutions resist FCA monitoring for compliance with the
special mission requirement to serve YBS. However, the director of the
System's President's Planning Committee stated that most System institutions
were making good-faith efforts to serve YBS and cooperating fully with FCA's
examination efforts related to YBS.11 Our interviews with institution
officials generally supported the director's comments. Most institution
officials said that they had no particular issues with FCA examination
protocols for YBS. The director said that he wished FCA's examinations of
YBS could be more focused. He also said that some parts of FCA's YBS
examination should not be repeated every year, once FCA had established that
an institution was in compliance in certain areas.
FCA Has Established YBS Reporting Policies
FCA has issued several memorandums to the System banks about their
responsibilities to report on YBS activities, as required by the amended
Farm Credit Act of 1971. A January 8, 2002, FCA memorandum required
11 According to the director of the President's Planning Committee, this
committee consists of a group of System representatives that comprises
district bank presidents, and representatives from some of the larger System
associations. The committee meets regularly to discuss policy issues for the
System and represents the System's interests in various task forces.
banks to provide districtwide reports summarizing quantitative information
about YBS business activity, including
* volume and number of all loans meeting YBS definitions and
* volume and number of new loans and number of new loans meeting YBS
definitions.
The memorandum also required banks to provide a districtwide summary
presenting qualitative data on YBS business activity, including narrative
that describes any districtwide YBS initiatives. FCA uses those reports to
compile Systemwide information for its publicly available annual report to
the Congress, according to FCA officials.
Each System bank is required to submit its 2001 YBS report to FCA by
February 28, 2002. The banks are to collect qualitative data on the YBS
efforts of each of the associations in their respective districts. FCA
provides a questionnaire for the banks' use in collecting the qualitative
data from the associations. This survey focuses on program management,
credit components and noncredit components, and outreach activities. The
program management components section of the survey includes questions on
whether the institution has established performance targets or goals for
their service to YBS. It also asks about the market penetration of the
institution's service to YBS. The credit component section includes
questions about the existence of special underwriting standards and the
types and extent of coordination with other governmental or private sources
of credit. The last section of the survey includes questions on the types of
training or services offered by the institutions, as well as the types of
outreach activities for YBS at the institutions.
FCA Sees Challenges to Ensuring System Compliance with Serving YBS
FCA officials told us that they feel challenged to enforce YBS-related
policies and procedures. They cited the broad nature of the YBS statutory
provision, which is repeated in the FCA's regulation; limitations of
available data on unmet credit needs; and resistance from some System
institutions as concerns (as described later in this report). However, the
officials also acknowledged that FCA has adequate authority as a regulator
to promulgate specific standards to implement the YBS statutory provision
and to use its enforcement powers if needed to ensure compliance. According
to FCA officials, the current practice has been to avoid requiring
institutions to take specific actions to address issues in YBS
program performance that arise in the course of compliance examinations.12
Instead, in 1998 to 2001-which officials termed as a period of evolution for
the programs and FCA oversight-FCA encouraged institutions to further
develop and improve their initiatives and programs to serve YBS through
policies, guidance, and the examination program.
A broad regulation, such as the current FCA regulation on YBS, is open to
broad interpretation. FCA's expectations for YBS program elements and
performance are unclear in the current language of the regulation.
Alternatively, regulation that provides specific guidance or standards for
YBS programs would afford FCA and System institutions greater certainty
about what is appropriate and adequate for YBS programs. Regulations are
legally enforceable by FCA and, under the Administrative Procedure Act, are
subject to a process of public notice and comment. Such a process would
facilitate review and input from the institutions regulated and other
parties affected by the regulation-including YBS in this instance. As we
will discuss later in this report, other regulators, operating under both
specific and broad statutes, have promulgated regulations with standards for
fulfilling their statutory special mission or service requirements.
12 In general, according to FCA policy and on the basis of our discussions
with FCA officials, when an FCA examiner identifies a compliance problem,
FCA is to respond in several ways, depending on the circumstances. First, an
examiner identifies a violation of YBS compliance-for example, the lack of
an institution board policy. FCA may cite the violation in an examination
report and require the institution to take specific corrective action, such
as requiring that the board adopt a policy for YBS within 60 days. If the
institution fails to take corrective action, the FCA can institute a formal
enforcement action to obtain a cease and desist order or civil money
penalties.
FCA Office of Examination Formalized Oversight of YBS through Creation of
Examination Leadsheet
As shown in figure 1, the leadsheet itemizes 10 steps for examiners to
follow in evaluating an institution's YBS mission compliance. Each of the
steps may involve a number of procedures for example, the first step
involves three procedures. As stated in the FCA Examination Manual,
examiners are to summarize pertinent information gathered during examination
work; these tasks are often best achieved through a leadsheet. According to
FCA officials, leadsheets have been used successfully in other examination
segments. The leadsheet is available electronically and may be used to
create an electronic workpaper record of the examination. The Examination
Manual states that the extent of workpaper documentation should vary,
depending on factors such as examination scope, risk present in the
institution, and experience level of examiners. At a minimum, according to
the Examination Manual, workpapers should demonstrate completion of each
examination objective and substantiate all conclusions reached in the Report
of Examination. When an examination is completed, the examiner is to write
the report of examination, which is to be provided to the examined
institution. A meeting for discussion of the examination findings may also
be held with officials of the examined institution.
Figure 1: YBS Examination Steps, as Provided by the YBS Examination
Leadsheet
Source: FCA Examination Leadsheet for YBS.
Properly Executed, YBS As a result of our analysis, we found the examination
leadsheet for YBS to Leadsheet Should Provide be a useful tool for FCA in
examining institutions for compliance with the Useful Information to FCA
special mission requirement of serving YBS. If properly executed, the
examination process set up by FCA, including the use of the leadsheet,
should provide FCA with useful information on a System institution's service
to YBS.
In analyzing the leadsheet, we traced each of the procedures in each of the
steps to requirements of the Farm Credit Act and FCA regulation, policy, and
guidance. For example, we noted that in completing the first procedure in
step 2 and the procedure in step 6, examiners would be determining the
institution's extent of compliance with explicit statutory YBS requirements.
For this reason, we refer to these as examination procedures for statutory
compliance. We found that the procedures in steps 1 to 7 otherwise focus on
(1) determining if the institution has in place FCA-required management
controls over program operations, (2) evaluating those controls, or (3)
determining if the YBS program is sound and whether it is meeting its stated
objectives. We refer to these as examination procedures for regulatory
compliance. Steps 8, 9, and 10 are procedures intended to help the examiner
accurately summarize conclusions and develop report-ready conclusions on the
institution's service to YBS. We refer to these as administrative
examination procedures.
In our review of a representative sample of 30 recent FCA reports of
examinations issued in fiscal year 2001, we found weaknesses that limited
FCA's ability to effectively oversee YBS programs. Generally, these
weaknesses can be described as not fully following examination procedures
and not completely documenting examination conclusions. FCA senior officials
said that examiners may not have followed examination procedures because
they used a risk-based approach in determining the scope of their
examination, did not have time due to limited resources, or met with
resistance from System institution officials.
Weaknesses in Examinations for YBS Compliance Limited FCA's Ability to
Effectively Oversee Institutions' YBS Programs
Examiners Usually Did Not Complete All Examination Steps
As shown in figure 2, of the 30 examinations reports we reviewed, none had
completely executed all examination procedures, and 27 (90 percent) had
inadequate support for conclusions. As shown in figure 3, as a result of our
analysis of the extent of completion of examination procedures for statutory
compliance, we found that in 29 reports (97 percent), the examiner completed
the first examination procedure for statutory compliance, which required
examiners to determine what specific programs or service are in place to
serve YBS. However, only 12 reports (40 percent) showed completion of the
second examination procedure for statutory compliance, which requires the
examiner to determine the extent
to which the institution coordinated with federal, state, or other
governmental or private credit sources.13
Figure 2: Percent of Weaknesses in FCA's Examinations of System Institutions
Source: GAO analysis.
13 We found incomplete responses in 13 of the examination reports; no
response in 4 reports; and in 1 report, the examiner noted that the
procedure was not applicable.
Figure 3: Extent of Completion of Examination Procedures for Statutory
Compliance by Percent
Source: GAO analysis.
In further analyzing the incompleteness of the reports, we found at least a
third of the reports had no review of 7 (54 percent) of the 13 examination
procedures for regulatory compliance. The procedures concerning regulatory
compliance that were most frequently not completed included
* evaluation of the quality of reporting to the board and FCA in accordance
with FCA's program definitions (80 percent of examinations),
* determination of whether the program is accomplishing its objectives for
reaching YBS (53 percent of examinations), and
* determination that the program has been adjusted on the basis of results
of demographic studies and related portfolio and territorial analysis (47
percent of examinations). The procedures that were most consistently
completed included determining if an institution used special underwriting
standards or risk pools for extending credit to YBS, and determining if an
institution conducted a demographic study of its service to YBS.
In our view, the number of examination procedures for regulatory compliance
that were not completed in a substantial number of instances indicates
improvements are needed in FCA oversight to better ensure the effectiveness
and efficiency of System operations related to YBS programs.
Examiners Did Not Provide Supporting Examination Workpapers
In the 30 examination reports we reviewed, we found that examination
workpapers often did not include documentary support for findings. In nine
reports we reviewed (30 percent), examiners concluded that regular reporting
to the institution's Board of Directors had occurred, but the workpapers
provided no documentation to support that finding. In 21 of the reports (70
percent), examiners either relied exclusively on interviews with association
officials or provided no workpapers to support findings related to data
quality.
The data quality findings that lacked support were those corresponding to
item seven of the leadsheet, which focuses on evaluating and testing the
institution's processes and internal controls for verifying (1) the
designation of YBS, (2) the accuracy of the institution's database, and (3)
the quality of the reporting to the board. Inadequate evaluation of the
management controls for classifying loans to YBS and accurately reporting to
the board undermines FCA's ability to help ensure the effectiveness and
efficiency of System operations related to YBS programs. FCA's efforts in
this area are particularly important, in that accurately reporting on the
number of loans made to YBS directly relates to the usefulness of any market
penetration studies of YBS, and comparisons of service to YBS from one year
to the next.
The examiners' inadequate supporting documentation raises questions about
the credibility of their conclusions and the quality of evaluations. For
example, in the examination workpapers of one institution, an examiner
concluded, on one hand, that the association's designation of YBS in its
database was inaccurate but, on the other hand, that the association had
processes to ensure that YBS loans were appropriately designated in the
database. The workpapers provided no supporting documentation for either of
these conclusions. In three examination reports, we found that the only
support provided for a finding that YBS-related definitions and database
systems were accurate were statements that the institutions' chief of
operations or chief executive officer had said this in an interview.
Professional standards do not support testimonial evidence from the auditee
as sufficient support for the finding.
FCA Senior Officials Said Examiners May Not Have Followed All Examination
Procedures for a Number of Reasons
FCA senior officials offered several explanations for incomplete execution
of procedures in YBS examinations. Primarily, they said that some examiners
may have exercised a risk-based approach to YBS examinations, which would
lead examiners to focus selectively on operations that are most important in
their material impact on the extent of service to YBS. We recognize that a
risk-based approach can be appropriate and useful for regulators. However,
we question whether a risk-based approach to the YBS compliance examination
would have been appropriate in 2001, the first full year of FCA's expanded
examinations for YBS compliance. Examiners need to establish a baseline of
knowledge about an institution's YBS efforts before deciding where to focus
an examination effort.
FCA senior officials also noted that examiners may not have been able to
complete all examination steps due to limited time and resources. They also
stated that examiners encountered resistance from some System institutions
during the YBS portion of the examination. According to these officials,
examiners would not typically document such resistance in examination
workpapers. Regarding constraints on examinations imposed by limited time
and resources or by some System officials' resistance, we note that
professional standards require examiners to report such constraints to avoid
misunderstandings concerning the work that was and was not done to achieve
the examination objectives. However, in our review of examiners' workpapers,
we found no explanations for examination procedures that were not executed.
System Efforts to
Serve YBS Varied
The sample of examination reports we reviewed indicated that the
characteristics of YBS programs at institutions in the System varied
significantly (e.g., the program activities shown in fig. 4).14 Slightly
more than half had some type of specific YBS program or service in place.
Nearly a third of the institutions in the sample had established some type
of numerical goal for YBS service, although most institutions were not
conducting demographic studies. Half had YBS marketing and outreach efforts
in place and a majority were coordinating their YBS offerings with federal,
state, or other governmental or private credit sources, as required by the
Farm Credit Act. Most commonly, System institutions coordinated with the
Farm Service Agency (FSA) Guaranteed Farm Loan program. All of the System
institutions support YBS activities through the Farm Credit
14 We did not independently verify the existence of YBS programs at System
institutions.
System Foundation (Foundation), which was formed in 1991 with contributions
from System banks. In fiscal year 2000, the System provided billions of
dollars in loans to YBS, according to annual reports that the System banks
submitted to FCA.
Figure 4: Illustrative YBS Program Activities
Slightly More Than Half of the Institutions Had Some Type of Specific YBS
Program or Service
FCA examination reports indicated that although all of the institutions had
a policy statement for serving YBS, slightly more than half of the
institutions (16) had some type of specific program or service in place to
serve these groups. Specific programs included special underwriting
standards, targeted educational training, and outreach programs to attract
YBS. For example, one institution offered loans to individuals in which it
waived the coverage ratio of greater than 125 percent, and borrowers with
limited equity as low as 20 percent may be considered.15 Another institution
offered the New Generation Loan Program, which provided reduced
interest-rate spreads for the first 5 years and underwriting standards to
accommodate the financial needs of YBS loan applicants. Some other
institutions, though, did not use any special loan underwriting standards,
risk parameters, or risk pools for extending credit to YBS
15 A coverage ratio is determined by dividing a lender's projected net
income by the costs of loan debt service. This ratio should be over 1
because it means the property is generating enough income to pay its debt
obligations. In the eyes of the lender, the higher the coverage ratio, and
therefore the more net operating income from which the owner can make debt
service payments, and the lesser the loan risk, the greater the cash flow to
the owner.
Source: GAO analysis.
market segments. YBS borrowers were generally required to meet the same
underwriting standards as other applicants, although in some cases
exceptions were permitted.
Nearly a Third of the System Institutions Had Some Type of Numeric Goals for
Their Service to YBS
Of the 30 institutions' examinations we reviewed, 9 had measurable goals for
their service to YBS. System institutions established measurable goals in
different ways. One institution incorporated lending to YBS as a key
performance area. Managers at this institution would earn higher ratings as
the volume of new YBS lending increased. Another institution included in
their business plan a goal for YBS lending of 5 percent of the volume of new
loans. A third institution set a goal of 20 percent of outstanding loans to
young farmers and 20 percent of outstanding loans to beginning farmers, by
number and volume.
Half of the Institutions According to FCA examinations that we reviewed,
System institutions Have Made Marketing and have made a variety of efforts
to market credit opportunities to YBS. They Outreach Efforts have utilized
Web sites with specific links to special YBS programs, met
with Young Farmer chapters, offered educational programs, and used radio and
television advertisements. Eleven of the institutions in our sample had no
formal marketing or outreach efforts to YBS.16
Farm Service Administration Loan Guarantees Represented System Institutions'
Most Significant Coordination Efforts
Most of the institutions in our review coordinated with federal, state, or
other governmental or private credit sources to provide credit to YBS, as
explicitly required by the Farm Credit Act. Most commonly, System
institutions coordinated with the FSA Loan Guarantee program. FSA will
guarantee loans made by the Farm Credit System and other conventional
lenders in amounts up to 95 percent of the principal loan amount. FSA is
required by law to target 25 percent of its guarantees for farm ownership
loans to beginning farmers. Similarly, 40 percent of its guarantees for
farmoperating loans must be targeted to beginning farmers. Beginning farmers
are generally defined as farmers or ranchers who have not operated a farm or
ranch for more than 10 years, and who will substantially participate in the
operation of the farm or ranch.
16 It was not clear from the examination workpapers whether or not four
institutions had marketing or outreach efforts to YBS.
The extent of use of FSA loan guarantees by System institutions varied.
According to our review of examinations, one institution reported 334 loans
to YBS, totaling over $26 million, with outstanding FSA guarantees. Another
institution had FSA guaranteed loans to 32 YBS borrowers, for a total of
$2.3 million. This represented 74 percent of the total number of guaranteed
loans made by the institution and 78 percent of the dollar volume. One
institution was reportedly the largest user of FSA-guaranteed loans in the
state, with 377 borrowers and $42 million in such loans. For this
institution, FSA-guaranteed loans to YBS represented 80 percent of the total
number of its FSA-guaranteed loans and 75 percent of the dollar volume of
its FSA guaranteed loans. Other institutions, however, made far less use of
the FSA loan guarantees. According to the results of a special review by one
institution's management group, only 8.8 percent of the loans reviewed at
that institution had an FSA guarantee.
System Associations Support Programs for YBS
System institutions also support YBS activities through the Farm Credit
System Foundation (Foundation), which grew out of the Farm Credit Council,
the System's trade group. The Foundation's mission is to help YBS and
ranchers to thrive. The Foundation was formed in 1991 with contributions
from System banks. The director of the Foundation told us that its ongoing
activities include sponsoring organizations with programs that benefit
agriculture's youth and provide development opportunities for those pursuing
a career in agriculture. For example, the Foundation provides financial
support and or scholarships for agriculture-related training that is
provided by groups like the Future Farmers of America, 4-H Clubs, and the
Progressive Farmer Foundation. It also sponsors research on issues important
to YBS farmers. A "major step" for the Foundation, according to the
director, has been an Internet-based survey of YBS conducted in 2001. The
survey was designed to obtain information about the credit needs of YBS,
their experiences obtaining credit, and other issues. The director told us
that he expected a final report, titled Barriers to Success, to be available
in 2002 and that it may include policy options for improving access to
credit for YBS.
The System Provided The amended Farm Credit Act of 1971 requires Farm Credit
banks for each Billions of Dollars in Loans district to submit to FCA
reports of activities under programs developed to to YBS in Fiscal Year 2000
serve YBS for the associations under their supervision. The act also
requires that an annual report summarizing the operations and achievements
in its district for these programs be submitted to FCA.
According to YBS reports that were submitted to FCA for fiscal year 2000,17
the associations made close to $3 billion in loans to beginning farmers and
ranchers in fiscal year 2000, approximately $2 billion in loans to young
farmers and ranchers, and nearly $5 billion in loans to small farmers and
ranchers.18 In the annual reports, some of the banks reported that they did
very little to sponsor YBS activities in their district and deferred to
their associations for these activities. Other banks reported having jointly
sponsored YBS initiatives with their associations, as well as having
supported individual state programs. Some of the types of activities
sponsored by banks included state cooperative councils, and the National
Young Farmer Education Institute.
Like the System, the housing GSEs-the Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac),19
and the Federal Home Loan Bank System (FHLBank System)20-were created by
Congress to provide a continuing source of credit nationwide to a specific
economic sector. However, the special mission obligations of the GSEs, with
the exception of the YBS obligation of the System and the Community
Investment Program (CIP) obligation of the FHLBank System, are established
by statutory language that includes measurable numeric goals or requirements
or establishes a goal-setting mechanism. Without measurable goals or
specific qualitative standards to help define compliance with mission
requirements, System institutions
The System's Special Mission Requirements Are Less Specific Than Those of
Housing GSEs
17 YBS reports for fiscal year 2001 were not yet available at the time of
our review.
18 FCA officials told us that they review the quantitative data submitted by
the System banks to identify any obvious mistakes, and they discuss any
inconsistencies with the banks.
The totals for loans provided to YBS are not mutually exclusive, and
depending on characteristics, a borrower may be counted in two or even all
three categories.
19 Fannie Mae and Freddie Mac buy mortgages from a variety of institutions
that lend money directly to home buyers such as mortgage companies, banks,
and credit unions. They retain some mortgages in portfolios and pool others
to create mortgage-backed securities (MBS) that are sold to investors in the
secondary mortgage market. They raise money to purchase mortgage assets by
selling bonds and MBS to investors throughout the world.
20 The FHLBank System raises the money it uses to lend to members (advances)
in three ways: by issuing bonds known as consolidated obligations (CO), by
accepting deposits from member institutions, and by selling capital stock to
members. The FHLBank System members (commercial banks, savings institutions,
credit unions, and insurance companies) may use advances generally to
support home mortgages, small business, community development, and
agricultural loans.
and FCA face challenges similar to those faced by banks and thrifts and
their regulators in connection with their obligations under the Community
Reinvestment Act (CRA) of 1977. CRA requires regulators of banks and thrifts
to encourage those financial institutions to help meet credit needs in all
areas of the communities they serve-including low-and moderate-income areas,
consistent with safe and sound operations. Neither the CRA nor CIP
requirements set numeric goals or provide a goal-setting mechanism.
Regulators who oversee compliance with CRA and CIP, however, make an overall
assessment about the regulated entities' performance efforts. In addition,
those regulators publicly disclose their assessment and/or make information
available about the performance of individual entities that they regulate.
Housing GSE's Have More Specific Special Mission Requirements than System
As part of our review, we compared the System's YBS mission requirements to
special mission requirements of other GSEs-specifically, the housing GSEs,
Fannie Mae, Freddie Mac, and the FHLBank System. We found that the GSEs
generally operated under statutory language that provides numeric goals or
requirements or a goal-setting mechanism, as shown in table 1. The
exceptions to this included the YBS service obligation of the System and the
obligation of the FHLBank System to establish a Community Investment
Program.
Table 1: Comparison of GSE Statutory Missions and Special Mission
Requirements
GSE Statutory mission Special statutory mission requirements
Fannie Mae and Freddie To provide stability, increase The U.S. Department of
Housing and Urban Development is required
Mac liquidity, and improve the to establish regulatory numeric goals for
these GSEs to meet in distribution of capital in housing purchasing
mortgages serving targeted groups, including low-and credit markets.
moderate-income borrowers.
Farm Credit System To provide a dependable and Each association is to
prepare a program for furnishing sound and affordable source of credit and
constructive credit and related services to YBS borrowers and make related
services to the agricultural YBS programs available in coordination with
other governmental and industry. private sources of credit. Reports of
program activities and progress toward objectives are to be made to the
regulator.
FHLBank System To extend mortgage credit by Each FHLBank is required, under
the Affordable Housing Program making loans, called advances, to (AHP) to
provide subsidized advances to members to support the its member
institutions who in turn financing of housing for low-or moderate-income
households. Each may use such advances to support FHLBank is required
generally to contribute annually to the AHP 10 home mortgages, small
business, percent of its net earnings or its prorata share of a FHLBank
community development and Systemwide aggregate of $100 million.
agricultural loans. Each FHLBank is also required to establish a Community
Investment Program to provide advances at cost plus administrative fees to
members to support the financing of housing and economic development
activities that benefit low-and moderate-income households and
neighborhoods.
Source: GAO analysis of GSE documents and statutes.
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992
required the secretary of Housing and Urban Development to issue regulations
to establish, monitor, and enforce housing goals for Fannie Mae and Freddie
Mac. The act mandated that the secretary establish targeted goals for
low-and moderate-income mortgage purchases as well as mortgage purchases for
very-low income families and low-income families living in low-income areas
and mortgages on housing in geographically underserved areas. After an
interim period in 1993 to 1995, during which time goals were set by
Congress, the secretary published a regulation in 1995 that established new
goals effective in 1996. By subsequent regulation dated October 2000, the
secretary raised the goal levels effective in 2001. The goals are to be
based on six factors, including the ability of the GSEs to lead the industry
in making mortgage credit available for very-low, low-and moderate-income
families, and families living in underserved areas.
The FHLBank System's special mission requirements, found in statute, include
the requirement that FHLBanks make specified annual contributions of
earnings to the AHP, and the CIP requirement, which does not mandate any
specific quantitative requirements or goals. An additional statutory
provision authorizes but does not require the FHLBanks to offer additional
Community Investment Cash Advance (CICA) programs, and does not mandate any
specific quantitative requirements or goals for such programs. The FHLBanks'
regulator, the Federal Housing Finance Board, has promulgated regulations
implementing all three statutory provisions.
The System's YBS Mission Requirement Creates Challenges Similar to Those
Created by CRA
In certain respects, the challenge that FCA faces in overseeing the System's
compliance with its statutory YBS mission requirement is similar to the
challenge that bank and thrift regulators21 face in assessing CRA compliance
for banks and thrifts. Enacted in 1977, CRA requires these regulators to
encourage banks and thrifts to help meet credit needs in all areas of the
communities they serve-including low-and moderate-income areas-consistent
with safe and sound operations. Without specifying a credit allocation goal
or any mechanism to set such a goal, CRA also requires the regulators to
assess institutions' CRA performance during examinations, taking into
account an institution's individual circumstances. Bank and thrift
regulators also are to take an institution's
21 These regulators include the Federal Reserve Board, the Office of the
Comptroller of the Currency, the Federal Deposit Insurance Corporation, and
the Office of Thrift Supervision.
CRA performance into account when approving applications for, among other
things, mergers of bank and thrift organizations.
In implementing CRA, bank and thrift regulators have been challenged to find
an effective approach, as evidenced by the many concerns expressed by banks
and thrifts over the years and repeated major revisions of the CRA
examination procedures. For example, in a broad 1993 review of issues
identified in many studies of bank regulation and its effects on the banking
industry, we found that bankers expressed more concern about the burden
associated with CRA than about any other single area of bank regulation. One
of the many specific concerns of bankers, we reported then, was that the
vagueness of the statute and the subjectivity of the examination process
made compliance difficult. 22
The current CRA regulations (which are now being reviewed for possible
revision to improve the efficacy of the regulations) provide several
approaches, based in part on lender size, that lenders can use to illustrate
their compliance with CRA regulations. Large retail institutions can opt to
be assessed by their regulator with regard to their lending record,
investments in community development activities, and systems for delivering
retail banking services. Another option allows banks to develop a strategic
plan detailing how the bank proposes to meet its CRA obligations. The
institution tailors the plan to the needs of the community by informally
seeking suggestions from the public during plan development. Once the plan
is developed, the institution must publish notice of the plan and solicit
written public comment for at least 30 days. After the comment period, the
institution is to submit the plan to its regulator for review and approval.
Small institutions (not over $250 million in aggregate assets or if
affiliated with a holding company, with total assets of less than $1
billion) are evaluated under a streamlined test that focuses primarily on
lending.
22 U.S. General Accounting Office, Regulatory Burden: Recent Studies,
Industry Issues, and Agency Initiatives, GAO/GGD-94-28 (Washington, D.C.:
December 13, 1993).
All Regulators, Except FCA, Issued Regulations for Special Mission
Requirements and Disclose or Require Disclosure of Information on
Performance of the Individual Regulated Institutions
In reviewing FCA's oversight of the special mission to service YBS
borrowers, we compared their efforts with those of other regulators
responsible for overseeing special mission or service obligations: the
Department of Housing and Urban Development (HUD), the mission regulator of
Fannie Mae and Freddie Mac;23 the Federal Housing Finance Board (FHFB), the
regulator and supervisor of the FHLBank System; and bank and thrift
regulators. All of the regulators conducted some type of periodic
examination or review of performance and required periodic reporting on
program status. All of the regulators except FCA had issued regulations with
specific standards describing what constituted an acceptable program and/or
setting quantifiable goals. In addition, all of the regulators except FCA
publicly disclosed information about the special mission or service
obligation performance of individual institutions, or required the regulated
entities to do so.
Oversight obligations of each regulator are described as follows:
* FCA, as discussed earlier, issues policy and guidance and conducts
periodic examinations that include reviews of System institutions'
compliance with YBS requirements. FCA collects information from System banks
about YBS programs and reports on YBS programs, in aggregate form, in its
annual report to the Congress.
* HUD has statutory authority to obtain the necessary data from Fannie Mae
and Freddie Mac for monitoring their compliance with the goals HUD sets.
According to a HUD official, HUD has a number of procedures in place to
assess the data supplied by Fannie Mae and Freddie Mac.24 Analyses of Fannie
Mae's and Freddie Mac's performance, based on the GSE's data, are
periodically published in HUD reports. HUD also releases annually a
public-use database containing the nonpropietary portions of the data.
According to HUD officials, analyses of data submitted by each GSE under
HUD's final rule, effective for 1996 through 2000, showed that both GSEs
achieved their housing goals during this period.
23 The Federal Housing Enterprises Financial Safety and Soundness Act gave
HUD general regulatory authority over Fannie Mae and Freddie Mac in all
areas other than the GSEs' safety and soundness. This same act also created
the Office of Federal Housing Enterprise Oversight, an independent office
within HUD, which has authority exclusive of the secretary, with regard to
the GSE's financial safety and soundness.
24 We recommended in a 1998 report that HUD develop a program to assess the
data. See U.S. General Accounting Office, Federal Housing Enterprises: HUD's
Mission Oversight Needs to Be Strengthened, GAO/GGD-98-173 (Washington,
D.C.: July 28, 1998).
* FHFB, as required by law, promulgated regulations that, among other
things, specify eligible program activities and establish uniform standards
for subsidized advances to finance homeownership and affordable rental
housing for low-or moderate-income families under the Affordable Housing
Programs (AHP). The law required each FHLBank to establish an advisory
council to advise the FHLBank on the AHP. Through regulation, FHFB required
each FHLBank to adopt a written AHP implementation plan and have its
advisory council review the plan. Each FHLBank reports annually to the FHFB,
which conducts compliance reviews of each AHP, and reports on the AHP to the
Congress annually. FHFB also publicizes actions that FHLBanks take under
their programs, as do the FHLBanks themselves.
The law does not require the FHLBanks to make a specified contribution of
funds to the required CIP. Through regulation, however, FHFB, has set
standards for assessing FHLBanks' compliance with CIP requirement. For
example, the regulation authorizes the FHLBanks to provide CIP advances to
members for, among other things, funding loan originations and purchasing
mortgage revenue bonds, as long as the loans financed by such bonds meet
CIP-eligibility requirements. CIP advances generally are made available at
cost plus administrative fees to FHLBank members (banks, thrifts, credit
unions, and insurance companies) which, in turn, make loans for CIP-eligible
purposes.
The law also authorizes FHLBanks to offer CICA programs in addition to their
CIP and AHP programs. FHFB issued regulations to provide the FHLBanks with
an array of specific standards for housing and economic development
projects, targeted beneficiaries, and targeted income levels that the FHFB
determined support community lending under CICA programs. While CICA
programs are optional for the FHLBanks, the FHFB determined that
establishing clear and specific CICA standards would be more likely to
increase economic development activities in targeted communities; and they
would also make CICA programs easier to implement and monitor.
Bank and thrift regulators, as noted previously, conduct periodic on-site
examinations that include assessments of CRA performance. CRA compliance
reports and performance ratings are released publicly and are available on
the Internet sites of the bank and thrift regulators as well as a
centralized Internet site.25 In reviewing Bank Holding Company merger and
other applications, regulators have a statutory responsibility, established
by the Bank Holding Company Act of 1956 and CRA to take into account an
institution's record of community credit performance when evaluating the
application. Regulators also have similar responsibilities under the
Gramm-Leach-Bliley Act of 1999 when considering bank permission to engage in
activities newly authorized under the act. However, CRA does not provide
regulators with enforcement authority on the basis of their compliance
examination findings.
Conclusions
As the regulator of the System, FCA is to ensure that the System
appropriately fulfills its statutory mission requirements, including the
requirement to serve YBS. The guidance that FCA has issued represents a
constructive effort to direct System institutions to comply with the YBS
mission requirement and set general standards to use in examining
compliance. FCA has issued a regulation on YBS, but it essentially restates
the statutory provision and does not provide the level of detailed guidance
found in the applicable FCA Board policy statement, bookletter, and
informational memorandums. FCA's efforts to guide System institutions in
establishing and implementing meaningful, result-oriented YBS programs, and
clarify its expectations for System performance would be strengthened by
setting clear, qualitative standards in regulation. Given the challenge of
identifying any unmet need for credit to YBS and the limited data on YBS, it
would seem appropriate for FCA to focus on qualitative rather than
quantitative standards. For example, such standards could include requiring
System institutions to establish or participate in educational and community
outreach programs for YBS and to use FSA guarantees where appropriate. In
addition, clear standards set forth in regulation would facilitate FCA's
ability to render an overall assessment of each System institutions'
performance in complying with the mission to serve YBS.
As a result of our analysis of FCA reports of examination for YBS
compliance, we found weaknesses due to incomplete execution of examination
of procedures and incomplete documentation to support examination findings.
These weaknesses impair FCA's ability to oversee System compliance in
meeting the mission requirement of serving YBS.
25 The statute provides for both a public and a confidential section to
protect the privacy of individuals.
The System mission to serve YBS is more like the CRA requirement
imposed on banks and thrifts and the CIP requirement imposed on
FHLBanks than the special requirements for affordable housing set for
Fannie Mae, Freddie Mac, and the FHLBanks. Regulators who oversee
compliance with CRA and CIP, however, make an overall assessment
about the regulated entities' performance efforts. In addition, those
regulators publicly disclose their assessment and/or make information
available about the performance of individual entities that they regulate,
or
require that the entities do so. Such disclosure can afford an incentive for
the entities to better their performance while providing privacy for
individuals. In contrast, FCA does not disclose the results of its
assessments of individual System institutions' performance in serving YBS.
FCA does disclose information on System service to YBS, but only in
aggregate form.
Both FCA and the System itself have taken steps to promote service to
YBS and to attempt to measure that service. Clear program expectations
and standards set in regulation, thoroughly complete and well-documented
examination reports, and disclosure of the performance of System
institutions would enhance FCA's oversight and support the System's
efforts to govern itself in achieving its special mission to serve YBS.
To strengthen FCA in its oversight role of the System, promote
compliance, and highlight the System's efforts to provide service to YBS,
we recommend that the FCA Board
promulgate a regulation that outlines specific activities and standards that
constitute an acceptable program to implement the YBS statutory
requirement;
ensure that examiners follow the guidance and complete the appropriate
examination procedures related to YBS, and adequately document the
work performed and conclusions drawn during examinations; and
publicly disclose the results of the examinations for YBS compliance for
individual System institutions.
We provided FCA a draft of this report for their review and comment. FCA
agreed with the information presented in the draft report and agreed to
address the issues we raised. FCA's letter is reprinted in appendix II. FCA
provided technical clarifications, which we have incorporated into this
report where appropriate.
Recommendations
*
*
*
Agency Comments
We are sending copies of this report to the chairman of the Senate Committee
on Agriculture, Nutrition, and Forestry; the chairmen and ranking minority
members of the Senate Committee on Banking, Housing, and Urban, Affairs; the
House Committee on Financial Services; the House Committee on Agriculture;
and the chairman and chief executive officer of the Farm Credit
Administration. The report will be available on GAO's Internet home page at
http://www.gao.gov.
If you have any questions about this report, please contact me or M. Kay
Harris at (202) 512-8678. Andy Pauline and Desiree Whipple were major
contributors to this report.
Sincerely yours,
Davi M. D'Agostino
Director
Financial Markets and Community Investment
Appendix I: Scope and Methodology
As agreed with our requestor, the objectives of this report were to study
(1) how the Farm Credit Administration (FCA) seeks to ensure that
requirements for the Farm Credit System (System) institutions fulfill the
mission of serving young, beginning, and small farmers (YBS); (2) the extent
to which FCA examinations follow FCA requirements in evaluating System
compliance in serving YBS; (3) the characteristics of YBS programs at
selected System institutions; and (4) how the requirements for System
institutions to serve YBS compare to the special mission or service
requirements of other government-sponsored enterprises and banks.
To study FCA's requirements for the System to fulfill the mission of serving
YBS, we reviewed the Farm Credit Act of 1971, as amended, to identify
requirements for the System institutions' service to YBS. We reviewed FCA's
regulations implementing the YBS requirement, its examination program,
including the Examination Manual, policies, bookletters, and informational
memorandums. We compared FCA's requirements with provisions of the act. We
interviewed officials from FCA, System institutions, the System's
President's Planning Council, the System's Farm Credit Foundation, and the
Farm Credit Council to obtain their views on the requirements and FCA's
interpretations. We also interviewed officials of the U.S. Department of
Agriculture's Economic Research Service and Farm Service Agency, regarding
agricultural credit and special programs to serve YBS.
To study the extent to which FCA examiners followed FCA requirements in
evaluating System compliance in serving YBS, we analyzed selected
examinations and compared them with FCA's own examination requirements. In
addition, we reviewed the supporting examination workpapers for the selected
associations. We documented whether examination questions were completed,
the extent to which the examiners included supplemental information in their
workpapers, and whether the examiner followed the procedures specified by
FCA policies. We met with FCA officials and examiners to discuss our
findings and observations about the examinations reviewed and to clarify any
questions we had about FCA policies and procedures. We randomly selected our
sample of 30 examinations from the universe of 69 examinations of
associations issued during fiscal year 2001. We limited our selection of
examination reports to those issued in fiscal year 2001, since 2001 was the
third year that System institutions had been expected to comply with FCA's
revised examination procedures for assessing compliance with serving YBS.
Reports issued in fiscal year 2001 were also the most recent available for
our review. We selected two additional examinations for our sample. We
Appendix I: Scope and Methodology
had to replace 2 of the original 30 examinations because 2 of the
examinations had actually not been issued in fiscal year 2001.
To obtain information on the characteristics of YBS programs at selected
System institutions, we documented the existence of specific YBS programs
and services as reported by FCA examiners in our sample of examination
reports and related workpapers. We also reviewed the annual YBS reports
submitted to FCA by the System banks. We did not contact individual System
institutions to verify this information or inquire about other services they
might offer YBS.
To study how the requirements for System institutions to serve YBS compared
to the special mission requirements of other government-sponsored
enterprises and banks, we reviewed laws, other relevant regulatory
documents, and our past work on these entities and their regulators. We
analyzed the requirements and enforcement mechanisms as specified in law and
implemented by regulators' policies to make our comparison.
Our work was done in accordance with generally accepted government auditing
standards. We did the work for this report between July 2001 and March 2002
at FCA offices in McLean, Virginia.
Appendix II: Comments from the Farm Credit Administration
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