Farm Management and Agricultural Trust

AGENCY:

Farm Credit Administration.

ACTION:

Notice.

SUMMARY:

The Farm Credit Administration (FCA or we) publishes this notice to inform the public of its decision to deny a request by a Farm Credit System (System or FCS) institution for approval to offer farm management and agricultural trust services as authorized related services. The proposed services were published for public comment on August 19, 2003.

EFFECTIVE DATE:

April 22, 2004.

FOR FURTHER INFORMATION CONTACT:

Lori Markowitz, Policy Analyst, Office of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-4434;

  or

Joy Strickland, Senior Counsel, Regulatory Enforcement Division, Office of the General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-2020.

SUPPLEMENTARY INFORMATION:

I. Objective

Consistent with law and safety and soundness principles, the objective of this notice is to inform the public of the FCA's decision on a request from an FCS institution to offer farm management and agricultural trust services as authorized related services.

II. Background

FCA published a notice and request for public comment on the institution's related services request in the Federal Register on August 19, 2003, and provided a 60-day comment period. (See 68 FR 49773) On October 23, 2003, FCA reopened the comment period until December 22, 2003. (See 68 FR 60689) In this notice, we are providing a summary of the comments we received and informing the public of FCA's decision on the related services request.

Related service, as defined in 12 CFR 618.8000(b), means “any service or type of activity provided by a System bank or association that is appropriate to the recipient's on-farm, aquatic, or cooperative operations, including control of related financial matters.” Any new service not previously authorized and placed on the Related Services List in 12 CFR part 618 requires a prior determination that the service is legally authorized. The FCA also must evaluate whether the service presents excessive risk to the requesting institution or the System as a whole, including whether the service could result in significant conflicts of interest or expose the institution or the System as a whole to significant liability.

In its evaluation of a proposed service, the FCA must focus on its application System-wide rather than on institution-specific factors. If we authorize a new related service, any System bank or association may develop a program and subsequently offer the same related service(s) to eligible recipients, subject to any special conditions or limitations imposed by the FCA. We may, at the time of approval, impose such special conditions or limitations on any approved service to ensure safety and soundness or compliance with law or regulation. These programs would be subject to review during the examination process.

III. Proposed Related Services

The following services were proposed as services that an individual institution would offer to its customers:

• Farm Management Services—Professionals familiar with the market would provide management of agricultural properties for real estate owners in the service area. Farm management includes defining ownership goals, identifying problems, analyzing alternatives, and making recommendations for achieving business goals. Farm managers would present the customer with a full spectrum of lease or custom farming alternatives and help the owner decide how to ultimately get the best return on assets. Key factors of the service would include developing a comprehensive farm operating plan, securing operators and negotiating leases, providing property reporting, including annual budgets and projections, analyzing government programs, formulating and implementing capital improvements and repairs, and handling commodity sales.
• Agricultural Trust Services—The institution would assist customers in creating a trust and managing the assets of the trust. As the trustee, the institution would handle the responsibilities involved in settling the estate, including recordkeeping, asset management, asset disposition, tax filings, and income distributions.

IV. Comments

Because of the complex nature of these proposed services, the FCA solicited public comment, in accordance with 12 CFR 618.8010(b)(3). We believe that evaluation of the proposal has been aided by the public comments we received. FCA received 390 comments, four of which asked for an extension of the original comment period or clarification of FCA's process. Commenters included FCS institutions, the Farm Credit Council, the American Bankers Association, the Independent Community Bankers Association, state banking associations, the National Association of Realtors, realtors, property managers, appraisers, and members of the public.

We received 19 comments in support of the proposal. Supporters commented that farm management and agricultural trust services would allow FCS institutions to become more comprehensive providers of financial services. Also, the proposed services would greatly benefit and parallel FCA's Young, Beginning and Small (YBS) farmer initiative by allowing YBS farmers to have highly regarded expert advice about specialized services available. Commenters stated that these services could provide retiring farmers with the alternatives and valuable business tools that would allow the transfer of assets from one generation to another, thus allowing for the continuation of the family farm business. The services could also benefit absentee and non-active farmland owners who do not want to actively farm the land, but want to continue land ownership and need assistance in farm management. Supporters also commented that the proposed services would meet the growing market demand in areas where the private sector providers are underserving the public or not offering such services at all.

Supporters also commented that a System institution offering the proposed services should demonstrate that appropriate risk management practices are in place and that safeguards are specifically identified in the agreement with the customer. Commenters asserted that risks could be adequately addressed by written programs establishing detailed operating procedures, staff qualifications, training, licensing, and insurance requirements, contractual provisions with clients, and “firewalls” between other institution operations. An organizational structure that provides for a separation of duties from the credit function would minimize potential conflicts associated with borrowers with distressed loans. Commenters further noted that an institution's board and management could implement internal controls through the development of policies and procedures, which would be monitored through internal and FCA regulatory examinations.

FCA received 367 comments in opposition to this proposal, many of which were identical in content. Commenters stated that the proposal would create an unfair competitive advantage because the proposed farm management and trust services are widely available to farmers throughout the country from existing service providers, and an FCS institution would be able to charge less for these services because of its Government-sponsored enterprise status. Many commented that farm management is a low margin business with high start-up costs due to the training and expertise requirements. Several commenters asserted that the proposed services are contradictory to Congressional intent and legislative history. Commenters in opposition also believe that FCS institutions cannot legally offer trust services because state law governs who can be deemed a corporate trustee, and most laws only include banks, savings and loan institutions, and trust companies. Further, the commenters noted that farm management, like any property management, is a commercial activity that most nationally chartered banks and savings and loan institutions are prohibited from offering.

The majority of comments in opposition to this proposal noted that there are significant conflicts of interest, particularly when the institution serves as farm manager, lender, and trustee of the same property. Financing farm operators and absentee landowners, while having a fiduciary position of negotiating leases and selecting farm operators, has built-in conflicts of interest. It would be difficult to negotiate lease terms as a farm manager if the farm operator were also a borrower. Commenters suggested that conflicts would also develop if potential farm management clients needed to borrow money. In addition, commenters stated that institutions offering farm management and trust services could expect to be involved in frequent litigation. As a result, some commenters felt that the services pose too great a financial risk to the System.

V. FCA's Action on the Proposal

After thoroughly considering the proposal and the comments received, the FCA concluded that farm management and agricultural trust services could come within the definition of related services as authorized in 12 CFR 618.8000 and the Farm Credit Act of 1971, as amended. The services are related to on-farm operations, which FCA has defined to include control of related financial matters. The proposed services are also similar to several other services that have been approved by the FCA, provided by FCS institutions for a number of years, and ratified through a notice and comment rulemaking process. Those services include appraisal services, estate planning services, farm recordkeeping services, and farm business consulting services.

Although the proposed services come within the statutory and regulatory parameters of a related service, farm management and agricultural trust services as proposed introduce significant risks and potential conflicts of interest for System institutions. An institution participating in farm management and agricultural trust services could face legal liability to its customers for certain management decisions, as well as third-party liability, including environmental liability. The financial risks associated with liability could significantly affect an institution's capital and financial condition. In addition, these services would likely involve substantial start-up and maintenance costs. If many institutions began offering these services, the risks and conflicts involved could adversely impact the System's viability.

Performing farm management and agricultural trust services for customers who are also borrowers of the offering institution poses potentially significant conflicts of interest. The conflicts would be magnified if a borrower's loan became distressed. Foreclosing on a loan, including providing distressed loan restructuring rights, would be difficult if the institution foreclosing on the loan were also managing the farm. Significant potential for conflicts would also exist in management and trust situations where owners and lessees were also borrowers of the institution. The potential conflicts of interests would increase the financial risk of offering these services because they are likely to give rise to frequent litigation, including creating defenses to foreclosures of managed properties and properties in trust. FCA believes that the conflicts of interest that this proposal presents are too great and cannot be satisfactorily resolved.

FCA recognizes that farm management and agricultural trust services can be beneficial to farmers and ranchers, particularly YBS farmers and ranchers. In some areas, these services may be provided through existing entities, while other areas may be underserved by existing entities. Notwithstanding the potential need for and benefits of these services, FCA believes that the conflicts and financial risks when one institution serves as both lender and manager/trustee outweigh the benefits that could be derived. FCA also notes that many of the benefits of these services, particularly the benefits to YBS farmers and ranchers, could be gained by System institutions more fully utilizing farm business consulting, which is an authorized related service on the Related Services List in 12 CFR part 618. Through farm business consulting, FCS institutions can provide critical advice to young and beginning farmers and advice on alternatives available to retiring farmers. Because FCS institutions that offer farm business consulting are not authorized to make management decisions for a customer, conflicts of interest and liability concerns are alleviated. For the foregoing reasons, the FCA Board has decided that farm management and agricultural trust services, as proposed, should not be authorized as related services.