oversight

FCA's Oversight of Young, Beginning, and Small Farmer Programs

Published by the Farm Credit Administration, Office of Inspector General on 2016-09-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

OFFICE OF
INSPECTOR GENERAL         Audit Report
                    The Farm Credit Administra on's
                     Oversight of Young, Beginning,
                      and Small Farmer Programs
                                A‐16‐04

                           Auditor‐in‐Charge
                             Tori Kaufman

                      Issued September 28, 2016




                        FARM CREDIT ADMINISTRATION
Farm Credit Administration                                          Office of Inspector General
                                                                     1501 Farm Credit Drive
                                                                     McLean, Virginia 22102-5090




September 28, 2016

The Honorable Kenneth A. Spearman, Board Chairman
The Honorable Dallas P. Tonsager, Board Member
The Honorable Jeffery S. Hall, Board Member
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Dear Board Chairman Spearman and FCA Board Members Tonsager and Hall:

The Office of Inspector General (OIG) completed an audit of the Farm Credit Administration’s (FCA or Agency)
Oversight of Young, Beginning, and Small Farmer (YBS) Programs. The objective of this audit was to
determine whether FCA’s oversight of YBS programs is effectively administered.

We found oversight was effectively administered, and FCA had an extensive program in place to oversee the
System’s YBS programs and trends. The Office of Examination reviews YBS programs in several risk-based
areas of the examination process. The Office of Regulatory Policy develops YBS-related regulations and other
guidance. ORP also analyzes and reports on the System’s YBS trends and performance each year through
multiple communication channels.

We identified opportunities to improve YBS oversight. In response to our report, the following actions were
agreed-upon:

    1. ORP document policies and procedures for YBS oversight activities, including:
        • A methodology for YBS comparison reporting that accounts for institution size and
        • A process to address deficiencies identified through YBS reporting and analysis.

    2. ORP incorporate YBS oversight activities and processes in internal control planning and evaluation.

    3. ORP develop a plan for addressing recommendations in the Agency’s YBS definitions review.

    4. OE provide guidance to examiners to ensure YBS transaction testing and conclusions are
       appropriately documented.

    5. ORP complete an interpretation on YBS disclosure requirements in annual reports to shareholders.

We appreciate the courtesies and professionalism extended by FCA personnel to the OIG staff. If you have
any questions about this audit, I would be pleased to meet with you at your convenience.

Respectfully,




Elizabeth M. Dean
Inspector General

Enclosure
AGREED-UPON ACTIONS:

To improve oversight of YBS programs,
the following actions were agreed-upon:

   1. ORP document policies and
      procedures for YBS oversight
      activities, including:                 The Farm Credit Administration (FCA or Agency) is an independent
                                             federal agency responsible for regulating, examining, and supervising the
        •   A methodology for YBS            Farm Credit System and the Federal Agricultural Mortgage Corporation.
            comparison reporting that        Section 4.19 of the Farm Credit Act of 1971, as amended, requires
                                             institutions to prepare programs to furnish sound and constructive credit
            accounts for institution size
                                             and related services to young, beginning, and small farmers (YBS) and
            and
                                             report operations and achievements to FCA. Annual reporting directly to
        •   A process to address             Congress is specifically required for YBS activities.
            deficiencies identified
            through YBS reporting and        The objective of this audit was to determine whether FCA’s oversight of
            analysis.                        YBS programs is effectively administered. We found oversight was
                                             effectively administered, and FCA’s program for overseeing the System’s
   2. ORP incorporate YBS oversight          YBS programs and trends was extensive. FCA’s Office of Examination (OE)
                                             performs risk-based examinations that address YBS programs. The Office
      activities and processes in internal
                                             of Regulatory Policy (ORP) develops regulations and other guidance
      control planning and evaluation.       related to YBS programs and analyzes YBS reporting from institutions to
                                             prepare reports for Congress, the public, the FCA Board, and System
   3. ORP develop a plan for addressing      institutions. We identified opportunities for improvement to FCA’s YBS
      recommendations in the Agency’s        oversight, including:
      YBS definitions review.
                                                 •    FCA had not fully documented its YBS oversight process and
                                                      control activities. Documentation is a fundamental part of an
   4. OE provide guidance to examiners
                                                      effective internal control system.
      to ensure YBS transaction testing          •    Improvements to YBS data processes will enhance consistency
      and conclusions are appropriately               and oversight. YBS variance reporting requirements are based
      documented.                                     on a standard threshold and do not account for institution size.
                                                      This process may allow large year-over-year changes not to be
                                                      fully explained or potential errors not to be identified. As part of
   5. ORP complete an interpretation                  reviewing annual YBS reporting, ORP may identify weaknesses
      on YBS disclosure requirements in               that warrant correction by System institutions and coordination
      annual reports to shareholders.                 with OE. This process should be formalized and documented.
                                                 •    Transaction testing for YBS coding was not always fully
                                                      documented. OE’s examination process and workpaper
                                                      templates are designed to provide consistency and support for
                                                      testing and conclusions.
                                                 •    Annual reports to shareholders did not always delineate goals
                                                      and targets. These measures are required in FCA regulations to
                                                      gauge the status of YBS programs and provide a comprehensive
                                                      understanding of results.

                                             Agency officials agreed with our report and to provide specific tasks to be
                                             completed to strengthen oversight of YBS programs.
                                    TABLE OF CONTENTS



BACKGROUND _______________________________________________________ 1

 Prior Reviews______________________________________________________________________ 5

AUDIT RESULTS______________________________________________________ 6

 Documenting YBS Oversight Activities __________________________________________________ 6

 Data Integrity _____________________________________________________________________ 7

   YBS Annual Reporting _____________________________________________________________ 7
   Transaction Testing _______________________________________________________________ 8
   YBS Definitions Review ____________________________________________________________ 9
 Disclosures in Annual Reports to Shareholders __________________________________________ 10

 Agreed-Upon Actions 1-5 ___________________________________________________________ 11

OBJECTIVE, SCOPE, AND METHODOLOGY ______________________________ 12

ACRONYMS ________________________________________________________ 13
BACKGROUND

    The Farm Credit Administration (FCA or Agency) is an independent federal agency responsible for
    regulating, examining, and supervising the Farm Credit System (FCS or System) and the Federal
    Agricultural Mortgage Corporation. The core mission of the Agency is to ensure a safe, sound, and
    dependable source of credit and related services for agriculture and rural America. As part of this
    mission, Congress mandates that the System serve the credit needs of young, beginning, and small
    farmers and ranchers (YBS). The viability and financial success of these borrowers is a critical component
    affecting the future of agriculture.

    Amendments in 1980 to the Farm Credit Act of 1971, as amended (the Act) set forth requirements for
    System institutions to serve YBS. Section 4.19, Young, Beginning, and Small Farmers and Ranchers, 12
    U.S.C. § 2207, requires institutions to prepare programs to furnish sound and constructive credit and
    related services to YBS and report operations and achievements to FCA. Furthermore, Section 5.17,
    Enumerated Powers, 12 U.S.C. § 2252, requires annual reporting directly to Congress that includes a
    summary and analysis of reports to FCA on serving YBS. FCA established definitions for young, beginning,
    and small as follows:


           Young

           • A farmer, rancher, or producer or harvester of aquatic products who is
             age 35 or younger as of the loan transaction date

           Beginning

           • A farmer, rancher, or producer or harvester of aquatic products who has
             10 years or less farming, ranching, or aquatic experience as of the loan
             transaction date

           Small

           • A farmer, rancher, or producer or harvester of aquatic products who
             normally generates less than $250,000 in annual gross sales of
             agricultural or aquatic products


    Specific activities and standards for the System’s YBS programs are promulgated in FCA regulations. In
    March 2004, FCA adopted Young, Beginning, and Small Farmers and Ranchers, 12 C.F.R. § 614.4165. This
    regulation provides minimum components that each System bank and association must include when
    developing a YBS program. YBS reporting requirements are also incorporated in 12 C.F.R. § 620.5,
    Contents of the Annual Report to Shareholders. The following summarize YBS requirements:




                                                        1
614.4165 Young, Beginning, and Small Farmers and Ranchers

(b) Farm Credit Bank Policies
Each Farm Credit Bank and Agricultural Credit Bank must adopt written policies that direct:
    1) The board of each affiliated direct lender association to establish a program to
       provide sound and constructive credit and services to young, beginning, and small
       farmers and ranchers and producers or harvesters of aquatic products;
    2) Each association to include in its YBS program provisions ensuring coordination with
       other System institutions in the territory and other governmental and private
       sources of credit;
    3) Each association to provide, annually, a complete and accurate YBS operations and
       achievements report to its funding bank; and
    4) The bank to provide the Agency a complete and accurate annual report summarizing
       the YBS program operations and achievements of its affiliated associations.

(c) Direct Lender Association YBS Programs
The board of directors of each association must establish a program to provide sound and
constructive credit and services to YBS in its territory. Such a program must include the
following minimum components:
     1) A mission statement describing program objectives and specific means for achieving
         such objectives.
     2) Annual quantitative targets for credit to YBS that are based on an understanding of
         reasonably reliable demographic data for the lending territory.
     3) Annual qualitative YBS goals that must include efforts to:
             o Offer related services directly or in coordination with others that are
                responsive to the needs of YBS in the territory;
             o Take full advantage of opportunities for coordinating credit and services
                offered with other System institutions in the territory and other
                governmental and private sources of credit who offer credit and services to
                those qualifying as YBS; and
             o Implement effective outreach programs to attract YBS.
     4) Methods to ensure credit and services offered to YBS are provided in a safe and
         sound manner and within the association’s risk-bearing capacity.

The YBS program of each association is subject to the review and approval of its funding
bank. The funding bank’s review and approval is limited to a determination that the YBS
program contains required components of this section. Quantitative and qualitative targets
and goals outlined above must be included in each direct lender association’s operational
and strategic business plan for at least the succeeding 3 years. In addition, each association
must have internal controls that establish clear lines of responsibility for YBS program
implementation, YBS performance results, and YBS quarterly reporting to the association’s
board of directors.



                                               2
  620.5 Contents of The Annual Report to Shareholders

  (k) Credit and Services to Young, Beginning, and Small Farmers and Ranchers and
  Producers or Harvesters of Aquatic Projects
      1) Each direct lender association must describe the YBS demographics in its territory
          and the source of this data. If there are differences in the methods by which
          demographic and YBS data are presented, these differences must be described.
      2) Each association must provide a description of its YBS program, including a status
          report on each program component set forth in 614.4165(c) and the definitions for
          “young,” “beginning,” and “small” farmers and ranchers. The discussion must
          provide information necessary for a comprehensive understanding of the
          association’s YBS program and results.
      3) Each Farm Credit bank must include a summary report of the quantitative YBS data
          from its affiliated associations as described in FCA’s instructions for the annual YBS
          year-end report. The report must also include the definitions of “young,”
          “beginning,” and “small” farmers and ranchers and narrative necessary for a
          complete understanding of YBS mission results.


Although § 614.4165 establishes minimum standards, it gives associations the flexibility to establish
quantitative targets, safety and soundness measures, and outreach programs that are appropriate for
their institution. Examples from the regulation are as follows:

                                      Methods to Ensure Credit
  Quantitative Targets for YBS
                                     and Services are Provided in            Outreach Programs
             Credit
                                      a Safe and Sound Manner
 •Loan volume and loan               •Custom loan underwriting          •Advertising campaigns
  number goals                        standards                         •Educational programs
 •Percentage goals                   •Federal or state loan             •Advisory committees to
  representative of the YBS           guarantees                         provide input on how to
  demographics in the                •Concessionary loan fees            best serve YBS
  territory                          •Other credit
 •Percentage goals for loans          enhancements
  to new YBS borrowers
 •Goals for capital
  committed to YBS loans


FCA’s oversight of YBS programs is multilayered. The Office of Examination (OE) reviews YBS programs of
banks and associations for compliance with regulations. The Office of Regulatory Policy (ORP) analyzes
YBS trends in the System and develops regulations and other guidance.

The OE reviews YBS programs in several areas of the examination process. YBS activities are a
component of examination topics to evaluate an institution’s mission compliance and regulatory




                                                   3
compliance. The mission compliance examination topic includes a YBS examination procedure, as well as
other procedures, to evaluate internal controls for YBS lending as follows:




          YBS               Examine the adequacy and administration of YBS programs,
                            contribution to meeting the System's public mission, and
                            compliance with FCA guidance


         Audit              Determine if the institution conducts an effective audit of
                            programs related to mission compliance
                            Examine individual assets and applications to assess compliance
  Transaction               with the institution's mission-related programs and applicable
    Testing                 laws and regulations to evaluate effectiveness of internal controls
                            and accuracy of data


Examination procedures addressing YBS are risk-based. OE’s risk-based structure is designed to focus
resources in areas that may materially affect safety and soundness. Examiners evaluate many different
factors to determine the scope and depth of work related to YBS procedures. These may include
changing risk conditions and other indications that new or revised programs or processes are in place.

ORP analyzes quantitative and qualitative data related to YBS mission performance. FCA collects
required YBS year-end reporting from the three Farm Credit Banks and one Agricultural Credit Bank.
Each bank’s report includes quantitative lending data from associations in its district. YBS lending activity
data from banks and associations is available through FCA’s Consolidated Reporting System. ORP also
prepares a qualitative questionnaire each year to gauge associations’ YBS program evaluation,
management, credit components, and outreach. For the first time this year, ORP conducted interviews
with personnel at selected associations to supplement questionnaire information and gain further
insight on their YBS activities.

The ORP summarizes quantitative and qualitative results across the System to inform Congress, the
public, the FCA Board, and System institutions. Each year, ORP prepares FCA’s Annual Report on the
System’s YBS Mission Performance and the YBS section of FCA’s Annual Report on the FCS. Each report
is published on FCA’s website. ORP also briefs the FCA Board on YBS trends and activity. Lastly, ORP
summarizes qualitative questionnaire responses and distributes a report with best practices to System
institutions.

In addition to developing regulations to implement the Act and help the System fulfill its mission, ORP
has issued additional guidance on serving the credit and service needs of YBS. Informational
memorandums are guidance documents issued to all FCS institutions and bookletters communicate the
Agency’s position on specific issues. The following were issued to provide additional guidance on YBS
lending:

    •   Informational Memorandum – Lending, Training, and Outreach Opportunities with the Farm
        Service Agency (November 25, 2014): This memorandum provides information on lending,



                                                     4
        training, and outreach opportunities available through the Farm Service Agency at the United
        States Department of Agriculture. The Informational Memorandum states these opportunities
        may be beneficial as part of coordinating YBS programs with other governmental sources of
        credit.
    •   Bookletter 066 – Providing Credit to Farmers and Ranchers Operating in Local/Regional Food
        Systems (October 11, 2012): This bookletter provides guidance on how FCS associations can
        effectively meet the credit and related service needs of farmers who market their agricultural
        products through local/regional food systems. The bookletter states due to their age, farming
        experience, and size, many local food farmers qualify as YBS.
    •   Revised Bookletter 040 – Providing Sound and Constructive Credit to Young, Beginning, and
        Small Farmers, Ranchers, and Producers or Harvesters of Aquatic Products (August 10, 2007):
        This bookletter provides guidance on interpreting “sound and constructive credit” in section
        4.19 of the Act and regulation 614.4165.

In December 2015, FCA issued a draft report on its review of YBS definitions and reporting procedures.
The FCA review was conducted by a workgroup including members from ORP, OE, and the Office of
General Counsel. The workgroup’s report discusses research and analysis to evaluate whether YBS
definitions remain appropriate based on changes within agriculture. The review also covered technical
issues related to YBS reporting language and procedures. The report included 11 recommendations and
was distributed to FCA senior staff for input in July 2016.

FCA’s strategic planning emphasizes the importance of the System’s YBS lending. The Agency’s 2016-
2021 Strategic Plan incorporates a strategy to emphasize mission-related responsibilities, including
programs for serving the credit and related service needs of YBS. FCA monitors achievement in this area
through a YBS performance measure. The Agency tracks the percentage of direct-lender institutions
with YBS programs that are in compliance with YBS regulations and targets a percentage of 90 or more.
OE and ORP are responsible for the Agency’s YBS performance measure.

Prior Reviews

In March 2002, the U.S. Government Accountability Office (GAO) completed an audit of FCA’s oversight
of the System’s compliance with its statutory requirement to serve YBS. The audit, Oversight of Special
Mission to Serve Young, Beginning, and Small Farmers Needs to Be Improved (GAO-02-304), made three
recommendations:

    •   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.

FCA regulation, § 614.4165, was a result of GAO’s audit. At the time of the audit, OE revised quality
assurance processes to ensure YBS examination procedures were completed and documented. The third
recommendation was closed and not implemented. After collecting input through an advance notice of
proposed rulemaking, FCA developed regulatory requirements for specific YBS information to be



                                                   5
     included in annual reports to shareholders, but YBS examination results, like the contents of all
     examination reports, are not publicly disclosed.


AUDIT RESULTS

     The objective of this audit was to determine whether FCA’s oversight of young, beginning, and small
     farmer (YBS) programs is effectively administered. We found oversight was effectively administered,
     and FCA had an extensive program in place to oversee the System’s YBS programs and trends. FCA
     regulations provide standards for YBS programs, and FCS institutions are required to report on YBS
     activity throughout the year and annually to FCA.

     The OE and ORP play significant roles in FCA’s efforts to ensure the System serves YBS borrowers. OE’s
     examination process includes a risk-based YBS procedure to examine: 1) the adequacy and
     administration of YBS programs; 2) contribution to meeting the System’s public mission; and 3)
     compliance with FCA guidance. During our review, officials stated guidance for this procedure will be
     developed in the upcoming months. OE also uses standard examination workpapers to review
     implementation of YBS regulatory requirements in institutions’ business plans and annual reports to
     shareholders. Standard examination workpapers are checklists used by examiners during the
     examination process in the specified area. In addition to developing regulations, informational
     memorandums, and bookletters, ORP analyzes and reports on the System’s YBS trends and performance
     each year through multiple communication channels. This year-round process informs Congress, the
     public, the FCA Board, and System institutions.

     Although FCA’s process included institution and System-wide analysis and reviews of YBS programs, we
     identified areas for improvement. Actions in the following areas will improve oversight and
     transparency:

         •   Documenting oversight activities and controls;
         •   Data integrity; and
         •   Disclosures in annual reports to shareholders.


     Documenting YBS Oversight Activities

     The ORP conducts year-round activities as part of FCA’s role in overseeing YBS programs in the System.
     ORP evaluates and analyzes required, annual YBS reporting. Following analysis, ORP may contact
     institutions to obtain further information on high variances in quantitative lending activity data. In
     addition, a qualitative questionnaire is prepared and distributed to institutions to gain insight on YBS
     program evaluation, management, credit components, and outreach. Using these datasets and
     information, ORP prepares several reports on YBS each year, including:

         •   Annual Report on the System’s YBS Mission Performance,
         •   Annual Report to Congress on the FCS, and
         •   Summary of responses from the qualitative questionnaire.




                                                         6
To date, ORP has not documented its YBS oversight process and control activities in FCA policies or
procedures. Documentation is a fundamental part of an effective internal control system. FCA’s Policies
and Procedures Manual 1007, Evaluation of Internal Control Systems, directs management to design,
monitor, test, and evaluate internal controls for all FCA functions impacting financial reporting,
regulatory compliance, and mission-related activities. This is also an emphasized area government-wide
with the new standards for internal control and management’s responsibility for enterprise risk
management 1. ORP’s analysis and reporting functions are critical components of the Agency’s YBS
oversight role. In addition, these functions are incorporated in strategies and actions adopted by the
Agency to ensure the FCS fulfills its public mission for agriculture and rural areas.

Each year, FCA office directors review operations and identify functions to include in their office’s
internal control systems. Based on these key activities, each office develops a two-year plan describing
internal control elements, their risk level, and planned reviews. ORP’s plan covers critical regulatory and
approval functions; however, the office’s annual YBS oversight processes were not covered by control
elements identified in the plan. The Agency’s planning and evaluation process is designed to provide
reasonable assurance that management controls are in place and operating effectively.


Data Integrity

YBS Annual Reporting

Data collection and analysis is central to FCA’s mission and strategic goals. Section 4.19 of the Act
establishes specific requirements for FCA to collect an annual report from each bank in the System
summarizing operations and achievements of YBS programs in its district. An officer must certify as to
the correctness of data in their bank’s YBS report and FCA provides specific instructions for this
reporting. Annually, each bank must provide FCA with the following:

    •   The number and dollar volume of all YBS loans outstanding for the bank and each affiliated
        association;
    •   The number and dollar volume of all new YBS loans for the bank and each affiliated association;
    •   A districtwide summary report for YBS loan activity;
    •   A narrative description of specific YBS programs and activities sponsored by the bank for all
        associations in its district; and
    •   A comparison report for each association and the bank including a narrative description of any
        year-over-year changes of 25 percent or more for a reporting category.

These YBS annual reports are used by OE during examinations, and ORP uses this data to prepare: 1) the
Annual Report on the System’s YBS Mission Performance and 2) the YBS section of the Annual Report on
the FCS. Quantitative data on YBS lending activities is available through FCA’s Consolidated Reporting
System. As an additional control, ORP reviews comparison reports with year-over-year variances to
identify potential reporting errors. Institution size can have a significant impact on year-over-year
percentage changes. For example, a small institution going from two loans to four loans would yield a

1
  Government Accountability Office’s Standards for Internal Control in the Federal Government and Office of
Management and Budget Circular No. A-123, Management’s Responsibility for Enterprise Risk Management and
Internal Control



                                                      7
100 percent increase. However, this type of large percentage increase is not necessarily indicative of
incorrect reporting. Conversely, at larger institutions, variances less than 25 percent may still be
significant and not necessitate an explanation through FCA’s YBS reporting process. Although 25 percent
is used as a standard threshold for each institution, this process could be strengthened. By developing a
variance reporting threshold that accounts for institution size, FCA may gain better insight into potential
errors and improve YBS data overall.

In its oversight role collecting and analyzing YBS annual reporting data, ORP may identify reporting
weaknesses and areas for improvement at System institutions. As part of a coordinated effort, during
the examination cycle, OE examiners may initiate recommended or required corrective actions to
address weaknesses discovered in YBS annual reporting. As an example, if an examiner determines
additional controls are necessary to ensure timely, complete, and accurate YBS annual reporting, a
corrective action may be recommended, documented, and tracked. Although not all errors and data
corrections require corrective action or referral to OE examination, ORP should develop a process to
ensure noteworthy issues are documented, communicated, and addressed appropriately.

Transaction Testing

The OE plays a key role in reviewing YBS programs at System institutions. This oversight is accomplished
through various risk-based examination procedures. Mission compliance is the main examination topic
that incorporates oversight of YBS programs. If mission compliance is included in the exam scope,
transaction testing may be completed. Mission compliance transaction testing examines individual
assets and loan applications. The purpose is to assess compliance with the institution’s mission-related
programs and applicable laws and regulations.

We sampled 16 institutions. During our approximately 3-year audit scope, 38 examinations were
completed at these institutions. Mission compliance transaction testing was completed as part of 10
examinations in our sample. We reviewed transaction testing because it includes reviewing the accuracy
of YBS coding 2 for institution assets. Examiners select risk-based, judgmental samples of institution
assets to test various elements of credit administration and compliance. In our sample, YBS coding
documentation was incomplete in various examinations. Because of this lack of documentation and/or
justification, we were unable to fully follow the extent of testing and/or conclusions required further
support. Our review was limited and relied on results and reports of examination documented in OE’s
Enterprise Documentation and Guidance System.

To ensure consistency in examination documentation, OE uses a standard asset examination workpaper.
This workpaper allows examiners to document whether YBS identification and reporting for the
reviewed asset is: satisfactory, a technical weakness, a material weakness, not examined, or not
applicable. Officials stated if the YBS identification and reporting field was blank in the asset
examination worksheet, the asset was not examined. However, we found this was not always
documented or explained. In order to verify sound methodologies and adequate levels of testing were
performed, examination documentation should show each step completed to fulfill the objective of the
examination procedure. OE’s examination process and Enterprise Documentation and Guidance System
are designed to provide a consistent, documented approach. This is especially important in risk-based


2
 Coding is established based on FCA definitions for young, beginning, and small as of the loan transaction date.
Coding is used to track and report on YBS lending activity.



                                                         8
reviews where the scope and depth of work is based on examiner judgment and varies across
examinations.

YBS Definitions Review

Periodic reviews of YBS performance measures and procedures help to ensure mission areas align with
the changing agricultural production system. Current YBS definitions were adopted by the FCA Board in
1998 to use in assessing the System’s performance. FCA’s review stated in 2013, the United States
Department of Agriculture’s Economic Research Service revised its definition of a “small farmer” from
$250,000 in gross farm income to $350,000 in gross cash farm income. The change was due to increased
farm commodity prices. Given this change, the length of time since adopting current definitions, and
other changes in agriculture and credit markets, FCA formed a workgroup to review YBS definitions and
reporting procedures.

The workgroup’s review was completed in December 2015 and yielded 11 recommendations for
changing YBS definitions, reporting methodologies, or procedures. These recommendations included
clarifying language changes as well as the following:

    •   Changing the income threshold for a small farmer from $250,000 to $350,000. This change
        would align with USDA’s modified definition of a small farmer but would necessitate a restart to
        existing performance trends in this area.
    •   Establishing three loan size reporting categories for young, beginning, and small borrower
        performance measures. These amounts will be based on the recommended increased income
        threshold for a small farmer, if applied.
    •   Further defining “income” used to identify a small farmer.
    •   Defining “closely-held legal entity” and “material ownership interest” in YBS reporting
        instructions.
    •   Requiring reporting certifications to be completed by a financial officer and submitted to FCA
        with YBS reporting. The current practice is for data to be certified by any officer and maintained
        in the institution’s files.
    •   Changing the current practice so associations report directly to FCA rather than through their
        district bank.

The ORP was in the process of collecting feedback on the definitions review and officials stated it would
take time to analyze the impact of recommendations in the report. Although certain recommendations
will require extensive input and deliberation, other recommendations, not involving a change in
practice, may be incorporated earlier. To ensure appropriate actions are completed, ORP should create
a plan and timeframes to consider and address each recommendation.




                                                    9
Disclosures in Annual Reports to Shareholders

Contents of the Annual Report to Shareholders, 12 C.F.R. § 620.5(k), requires the following YBS
disclosures:

    •   Associations must describe the YBS demographics in their territory and the source of
        demographic data. If there are differences in the methods by which the demographics and YBS
        data are presented, those differences must be described.
    •   Each association must provide a description of its YBS program, including a status report on
        each program component as set forth in 614.4165(c) and the definitions of “young,”
        “beginning,” and “small” farmers and ranchers. This discussion must provide such other
        information necessary for a comprehensive understanding of the association’s YBS program and
        its results.
    •   Each Farm Credit bank must include a summary report of the quantitative YBS data from its
        affiliated direct lender associations as described in FCA’s instructions for the annual YBS year-
        end report. The report must also include the definitions of YBS. A narrative may be necessary
        for an ample understanding of the YBS mission results.

YBS reporting is one of many required disclosures. OE utilizes a standard examination workpaper to
ensure annual reports to shareholders fulfill regulatory requirements. This checklist is completed as part
of the financial and shareholder reporting examination procedure, which is also risk-based.

During our review, we identified annual reports to shareholders that did not fully describe the status
and results of quantitative targets or qualitative goals. Examinations for 10 of the 16 institutions we
sampled included reviews of YBS disclosures in annual reports to shareholders within our scope. For 5 of
these 10 institutions, we noted examples where goals and actual results for the year were unclear in
annual reports to shareholders. These institutions addressed YBS activities in various formats. For
example, some reports discussed overall YBS lending at year-end or goals for future years; however,
their goals for that reporting year and actual results were not specifically addressed.

OE officials stated 12 C.F.R. § 620.5(k) does not necessarily require each goal and results for the
reporting year, moreover YBS activity is included in the institution’s reporting to their board. However,
§ 620.5(k)(2) references a “status report on each program component as set forth in 614.4165(c)” and
“information necessary for a comprehensive understanding of the association’s YBS program and its
results.” FCA regulation § 614.4165(c) describes required YBS goals and targets. To ensure a consistent
approach and proper oversight, ORP can provide an interpretation on what is required to fulfill
§ 620.5(k)(2). Based on this interpretation, OE can provide guidance to institutions and examiners to
ensure reporting contains sufficient detail to fulfill regulatory requirements.

Annual reports to shareholders are an important component of YBS data transparency of the System.
Although FCA aggregates and reports on institutions meeting YBS goals, annual reports to shareholders
provide public information about individual institution metrics and performance. Transparency was also
a key focus when YBS requirements were established for annual reports to shareholders. These
requirements were implemented in 2004 as part of the Agency’s response to GAO’s audit of FCA’s
oversight of the System’s YBS mission. Although FCA did not implement GAO’s recommendation to
publicly disclose YBS examination results, additional disclosure requirements were established to
provide a comprehensive understanding of each institution’s YBS program performance.



                                                    10
Agreed-Upon Actions 1-5

To improve controls, consistency, and transparency, the following actions were agreed-upon:

    1. ORP document policies and procedures for YBS oversight activities, including:
        • A methodology for YBS comparison reporting that accounts for institution size and
        • A process to address deficiencies identified through YBS reporting and analysis.

    2. ORP incorporate YBS oversight activities and processes in internal control planning and
       evaluation.

    3. ORP develop a plan for addressing recommendations in the Agency’s YBS definitions review.

    4. OE provide guidance to examiners to ensure YBS transaction testing and conclusions are
       appropriately documented.

    5. ORP complete an interpretation on YBS disclosure requirements in annual reports to
       shareholders.

Agency officials agreed with our report and to provide specific tasks to be completed to strengthen
oversight of YBS programs.




                                                   11
OBJECTIVE, SCOPE, AND METHODOLOGY

     The objective of this audit was to determine whether FCA’s oversight of young, beginning, and small
     farmer (YBS) programs is effectively administered. We conducted fieldwork at FCA’s Headquarters in
     McLean, VA from May 2016 through September 2016. We limited our scope to FCA’s YBS oversight from
     January 2013 through April 2016.

     We took the following steps to accomplish the objective:

         •   Identified and reviewed applicable laws, regulations, and other guidance related to the
             objective.

         •   Reviewed prior audits and other reviews related to the audit objective.
         •   Reviewed the Agency’s strategic plan and performance measures pertaining to the audit
             objective and determined FCA activities to fulfill YBS measures.
         •   Reviewed the Agency’s process for YBS data collection, analysis, and reporting to inform the
             public, the FCA Board, and System institutions.
         •   Analyzed policies, procedures, and internal controls related to YBS activities and reporting.
         •   Reviewed guidance in the exam manual pertaining to the Agency’s YBS oversight.
         •   Conducted interviews with Office of Regulatory Policy and Office of Examination officials.
         •   Sampled 16 institutions with 38 examinations completed from January 1, 2013 to April 30, 2016.
             We reviewed the YBS, audit, and transaction testing procedures completed as part of the
             mission compliance topic. We also reviewed regulatory compliance checklists completed to
             examine YBS requirements within business plans and annual reports to shareholders. Annual
             reports to shareholders for January 2013 to April 2016 were included in our review. Not all
             procedures were completed as part of each examination in our sample due to OE’s risk-based
             examination process. Our sample was selected to incorporate institutions in each district; our
             sample included one bank and 15 associations. The sample was judgmental and cannot be
             projected over the entire population.
      This audit was performed in accordance with Generally Accepted Government Auditing Standards.
      Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence
      to provide a reasonable basis for our findings and conclusions based on our audit objectives. We
      assessed internal controls and compliance with laws and regulations to the extent necessary to satisfy
      the objective. Because our review was limited, it would not necessarily have disclosed all internal
      control deficiencies that may have existed at the time of our audit. We assessed the computer-
      processed data relevant to our audit objective and determined the data was sufficiently reliable. We
      assessed the risk of fraud related to our audit objectives in the course of evaluating audit evidence.
      Overall, we believe the evidence obtained provides a reasonable basis for our conclusions based on our
      audit objective.




                                                         12
ACRONYMS


           C.F.R.   Code of Federal Regulations

           FCA      Farm Credit Administration

           FCS      Farm Credit System

           OE       Office of Examination

           OIG      Office of Inspector General

           ORP      Office of Regulatory Policy

           U.S.C.   United States Code

           YBS      Young, beginning, and small farmers, ranchers, and producers or harvesters of
                    aquatic products




                                                  13
    R E P O R T

Fraud | Waste | Abuse | Mismanagement




      FARM CREDIT ADMINISTRATION
      OFFICE OF INSPECTOR GENERAL

   Phone: Toll Free (800) 437-7322; (703) 883-4316

                Fax: (703) 883-4059

           E-mail: fca-ig-hotline@rcn.com

          Mail: Farm Credit Administration
            Office of Inspector General
               1501 Farm Credit Drive
              McLean, VA 22102-5090