54 FARM CREDIT ADMINISTRATION-PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 Figure 8 Comparison fo Scheduled and FY 2001 Performance Goals and Outcomes Goal 1-Ensure the Farm Credit System fulfills its public mission to provide constructive, competitive, and dependable credit and related services for agriculture and rural America. The purpose of Goal 1 is to maximize opportunities for the FCS to provide competitive and dependable credit and services for agriculture and rural America. To measure our performance in these areas, we developed three Agency-level performance measures for effective regulation and public policy (see Table 9a, page 60). Along with these performance measures, FCA's Strategic Plan lists four objectives that provide additional guidance and direction for our activities in support of this goal. Objective 1 - Ensure System institutions fulfill their public mission by reaching out to all potential customers. FCA regulations implement the Farm Credit Act and are the means by which System institutions have authority to serve customers. Thus, it is critical that we plan and complete regulatory and policy projects that help maximize the System's ability to serve customers and remove impediments that prevent the System from serving all potential customers Congress has authorized it to serve. A performance measure that helps us measure success for this objective is that we complete 90 percent of the regulatory projects that are scheduled in the Regulatory Performance Plan for the fiscal year. In FY 2001, we completed seven of the nine regulatory projects (78 percent) included in our annual Regulatory Performance Plan, which was 12 percent less than our performance measure goal. The projects we did not complete were final actions on the national charter initiative and the loan purchase and sales initiative. Instead of adopting the national charter regulation as final, the FCA Board extended the comment period to allow added time for public input and our consideration of public comments. At the beginning of FY 2002 (October 11, 2001), staff presented a draft final rule to the FCA Board. At the meeting, the FCA Board members indicated they would not proceed with the rule. The FCA Board deferred action on the loan purchase and sales initiative until FY 2002. It was adopted on December 13, 2001. In addition to the planned regulatory projects, we completed three regulation projects not contained in the annual Regulatory Performance Plan (see Figure 8). The three new projects were (1) National Charter Initiative - Extension of Comment Period; (2) ecommerce proposed regulations; and (3) a public meeting to discuss Farm Credit FARM CREDIT ADMINISTRATION-PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 The third project, in particular, should enhance the System's ability to reach out to all potential customers. We conducted a public meeting on FCS financing of OFIs to gain information on how the FCS can better serve all potential customers through financing other non-System agricultural lenders. Objective 2- Ensure quality customer service at lowest cost through healthy competition. A performance goal that helps us measure success for this objective is to use special customer focus or features on 40 percent or more of the regulation actions taken. For example, in response to requests from the public, we extended the comment period on our national charter initiative to obtain further comments. We used such features on 100 percent of the Board actions completed in FY 2001, which greatly exceeds our 40 percent performance goal. Another way we measure performance on this and the following objective is by obtaining customer feedback on our success in meeting the objectives outlined in our regulations. Customer feedback was obtained by an FCA Inspector General survey. This process helped to preserve the independence and confidentiality of the survey and contained the following questions: 1. Did our rulemaking and policy activities recognize market forces and encourage innovation for System institutions? 2. Did we adequately involve the public in seeking its perspective regarding our rulemaking activities? 3. Did our rulemaking and policy activities implement the Farm Credit Act without imposing unnecessary burden? Respondents answer these questions on a rating scale of 1 to 5, with 1 being the highest rating. Our goal for the survey is to have an average rating of less than 2.5. In the beginning of the fiscal year, the FCA Inspector General conducted a survey of 247 constituents (FCS institutions and commenters to regulatory actions taken by FCA during FY 2000). The ratings for questions 1, 2, and 3, were 2.30, 2.27, and 2.35, respectively, for an overall average of 2.31. We will evaluate the survey responses, improve the survey as needed, and survey constituents on FY 2001 regulations early in FY 2002. Objective 3- Enable the System to serve evolving customer needs and compete in new agricultural and financial markets. To enable the System to serve evolving customer needs, we adopted the proposed ecommerce regulations. Through these regulations, we ensure that System customers can use technological advances in lending and gain efficiencies through time and various resource savings. We expect System customers who live in rural areas to benefit greatly 55 6 FARM CREDIT ADMINISTRATION-PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 far-reaching step in serving evolving customer needs, we reproposed amendments to our termination regulations. The regulations describe how any lending institution of the System car. apply to terminate its charter and become a financial institution under another Federal or state chartering authority. In addition, we adopted the stock issuance regulations that allow System service corporations to sell stock to non-System entities. These regulations could help in forming alliances and in bringing services to System borrowers. We also continued our efforts to enable the System to serve new agricultural and financial markets. We hosted visitors from Brazil, South Africa, Bosnia, and Indonesia and briefed them on the System and ways the U.S. model of financing agriculture and rural America could be used in their countries. Objective 4 — Enable optimum utilization of Farmer Mac by the FCS and other agricultural and rural housing mortgage lenders for the benefit of agricultural producers and rural America. In FY 2001, we adopted risk-based capital regulations, which outline Farmer Mac's riskbased capital requirements. The rule requires additional capital if loan portfolio and/or interest rate risks increase. Farmer Mac has one year to implement the rule and will have to comply with the new risk-based capital requirements beginning May 23, 2002. Also, FCA, through OSMO, maintains ongoing oversight of Farmer Mac's operations and financial performance and condition. In addition, OSMO directs the annual examination of Farmer Mac regarding its safety and soundness and compliance with laws and regulations. These combined regulatory measures help to ensure that Farmer Mac remains in a safe and sound condition and that it is able to provide the secondary market for agricultural and rural housing lenders for which it is chartered. Goal 2- - Supervise risk to ensure the safety and soundness of the Farm Credit The purpose of Goal 2 is to ensure that the Agency accomplishes its primary mission of regulating and supervising the safety and soundness of the Farm Credit System. To measure our performance in this area, we developed eight Agency-level performance measures for effective examination and supervision (see Table 9b, page 61). Along with these performance measures, FCA's Strategic Plan lists three objectives that provide additional guidance and direction for our activities in support of this goal. We continued to enhance the value of our Reports of Examination, and our effectiveness in the correction of problems, by requiring corrective actions by institutions when we discover unsafe or unsound conditions and violations of laws or regulations. Of the 104 FARM-CREDIT-ADMINISTRATION PERFORMANCE AND ACCOUNTABILITY REPORT FY 2001 Reports of Examination issued in FY 2001, 29 contained 74 requiremer.ts. These requirements focused on correcting or addressing unsafe and unsound practices or violations of laws and regulations. The number of reports with required actions comprised 28 percent of the total issued in FY 2001, compared with 38 percent of the total reports issued in FY 2000. The decline in required actions correlates with the improving risk-bearing capacity of the System over the past few years. Nevertheless, our Reports of Examination continued to contain recommendations to further strengthen the operations of System institutions in accordance with sound business practices. We continued to use our Financial Institution Rating System to identify changes in institution risk characteristics. This process includes evaluating the risk in each bank and direct-lender institution every 90 days to make sure assigned ratings reflect current risk and conditions in the System. For the first time since 1999, a quarterly risk analysis reflected more rating downgrades than upgrades. As of March 31, 2001, we downgraded six composite ratings (all from 1 to 2) and upgraded only one (from 2 to 1). FIRS component ratings changes consisted of 11 upgrades versus 14 downgrades. While this was not indicative of an adverse trend because FIRS ratings continued to improve through September 30, 2001, it exemplifies how we use FIRS as an early warning indicator. Semiannually, we review and analyze the System's new money, refinancing, and rollover trends. This review and analysis identifies the sources of growth in FCS institutions and the potential for transfer of risk from other lenders to FCS institutions, especially during stressful times in agriculture. The most recent report, evaluating trends from 1997 to 2001 among direct lenders in the FCS, did not reflect any material concerns with new money loaned, refinanced debt, or rollovers in FY 2001. We continued to enhance our effective correction of problems in System institutions by using a three-tiered supervision program (normal, special, and enforcement) to clearly distinguish the risks and special oversight needs of institutions. During FY 2001, only one institution was under special supervision, and no institutions were under an enforcement action. Objective 2 — Develop regulatory guidance and examination procedures that address new ventures of System institutions, such as e-commerce activities. During FY 2001, we developed regulatory guidance on important subjects via examination focus areas and pro forma examination procedures, as well as expectations for new ventures such as e-commerce activities. PCA examiners have been completing a standard examination program for loan portfo'io management, which includes a subsection on the relatively untested venture of scorecard lending. The scorecard lending subsection includes procedures to assess (1) the process for establishing the statistical validity of the credit scoring model; (2) 57 58 FARM-CREDIT ADMINISTRATION-PERFORMANCE AND ACCOUNTABILITY REPORT-FY 2001 the risk associated with override decisions; (4) the adequacy of risk controls over the credit scoring process; and (5) overall management and servicing of the scored loan portfolio. Completion of the standard examination program facilitates conclusions regarding whether an institution's scorecard portfolio is appropriately managed and is within the institution's risk-bearing ability. We have established e-commerce as a specific examination focus area for FY 2002. Three standard examination programs have been developed for examiners to facilitate conclusions regarding whether management has taken appropriate actions to ensure the safety of its information and protect the institution and its borrowers. To further develop our expertise in this budding channel for delivering financial services, in early FY 2002 we will conduct an e-commerce training course for post-commissioned examiners. Quarterly through 2001, we conducted centralized reviews of institutions' Web sites. We have begun to assess the number and extent of alliances and joint operations activities among FCS institutions, beyond chartered service corporations. Any concerns or issues that should be addressed as a result of these alliances are being identified as part of this assessment and will likely provide the basis for the development of regulatory guidance and examination procedures in the future. Objective 3 - ·Design examination programs to evaluate the progress by PCS Our examinations continued to focus on mission performance by the FCS, particularly in service to YBS farmers. In addition, a new mission measure was prepared for FY 2002 to focus additional attention on this important area. During FY 2001, our examiners have been completing a standard examination program to determine the adequacy of FCS service to YBS farmers. Examiners evaluate an institution's practices in implementing and reporting on YBS lending programs and related services in accordance with applicable laws, regulations, policies, directives, and FCA Bookletter BL-040. Specifically, the YBS examination program includes evaluations of an institution's related policies and procedures, lending programs, risk management, business and marketing programs, marketing efforts, coordination, with governmental or private sources of credit, and the accuracy of its database and reporting. In addition, examiners assess whether the institution has effectively analyzed the demographics of its loan portfolio in relation to the demographics of its territory and has taken appropriate program actions. Completion of this standard examination program was mandatory on all FY 2001 FCS examinations, and a similar examination program will be employed on |