Financial Columnists questions $27M Partially Unsecured Government Loan to St. Joseph College before it Failed

Posted on June 30, 2017 – In a recent column, financial columnist Bert Ely recalled into question the prudence of a government backed loan that Farm Credit Mid-America made to St. Joseph College in January 2015. Mr. Ely claims that it was known that the college was in financial trouble when the loan was made, over 2 years ago.

On an update note in his June column Ely had the following to say about the matter:

As I wrote in the February 2017 FCW, Farm Credit Mid-America (FCMA), the FCS’s second-largest association, had lent as much as $27 million to the financially troubled St. Joseph’s college in Rensselaer, Indiana. The loan was only partially secured by farmland. On May 9, the college’s president resigned, three days after the college suspended operations. According to a news release the college issued, it is working “on a transition to a new beginning.” However, it is problematic that the college will ever resume operations, which raises this question: How big a loss will FCMA take on a loan it should never have made. Of course, that loss would be shared with any FCS institutions that purchased participations in the loan. To date, there has been radio silence at FCMA about the status of this loan and how bad the loss will be. This is another loan the FCA and the FCA’s Inspector General should investigate, specifically as to whether it was permissible under the Farm Credit Act.

In February 2017 when St. Joseph’s College failed, Ely dedicated much of his financial monthly column at that time to how he thought there was a problem with collateral rights for the loan and that he did not think that St. Joseph’s met the lender’s charter definition of a farmer. Ely’s February 2017 column section pertaining to the St. Joseph’s loan is reprinted below.

Farm Credit Mid-America almost certainly faces a loss on a loan to a bankrupt college it should never have made Two years ago, in the January 2015 FCW, I wrote about a $27 million loan Farm Credit Mid-America (FCMA) made in May 2013 to St. Joseph’s College in Rensselaer, Indiana. FCMA, the second-largest FCS association, is headquartered in Louisville. According to a news release St. Joseph’s issued at that time, the college refinanced “its long term debt obligations through partnerships with DeMotte State Bank [of DeMotte, Indiana] and [FCMA].” The loan “will be locked in at a fixed interest rate for a 20 year term.” Reportedly, the bank merely serviced the loan on behalf of FCMA. On February 3, 2017, St. Joseph’s announced that its board had “voted to suspend activities on [its] campus at the end of the current semester” due to “a ‘dire’ financial situation at the more than 125-year-old institution.” According to one school official, “the school’s financial issues had been ‘brewing’ for the past 10 to 15 years, or longer;” that is, long before it obtained the FCMA loan. The school’s president stated that “a total of $100 million would be needed to sustain [the school] in its current state for five or more years,” including paying off $27 million of debt, presumably the FCMA loan.

In my article about the FCMA loan, I raised two huge problems with the loan. First, I questioned if the college was an eligible FCS borrower. That is, was it a “bona fide” farmer, as that phrase is used in the Farm Credit Act. In November of 2014, I asked the FCA if St. Joseph’s could be considered to be a “bona fide” farmer and therefore eligible to borrow from the FCS. Michael Stokke, the FCA’s Director of Congressional and Public Affairs, responding to my email, stated that my inquiry “does not involve a loan for which you are obligated,” which is how the FCA often blows off complaints about improper FCS lending. Stokke, who is still with the FCA, then stated that “we assure you that, under our examination authority, we have reviewed [FCMA’s] relationship with the College and determined that, in its business dealings with the College, [FCMA] has complied with our regulations.”

According to a well-placed source, FCMA has a lien on all of St. Joseph’s real estate, which comprises campus buildings as well as 8,000 acres of farmland that had been gifted to the college. Assuming that St. Joseph’s does not reopen, as has been the case with many other small colleges that have closed in recent years, its campus, located in northwest Indiana, 80 miles south of Chicago, will net FCMA little, if anything, after taking into account substantial deferred maintenance costs and its location in a town with a population of 6,000. The farmland might bring at least $6 million, so FCMA is likely facing a loss of at least $20 million on this loan. As I reported in 2015, in 2010 St. Joseph’s was gifted with 7,634 acres of farmland with an estimated value of $40 million, more than enough to pay off the FCMA loan. However, the donor of that land, a very savvy businesswoman most likely quite aware of the school’s financial difficulties, “stipulated in her will and written agreements with the college that neither the college nor the [Catholic] church could sell the farmland.” Reportedly, the new beneficiary of the income produced by this farmland will be an unrelated charitable institution. It will be interesting to see if FCMA tries to establish a claim on that land so as to reduce its loss on the loan.

Given the substantial loss FCMA is facing on its St. Joseph’s loan, FCMA should discuss in its 2017 annual report how it justified making a clearly undercollateralized loan to a clearly ineligible borrower. Perhaps FCMA sold participations in this loan to other FCS institutions, which should raise this question among those buyers: Why did we buy a piece of such a lousy loan? The FCA should reexamine and publicly explain whether it should have approved this loan after being questioned about it. The ag committees should ask why the FCA stated that “in its business dealings with the College, [FCMA] has complied with [the FCA’s] regulations.” Does the Farm Credit Act actually permit partially collateralized loans to private colleges? This loan could be yet one more instance where an FCS loan raises “doubts and questions among members of Congress.” Hopefully that will be the case.

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