Credit Scoring and Credit Reports

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					                      Slide Show #10

 Financial Markets and
Financial Intermediation

       AGEC 489/690
        Spring 2009
       Both Sides of the Desk

The borrower:
•Enterprise analysis
•Cash management
•Line of credit needs
•Operating loan application
•Investment planning
•Term loan application
•Planning for long run
       Both Sides of the Desk

The borrower:                 The lender:
•Enterprise analysis          •Loan application analysis
•Cash management              •Credit scoring
•Line of credit needs         •Loan pricing for risk
•Operating loan application   •Loan approval process
•Investment planning          •Loan portfolio analysis
•Term loan application        •Loan loss reserves
•Planning for long run        •Regulatory oversight
                              •Lending institutions serving
                               commercial agriculture and
                               rural businesses.
  Financing Investment Projects
 Assume you have a project that has a strong
  positive NPV.
 What is the next step – financing with loan or
  obtaining a financial lease?
    Financing with loan requires completing a loan
     application with a financial institution.
    Applying for a financial lease to finance purchase
     equipment often obtained through manufacturer.
 Be prepared to present financial statements and
  income tax reports in either case.
 Lenders Serving US Agriculture
 Real Estate Lenders              Nonreal Estate Lenders
  o Farm Credit System                o Farm Credit System
  o Farm Service Agency               o Farm Service Agency
  o Commercial banks                  o Commercial banks
  o Life insurance                    o Individuals and others
  o Individuals and others

    The two biggest lenders to US agriculture are the Farm Credit
    System and commercial banks.
Financial Intermediation
                       Farm Credit System
 Investors in     Government         Farm Credit         Farm
 bond market      bond market       System entities    borrowers

                       Commercial Banks

          Individual       Commercial        Farm
          depositors         banks         borrowers

In both instances, financial intermediation transfers savings
and investment of others into loan funds borrowed by farmers.
Farm Credit System
    Farm Credit System
Major long term (mortgage) lender to US
Originally a government entity; now a
 private lender with implied government
Obtains capital by issuing consolidated
 bonds in national bond market as a GSE
 (government sponsored enterprise).
    Farm Credit System
 Also makes short and intermediate term loans
  for the production of farm products, aquatic
  products, and purchase or repair of rural
 The FCS today accounts for 20% of non-real
  estate farm debt outstanding.
 The FCS today also accounts for over 40% of
  the real estate farm debt outstanding ( debt
  secured by real estate mortgage).
      Farm Credit System
 FCS became wholly borrower-owned when the
  last government loan was repaid in 1968.
 FCS is regulated by the Farm Credit
  Administration, which is an agency of the
  Federal government’s Executive Branch. The
  FCA regularly examines loan portfolios to
  ensure compliance with sound lending
  practices set forth in examination manuals.
The original 12 district banks have consolidated into 6 districts today.
Characteristics of Farm Credit System Loans
Financial Intermediation Process in the Farm Credit System
  Questions Along the Farm Credit
  System Supply Chain

 Building    Adequate        Portfolio      Potential   Global loss
   debt         loan          stress       for higher    of wealth
repayment    application     testing?        cost of        and
 capacity   assessment      Adequacy      funds over    perceived
  stress?     and risk     of loan loss   the longer    risk in US
              pricing?      reserves?         run?      securities
Let’s Look at a Farm
 Credit Association
Website for the Farm
Credit Bank of Texas
– a district bank that
serves credit
associations within
this district like Capital
Farm Credit.
The Capital Farm Credit Association is
headquartered in Bryan Texas. It has 35 offices
throughout the state of Texas and one office in the
state of Tennessee.

                                               Capital Farm
                                               Credit Assoc.
You can apply electronically for various types of loans from the Capital
Farm Credit Association.
differ by the size
    of the loan
 Less information required on
smaller loan requests – greater
 reliance placed on scorecard
       lending practices.
Annual LOC

access to
Commercial Banks
   Commercial Banks
 In US today there are 8,500 independently
  chartered banks in the US.
 Large commercial banks like Bank of America
  have a significant amount of farm loans, but this
  represents a small portion of their total loan
 Rural commercial banks have a much greater
  percentage of their loan portfolio devoted to
       Bank Mergers
The US banking industry has been
 consolidating over the last several
Ultimately the nation may have less
 than 2,000 chartered banks.
Studies have shown that mergers have
 generally resulted in a net outflow of
 loan funds from rural to urban areas.
US Bank Consolidation
Characteristics of rural commercial banks
Other Ag Lenders
        Niche Lenders
 Life insurance companies – large real estate
 Merchants and dealers – finance purchase or
  lease of their machinery and equipment.
 Farm Service Agency – government lender
  making subsidized loans to small and beginning
  farmers, direct lender of last resort, source of
  emergency loans, and source of guarantees on
  loans made by others.
Regulators of Lenders
 Regulator of Lenders
Farm Credit System       Farm Credit Administration

Farm Service Agency      USDA and Congress

Commercial banks         Comptroller of Currency
                         Federal Deposit Insurance
                         Corporation (FDIC)
                         Federal Reserve System
                         State banking agencies
Life Insurance
Companies                None

Individuals and others   None
                                    Hire ag

See Handout 7 and 8 for details
Commercial Bank Regulation

The Comptroller of the Currency
is an agency within the U.S.
Commercial Bank Regulation

Fit  Fittington Fit Fittington