DECATUR — One Michigan farm operation’s alleged attempts to mislead banks and other financial institutions could result in “strict(er) requirements” from agricultural lenders, industry experts say.
The news comes just weeks after Michael and Melissa Stamp were named in a five-count “superceding indictment” on federal charges at their Decatur-based Stamp Farms LLC and Northstar Grain LLC, including the conspiracy to commit bank fraud and crop insurance fraud in relation to federally insured financial institutions.
With farm incomes falling for a sixth year in 2018 and farmers taking on more debt during this downturn, ag lenders are already stepping up their “due diligence” on borrowers.
Add Stamp Farms into the equation, and ag lenders in 2019 might “become more stringent on what they require” Michigan farmers to fill out in terms of documentation, said Laura Genovich, an attorney for the law firm Foster Swift Collins & Smith PC.
“This is in order to prevent this (fraud case) from happening again,” Genovich, who specializes in commercial litigation and commercial law in Foster Swift’s Grand Rapids office, told Michigan Farm News. “In the past, you might have been able to say, 'Yeah, I've got this many cows, and the loan officer would write it down, and you're good to go.’ Now, there might be more on-site inspections and more due diligence on the part of lenders to make sure this doesn't happen again because obviously this is harmful not only to the private lender but the extent of this fraud impacts U.S. taxpayers; it goes all the way to the top.
"Now, everybody wants to be careful.”
Wells Fargo & Company, which did not respond for comment before this story went to press, loaned Stamp Farms more than $60 million in 2011, as Michigan Farm News reported at the time. While fraud cases of Stamp’s scope and size are “uncommon,” Genovich said it is not indicative of a larger trend of Michigan farmers misleading creditors.
"Most farmers ... are honest and are not trying to defraud banks or their creditors," Genovich said. "When it happens, and especially on this scale, it's good that it's caught, and if the allegations are true, that they are being prosecuted. I think lenders are going to take a lesson from this (case). In the past, where you might have had more casual, friendly relationships between lenders and farmers — handshake deals and things like that — you might see more strict requirements for documenting and double checking things that are in those documents."
Similarly, Dr. Danny Klinefelter, professor and extension economist from Texas A&M University, said a case like Stamp’s “changes the mentality of the bank.”
“A large case like this — it can severely hurt the capital position for a bank,” Klinefelter told Michigan Farm News this week, noting that’s it’s not always a lender’s fault for some mishaps with farming documentation.
Instead, he said it’s “really difficult” for the lender to know how the farm business operates nowadays because of the diversification of a farm’s offerings and locations.
“It’s hard for (creditors) to stay up with things,” Klinefelter said. “Farmers need to keep lenders up to date with them, (so they) understand their strategies. … One person can’t keep track of a farm of that size.”
The abundance of “information makes the ability to stay on top of things even more difficult,” he said, and this movement between different parts of the business tends to “get away from the manager, or sometimes it gets away from the lender.”
This creates information that hasn’t been verified, Klinefelter continued.
“Stamp’s (operation) was into fertilizer and farming and trucking,” he said. “As you get more involved, it’s hard to get what (business) is connected to what, especially for lenders. … There have been cases where there’s been fraud on part of the lender — a loan officer who writes up a loan and creates new accounts to get bonuses.”
Going forward, he said that “unless you have different people approve it, a coordinating effort, then it won’t be properly verified.”
According to Genovich, she, too, thinks farmers must “take as good of records as you can.”
“I think we are going to see, even with existing loans, loan officers doing more diligence to make sure things are as they are supposed to be,” she said. “... Get an accountant involved if you need to."
BEHIND CLOSED DOORS
Unlike other Michigan industries, handshake deals are commonplace in the ag sector.
That’s according to Vermont Law School’s Center for Agriculture & Food Systems, which notes that the flexibility of handshake deals for farmers “can be a helpful tool” when there is not much at stake in a business dealing.
However, according to the study, “when farmers are investing money, time, and other resources in a farm operation, it is generally a big mistake to rely on a lease agreement based on a handshake.”
Similarly , Genovich said there are “more hand-written notes and things like that than you might see in other commercial transactions.”
"With my experience, that's the case, because I do both farm- and non-farm bankruptcies,” Genovich added. “With my farm cases at Chapter 12, they are smaller farms, family farms.”
Although she doesn't think lenders will be more hesitant to loan money out to farmers in 2019 — and that handshake deals will become a thing of the past — Genovich said financial institutions will be "more careful about ensuring that all of the I's are dotted and T's are crossed (in farm documents)."
"There was a lot of bankruptcy fraud alleged here of misrepresenting assets and concealing transfers and funds that Melissa Stamp allegedly diverted to other people," Genovich said. "From my perspective, this is a cautionary tale that — as great of a relationship that I have with a lot of farmers who I deal with in bankruptcy — you've got to double check things."