Letters to Regulators
Business and Industry (B&I) Loan and Loan Guarantee Program
December 9, 2004
RE: Rural Business-Cooperative Service; Business and Industry Guaranteed Loan Program; Interim Final Rule - RIN 0570-AA39
Dear Branch Chief:
We are sending this letter on behalf of the Independent Community Bankers of America (ICBA)1 and our community bank members. Our comments pertain to the Rural Business-Cooperative Service (RBS) request for comments regarding the interim final rule for the Business and Industry (B&I) loan and loan guarantee program.
While most of the regulatory provisions appear to be relatively straightforward and reflect the statute's wording, we have great concern that USDA/RBS has taken it upon themselves to redefine "eligible borrowers" by expanding the definition of a cooperative to include, in essence, non-cooperatives. We find this expansion to be completely without merit or without legal foundation based on the statute and legislative history. We expand on these comments below.
Background and General ICBA Views
The RBS has asked for responses to an interim final rule published November 9, 2004 in the Federal Register that would incorporate provisions of Sections 6013, 6017, and 6019 of the Farm Security and Rural Investment Act of 2002 (Public Law 101-171). These three sections of the act involve three distinctly separate issues within the B&I program.
Section 6013 simply expands the definition of renewable energy systems that are eligible for loans and loan guarantees to include "wind energy systems and anaerobic digesters for the purpose of energy generation". This expansion of eligible renewable energy systems is clearly stated in the statute.
Section 6019, as it relates to the B&I program, allows the Secretary to provide lenders with a simplified application form for loan guarantees under the B&I program of up to $400,000. Additionally, if the Secretary determines that there is no increased risk of default, the limit for a simplified application can be increased to $600,000. ICBA trongly supports this provision and encourages the Secretary to make use of the simplified loan applications for loan guarantees up to $600,000. This would help reduce the paperwork burden on banks and their customers applying for these loans, and should increase the efficiency of processing these loan guarantees, making more credit available to rural businesses.
Section 6017 expands the eligible purposes of the B&I direct and guaranteed loan programs to allow for the guarantee of the purchase of capital stock by individual farmers or ranchers in a farmer cooperative established for the purpose of processing agricultural commodities. This section also allows the Secretary to make or guarantee a B&I loan to cooperative organizations that are headquartered in metropolitan areas if the loan is used for a project located in a rural area. Also, a cooperative organization can obtain a loan guarantee for a facility not located in a rural area if the primary purpose of the guarantee is for a value-added processing facility for producers located within 80 miles and the primary benefit will be to provide employment for residents of a rural area. While this expands a portion of the B&I portfolio to non-rural areas, the loans are intended to primarily benefit agricultural producers and rural communities.
Our primary concern with the provisions of Section 6017 deals with the revised definition pertaining to a cooperative organization. We note that the current regulations list the eligible borrowers for the B&I program as "cooperative, corporation, partnership, or other legal entity organized and operated on a profit or nonprofit basis". The interim final rule issued by the RBS expands the definition of a cooperative organization (i.e. cooperative), which RBS would now define as "a cooperative or an entity, not chartered as a cooperative, that operates as a cooperative in that it is owned and operated for the benefit of its members, including the manner in which it distributes its dividends and assets".
While the statute uses the term "cooperative organization", we do not find any new definition in statute or any use of the term in the legislative history (statement of managers) that reflects the expanded definition that the RBS would add in this regulation. It appears the RBS took it upon themselves to create a definition of cooperative organization that is much broader than anything that has previously been in the statute or regulation. Again, this is troubling and legally without foundation.
The RBS should not be involved in interjecting itself into broader debate of whether cooperative benefits, derived from various Federal statutes, should also be applicable to entities that are not cooperatives although they may have some characteristics of cooperatives. USDA has gone well beyond the scope of current law and regulations when it comes to defining a cooperative.
We also strongly disagree with the logic that a cooperative organization can be an entity that is either a cooperative or is not a cooperative. This arbitrary and expanded definition RBS is proposing would significantly expand the scope of businesses eligible for B&I loans under provisions designed to apply to farm cooperatives. Eligibility could conceivably apply, for example, to a Sam's Club or Costco stores serving rural markets, which are membership organizations; or credit card companies headquartered near a rural area that offers its members end of year rebates or dividends.
Further, many stock companies pay dividends to their stockholders, but they are not considered "cooperatives"; yet they could be eligible under USDA/RBS's expanded definition. In fact, it would appear that very few businesses with some type of rural orientation would not be considered a "cooperative organization". In addition, the new RBS definition does not require farmer ownership or control of the "cooperative organization", thus the expanded RBS definition represents a significant, negative step away from targeting cooperative benefits to actual farmer cooperatives.
We note that USDA/RBS's revised definition says the organization only has to be owned and operated for the benefit of its members. This is a far cry from being owned and operated by its members. The revised definition also doesn't state that the "members" need to be farmers and ranchers. Thus, these newly eligible entities may often not be or function as farmer owned cooperatives.
This expanded eligibility criteria raises a number of other questions in that it would allow many non-traditional businesses to compete for funds as cooperatives, thereby reducing funding available to traditional farmer-owned cooperatives and competing with them as cooperatives even though the entity has decided not to obtain a cooperative charter and may have other advantages in its business structure not afforded to cooperatives. There is no basis in the legislation for RBS to pursue these outcomes.
The inclusion of this expanded eligibility definition is not a change "mandated by sections 6013, 6017, and 6019 of the 2002 Farm Bill" - the rationale given by USDA/RBS to proceed to an interim final rule. Therefore, RBS has no basis to include it in an interim final rule. RBS should rewrite this regulation as a proposed rule and provide a 60-day comment period and delete the new definition under § 4279.108 (a) "Type of Entity".
We urge the RBS to withdraw this provision of the interim final rule and continue to use the definition of cooperatives that has traditionally been found in Federal statutes and regulations. There was no debate or discussion during the writing of the Farm Bill about expanding the definition of cooperatives, nor has there been any formal action by Congress since that time on this issue. If outside organizations want such changes in the B&I program, they should lobby Congress for legislative changes, and the USDA/RBS should not be complicit in adopting changes recommended by outside interests that have no basis in the statute or legislative history.
It is completely inappropriate for USDA's RBS to single-handedly rewrite the definition of cooperatives to include non-cooperatives for the purpose of receiving Federal loan programs and benefits as cooperatives. For this reason, we request that USDA correct the provision defining cooperative organizations to include only traditional cooperatives - in essence keeping the current definitions in tact, especially since not signal was given by Congress that a revised definition was necessary or even considered.
As an example of the interim final rule's internal contradiction, Section 6017, paragraph (3) is titled "LOANS TO COOPERATIVES" and the language that follows in the section includes "cooperative organization", meaning that this term is clearly meant to apply only to true cooperatives, and therefore there can be no other meaning intended by Congress other than that a cooperative organization is truly a cooperative. It cannot, as the rule from RBS states, include entities not chartered as cooperatives, but that may operate in some way as cooperatives. Rather, by the very label of the section, cooperative organizations must be true cooperatives, not some modified definition of cooperative-like entities.
Another example from the statute is Section 6017 paragraph (B), which states:
"REFINANCING - A cooperative organization that is eligible for a business and industry loan shall be eligible to refinance an existing business and industry loan with a lender if - . . .".
This language clearly implies that cooperative associations are actual farm cooperatives that are already currently eligible for and currently have B&I loans. Furthermore, regarding this particular passage, page 145 of the Statement of Managers reads:
"Farmer co-ops (emphasis added) eligible for B&I loans shall be eligible to refinance existing loans."
It is quite clear that the term "cooperative organization" does not therefore invite any further redefinition based on either the statute or the legislative history.
Furthermore, Section 6017 paragraph (2), which is titled "LOAN GUARANTEES FOR THE PURCHASE OF COOPERATIVE STOCK", allows for the guarantee of stock that farmers and ranchers purchase in a farmer or rancher cooperative. Again, the purpose of this provision is for farmers to invest in farmer-owned cooperatives, not some hybrid cooperative-like entity. It makes no sense for the cooperative stock purchase program to be applied to businesses that really are not "cooperatives". But, this is clearly conceivable under USDA/RBS's expanded definition of "cooperative organizations".
For reference, we believe it would be relevant to compare the current definition of a farmer cooperative in the Farm Credit Act statute (12 USC 2129 Sec. 3.8) that governs the lending of CoBank. In summary, the statute requires cooperatives to be an association of farmers, producers or harvesters of aquatic products, or any federation of such associations that are operated on a cooperative basis and market, process, or distribute farm products or furnish farm supplies. Each member of the cooperative is only allowed one vote and the cooperative cannot pay dividends on stock in excess of ten percent. In addition, at least eighty percent of the voting control of the cooperative must be made up of farmers and the cooperative must deal in products from or for members in amounts greater than for non-members. RBS's interim final rule is completely inconsistent with these requirements for a cooperative organization.
This definition of a farmer cooperative has been in CoBank's statute and is based also on other federal laws defining farmer cooperatives and their benefits. Therefore, we believe it appropriate for the final rule to keep its current definition of cooperatives and their eligibility and not expand this category through a nebulous redefinition.
Regarding the appraisal of collateral used for B&I loan guarantees, we recommend that only outside, independent appraisers should be used when the appraisal involves very large loan amounts. The use of a lender's in-house appraisers for the largest loans does not seem appropriate as it represents a conflict of interest, so RBS should require the use of independent appraisers for the very largest B&I loans. However, we do not believe that appraisals are necessary on all B&I loans, especially those below the LowDoc threshold. There may not be appraisers in every rural area and the bank's judgment that adequate collateral is available should be sufficient on smaller loan sizes.
We support USDA/RBS's definition of a rural area to be any area other than a city with more than 50,000 inhabitants and the urbanized area contiguous and adjacent to any such city. This definition seems appropriate for the purposes of this USDA loan and guarantee program and it reflects the statute's wording. We agree with the definition and ask that it be maintained.
We support the USDA offering a streamlined loan application for businesses up to $600,000 as mandated by the statute. However, we strongly urge the RBS to withdraw this rule until the definition of cooperative organization is altered to reflect only those traditional cooperatives that have previously been included in the B&I regulations.
Thank you for your consideration of our views and we appreciate the opportunity to comment on this rule. If you have any questions about this comment letter, please contact Mark Scanlan, Director, Office of Agriculture and Rural Policy or Reece Langley, Deputy Director, Office of Agriculture and Rural Policy at 202-659-8111.
Camden R. Fine
1 The Independent Community Bankers of America represents the largest constituency of community banks of all sizes and charter types in the nation, and is dedicated exclusively to promoting the interests of the community banking industry. With nearly 5,000 members, ICBA members employ more than 225,000 Americans and hold more than $778 billion in total assets. For more information, visit ICBA's website at www.icba.org.