THE FARM AND RURAL SAFETY NET
- Community banks are vital to the financial success of rural America and have historically financed a majority of commercial bank lending in rural areas. ICBA is pleased that the new farm bill (the Agricultural Act of 2014) maintains robust funding levels for agricultural and rural-oriented programs. These programs support the activities of community banks and their farm, ranch and rural customers.
- ICBA believes the new bill’s significant enhancements for crop and revenue insurance programs will enhance producers’ risk management strategies and help ensure their ability to repay bank loans.
- ICBA believes the bill’s removal of term limits on USDA-guaranteed farm operating loans, as advocated by ICBA, will allow community banks to continue working with thousands of borrowers who would not otherwise qualify for commercial credit.
- ICBA urges Congress to remove volume caps on guaranteed farm loans and rural development (Business & Industry) loans.
- Placing concentration limits on community bank portfolios of agricultural loans, as some banking regulators have proposed, would needlessly curtail lending relationships with many agricultural customers whose loans represent solid credits.
- Programs designed to spur rural America's economic growth should be user-friendly for community banks and their customers.
- Farmer Mac should continue improving its secondary market for agricultural loans.
Thousands of community banks are located in rural areas. Approximately 2,500 community banks are classified as "agricultural" banks and more than 3,000 community banks have agriculture-related portfolios of at least $5 million. Historically, community banks have provided over one-half of all commercial bank agricultural financing. Community banks often use loan guarantee programs to benefit their customers and manage risks. Continuation of these programs is vital for rural America.
Farm Bill Policy: Funding and Programs. The Agriculture Act of 2014 will allow lenders and their farm customers a long-term policy framework for business and long-term planning decisions. The bill provides billions of dollars through various programs that will circulate through the farm sector and rural communities. The 2014 farm bill increases funds for crop and revenue insurance programs by several billion dollars. The bill provides several options for farmers to choose from including price loss coverage (PLC) and Ag Risk Coverage (ARC) options. Separate new programs were authorized for cotton and dairy producers, although Congress may need to re-examine whether these programs are meeting the intended objectives, particularly for cotton producers.
Community banks often encourage farmers to enroll in crop/revenue insurance to enhance farmers’ ability to repay loans. More than 250 million acres are now covered by crop and revenue insurance, providing nearly $80 billion of coverage. The program remains an important safety net for farmers and for rural communities that depend on the farm sector. The new bill also provides disaster insurance protection for livestock producers.
Guaranteed Loans. USDA's guaranteed loan programs allow community banks to make loans to higher risk borrowers with a guarantee of repayment. Community banks are extensive users of both the Farm Service Agency's (FSA) farm loan programs and the Rural Development Agency’s business loan programs. If such programs are made fully or nearly self-funding through higher user fees, Congress should also remove volume caps and/or significantly raise the amount of such loans that can be made. Further, Congress should at least double the size limits for guaranteed ownership loans. ICBA is pleased that recent appropriations bills have raised the amount of USDA guaranteed farm real estate loans to approximately $2.5 billion from the previous level of $1.5 billion, as advocated by ICBA. These increased levels should continue or be further increased in the future based on demand. ICBA is pleased the new farm bill removes term limits on guaranteed farm operating loans as advocated by ICBA. Borrowing and lending decisions should be made at the local level between community banks and their farm and ranch customers.
Farmer Mac. Farmer Mac was created to serve as a secondary market providing rural lenders the option to sell agricultural real estate and rural housing loans, thereby enhancing community bank liquidity. Farmer Mac should continue to develop agricultural programs, underwriting procedures, and pricing to attract a large segment of the community bank industry. ICBA opposes granting Farmer Mac any authorities that could be detrimental to community banks. ICBA believes Farmer Mac should remain focused on its original mission of being a secondary market for agricultural loans. Any charter enhancements desired by Farmer Mac should be shared with ICBA and ICBA’s Agriculture-Rural America Committee prior to adoption by Farmer Mac’s board in order to allow adequate feedback and consideration by community bankers prior to staking out a formal position.
Diversifying Rural America. Rural community banks, with their extensive delivery network in thousands of communities underwrite loans for agriculture, small businesses and general rural economic activity. Rural policy goals should complement community banks' efforts. Such goals should include: creating off-farm jobs; maintaining the local tax base; sustaining the population base necessary to keep experienced local leadership and a skilled workforce; and facilitating the development of the infrastructure and public services necessary to keep rural communities vibrant. ICBA supports efforts to meet a greater percentage of U.S. energy needs from developing domestic and renewable resources.
Agricultural Loan Concentration Limits. ICBA is concerned with guidance from the FDIC regarding the establishment of portfolio concentration limits for agriculture loans. The FDIC’s guidance suggests that banks should apply commercial real estate (CRE) guidelines – limiting concentration of CRE loans to 300 percent of bank capital – to agricultural loans. ICBA believes the CRE model is inappropriate for agricultural lending. Placing concentration limits on community bank portfolios of agricultural loans will needlessly curtail lending relationships with many agricultural customers whose loans represent solid credits. Many banks in rural areas do not have economic choices beyond agriculture and such guidance could dramatically increase their risks as they venture into new lending markets. Community banks’ risk mitigation practices for agricultural lending prevent the need for concentration limits.
Crop Insurance and Lending Limits. ICBA believes the amount of farm loans equal to protections provided by crop and revenue insurance should be exempt from banks’ lending limits.
Staff Contact: Mark Scanlan