Advocacy

Reform and Refocus the Farm Credit System

ICBA strenuously opposes the Farm Credit Administration’s (FCA’s) efforts to allow FCS to engage in non-farm financing labeled as investments or investment bonds.

ICBA Policy Resolution

Reform and Refocus the Farm Credit System

Position

  • Farm Credit System (FCS) lenders enjoy unfair competitive advantages over rural community banks, leveraging their tax and funding advantages as government sponsored enterprises (GSEs) to siphon the best loans out of community banks’ loan portfolios. Such abusive activities wreak havoc on community banks’ lending portfolios, jeopardizing the viability of many community banks and the economic strength of the thousands of rural communities they serve.
  • ICBA strenuously opposes the Farm Credit Administration’s (FCA’s) efforts to allow FCS to engage in non-farm financing labeled as investments or investment bonds. This program, which the FCA has implemented via regulatory guidance, is a successor to the “Rural Community Investments” proposal, which was withdrawn in November 2013.
  • ICBA further rejects proposed legislation by the Farm Credit Council to allow blanket approval authority of FCS investments without FCA’s initial case-by-case approval.
  • ICBA opposes allowing the FCS to become the equivalent of rural banks with tax exempt credit union advantages and broad bank-like powers to establish checking and savings accounts, take deposits, establish a consumer-oriented deposit insurance plan within the FCA or have access to the Federal Reserve’s ACH system for clearing electronic credit and debit transfers.
  • ICBA believes numerous changes to the Farm Credit Act are necessary to reform the FCS, ensuring its adherence to its historical mission of serving bona fide farmers and ranchers while preventing it from engaging in below-market pricing of loans and non-farm lending including the extension of credit to America’s largest corporations.

Background

Community Banks and the Rural Economy. Thousands of community banks are in rural areas. As of the first quarter 2019, there were 1,315 “farm” banks representing nearly one-quarter of all FDIC-insured institutions. Agriculture loans held by FDIC-insured institutions totaled $184 billion.

Community banks of less than $10 billion in asset size hold approximately 80 percent of all banking sector agriculture loans. Approximately 3,000 community banks have agriculture-related portfolios of at least $5 million. Community banks remain the only banking presence in more than 600 counties (nearly 20 percent of all U.S. counties) and hold the majority of bank deposits in rural counties.

Farm Credit System. FCS lenders enjoy unfair advantages over rural community banks and leverage their tax and funding advantages as government sponsored enterprises (GSEs) to siphon the best loans away from community banks. The FCS is the only GSE that competes directly against private sector lenders at the retail level. FCS was chartered by Congress to serve bona-fide farmers and ranchers and a narrow group of farm-related businesses that provide on-farm services.

However, in recent years FCS has sought numerous non-farm lending powers in an effort to compete directly with commercial banks for non-farm customers. In addition, FCS lenders promise prospective borrowers “patronage refunds” to lower borrowing costs and thereby entice borrowers away from community banks. These patronage refunds are a direct result of the unfair tax advantages enjoyed by FCS lenders.

FCS’s complicit regulator, the FCA, has also sought to expand FCS activities through regulatory initiatives such as “investment bonds” and the “Rural Community Investments” regulation finalized in 2018. These initiatives provide authority for non-farm lending under the guise of “investments,” even though such lending goes beyond the constraints of the Farm Credit Act. Additionally, the Farm Credit Council has proposed replacing the FCA’s approval of these “investments” with blanket authority for FCS lenders to approve any investment without FCA’s up-front review. ICBA opposes the Farm Credit Council’s legislative proposal.

Recent proposals to allow the FCS to become the equivalent of rural commercial bank-credit union combinations would devastate thousands of rural community banks both in urban and rural and remote areas of the U.S. Such proposals are another FCS-initiated effort to utilize GSE tax and funding advantages to expand beyond statutory lending constraints, ignore FCS’s GSE mission of serving actual farmers and ranchers, and dramatically increase FCS institutions’ profits at the expense of tax-paying private sector community banks.

Congress should, among other actions, reform and refocus the FCS by equalizing tax treatment between community banks and FCS lenders; prohibiting non-farm lending including through “investments” authorities and “similar entity” loans to large corporations; prohibiting predatory, below-market pricing of loans; enforcing deposit taking prohibitions and changing the makeup of the FCA board. 

Staff Contact: Mark Scanlan