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.
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