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 from community banks’ loan portfolios. The FCS’s abusive tactic of undercutting market pricing to obtain the best loans jeopardizes 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) initiative to allow FCS to engage in non-farm financing labeled as investments or investment bonds. This initiative, which the FCA is implementing via regulatory process, is a successor to the “Rural Community Investments” proposal, which was withdrawn in November 2013.
ICBA further rejects legislation proposed by the Farm Credit Council to allow blanket approval authority of these FCS “investments” without FCA’s case-by-case review and approval.
ICBA opposes allowing the FCS lenders to become the equivalent of rural banks with powers to establish checking and savings accounts, take deposits, or establish a consumer-oriented deposit insurance plan within the FCA. FCS lenders must not have access to the Federal Reserve’s ACH system for clearing electronic credit and debit transfers.
ICBA opposes expansion of FCS authorities and supports legislative and regulatory provisions to ensure FCS’s adherence to its historical mission of serving bona fide farmers and ranchers.
Community Banks and the Rural Economy. Thousands of community banks serve 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 hold nearly 70 percent of total agriculture loans from the banking sector. Community banks of less than $10 billion in asset size hold approximately 80 percent of all banking sector agricultural loans. Approximately 3,000 community banks have agriculture-related portfolios of at least $5 million. Community banks are four times more likely to operate offices in rural counties. 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 banking 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.
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 prior 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 banks would devastate thousands of rural community banks both in urban and rural and remote areas. Such proposals are another FCS-initiative 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 reform and refocus the FCS’s authorities in order to limit their non-farm lending activities, including through “investments” authorities and “similar entity” loans to large corporations, to ensure these authorities do not circumvent existing statute or go beyond the intent of Congress; prohibit predatory, below-market pricing of loans; equalize tax treatment between community banks and FCS lenders; and changing the makeup of the FCA board.
Staff Contact: Mark Scanlan