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the FCA is implementing via regulatory process, is a successor to the “Rural Community Investments” proposal, which was withdrawn in November 2013.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
The Honorable Pat Roberts
The Honorable Debbie Stabenow
Dear Chairman Roberts and Ranking Member Stabenow:
On behalf of the American Bankers Association (ABA) and the Independent Community Bankers of America (ICBA), representing over 52,000 bank locations across the United States, we write to express our concern over possible inclusion of the so-called “Livestock Trust” legislation in the COVID-19 relief package being considered by the Senate.
We believe this legislation could be very disruptive to the financing of livestock in many states and will cause great confusion and uncertainty to producers and their lenders. We believe careful consideration should be given to the issues raised in this letter to ensure the most workable and effective solutions are available to livestock producers.
A dealer trust only targets sales to undefined “dealers” and would be a complicated, expensive solution that could disrupt the entire livestock industry, including its financing, and cause many producers to receive lower prices for their livestock. One analysis of Packers & Stockyards (P&S) records indicates that over a recent 18 year period 99.9% of livestock purchased by registered dealers and order buyers resulted in no losses.
There are existing alternatives in place that provide better protection. Existing private sector insurance products (Livestock Market Payment Insurance) already provides several billion dollars of prompt protection against potential losses from livestock sales, covering 80 percent of risk. By comparison, the current Packer Trust, upon which this legislation is modeled, has provided only a 45 percent payment in the Sam Kane Beef Processors case, even after 3 years of lawsuits and nearly $1 million spent by livestock sellers in legal fees.
Additionally, current protections offered producers via the P&S prompt payment rules and bond requirements already cover producers who require dealers who purchase their cattle to follow current laws and pay them within 24 hours. The proposed livestock trust appears intended to cover livestock auctions/marketers who do not pay or require payments within 24 hours but rather intend to offer credit for a multi-day or multi-week period, contrary to P&S rules.
They are seeking the protection of a “cash sale” under P&S when in fact they are extending credit. Producers and auction barns can also obtain a bank-to-bank wire transfer before releasing cattle for shipment. Payments are certain because banks only wire money if the sender has the funds available. The money is typically available the same day.
Livestock producers will be harmed. Producers will receive lower prices for cattle from fewer buyers and auction barn bidders. By using a statutory trust to supersede or negate the legitimate first liens of lenders on cattle utilized as collateral, fewer cattle buyers will qualify for financing as they will lack the collateral and capital needed to verify their ability to repay loans. Small to midsized cattle buyers will exit the business leaving fewer, larger cattle buyers. The reduced number of cattle buyers will mean less competitive bidding on livestock and thus lower prices.
Federal bank examiners will object to lenders financing cattle buyers. Bank examiners will recognize banks can no longer obtain a first lien on cattle used by undefined “dealers” to purchase livestock. Lenders won’t be able to identify or monitor when a trust claim may exist and supersede their liens until after lawsuits and clawback actions are taken against them.
Mitigation of lenders’ risk at the time of the loan will be impossible. Examiners will require banks to obtain additional sources of collateral from buyers to ensure loans can be repaid and that no trust assets have been used to make loan payments. Many buyers will be unable to do so and examiners will classify such loans forcing banks to discontinue these loans. The only target for a dealer trust at that point will be other livestock producers.
A livestock trust will be confusing and disruptive at a time of industry distress. Implementing a livestock trust will introduce tremendous confusion and dramatic changes to the financing and marketing of livestock at a time of immense economic duress. It will be unclear to lenders when a customer will act as a “dealer” and also a seller and some customers will function in both capacities.
Since the definition of a dealer is not limited to “registered livestock dealers” and will be subject to broad interpretation by the courts for the actions of any person or entity who buys and then sells livestock, the number of persons, entities and transactions involved will be huge and nearly impossible to track. Many lawsuits will be filed due to this lack of clarity.
An enormous regulatory burden would be placed upon the USDA’s P&S division.
USDA’s P&S division doesn’t have the resources to effectively regulate, investigate, track down transactions, monitor and provide oversight in a timely manner for this increase in the number of transactions and entities subject to a new dealer trust regulation.
What will be the cost, the effectiveness, and the impact of these new powers of enforcement given to P&S to act promptly and efficiently when a dealer trust claim is filed? What will be the industry’s hard costs for compliance, competition, prices and the unintended consequences to all market participants?
We are quite concerned about major disruptions in the financing and marketing of cattle caused by a livestock trust. The livestock trust appears designed allow the financing of livestock inconsistent with the P&S’s prompt payment rules. Sellers requiring prompt payment at the time of the transaction has proven very effective as shown by the P&S’s historical data. Private sector insurance products and electronic funds transfers provide additional protections.
We strongly urge you not to include the livestock trust legislation in the next COVID-19 relief package. As this discussion continues, it is important to focus on protecting producer prices, ensuring all voices are heard and safeguarding existing private sector insurance products. Congress should want credit to flow more freely within the livestock industry during these difficult times. Thank you for your consideration of our views.
Independent Community Bankers of America
American Bankers Association