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 This initiative is a successor to the “Rural Community Investments” proposal, which was withdrawn in November 2013.
ICBA 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 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 also 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 and a limited number of businesses that provide on-farm services.
Community Banks and the Rural Economy. Thousands of community banks serve rural areas. The FDIC reported that as of September 30, 2021, there are 1153 agricultural banks, defined as those community banks with over twenty-five percent of their loans focused on agriculture. Many additional community banks hold significant agricultural loan volumes. At year-end 2020, although all community banks held only 25 percent of total banking industry assets, their share of farm loans at commercial banks was approximately 88.4 percent, according to the FDIC.
Bank agricultural loans were distributed among more than 4,280 banks (about 85.43 percent of all commercial banks), while only about 67 FCS lending institutions hold agricultural loans. According to the USDA, total farm debt increased from $356.7 billion in 2015 to $441.3 billion in 2020 with projected debt for 2022 of $467.4 billion.
The share of the Farm Credit System’s (FCS) portion of overall farm debt increased from 40.6 percent in 2015 to 44.3 percent in 2020, rising from $145 billion to $195.5 billion. By comparison, the share of overall farm debt held by commercial banks decreased from 42.7 percent in 2015 to 36.2 percent in 2020 as their farm loans rose from $152.4 billion to 159.9 billion. The FCS now holds 22 percent more farm loans than commercial banks.
The growth in FCS loan volume is almost entirely due to their rapid growth in the System’s tax-free farm real estate lending, which increased by 45 percent between 2015 to 2020 rising from $96.7 billion in 2015 to $140.5 billion in 2020 a growth rate more than twice that of commercial banks. This data strongly supports the need for Congress to pass the ECORA legislation (H.R. 1977 / S. 2202).
Community banks are four times more likely to operate offices in rural counties. Large banks are exiting rural America; their branch presence has declined by 18 percent in the last 10 years. Community banks remain the only banking presence in nearly 1,200 counties (well over a third 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 Farm Credit Administration (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 requirement for these “investments” with blanket authority for FCS lenders to approve any investment without FCA’s prior 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 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. These expansionist activities pose greater risk of financial loss to U.S. taxpayers, who ultimately stand behind all GSEs.
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 change the makeup of the FCA board.
Staff Contact: Mark Scanlan
April 20, 2022
The Consumer Financial Protection Bureau issued a report on the challenges faced by Americans in rural communities.
Report Details: The report says many in rural communities lack access to physical bank branches, are more likely to seek credit from nonbanks, and are heavily affected by medical bills. The CFPB said it will expand its efforts to address these and other challenges facing rural America.
ICBA Letter: The report follows a recent ICBA letter to the bureau noting that regulatory compliance burdens are driving consolidation while exacerbating the decline of rural businesses and their ability to access low-cost credit.
Community Bank Impact: In its letter, ICBA said community banks proportionally maintain more branches than larger institutions and are robust lenders to minority and low-to-moderate-income borrowers.
Recommendations: ICBA also encouraged policymakers to:
Support the ECORA Act, which would exempt from taxation interest income on farm real estate and rural mortgage loans.
Enhance the farm bill’s rural safety net, particularly through guaranteed loan programs.
Examine the tax and regulatory advantages of credit unions and Farm Credit System entities as well as credit union acquisitions of community banks.