A federal agency has scrapped a proposal to automatically allow government-sponsored farm lenders to invest more in rural hospitals, retirement homes and similar facilities.
However, it may still allow such loans on a case-by-case basis.
The Farm Credit Administration’s proposed rule would have authorized companies within the Farm Credit System network of lenders to make such investments without the agency’s prior approval.
For example, a rural nursing home could raise money by selling a bond to a system lender, as long as certain criteria were followed.
Community bankers and others had vehemently opposed the proposal, arguing that it deviated from the system’s primary purpose of lending to agriculture.
The Farm Credit System enjoys lower tax rates and lending costs than commercial banks, so it shouldn’t be allowed to compete with them beyond its traditional mission, opponents claimed.
Proponents argued that such investment is critical to agriculture, since farmers need access to hospitals, schools and other facilities in the rural areas where they live.
Farm families often rely on off-farm income, so such facilities also provide jobs and other economic opportunities in rural communities, proponents claimed.
While the Farm Credit Administration has dropped the proposal — and will end associated pilot programs aimed at rural investment — it isn’t backing away from the idea entirely, said Gary Van Meter, director of the agency’s regulatory policy office.
“We felt it was more important to go forward on a case-by-case basis,” Van Meter said.
Lenders within the system will still be able to ask the FCA’s permission to invest in rural facilities, but the agency has decided against creating a standardized process for such investments, he said.
The agency decided to back away from the proposal in part because system lenders made a relatively small amount of investment in such facilities under the pilot programs, Van Meter said.
Since the pilot programs were launched nearly a decade ago, Farm Credit institutions invested about $733 million in rural community projects. That represents less than a half-percent of the system’s total loan volume.
The proposed rule was initially floated in 2008 and has since generated strong feelings on both sides, Van Meter said. “It was controversial.”
Some lenders within the Farm Credit System likely didn’t make such investments due to uncertainty, said Ken Auer, president and CEO of the Farm Credit Council, a trade group for system companies.
To participate in the pilot programs, lenders had to spend money on hiring people with the expertise to analyze those types of investments, he said. Many preferred to “wait and see” whether the rule would be finalized.
“Not all institutions were able to take that risk,” Auer said.
Opponents of the proposal seemed to think that if they didn’t want to fund rural community projects, then nobody should be allowed to, he said.
Expanded investment in rural facilities is especially important now due to tighter federal spending, Auer said. “There are more than enough needs in rural America.”
Bert Ely, a financial industry consultant who opposed the proposal, said he remains suspicious of the Farm Credit System’s involvement in such projects.
By allowing such investments on a case-by-case basis, “they’re still keeping it in place, effectively,” said Ely, who is affiliated with the American Bankers Association, an opponent of the rule. “De facto, they’re going to continue it.”
The notion that Farm Credit System lenders are investing by buying bonds is really just a “subterfuge” intended to exceed their authority under the Farm Credit Act, which created the system, he said.
“It’s a loan by another name. There’s credit risk,” Ely said. “It’s sidestepping the credit restrictions in the Farm Credit Act.”