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Agricultural Credit: Institutions and Issues

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Order Code RS21977 Updated January 24October 1, 2008 Agricultural Credit: Farm BillInstitutions and Issues Jim Monke Specialist in Agricultural Policy Resources, Science, and Industry Division Summary The federal government has a long history of providing credit assistance to farmers by issuing direct loans and guarantees, and creating rural lending institutions. These institutions include the Farm Service Agency (FSA) of the U.S. Department of Agriculture (USDA), which makes or guarantees loans to farmers who cannot qualify at other lenders, and the Farm Credit System (FCS), which is a network of borrowerowned lending institutions operating as a government-sponsored enterprise. The 2007 farm bill offers Congress opportunities to address agricultural credit. Both the Senate- and House-passed farm bills make several adjustments to the FSA loan program by expanding opportunities for beginning and socially disadvantaged farmers and raising lending limits, but deny expansion of FCS lending authorities. A House floor amendment from leaders in the Financial Services Committee stripped FCS expansion provisions from H.R. 2419. The controversy between FCS and commercial banks is based on perceptions of credit availability and the role of GSEs. A Senate floor amendment to add FCS expansion provisions did not occur. This report will be updated. Background The federal government has a long history of providing credit assistance to farmers. First, USDA’s Farm Service Agency (FSA) issues direct loans and guarantees on loans made by commercial lenders to farmers who do not qualify for regular credit. Therefore, FSA is called a lender of last resort. Second, the Farm Credit System (FCS) is a cooperatively owned commercial lender that is federally chartered to serve only agriculture-related borrowers. FCS makes loans to creditworthy farmers, and is not a lender of last resort. Statutory authority for both the FSA and FCS is permanent, but farm bills often make adjustments to eligibility criteria and the scope of operations. Other sources of farm credit include commercial banks, life insurance companies, and individuals, merchants, and dealers. Figure 1 shows that commercial banks lend most of the farm sector’s total debt (37%), followed by the Farm Credit System (30%), individuals and others (21%), and life insurance companies (5%). The Farm Service Agency provides 3% of the debt through direct loans, and guarantees another 4% of the market (through loans of commercial banks and FCS). CRS-2 Figure 1. Market Shares of Farm Debt, by Lender Total: $214 billion in 2005 Farm Credit System 30% Commercial banks 37% Farm Service Agency Direct 3% Guaranteed 4% Life insurers 5% Individuals and others 21% Source: CRS, using USDA-ERS and FSA data at [http://www.ers.usda.gov/Briefing/FarmIncome/Data/Bs_t6.htm] The farm sector has about $214 billion in debt. Yet only about 66% of farmers have any debt (farm or nonfarm), and only 38% have farm debt. Most of the debt is owed by medium-sized family farms and large commercial farms. Creditworthy farmers generally have adequate access to loans. Credit conditions are generally good, and default rates have been declining. USDA data show stable or slightly declining debt-to-asset ratios, rising equity, and strength in farmers’ ability to repay debts. Nonetheless, some farmers continue to experience financial stress, and agriculture is prone to business cycles that may pose financial difficulties. Thus, many interests continue to see some need for federal intervention in agricultural credit markets. Farm Lending Institutions Commercial Banks, Life Insurers, and Individuals. Commercial banks, life insurance companies, and individuals and others provide 63% of total farm debt without federal support or mandate. Commercial banks provide most of the loans to farmers through both small community banks and large multi-bank institutions.1 Life insurance companies historically also have looked to farm real estate mortgages for diversification. The “individuals and others” category consists of seller-financed loans from private individuals, and the growing segment of “captive financing” by agribusinesses. Farm Credit System (FCS).2 Congress established the Farm Credit System in 1916 to provide a dependable and affordable source of credit to rural areas at a time when commercial lenders avoided farm loans. FCS is not a government agency nor guaranteed 1 Commercial bank issues are summarized by the American Bankers Association at [http://www. aba.com/Industry+Issues/issues_ag_menu.htm]. 2 Farm Credit System institutions are described at [http://www.fca.gov/FCS-Institutions.htm]. CRS-3 U.S. Department of Agriculture’s Farm Service Agency is a lender of last resort; it makes direct loans and guarantees commercial loans to farmers. The Farm Credit System (FCS) has a statutory mandate to make loans to credit-worthy farmers; it benefits from being a government sponsored enterprise (GSE). Farmer Mac, another GSE, creates a secondary market for agricultural loans. The global financial crisis has taken a toll on Farmer Mac’s capital. Investments in Fannie Mae and Lehman Brothers suffered about $97 million in losses, putting Farmer Mac’s ability to meet capital requirements in jeopardy. It raised $65 million in a special stock issuance, and presumably will meet its quarterly capital requirement. The scope of the farm loan programs was adjusted in the 2008 farm bill, but the farm bill did not allow any expansion of FCS lending authorities. However, through the regulatory process, FCS is proposing to expand the scope of permissible investments. A proposed rule would allow FCS institutions to invest in debt securities of rural projects, as well as to make equity investments in rural venture capital funds, both in rural areas under 50,000 population. Supporters claim a need for more and innovative financing in rural areas. Opponents say FCS is overstepping its statutory authority and should focus on making loans to farmers. Background The federal government has long provided credit assistance to farmers. First, USDA’s Farm Service Agency (FSA) issues direct loans and guarantees on loans made by commercial lenders to farmers who do not qualify for regular credit. Therefore, FSA is called a lender of last resort. Second, the Farm Credit System (FCS) is a cooperatively owned, federally chartered private lender with a mandate to serve agriculture-related borrowers. FCS makes loans to creditworthy farmers, and is not a lender of last resort. Third, Farmer Mac provides a secondary market for agricultural loans. Other lenders include commercial banks, life insurance companies, and individuals, merchants, and dealers. Figure 1 shows that commercial banks lend most of the farm sector’s total debt (45%), followed by the Farm Credit System (34%), individuals and CRS-2 others (10%), and life insurance companies (5%). The Farm Service Agency provides less than 3% of the debt through direct loans, and guarantees about another 4% of the market. The farm sector had about $210 billion in debt at the end of 2007 and $2.2 trillion in assets, resulting in a debt-asset ratio of less than 10%, which is historically low and indicates that the farm sector is not overly leveraged. Credit conditions in agriculture are generally good. USDA data show declining debt-to-asset ratios, rising equity, and strength in farmers’ ability to repay debts. For the most part, the farm lenders have not suffered losses like housing lenders have the past year. But the farm economy is not completely isolated. The global financial crisis is raising fears that credit availability for farmers, along with the rest of the economy, may become more constrained in the coming year. Figure 1. Market Shares of $210 Billion of Farm Debt, 2007 Source: CRS using USDA-ERS and FSA data at [http://www.ers.usda.gov/briefing/FarmIncome/data/Bs_t5.htm]. Government-Related Farm Lending Institutions USDA’s Farm Service Agency (FSA). The USDA Farm Service Agency (FSA) is a lender of last resort because it makes direct farm ownership and operating loans to family-sized farms that are unable to obtain credit elsewhere. FSA also guarantees timely payment of principal and interest on qualified loans made by commercial lenders such as commercial banks and the FCS. Permanent authority exists in the Consolidated Farm and Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). Direct loans are limited to $300,000 per borrower; guaranteed loans to $1,094,000 per borrower (adjusted annually for inflation). Direct emergency loans are available for natural or other disasters. Some guaranteed loans have a subsidized interest rate. Part of the FSA loan program is reserved for beginning farmers and ranchers (7 U.S.C. 1994 (b)(2)). For direct loans, 75% of the annual funding for farm ownership loans and 50% of direct operating loans are reserved for the first 11 months of the fiscal year. For guaranteed loans, 40% is reserved for ownership loans and farm operating loans for the first half of the fiscal year. Funds are also targeted to “socially disadvantaged” farmers based on race, gender, and ethnicity (7 U.S.C. 2003). CRS-3 Farm Credit System (FCS). Congress established the Farm Credit System in 1916 to provide a dependable and affordable source of credit to rural areas at a time when commercial lenders avoided farm loans. FCS is not a government agency nor guaranteed by the U.S. government, but is a network of borrower-owned lending institutions. It is not a lender of last resort; it is a for-profit lender with a statutory mandate to serve agriculture. Funds are raised through the sale of bonds on Wall Street. Five large banks allocate these funds to 9695 credit associations that, in turn, make loans to eligible creditworthy borrowers. StatuteStatutes and oversight by the agriculture committees determine the scope of FCS activity as a government-sponsored enterprise (GSE), and provide benefits such as tax exemptions. Benefits such as tax exemptions are also provided. Eligibility is limited to farmers and ranchers farmers, farm input suppliers, rural home owners homeowners in towns with less thanunder 2,500 population, and cooperatives. The federal regulator is the Farm Credit Administration (FCA). Permanent authority exists in the Farm Credit Act of 1971, as amended (12 U.S.C. 2001 et seq.). Major amendments generally have been enacted separately, but farm bills are used for smaller amendments. FCS does not receive an annual appropriation, but is privately funded. In recent years, appropriators placed a limit on the size of the FCA’s budget, which is funded by assessments on FCS institutions. For more background about FCS, see CRS Report RS21278, Farm Credit System, by Jim Monke. USDA’s Farm Service Agency (FSA).3 The USDA Farm Service Agency (FSA) is a lender of last resort because it makes direct loans to family-sized farms that are unable to obtain commercial credit. FSA also guarantees timely payment of principal and interest on qualified loans made by commercial lenders such as banks and the Farm Credit System. Permanent authority exists in the Consolidated Farm and Rural Development Act (CONACT, 7 U.S.C. 1921 et seq.). However, Congress uses omnibus farm bills to make changes to the terms, conditions, and eligibility requirements. FSA makes farm ownership and operating loans to operators of family-sized farms who can demonstrate enough cash flow to make payments. Direct loans are limited to $200,000 per borrower. Guaranteed loans are limited to $899,000 per borrower (adjusted annually for inflation). Emergency loans are available for qualifying natural or other disasters. Some guaranteed loans have a subsidized (below-market) interest rate. Since the 1980s, emphasis within the FSA loan program has shifted from making direct loans toward issuing more guarantees. This lessens farmers’ reliance on direct federal lending, and leverages federal dollars since guarantees are cheaper to subsidize. In the late 1990s, 30% of loan authority was for direct loans; that ratio is now about 25%. Certain portions of the FSA farm loan program are reserved for beginning farmers and ranchers (7 U.S.C. 1994 (b)(2)).4 For direct loans, 70% of the amount for farm ownership loans and 35% of direct operating loans are reserved for beginning farmers for the first 11 months of the fiscal year (until September 1). For guaranteed loans, 25% is reserved for such farmers for ownership loans and 40% for farm operating loans for the first six months of the fiscal year (until April 1). Funds are also targeted to “socially disadvantaged” farmers based on race, gender, and ethnicity (7 U.S.C. 2003). 3 4 USDA Farm Service Agency loan programs are described at [http://www.fsa.usda.gov/dafl]. For more background on FSA loan programs, see “Evaluating the Relative Cost Effectiveness of the Farm Service Agency’s Farm Loan Programs,” by Charles Dodson and Steven Koenig, at [http://www.fsa.usda.gov/Internet/FSA_File/farm_loan_study_august_06.pdf] CRS-4 Farm Bill Issues Farm Service Agency. Authority for the size of FSA’s farm loan program is specified in the 2002 farm bill and expires at the end of FY2007. The 2007 farm bill is seen as a vehicle to set new loan authorization levels for FSA, although actual funding would continue to be set by annual appropriations acts. The 2002 farm bill authorized a maximum loan authority of $3.796 billion for direct and guaranteed loans for each of fiscal years 2003-2007 (7 U.S.C. 1994(b)(1)), and specified how this would be divided among different types of loans. Appropriators have funded between about 81% to 95% of the total authorization, with more than 100% for some loan types. The House-passed farm bill, H.R. 2419, does not specify new overall loan authorization levels, but the Senate-passed bill does update the authorizations for discretionary appropriations. Both the House and Senate bills include provisions that would: ! Increase lending limits per farmer to $300,000 for direct farm ownership loans and $300,000 for direct operating loans, up from $200,000 for each program. These limits were set in 1984 for direct farm ownership loans, and in 1986 for direct operating loans, and have not kept pace with inflation. (Limits for guaranteed loans were raised in 1998 and indexed for inflation.) ! Further prioritize lending for beginning and socially disadvantaged farmers by increasing the amounts reserved for these groups. ! Make the down-payment loan program more beneficial for farmers. ! Extend and expand the guarantee program for seller-financed land loans. ! Extend the right of first refusal to reacquire a homestead property to the family of a socially disadvantaged borrower-owner who is a socially disadvantaged farmer or rancher. ! Restore priority given to socially disadvantaged farmers and ranchers whenever the Secretary of Agriculture sells or leases property. In addition, the House bill would: ! Create a special loan guarantee program for conservation projects. ! Extend, but only until January 1, 2008, the suspension of the enforcement of “term limits” on guaranteed loans which are set in statute to require farmers to graduate from FSA credit to commercial lenders (see below). In contrast, the Senate-passed bill would: ! Make more conservation programs eligible for existing FSA farm loans, including the transition to organic and sustainable farming, and give priority to beginning farmers and ranchers for such loans. ! Permanently eliminate “term limits” on guaranteed loans. ! Create a beginning farmer “Individual Development Account” pilot program with matching up to 3:1 up to $9,000/year for capital expenditures. The bill authorizes $5 million/year from CCC. Provisions for term limits are intended to prevent chronically inefficient farms from continuing to receive federally subsidized credit, but the political and social prospects of the government withdrawing credit from these farmers are sometimes unpleasant. Currently farmers are limited to receiving direct operating loan eligibility for seven years, and guaranteed operating loans for 15 years (7 U.S.C. 1949). A provision in the 2002 farm CRS-5 bill (Sec. 5102 of P.L. 107-171) suspended application of the 15-year guaranteed limit through the end of 2006, and subsequent appropriations laws have extended the suspension provision until March 15, 2008. An increasing number of farmers are reaching their term limits. Thus, there are pressures to again extend the eligibility allowance (as in the House bill), or revisit the original purpose of the term limits requirement (as in the elimination of term limits in the Senate bill). Farm Credit System. In recent years, FCS has expanded its lending, to a limited degree, beyond traditional farm loans and into more rural housing and non-farm businesses. In early 2006, FCS released a report titled Horizons, which highlights perceived needs for greater lending authority to serve a changing rural America.5 Some see Horizons as a guide for legislative action to expand lending authorities, possibly in the 2007 farm bill.6 The primary objectives in the Horizons project include (1) expanding lending authorities to include rural housing in towns with up to 50,000 population (currently 2,500), (2) expanding lending authorities by adding agribusinesses to the list of eligible borrowers (regardless of farmer ownership or throughput). Commercial banks oppose any expansion of FCS lending authority, saying that commercial credit in rural areas is not constrained and that FCS’s government-sponsored enterprise (GSE) status provides an unfair competitive advantage. Commercial banks assert that, with financial deregulation and integration, there is no credit shortage for agriculture. They say that the federal tax benefits for FCS are no longer necessary, or at least should not be extended to non-farm, non-agriculture loans. FCS counters this by asserting its statutory mandate to serve agriculture (and by extension, rural areas) through good times and bad, unlike commercial lenders without such a mandate. Both the Senate- and House-passed farm bills do not contain any expansion of Farm Credit System lending authority. In the House, a floor amendment (H.Amdt. 702) by Financial Services Committee Chairman Frank and Ranking Member Bachus removed, by voice vote, the House Agriculture Committee’s provisions that would have: ! ! ! ! Increased the population cutoff for rural housing loans from 2,500 population to 6,000 population. Added a general agribusiness category to the list of eligible borrowers, except that it would have limited these new types of agribusiness loans to renewable energy projects only. Added eligibility for certain “new generation” farmer cooperatives that are at least 50% farmer-owned. Replaced the borrower stock-holding requirement, which is currently a numerical target (the lesser of $1,000 or 2% of the loan), with the discretion of the institution. In the Senate, the committee-reported bill did not contain any FCS expansion provisions. Although expected by some, a Senate floor amendment to allow FCS expansion was not introduced. 5 6 The Horizons report is available at [http://www.fchorizons.com]. Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at [http:// www.aba.com/NR/rdonlyres/E1577452-246C-11D5-AB7C-00508B95258D/45256/Horizons 2006ELYFINAL.pdf]. CRS-6 The policy decision of whether to expand FCS lending authority has become less about “farm” credit, and more about the ideological role of a retail GSE lender competing with private lenders. Committee jurisdiction was called into question by the House Financial Services Committee. In letters to the Agriculture Committee, and in statements on the floor, Representatives Frank and Bachus of the Financial Services Committee asserted their committee’s jurisdiction for nonfarm lending and their specific opposition to Horizons. The Administration also came out against FCS expansion in the Statement of Administration Policy on H.R. 2419. Finally, the past chairman of the Farm Credit Administration, the federal regulator, Michael Renya, also voiced opposition in a letter prepared for the House floor debate. Beyond the Farm Bill. The scope of FCS lending authority also could grow under an still-pending October 2006 proposed rule to expand eligibility for farm processing and marketing loans (71 FR 60678, October 16, 2006). The intent is to allow FCS to finance larger value-added farm processing firms that are being built with more outside capital and involvement than in the past. Opponents fear that the regulation could allow more non-agriculture financing. Some also have questioned FCA’s recent approval of a pilot program that allows “mission-related” investments in what sometimes are called “Rural America Bonds.” Like banks, FCS institutions can make investments in additional to issuing loans, usually in negotiable instruments like Treasury bonds. However, the pilot program allows investments in certain private or public bonds (e.g., for rural community facilities). This effectively results in lending, sometimes for purposes that otherwise may not qualify for FCS loans. For FCS institutions, the investments are not subject to statutory restrictions on borrower eligibility.7 FCA promotes the program “to allow greater flexibility” and “to better serve the changing needs of agriculture and rural areas.” Commercial banks assert that the investments allow FCS to exceed its statutory lending scope. Lending authorities and GSE preferences were highlighted again in 2004 when a private bank, Netherlands-based Rabobank, tried to purchase an FCS association. The board of directors of Omaha-based Farm Credit Services of America (FCSA) initially voted for the sale, indicating to some that FCS may no longer need government sponsorship. A general outcry led FCSA to withdraw from the deal.8 At that time, commercial bankers said that FCS institutions should be allowed to leave if they want more lending authorities, while FCS asked Congress to eliminate the provision allowing institutions to leave the system (12 U.S.C. 2279d). It is not clear whether Congress, in 1987, intended the provision to be used by outside companies to purchase parts of FCS. The Farm Credit Administration has since amended the regulations for FCS institutions wanting to terminate their charter (71 FR 44409, August 4, 2006), by allowing more time for FCA to review the request, more communication, and more shareholder involvement. 7 For background, see FCA, “Investments In Rural America,” presentation to the Farm Credit Council Annual Meeting, Jan. 2006 [http://www.fccouncil.com/uploads/Laurie_Rae_FCA.ppt]; and FCA, Informational Memorandum on Investments in Rural America, June 25, 2004. 8 For further background, see CRS Report RS21919, Farm Credit Services of America Ends Attempt to Leave the Farm Credit System, by Jim Monke. regulator is the Farm Credit Administration (FCA). Farmer Mac is a separate GSE that is a secondary market for agricultural loans. It is part of the FCS in that FCA is its regulator, but it is financially separate. Farmer Mac purchases mortgages from lenders and guarantees mortgage-backed securities that are bought by investors. Permanent authority rests in the Farm Credit Act of 1971 (12 U.S.C. 2001 et seq.). For more background, see CRS Report RS21278, Farm Credit System. Farmer Mac’s Capital Problems in the Global Financial Crisis The global financial crisis that began with subprime mortgage defaults in 2007 and spread throughout the U.S. and global financial sectors in 2008 has taken a toll on Farmer Mac’s capital. Farmer Mac lost about $97 million in Fannie Mae stock and Lehman Brothers securities, putting in jeopardy its ability to meet statutory capital requirements for September 30, 2008. Farmer Mac had invested $52 million in Fannie Mae preferred stock; it is now valued at about $3.2 million, for a $49 million loss.1 Its $60 million investment in Lehman Brothers debt securities fell to about $12 million, for a $48 million loss.2 In the last quarterly report filed on June 30, 2008, its minimum statutory capital requirement was $215 million, and it had capital of $255 million, for a $40 million cushion. Based on these amounts, the investment losses would have put the capital under the required level without other action. If the capital requirement is not met, statute requires FCA to downgrade Farmer Mac’s rating, something it has never needed to do. Such enforcement would involve a capital restoration plan, suspension of dividend payments, and possibly limitations on Farmer Mac’s growth (12 U.S.C. 2279bb-6). However, a formal capital restoration plan appears unnecessary because on October 1, 2008, Farmer Mac announced that it raised $65 million in capital by issuing preferred stock. The shares were bought by the five Farm Credit System banks and one commercial lender.3 Farmer Mac’s core business involving agricultural lending is performing well; all agricultural lenders, including the FCS, are having historically low default rates. 1 Securities and Exchange Commission, Form 8-K, September 12, 2008, at [http://www.sec.gov/ Archives/edgar/data/845877/000084587708000043/form8k.htm]. 2 Securities and Exchange Commission, Form 8-K, September 22, 2008, at [http://www.sec.gov/ Archives/edgar/data/845877/000084587708000046/form8k.htm]. 3 Farmer Mac,”Farmer Mac Raises $65 Million in Capital Through the Issuance of Senior Preferred Shares,” Oct. 1, 2008, [http://www.farmermac.com/news/Open_News.aspx?ID=108]. CRS-4 2008 Farm Bill Provisions Statutory authority for FSA and FCS is permanent, but periodic farm bills — such as the 2008 farm bill (P.L. 110-246) — often make adjustments to eligibility criteria and the scope of operations. These adjustments are summarized below, and a more detailed side-by-side comparison of provisions is available in CRS Report RL34228, Comparison of the 2008 Farm Bill Conference Agreement with the House and Senate Farm Bills. Farm Service Agency. The 2008 farm bill authorizes the FSA farm loan program at $4.226 billion for each of FY2008-FY2012, including $1.2 billion for direct loans. Actual funding is determined in annual appropriations acts. In addition, the farm bill: ! ! ! ! ! ! ! ! ! ! Increases lending limits per farmer to $300,000 for direct farm ownership loans and $300,000 for direct operating loans, up from $200,000 each. Further prioritizes lending for beginning and socially disadvantaged farmers by increasing the amounts reserved for these groups (see above). Extends the term of the beginning farmer down-payment loan program, raises the lending limit, and lowers the interest rate. Adds eligibility for socially disadvantaged farmers. Makes permanent and nationwide the guarantee program for sellerfinanced land loans to beginning and socially disadvantaged farmers. Suspends until December 31, 2010, the enforcement of “term limits” on guaranteed loans that require farmers to graduate to commercial lenders. Adds eligibility for emergency loans to equine farmers; conferees noted that horses for racing, showing, and recreation should not be eligible. Creates a beginning farmer “Individual Development Account” pilot program. Farmers receive up to a 2:1 match, up to $6,000/year. Creates direct loans and loan guarantees for conservation projects. Extends the right of first refusal to reacquire a homestead property to the family of a socially disadvantaged borrower-owner. Adds socially disadvantaged farmers to beginning farmers as preferred groups when the USDA sells or leases property. Farm Credit System. The enacted 2008 farm bill does not allow any expansion of Farm Credit System lending authority. Although an initial House draft of the farm bill included some expanded lending authorities, those provisions were removed by a floor amendment from leaders of the House Financial Services Committee. For the Farm Credit System, the 2008 farm bill: ! ! ! ! Allows rural utility (electric or telephone facility) loans to qualify for the agricultural mortgage secondary market (Farmer Mac). Provides for separate consideration of rural utility loans when determining credit risk. Makes technical changes in the payment of insurance premiums by FCS banks to the FCS Insurance Corporation. Makes more borrowers able to own Bank for Cooperatives voting stock. Equalizes lending authorities for associations in Alabama, Mississippi, and Louisiana by allowing Federal Land Bank Associations to make shorter-term loans, and Production Credit Associations to make longerterm loans. Requires board and shareholder votes. Effective Jan. 1, 2010. CRS-5 Farm Credit Administration Proposed Rule on Investments Background on FCS Proposals for Expansion. The Farm Credit System is authorized by statute to lend to farmers and ranchers. Loans may also be made for the processing and marketing activities of these borrowers, home loans in rural areas, certain farm-related businesses, and cooperatives. Loans to other borrowers are prohibited. In recent years, FCS has sought to expand its lending authority beyond traditional farm loans. In 2006, an FCS report titled Horizons4 highlighted perceived needs for greater lending authority, including rural housing in towns with up to 50,000 population (currently 2,500) and broader eligibility for agribusinesses. Commercial banks oppose any expansion of FCS lending authority, saying that credit in rural areas is not constrained given financial deregulation and integration, and that FCS’s GSE status provides an unfair advantage.5 They say that federal tax benefits for FCS are no longer necessary.6 The policy decision of whether to expand FCS lending authority has become less about “farm credit,” and more about the ideological role of a retail GSE lender competing with private lenders.7 FCS asserts its statutory mandate to serve agriculture (and by extension, rural areas) through good times and bad times. In Congress, committee jurisdiction has been questioned. During debate over the 2008 farm bill, the House Financial Services Committee and the Senate Banking Committee asserted jurisdiction for nonfarm lending and opposition to Horizons.8 The Administration opposed FCS expansion,9 and a past chairman of the FCA, Michael Reyna, also voiced opposition.10 Mission-Related Investments. On June 16, 2008, the FCA published a proposed rule to allow “mission related investments” (73 Federal Register 33931-33940).11 These investments include (1) debt securities in projects that benefit rural communities and (2) equity investments in venture capital funds. The proposed rule would define rural areas to include up to 50,000 residents. Targeted projects include community facilities, transportation, rural business investment companies, and venture capital funds. 4 The Horizons report is available at [http://www.fchorizons.com]. 5 Bert Ely, “The Farm Credit System: Lending Anywhere but on the Farm,” at [http://www.aba. com/nr/rdonlyres/e1577452-246c-11d5-ab7c-00508b95258d/45256/horizons2006elyfinal.pdf]. 6 The tax benefits for FCS include an exemption from federal, state, municipal, and local taxation on the profits earned by the real estate side of FCS. For investors who buy FCS bonds to finance the System, the interest earned is exempt from state, municipal, and local taxes. 7 Unlike the housing GSEs (Fannie Mae, Freddie Mac) that do not lend directly to homeowners, the Farm Credit System is a retail lender that competes for farm loans against commercial banks. 8 Letter on House-Senate Farm Bill Conference, Jan. 15, 2008 [http://www.house.gov/apps/ list/press/financialsvcs_dem/press011607.shtml], and letter to House Agriculture Committee, May 18, 2007 [http://www.house.gov/apps/list/press/financialsvcs_dem/press052207.shtml]. 9 Statement of Administration Policy on H.R. 2419, July 25, 2007, p. 3 [http://www.whitehouse. gov/omb/legislative/sap/110-1/hr2419sap-r.pdf] 10 11 Congressional Record, July 26, 2007, p. H8728. FCA, proposed rule on Rural Community Investments, [http://www.fca.gov/handbook.nsf/ ff16b393f6bb3aa0852563ce006665bb/ea4c5c5dfb4c60058525746b0044e5b1?OpenDocument]. CRS-6 FCA promotes the program “to allow greater flexibility” and “to better serve the changing needs of agriculture and rural areas.” The proposed rule states that “many rural areas are struggling to retain economic viability and vitality,” and that “essential facilities, infrastructure, and services ... often lag behind those in metropolitan areas ... obstacles to rural economic development and revitalization [that] are further compounded by funding challenges.” FCA designed the rule “to enable FCS to collaborate and partner in rural development ... as a financial intermediary promoting the flow of money into rural areas.” Like banks, FCS institutions may use their assets to make loans or buy investments. Some question whether investments in the types of projects mentioned in the rule are safe and/or mission-related. Critics say that the rule’s definition of rural as 50,000 population is at odds with the FCS statutory limit of 2,500 population for rural home loans. Do investments in bonds and venture capital effectively result in loans by another name to borrowers who otherwise are ineligible for FCS loans? Since 2004, an FCA pilot program has been allowing similar investments in what sometimes are called “Rural America Bonds.”12 The proposed rule basically would make the pilot program, with revisions and the addition of the venture capital funds, a permanent part of FCS regulations and available to all FCS institutions. The proposed rule was open for public comment until August 15, 2008, and over 10,000 comments were submitted.13 Among the comment letters are two bipartisan letters from the House Financial Services Committee14 and the Senate Banking Committee15 opposing the rule. These letters note that the 2008 farm bill rejected legislation to expand FCS lending authorities, request the proposed rule be withdrawn, and ask that decisions about the scope of FCS activities be left to Congress. Also, Representatives Herger, Buyer, and Manzullo, and Senators Byrd, Lugar, and Bingaman submitted letters from constituents who oppose the rule. The chairmen of the House and Senate agriculture committees have not taken a position publicly. USDA’s Rural Development agency submitted a comment letter in support of the rule,16 which somewhat contradicts the Administration’s opposition to FCS expansion in the farm bill in 2007. The disposition of the proposed rule now awaits action by the FCA. The FCA is authorized to implement rules that it believes are in accord with the statutes. Congress has no official role in the approval process for this proposed rule unless it exercises its legislative power, including disapproving the rule under the Congressional Review Act. 12 FCA, Informational Memorandum on “Investments in Rural America,” Jan. 11, 2005. 13 Comment letters are available at [http://www.fca.gov/apps/regproj.nsf/e211b6dc2a9fbbba 85256e5100541454/9dcc7754de2e51bb852572dd00526b3f?OpenDocument]. 14 Reps. Frank, Bachus, Maloney, and Biggert, House Financial Services Committee, letter to FCA on July 10, 2008 [http://www.aba.com/aba/documents/press/LettertoFCA7_10_08.pdf]. 15 Senators Dodd and Shelby, Senate Banking Committee, letter to FCA on August 8, 2008 [http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/c2d1d0197290e ad2852574a2004a1021?OpenDocument]. 16 James Alsop and Joseph Ben-Israel, USDA Rural Development, letter to FCA on August 14, 2008, at [http://www.fca.gov/apps/regproj.nsf/9646a6b403d8272d85256e5100541453/8fed246 b2b6da162852574a500617f65?OpenDocument]