Rural Community Investments - Proposed Rule - Comments received after 8/15/08 John Critchfield P.O. Box 2733 joplin, MO 64803-2733
December 12, 2008
Gary K. Van Meter Deputy Director, Office of Regulatory Policy Farm Credit Administration 1501 Farm Credit Drive McLean, VA 22102-5090
Dear Gary Van Meter:
I must state my very strong opposition to the FCA's "Rural Community Investments" proposal. This proposal is illegal, inconsistent with legislative history, and transforms this retail government sponsored enterprise (GSE) away from its historic mission of serving farmers and ranchers and their farmer-owned businesses. This proposal will harm farmers and ranchers and our rural communities.
Congress has not authorized FCS to make loans for any of the purposes that the FCA outlines. For FCA to suggest that the financing of activities that would otherwise be illegal under the Act is consistent with congressional intent if these activities are labeled or considered to be "investments" is spurious. Instead of targeting "mission-related" investments, the proposal allows a vast array of financing for non-farm activities including restaurants, hotels, commercial buildings, manufacturing and any other purposes that FCA may approve in the future. This is a dramatic shift away from those the FCS was created to serve, farmers and ranchers, in favor of those activities not actually related to production agriculture.
These "investments" are not simply supplemental credit that is additional or complimentary to loans made by community banks. Instead, such financing would displace credit extended by the banking sector. Therefore, it is illogical and misleading for FCA to suggest that these investments would not be the equivalent of loans. It is deceptive for FCA to suggest that the "bonds" FCS would use to finance a wide array of businesses are something other than loans.
I disagree that allowing FCS to finance community facilities, transportation projects and other economic development activities are "mission-related" purposes just because farmers may live in rural communities. The vast majority of populations living in rural communities are not farmers and the activities financed would not be primarily of benefit to farmers, but the general populace. FCA's suggestion that farmers may indirectly benefit is a ridiculous rationale for the proposal.
The proposal also will cause great harm to our rural communities as FCS lenders will usurp huge amounts of financing from the community banking sector. FCA states this siphoning of bank finance will be over $35 billion in the first year of the program. In a decade's time, at current growth rates, the amount of financing siphoned away from banks and geared exclusively towards non-farm purposes could equal or exceed the FCS's current total loan volume and far exceed the current level of loans to actual farmers. As FCS lenders cherry-pick the best financing opportunities away from the banking sector, many banks will be forced out of business as they lack the tax and funding subsidies of FCS lenders. While FCA typically goes to great length to suggest the banking sector isn't disadvantaged in terms of federal subsidies compared to FCS lenders, these arguments are superficial and misleading.
The risky venture capital investments allowed by FCA places the capital of FCS's farmer borrowers at risk of loss. According to the FCA's most recent annual report, over eighty percent of System surplus is capital. Banks are not allowed to make investments of 150 percent of their surplus or capital in these activities and bank investments are based on actual legislative authorization by Congress. FCA's proposal goes far beyond anything contemplated in the Farm Credit Act by Congress and in other laws applicable to the banking industry. Banks, unlike FCS lenders, are intended to be general purpose lenders and therefore it makes no sense for FCA to adopt broader policies targeting non-farm purposes than is allowed for the banking sector. The proposal also would allow the mixing of banking and commerce by a GSE. Congress has historically prohibited mixing of banking and commerce due to conflicts of interests.
The practical result of FCA's proposal is to make the congressionally intended limits in the Act meaningless. Any illegal loan or financial activity could be determined by FCA to be an investment and therefore legal. FCA's interpretations would become supreme while the actual statute would have little or no significance. Congress rejected FCS efforts to gain expanded powers as part of the farm bill. Congress did not add FCS expansions in either the credit or rural development titles of this bill, an unmistakable indication Congress did want FCS institutions to be general purpose lenders. FCA could have consulted with Congress on rural development policies but chose to wait until after the farm bill's completion to bring forward this proposal, a very curious approach if FCA's goal was actually aimed at enhancing rural development.
It is quite troubling that FCA defines "rural" as communities up to 50,000 people. The Census Bureau defines rural as towns of 2,500 or fewer. In contrast to the proposal, the Act itself limits non-farm financing for rural home mortgages to towns of 2,500 or less and for water and waste disposal (essential community facilities) to towns of 20,000. FCA's rural definition would allow FCS financing near large cities, while ignoring financing in remote rural areas. This proves that the proposal is not really intended to address any real capital access issues that may exist in rural areas. The proposal's real goal is just to expand FCS powers as broadly as possible.
Congress granted FCA basic authority to regulate investments to ensure FCS lenders can manage their liquidity requirements and interest rate risks on their balance sheets. In contrast, this proposal allows FCS lenders to make currently illegal loans if they are labeled as investments.
This proposal is unwarranted and would harm rural America by displacing many community banks. It also puts the hard earned capital of the System's owners at risk and allows for an arbitrary and high level of System capital to be funneled into investments which displace banking loans. Suggesting that this proposal will benefit the banking sector is misleading when FCS and FCA have not sought to discuss or develop the proposal in coordination with the banking community. This is a self-serving proposal that FCA is trying to disguise with the appearance of good intentions. There is already a flexible flow of credit to rural America and FCS itself testified to Congress last year that there are no credit gaps in rural America. Congress has not authorized FCS entities to be broad-based rural development lenders. The proposal is inconsistent with legislative history and the Farm Credit Act. I respectfully request that FCA withdraw the proposal.