The banking industry landed a victory in its fight to reform the Farm Credit System. The board of the Farm Credit Administration, the Farm Credit System's regulator, recently voted to withdraw a proposed rule that allowed the government-sponsored enterprise's lenders to invest in non-agricultural companies.

The board also voted to conclude all pilot programs associated with the proposal.

The Independent Community Bankers of America and the American Bankers Association have made reforming the Farm Credit System a priority. Their agendas included a push to limit investments by the GSE's lenders to farms and rural utilities.

"It is a good first step," Mark Scanlan, the ICBA's senior vice president of agriculture and rural policy, said of the Farm Credit Administration's decision. "This stops a permanent and blanket regulatory authority for" expanded investment.

In June 2008, the Farm Credit Administration published a proposed rule that would have allowed Farm Credit institutions to invest in companies that were unrelated to agriculture, such as nursing facilities, hospitals and fairgrounds. Those institutions are legally barred from lending to these entities so the investments were often issued as privately held bonds.

More than 30 Farm Credit associations and three banks held pilot programs that invested $1.2 billion as of Dec. 31, 2012, according to the Farm Credit Administration. All of the pilots will be wound down by the end of next year. Those institutions may continue to hold their investments through their maturity dates.

The proposed rule attracted significant attention, including ire from the banking industry. The Farm Credit Administration received 10,000 comment letters, the most it has ever gotten over a proposed rule, says John Blanchfield, the ABA's senior vice president of agricultural and rural banking.

"There is nothing wrong with helping rural hospitals," Blanchfield says. "Rural hospitals save lives. But there's no gap in that business. Banks compete aggressively for loans that make economic sense."

Bankers had become increasingly frustrated that the proposal languished for years without resolution. Most of the Farm Credit Administration's proposed rules are decided within a year after the comment period closes, though there are exceptions, says Gary Van Meter, the agency's deputy director for the office of regulatory policy.

In mid-November, the three-member board voted to end the programs and withdraw the rule. After the programs end, Farm Credit institutions must get approval for these investments on an individual basis, which is what the board had previously allowed, Van Meter says.

"The initial rule had quite a bit of controversy," Van Meter says. "There were many for and many against it. Our board decided it was best to withdraw the proposed rule."

Those in the banking industry praised the decision, adding that banks are willing and able to fill demand for the financing outlined in the withdrawn proposal. Banks have struggled to boost revenue because of low interest rates and soft loan demand.

Farm Credit is Gothenburg State Bank's toughest competitor for ag loans, though they yet to cross paths for other types of financing, says Matt Williams, the Nebraska bank's chairman and president and a former chairman of the American Bankers Association. Still, he fought against the proposal, arguing that Farm Credit has unfairly tried to expand the types of lending that it can do since it was formed nearly a century ago.

"The banking industry is very liquid and very willing to" lend, Williams says. "If nothing else, Farm Credit needs to go back to its original mission, which was direct agricultural lending."

Still, bankers remain concerned that transparency might diminish if the Farm Credit Administration approves investments on an individual basis. This shouldn't be a problem since the agency makes information about board meetings publicly available, Van Meter argues.

There were people who were upset with the board's decision. Increased competition helps build stronger rural communities, says Ken Auer, president and chief executive of the Farm Credit Council, a trade group for the Farm Credit System.

"Obviously we are disappointed," Auer says. "The system engaged in these types of investments because customers took advantage of it. This is important for keeping young folks involved in agriculture and having more vibrant rural communities."

Colfax Health & Rehabilitation Center in Wisconsin relied on financing from a Farm Credit institution, AgStar Financial Services, to build a new facility. Local banks wouldn't lend the more than $10 million the center needed because it lacked the appropriate collateral, says Jill Gengler, administrator of Colfax Health.

AgStar participated in the investment, which included a loan from the Department of Agriculture. Without the funds, Colfax Health likely would have stayed at its old facilities and would have been unable to offer additional services, Gengler says. Colfax Health is the second-biggest employer in a community with a population of roughly 1,200.  

"This is for the improvement of rural America," Gengler says. "It's really too bad this option won't be out there for others in the future."

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