Farm Credit System lenders are sharply divided over a proposal to radically change the system's 83-year-old lending rules.

Since the government-sponsored Farm Credit System was established to ensure that all farmers would have access to credit, its lenders have been limited to making loans to farmers and ranchers within their districts.

But the Farm Credit Administration, which regulates the system's 203 lenders, wants to eliminate geographic boundaries to encourage competition and offer borrowers more options.

"The major consideration here is giving the customer more flexibility," said Marsha Pyle Martin, chairman of the Farm Credit Administration.

The proposal, introduced last summer, has provoked a flood of comment letters.

Supporters say the rules need to be changed so that Farm Credit lenders can continue serving customers that are expanding. New rules would also let Farm Credit lenders compete for larger credits, which are becoming more common as the farming industry consolidates.

"In order to continue to be relevant in the marketplace, the authority to follow our clients to whatever locations their business may take them is essential," wrote David R. Hoelmer, vice president and general counsel at Agstar Farm Credit Services in Mankato, Minn.

Opponents argue that the largest lenders will "cherry-pick" the best customers in other markets, leaving smaller, local lenders with the higher credit risks. They also worry that this would be the first step toward a mass consolidation of Farm Credit lenders.

"In many ways, this would be analogous to First Union authorizing their branches and commercial loan officers to compete against one another for customers," wrote Ronald K. Byrd, president and chief executive officer with Central Maryland Farm Credit in Westminster.

The Farm Credit Administration must decide whether to adopt the so- called "customer choice" regulations or go back to the drawing board.

In an interview, Ms. Martin did not indicate which way the board was leaning, saying only that it "will seriously consider" the 228 comment letters received.

But she expressed disappointment at some of the criticsm. "I was surprised at some of the associations who were opposed," Ms. Martin said. "I considered them organizations that had no fear."

Commercial banks strongly opposed the changes.

Banks have long accused Farm Credit lenders of using their tax-exempt status to undercut banks on interest rates charged to farmers. Competition within the Farm Credit System could inspire some lenders to lower rates even further, bankers argue.

In comment letters, bankers also expressed concern about Farm Credit lenders entering faraway markets. The Illinois Bankers Association argued in its letter that boards of directors-made up mostly of local farmers- "don't have the skill or expertise to evaluate distant commodity markets."

"Aggressive FCS lenders will make risky mistakes if they lend in new markets about which they know nothing," the Illinois Bankers wrote.

Still, it is opposition from within the Farm Credit System-not from banks-that might ultimately sink the customer choice proposal.

The most vocal opponent is the Farm Credit Bank of Texas, one of the nation's six Farm Credit Banks that provide funds to smaller lenders.

The $5 billion-asset bank hired a Washington, D.C., law firm to write its 30-page comment letter. In an interview, senior vice president and general counsel Bill Zimmerman said the Farm Credit Administration may have overstepped its authority by proposing a rule change.

"If Congress feels the system is inappropriate, then Congress can change it," Mr. Zimmerman said.

He also argued that competition will inevitably weaken some of the smaller lenders. And if any lenders fail, he said, it will be up to the other Farm Credit institutions to bail them out.

"It seems kind of silly to beat each other's brains out," he said.

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