The Department of Housing and Urban Development has withdrawn a proposed rule that would have allowed government-backed Farm Credit System lenders to make more home loans.

In a notice published in the Federal Register Monday, HUD concluded that the proposal to let Farm Credit lenders offer loans backed by the Federal Housing Administration would conflict with efforts to reduce the government's involvement in the mortgage finance market.

"While HUD seeks to ensure the availability of mortgage financing for qualified borrowers nationwide - and particularly in underserved markets -- HUD and the [Obama] administration remain committed to reducing FHA's market share and facilitating the return of private capital to the market," HUD said.

Farm Credit lenders primarily make loans related to agriculture, though their charter permits them to make home loans in rural markets with less than 2,500 residents. Concerned that credit in rural areas was drying up, HUD said in issuing the proposed rule in August that allowing Farm Credit lenders to participate in FHA programs could "provide an additional avenue" for mortgage financing in such communities.

HUD said in the Federal Register notice Monday that it received 27 substantive responses to its proposed rule and that comments were almost evenly split between supporters and opponents.

Supporters said that the need for credit in rural market is real and that allowing Farm Credit lenders to offer FHA loans would help satisfy demand. But opponents argued that community banks were already meeting the need for credit and that any efforts to broaden the FHA program would run afoul of policymakers' efforts to reduce the government's role in the housing market.

HUD said that the FHA would continue to monitor the availability of credit in rural markets to ensure that residents have access to homeownership.

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