Farm Credit lenders did not get much of what they wanted in the latest farm bill passed by Congress, but they could soon gain more powers to invest in rural communities anyway under a proposal put forth by their regulator.
As it stands, Farm Credit System lenders can do little more than make loans to farmers and ranchers and offer mortgages in small towns.
However, a rule proposed by the Farm Credit Administration and put out for comment May 8 would let them make both debt and equity investments in a range of projects, such as schools, hospitals, and infrastructure, provided they are in rural communities.
The banking industry fiercely opposes the rule, arguing it would divert Farm Credit System lenders from their core mission of lending to farmers and move them into lines of business already served by banks.
Banking advocates see the proposal as the latest attempt by the Farm Credit System to broaden its powers through regulation, its attempts to do so through legislation having fallen short.
But Ken Auer, the president and chief executive of the Farm Credit Council, a trade group representing Farm Credit lenders, said small-town banks are not necessarily meeting the needs of rural communities, because many are too small to finance large projects, like hospitals.
"This rule provides another way" for Farm Credit lenders "to provide a flow of capital into rural areas," Mr. Auer said. "This is not about helping the Farm Credit institutions, but helping the rural communities."
The proposed rule, if approved, would make permanent a pilot program that began in 2005. Under the rule, system institutions would be able to team up to buy bonds for health-care services, infrastructure improvements, quality-of-life projects, and other economic opportunities that are "meaningful to rural residents" and contribute "to a strong agriculture," Nancy Pellett, the chairman of the Farm Credit Administration, said in a press release issued last week.
The agency gave the rule initial approval on May 8, marking the beginning of a 60-day comment period.
Additionally, the system's lenders would be able to have equity investments into rural-area venture capital firms. A final clause in the rule would allow institutions to have other investments approved upon request.
The pilot program allowed institutions in the system to make investments in rural communities on a case-by-case basis.
In the three years of the program 37 institutions participated, including ArborOne Financial in Florence, S.C. ArborOne helped two rural communities build small critical-access hospitals in Arkansas and Minnesota valued at $16 million each by buying bonds issued for the projects, said Jack Shuler, ArborOne's president and CEO.
Mr. Shuler disagrees with the banking industry's contention that Farm Credit lenders would stray from their mission of helping farmers and ranchers by investing in rural development projects.
"We think for farmers to survive, rural towns have to be strong and viable," he said. "This ties very well together with our mission."
He said ArborOne is looking to do other service-oriented investment deals under the program, such as more hospitals or water-treatment plants, mostly because those have the extra advantage of being eligible for guarantees by the Department of Agriculture.
Banking industry officials say there is nothing in the proposed rule that would prevent Farm Credit lenders from investing in large-scale commercial projects. Mark Scanlan, director of the Independent Community Bankers of America's Office of Agriculture and Rural Policy, said some lenders that participated in the pilot program took out advertising space announcing their ability to invest in commercial projects such as hotel and convention space, multifamily housing developments, and industrial parks.
"This is basically a huge power grab," Mr. Scanlan said. "This is a shift away from being a government-secured enterprise focusing on farmers and ranchers into a generalized rural-America lender."
Banking advocates also oppose the rule because it would apply to communities with 50,000 residents or less, whereas the system's home loans can be made only in towns with 2,500 residents or less.
"They can get into some reasonably good-sized cities under that rule," said John Blanchfield, director of the American Bankers Association's Center for Agriculture and Rural Banking.
The banking industry and Farm Credit lenders have been sparring for years over Farm Credit System expansion.
Farm Credit lenders scored an important victory earlier this year when the Farm Credit Administration gave final approval to a rule that grants them greater ability to lend to agricultural processors, such as juicing factories or ethanol plants.
But the banking industry won a major battle when it succeeded in keeping some key Farm Credit-supported provisions out of new farm bill recently passed by the House and Senate.
The Farm Credit System was seeking the ability to offer mortgages both in towns with populations of up to 6,000 and to any business related to renewable energy, but those provisions ultimately omitted from the legislation. (President Bush vetoed the bill Wednesday because of its $300 billion price tag, but Congress says it has enough votes to override the veto.)
In a press release issued last month, ICBA chairman Cynthia Blankenship commended Congress for "excluding provisions that would have diverted the Farm Credit System's focus away from farm lending."
"ICBA adamantly opposes allowing the Farm Credit System's lenders to become the equivalent of commercial banks while retaining tax and funding advantages as government-sponsored enterprises," said Ms. Blankenship, who is also the vice chairman and chief operating officer of the $250 million-asset Greater Southwest Bancshares Inc. in Irving, Tex.
