WASHINGTON — Community bankers on Monday blasted the Farm Credit Administration’s proposal to grant national charters, telling the Senate Agriculture Committee that the controversial plan could drive them out of business.

“The proposal is driven by the large institutions within the Farm Credit System who will have the financial leverage and resources to drive smaller FCS associations out of business while driving some commercial banks either out of agriculture lending or out of business,” testified Dale Leighty, president of the First National Bank of Las Animas (Colo.). He said most of his bank’s $60 million of loans are agricultural credits.

Under a proposal that the agency issued last month, any of the 158 Farm Credit lenders could apply for a national charter, which would let it lend beyond its current regional boundary.

FCA Chairman Michael M. Reyna argued that national charters are essential to the system’s health. Limiting lenders to specific regions makes them vulnerable to local economic downturns, he said.

Unlike Farm Credit lenders, commercial bankers “can abandon agriculture during recessions and lend instead to other sectors of the economy where the profit is greater and the credit problems are fewer,” Mr. Reyna testified. “If the Farm Credit System is to remain a viable source of credit … it must be able to respond to changes in the market it serves.”

He said the proposal, which is open for public comment until March 18, “would help the system modernize its credit delivery structure and … maintain safe and sound operations.”

Bankers countered that encouraging expansion of the Farm Credit System — a network of government-sponsored lenders that serves farmers and agriculture-related businesses — would lead to unfair competition with the private sector, jeopardize the system’s safety and soundness, and give farmers no benefit.

“System institutions will consistently underprice credit on large deals in order to get the business. We have many documented cases of this practice,” testified Philip Burns, chairman of the $80 million-asset Farmers and Merchants National Bank in West Point, Neb.

The bankers’ complaints were supported by Rep. Jim Leach, the former House Banking Committee chairman who has criticized the national charter initiative.

“It is preposterous … to massively change the nature of rural finance under the assumption that America’s financial companies do not have the capacity to serve our market economy,” Rep. Leach testified. “This proposal should be absolutely rejected.”

Rep. Leach asserted several times that the national charter would “socialize credit” and let Farm Credit lenders get into auto, business, and “any other kind of loan you can visualize.”

Mr. Reyna said such concerns are unfounded, and he emphasized that Farm Credit institutions would remain single-industry lenders under the proposal.

It was not clear whether Senate Agriculture, which has oversight jurisdiction of the FCA, would be swayed by the bankers’ arguments. Sen. Michael Crapo, R-Idaho, and fellow panel members focused on how national charters would affect farmers’ access to credit.

Rep. Leach told Sen. Crapo: “I don’t see how this enhances farmers’ access in any way.”

The agency had planned to start granting national charters in January under a rule it adopted last summer. But it shelved the plan in October after lawmakers slammed the agency for issuing the rule without first consulting Congress or the Treasury Department, and for bypassing the normal review and comment periods. The agency republished the proposal last month.

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