CUNA Comment Letter

CUNA's Letter to the Farm Credit Administration

June 19, 2000

Patricia W. DiMuzio
Director - Regulation and Policy Division
Office of Policy and Analysis
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102-5090

Re: Advanced Notice of Proposed Rulemaking (ANPR) – Revisions to Regulations Regarding Farm Credit System (System) Lending to Other Financial Institutions (OFIs)

Dear Ms. DiMuzio:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the ANPR regarding revisions to the regulations on lending to OFIs. The ANPR, which appeared in the Federal Register on April 20, 2000, requests comments on the appropriate risk weighting of System bank loans to OFIs, the public availability of the identities of OFIs, cross- district funding of OFIs, and ways to improve System banks’ funding of OFIs. CUNA represents more than 90 percent of our nation’s 10,600 state and federal credit unions.

Currently, the Farm Credit Act of 1971 imposes risk-based capital requirements on System Banks. Under these requirements, the amount of capital that a System bank must hold against loans depends at least in part on whether it is a loan to an OFI. Loans to OFIs, such as credit unions, receive a risk weighting of 100 percent while loans to other lenders within the System receive a risk weighting of only 20 percent. The result is that a System bank must hold five times as much capital for loans to credit unions as compared to loans made to other lenders within the System. This disparity could limit opportunities for some credit unions to serve farmers, ranchers, and other users of farm credit who are credit union members.

We do not believe there is any justification for requiring the holding of five times the amount of capital for loans to credit unions as compared to loans to other lenders within the System. A loan for a specific amount to a rancher or farmer, for instance, will generally have the same characteristics, regardless of whether the loan is made by a credit union or another lender within the System. If the loans have the same characteristics, then they generally entail similar risks and should both receive similar risk weightings.

The ANPR offers several alternatives for revising the risk weighting of loans. The ANPR suggests that loans to OFIs that are “regularly examined and have capital requirements similar to our capital rules, such as commercial banks, might qualify for a lower risk weighting.-- If the FCA pursues this alternative, we strongly urge that the risk weighting for credit unions be no higher than the risk weighting for commercial banks.

Credit unions have a very strong safety and soundness record that is at least as robust as that of any other type of financial institution and, like commercial banks, are subject to examination and risk-based capital standards. Credit unions are subject to prompt corrective action rules, which requires the National Credit Union Administration to impose or consider a series of mandatory or discretionary supervisory actions if the net worth of a credit union drops below certain levels. These are comparable to the prompt corrective action rules that must be followed by commercial banks. As required by Congress under the Credit Union Membership Access Act, credit unions will soon be subject to additional prompt corrective action rules that will establish risk-based net worth requirements for certain credit unions, based on the risk level of the credit union's portfolio of assets and liabilities. These rules are scheduled to take effect early next year.

Another alternative suggested by FCA would be to lower the risk weighting for non-System lenders if the lender pledges additional securities or if the lender agrees to meet certain capital requirements, as suggested by a System bank. As described above, credit unions are already subject to regulatory requirements regarding net worth. We believe that another layer of similar requirements for System lending would be cumbersome for credit unions and is simply not warranted.

The ANPR also requests comment on the public availability of the identities of OFIs, such as credit unions. Although we support the nondisclosure of the names of ranchers, farmers, and other individuals for privacy reasons, we do not believe that such concerns apply to the disclosure of the name of the credit union and the type of agricultural credit that is offered. We believe that the disclosure of the credit union’s name will have positive benefits because it will provide ranchers, farmers, and others with additional information about the benefits of credit union membership and the additional credit options that are available to them.

Thank you for the opportunity to comment on the ANPR regarding revisions to the regulations on lending to OFIs. If you or other staff have questions about our comments, please give me a call at (202) 218-7795.

Sincerely

Jeffrey Bloch
Assistant General Counsel