CUNA Comment Letter

Proposed Rule on Farm Credit System Lending

VIA E-mail: reg-comm@fca.gov

October 10, 2003

S. Robert Coleman
Director - Regulation and Policy Division
Office of Policy and Analysis
Farm Credit Administration
1501 Farm Credit Drivet
McLean, Virginia 22102-5090

Re: Proposed Rule - Revisions to Regulations Regarding Farm Credit System (System) Lending to Other Financial Institutions (OFIs)

Dear Mr. Coleman:

The Credit Union National Association (CUNA) appreciates the opportunity to comment on the proposed rule regarding revisions to the rules on lending to OFIs. CUNA represents more than 90 percent of our nation's 10,000 state and federal credit unions.

Summary of CUNA's Comments

Risk-based Capital Requirements

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.

The Farm Credit Administration (FCA) has proposed that a non-system lender may receive a risk weighting of 20%, the same as for a System lender, if the non-system lender is a federal or state-regulated financial institution. CUNA supports this change.

In 2000, the FCA issued an Advance Notice of Proposed Rulemaking (ANPR) requesting comment on this issue. In our comment letter in response to the ANPR, we indicated that 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, therefore, receive similar risk weightings. We are pleased that the FCA has responded positively to our comments and now proposes to change these risk-based capital requirements.

The FCA has also proposed a further requirement that the obligation must have full recourse or another form of credit enhancement. 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, similar to bank and thrifts, are subject to examination and risk-based capital standards. We believe that this proposed further requirement for System lending could be cumbersome for credit unions and is simply not warranted.

Choice of Farm Credit Bank

Currently, a non-system lender, such as a credit union, must first apply to the System Bank that serves the area in which the non-system lender operates. If that Bank denies funding, or does not approve the application within 60 days, the lender may apply to another System Bank outside the area. The rules also allow a Bank to give consent to another Bank to provide services to the lender.

The proposed rule will allow the non-system lender to apply for services from any System Bank, regardless of where it is located. However, a System Bank must provide notification to a Bank in the territory in which the lender maintains its headquarters or the territory in which the lender has more than 50 percent of its loan volume. This will provide the other Bank with the opportunity to contact the applicant in order to offer its services.

CUNA supports this provision. We believe such competition will lower funding costs for the lender, which can then be passed on to the borrower.

Disclosure of the Identity of Non-system Lenders

The proposed rule will allow System Banks to disclose to the public the names, addresses, telephone numbers, and website addresses of non-system lenders that consent to the release of this information. In our comment letter in response to the FCA's ANPR that was issued in 2000 requesting comment on this issue, we indicated that for credit unions that serve as non-system lenders, 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. We are pleased that the FCA has responded positively to our comments and now proposes to include these disclosure provisions in the rules regarding lending to OFIs.

Thank you for the opportunity to comment on the proposed rule regarding revisions on lending to OFIs. If you or other staff have questions about our comments, please give me a call at (202) 508-6732.

Sincerely,

Jeffrey Bloch
Assistant General Counsel