CUNA Regulatory Comment Call
August 15, 2003
Revisions to Farm Credit System Lending
(NOT A MAJOR RULE)
- The Farm Credit Administration (FCA) has issued a proposal amending its rules regarding non-system institutions, such as credit unions, with the goal of facilitating cooperation within the Farm Credit System in order to provide affordable credit to farmers and ranchers.
- The proposed rule addresses a number of issues, including the following:
- A request for comment on how non-system lenders, such as credit unions, can demonstrate that they are significantly involved in agricultural lending, which is required in order to participate in the Farm Credit System.
- Allowing non-system lenders the ability to apply for services from any Farm Credit Bank or the agricultural credit bank (collectively referred to as System Banks), regardless of where they are located.
- Additional disclosures from System Banks that would be available to non-system lenders, which would provide information to determine if non-system lenders are treated equitably, as compared to lenders within the System.
- Allowing System Banks to disclose the identity of non-system lenders.
- Changes to the risk-based capital requirements that reduce the amount of capital that a System Bank must hold against loans to non-system lenders that are regulated financial institutions to the same level that now applies to lenders within the System.
The Farm Credit Act of 1971 (Act) authorizes System Banks to fund and discount loans for certain non-system lenders, which include credit unions. The loans are generally made to various types of farmers and ranchers, with maturities of up to ten years in most cases.
In April 2000, the FCA issued an advance notice of proposed rulemaking (ANPR) to solicit comments on revising Farm Credit lending requirements in order to further develop relationships with non-system lenders so that farmers and ranchers will have better access to credit. This provided the FCA with an opportunity to raise issues and to receive comments on these issues prior to publishing a proposed rule. Click here for a copy of CUNAs Regulatory Comment Call for more information regarding the ANPR, and click here for a copy of CUNAs comment letter that was submitted in response to the ANPR.
As a result of the comments received in response to the ANPR, the FCA has now issued a proposed rule. This proposal addresses the issues raised in the ANPR, as well as other issues that will affect non-system lenders, such as credit unions.
DESCRIPTION OF THE PROPOSED RULE
The Act required FCA to issue rules to assure that the funding and discount services of the System Banks are available on a reasonable basis to any non-system lender, such as a credit union, that is significantly involved in lending for agricultural or aquatic purposes. The FCA current rules impose a threshold with regard to significantly involved to require that the non-system lender maintain at least fifteen percent of its loan volume, at a seasonal peak, in loans and leases to farmers, ranchers, and aquatic producers. Such lenders that do not meet this threshold may still have access to the System Banks, but will not be assured of such access during those times when credit may be scarce.
FCA is not proposing to change the fifteen percent threshold. However, FCA is requesting comments on alternatives that would also reasonably demonstrate that a non-system lender is significantly involved in agricultural lending.
Choice of Farm Credit Bank
Currently, non-system lenders, such as credit unions, 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 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 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. FCA believes such competition will lower funding costs for the lender, which can then be passed on to the borrower.
Under the proposed rule, non-system lenders may not borrow from two or more System Banks at the same time. Non-system lenders must provide collateral and allowing more than one System Bank to provide services to that lender could pose safety and soundness concerns if the lender experiences financial problems or if there is a dispute over the collateral.
FCA rules require that non-system lenders, such as credit unions, be treated equitably by the System Banks, as compared to lenders within the System. However, this does not mandate equal treatment. Disparities in the cost of funds that are charged between non-system lenders and System lenders are permitted if attributed to differences in credit risks and administrative costs to the System Banks.
FCA proposes the following two changes to its rules with regard to disclosures so that non-system lenders understand this disparity and are assured that they are being treated fairly by the System Banks:
- Upon the request of the non-system lender, a System Bank must provide a copy of its policies, procedures, loan underwriting standards, and pricing guidelines with regard to non-system lenders. This would include the specific components that make up the cost of funds and the amount of each component in basis points.
- Upon the request of the non-system lender, a System Bank must explain the reasons for any variation in the overall funding costs between non-system lenders and System lenders. This would be between groups of lenders, as this proposal will prohibit System Banks from disclosing financial or confidential information about individual institutions.
Disclosure of the Identity of Non-system Lenders
The ANPR requested comment on whether System Banks should disclose the identities of non-system lenders. CUNAs comment letter supported such disclosures in an effort to provide borrowers information about credit unions and the additional credit options that are available. As a result, FCA is now proposing to 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. Each System Bank must adopt policies and procedures for disclosing the information and for obtaining and maintaining these consents.
Risk-based Capital Requirements
The FCA imposes risk-based capital requirements. Under current requirements, the amount of capital that a System Bank must hold against loans depends at least in part on whether the loan is to a non-system lender, such as a credit union, or to a lender within the System. Loans to non-system lenders receive a risk weighting of 100 percent while loans to System lenders receive a risk weighting of 20 percent. The result is that a System Bank must hold five times as much capital for loans to non-system lenders as compared to System lenders.
The ANPR requested comment on whether these risk-based capital requirements should be changed. In the comment letter filed in response to the ANPR, CUNA strongly objected to the disparity in capital requirements between non-system lenders and System lenders, pointing out that credit unions have a very strong safety and soundness record and regulatory structure that is comparable to other types of lenders.
In response to these comments, FCA is proposing 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. There will also be a further requirement that the obligation must have full recourse or another form of credit enhancement. This change is intended to reduce costs for System Banks that should ultimately reduce interest rates that are charged to borrowers, which should provide System Banks with greater incentives to expand lending to non-system lenders.
QUESTIONS TO CONSIDER REGARDING THE REVISIONS TO FARM CREDIT SYSTEM LENDING
- Current FCA rules assure that the funding and discount services of the System Banks are available to any
non-system lender, such as a credit union, that is significantly involved in lending for agricultural or aquatic
purposes. These rules impose a threshold with regard to significantly involved to require that the lender maintain
at least fifteen percent of its loan volume, at a seasonal peak, in loans to farmers, ranchers, and aquatic producers.
Do you have other suggestions for criteria that can show that a lender is significantly involved in agricultural lending?
- FCA is proposing changes that will require disclosures, upon request of a non-system lender, of a System Banks
policies, procedures, loan underwriting standards, and pricing guidelines with regard to non-system lenders, as well
as an explanation of any variations in funding costs between non-system lenders and lenders within the System. Will
this be sufficient to alleviate possible concerns of credit unions, as non-system lenders, that they will be treated
equitably as compared to System lenders? Is there other information that could be provided that would also help alleviate
- Are there other changes or alternatives that would improve a System Banks ability to serve a non-system lender,
such as a credit union? Please explain any changes or alternatives that you would suggest?
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com