Pub. 5 2016 Issue 8

November 2016 17 l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s has risen even higher, to nearly 50%. The higher share attributable to FCS real estate lending, relative to the FCS’s non-real estate lending, reflects the greater tax advantage the FCS as a real estate lender – its profits from real estate lending are exempt from all corporate income taxation while its profits from non-real estate lending are subject to federal corporate income taxes. The leveling off in the growth of the FCS’s market share in recent years probably reflects a narrowing of the funding-cost differential between the FCS and private-sector lenders due to today’s very low level of interest rates. However, the FCS’s funding cost advantage will increase when rates begin to rise. Essentially, what has happened since 2000 is that the taxpayer-subsidized FCS has increasingly “crowded out” farm lending by taxpaying private-sector lenders. This crowding out has occurred without any public debate as to its desirability. The shift of farm debt from commercial banks to the FCS has had another unintended consequence – it has reduced the amount of loans that rural community banks can put on their books, which has undoubtedly been a factor driving consolidation among rural banks. Put another way, had the FCS’s market share held constant since 2000, commercial banks would be holding another $43 billion of farm loans on their books or servicing farm loans in that amount previously sold to Farmer Mac. How big a lender the FCS should be to American agriculture has become a pressing issue that Congress must address, and the sooner the better. The FCA adopts important regulatory review projects Twice a year the FCA updates its Regulatory Projects Plan – the regulations it proposes to study, revise, or even adopt over the next year. Here is the link to the list of the proposed and actual regulations in the FCA’s Fall 2016 Regulatory Projects Plan: http://www.fca.gov/law/perf_ plan.html Some pending regulatory projects should be of particular interest to bankers. Bank review of insider loans: This project will “consider whether the current regulations requiring [FCS] bank review of association insider loans is appropriate for the [FCS’s] current structure and serves to ensure compliance with applicable Standards of Conduct regulation.” As reported in the July FCW, I estimate that approximately 1% of the FCS’s total lending is to insiders – senior management and directors. Loans to insiders must be subject to closer scrutiny due to the great potential for abuse. Financing farm-related service businesses: This review will determine whether these regulations “provide the appropriate framework for determining eligibility and purposes of financing for service providers, including service providers within local food systems.” This regulatory review must be carefully monitored to ensure that in the guise of financing urban farmers the FCA does not open the door to FCS financing of a broader range of service providers who serve non-agricultural customers. Territorial concurrence: Presently, an FCS association cannot lend in another association’s territory without the other association’s consent. This review would determine whether “requiring notice or concurrence for loans extended in another association’s chartered territory are appropriate for the [FCS’s] current structure, lending practices and operating environment.” This review could revive the Horizons Project of a decade ago, which would have authorized FCS associations to engage in out-of- territory lending, unleashing unhealthy competition between associations. Similar entity authorities: This study, to be conducted early next year, “would consider whether revised or additional guidance is needed to clarify the authorities of [FCS] banks and associations to participate in similar entity loans.” The FCS’s abuse, especially by CoBank, of its similar-entity authority to lend to Verizon, AT&T, and other investor-owned businesses has sparked great concern among members of the Senate and House Agriculture Committees. It will be interesting to see the extent to which the FCA proposes to rein in FCS lending to “similar entities.” Attribution rules: This pending study “would consider whether to modify current attribution rules that are applied to determine when loans to a related borrower are combined and attributed to a borrower’s outstanding loans for lending and leasing limit purposes.” Given how credit problems can flow to parties linked by loan guarantees and shared ownership of assets, the FCS should err on the side of conservatism when combining credit exposures for the purpose of limiting credit exposures. “Due to [a] limitation of staff resources,” it appears that this most important project has been placed on hold. Report FCS lending abuses to: green-acres@ely-co.com Bankers are continuing to send FCW reports of FCS lending abuses, such as FCS loans for rural estates, weekend getaways, and hunting preserves. Email reports of similar lending abuses in your market to: green-acres@ely- co.com