Note the second item under “New Business” on this agenda for a Farm Credit Administration board meeting tomorrow. The board will vote on a proposal it issued a year ago that would allow Farm Credit System institutions to purchase farm loans from failed banks being resolved by the FDIC. Specifically, the proposed rule would:

Permit System institutions with direct-lending authority to purchase individual, or pools of, eligible loans from the FDIC.

Require due-diligence reviews before and after the loan purchases to determine if the loans meet the eligibility and scope-of-financing requirements of the Act and FCA regulations.

Require that a System association obtain approval from its funding bank for individual loans or pools of agricultural loans that exceed 10 percent of the association’s total capital.

Require the System institution to offer membership status to borrowers whose loans are purchased, provided the loans meet the eligibility and scope-of-financing requirements of the Act and FCA regulations.

Require System institutions to provide borrower rights to borrowers with distressed agricultural loans.

Require divestiture, when financially feasible, of loans purchased (a) that are ineligible or (b) that are eligible but whose borrowers elect not to become members of the System institution.

Allow System institutions, which have authority to make long-term mortgage loans or short- and intermediate-term production loans, to purchase loans outside their chartered territory without receiving permission to do so from the System institutions in whose territories the loans are held. However, the purchasing System institutions would be required to notify these institutions of the purchase.

It’s a bitter pill to swallow for bankers, who don’t want any more competition from FCS lenders. I have written that the FCS should be phased out since the market no longer needs a government sponsored farm lender. On the other hand, this proposal will do some good in that it will provide another buyer for FDIC assets. That holds costs down, and ultimately means less cost to the banking industry.

If the rule is approved, it will be interested to see how many FCS lenders step up to buy FDIC loans from failed banks. In the last few years, most of the bank failures have not come out of the farm sector, so the amount of loans affected by this vote is relatively small. Nonetheless, I hate to see GSE’s gain additional power. I would much prefer to see steps taken which level the competitive playing field  between FCS lenders and traditional banks. That means either taxing FCS lender profits, or exempting profits from farm loans at community banks.