U.S. Senator Herb Kohl today said the Federal Deposit Insurance Corporation's (FDIC) new guidelines on farm loans are "a good first step" to ensuring that agricultural lending is eased. The guidance was issued in response to questions raised by Kohl during a Senate Banking Committee hearing with FDIC Chairwoman Sheila Bair on December 1st. Kohl was responding to concern from Wisconsin farmers and agricultural lenders that regulators were discouraging community banks from carrying farm loans, which they consider higher risk. The FDIC oversees banks and savings institutions to maintain stability in financial and lending markets and monitors compliance with consumer protection laws.
"I'm glad to see that the FDIC responded so quickly to our concerns over the freeze in farm credit. These guidelines will encourage banks to work with farmers to keep their businesses viable, relying on the sound judgment and good faith of our community lenders who know that no two situations are alike," Kohl said.
According to the FDIC, troubled farm loans are at their highest level in 17 years. Approximately two percent of farm loans are in trouble. Often, the collateral for operating loans is the farm itself, so if a farmer defaults on the loan they are at risk of losing their business and their home. Because default rates are on the rise, several banks told Kohl that regulators are seeing farm loans as suspect, and discouraging community banks from carrying farm loans. Kohl urged Bair at the Banking Committee hearing to work with banks to make sure farmers have access to credit; Bair indicated that the FDIC would be open to creating guidelines specific to agriculture lending, similar to what they have done to ease mortgage and commercial lending.
The FDIC's announcement was sent to all FDIC-supervised banks and includes guidance that says:
· Banks should not rely solely on agriculture real estate as collateral, but should pay attention to a farmer's cash flow situation.
· Banks should not refuse credit to sound borrowers because of business segment or geographic location. Loan decisions should be based on the creditworthiness of the individual borrower, consistent with prudent management of credit concentrations.
· Banks should work with borrowers. In the case where a farm operation is struggling, the financial institution should work with the borrower to restructure loans where appropriate.
Kohl said he will continue to monitor the FDIC's efforts to improve agriculture lending.