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Kohl Questions FDIC Chair About Problems in Farm and Commercial Lending

Press Release

Location: Washington, DC

Senator Stresses Importance of Allowing Struggling Farmers Access to Credit & Protecting Community Banks' Ability to Lend to Small Business

U.S. Senator Herb Kohl today questioned Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila Bair about two issues affecting Wisconsin's economy during a Senate Banking Committee hearing this morning. The FDIC oversees banks and savings institutions to maintain stability in financial and lending markets and monitors compliance with consumer protection laws. Kohl raised concerns about problems in farm lending and commercial real estate lending in Wisconsin.

According to the FDIC, farmers are falling behind on their loans at a 17-year high. Approximately two percent of farm loans are in trouble. Often, the collateral for farm loans is the farm itself, so if a farmer defaults on an operating loan they are at risk of losing their business and their home.

"Because of the economy and because some farm loans are in trouble, several banks are telling us that regulators are seeing farm loans as suspect, and discouraging community banks from carrying farm loans. This attitude is hurting rural America without making the banking system safer. What is the FDIC doing to work with banks to make sure farmers have access to credit?" Kohl asked.

Bair said 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.

Kohl also expressed concern over tight credit for small businesses in Wisconsin. Because of the decrease in real estate prices, many commercial borrowers will not be able to refinance, possibly causing mass foreclosures and hurting banks nationwide. Community banks, which often have large real estate portfolios, are likely to be hardest hit by this downturn. Community bankers are uncertain about how regulators will treat commercial loans that they have on their books, making it difficult for them to lend to small businesses.

Kohl noted that last year, the FDIC and other regulators issued guidelines about when a bank can modify a commercial real estate loan, without penalty from examiners, to reach a prudent plan for borrowers to meet their obligations without freezing a bank's ability to make other loans.

"I have heard from bankers that the regulatory examiners are not always following these guidelines. What can be done to bridge the gulf between what is written here in Washington and what is actually happening at the local level? Is the FDIC serious about giving banks and borrowers a chance to work out these loans without freezing a bank's ability to make other loans?" Kohl asked Bair.

Bair indicated that the FDIC has tried to exercise flexibility with community bank loans, determining that regulators should not criticize loans when borrowers are not in default and work to restructure loans when borrowers fall behind. She noted that community banks' balance sheets are getting cleaned up as the country emerges from the credit crisis, and that an FDIC ombudsman is available to any specific institutions that have concerns about policies being applied appropriately.

Kohl will continue to work with regulators on these two issues so that Wisconsin's bankers, farmers and small businesses can continue to access credit.

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