ACRE could ease mounting borrowing costs in rural America, lawmakers say

A bipartisan bill offering tax relief for rural lenders could partially “offset the unlevel play fields” facing community banks in rural areas, but more regulatory reforms are needed to cushion against adverse economic conditions. 

“Community banks specifically face mounting regulatory burdens that make banking less efficient and more costly,” says Mark Scanlan, vice president of agriculture and rural policy of The Independent Community Bankers of America, ICBA. “The spike in interest rates from the Federal Reserve’s successive rate hikes has made the cost for production loans and mortgage loans much more expensive.”

The Access to Credit for our Rural Economy Act, proposed in May by Reps. Randy Feenstra (R-Iowa) and Wiley Nickel (D-N.C.), would amend the IRS code to exempt community banks from taxes on earned interest from agricultural real estate loans, already enjoyed by competitors, such as the Farm Credit System institutions and credit unions.

“ACRE will allow community banks to lower the interest rates on farm real estate loans and rural housing loans,” Scanlan says. “The rate reduction would be significant and helps producers, particularly young, beginning, and small farmers who need greater assistance to strengthen their operations.”
 
ACRE will also help community banks lower the mortgage costs on farm real estate loans and rural housing loans in towns of population fewer than 2,500 and for mortgages less than $750,000.

“We need to give our main street lenders much-needed flexibility to offer agricultural and home loans at affordable rates to grow our rural communities,” Rep. Feenstra says in a statement.

This legislation would expand access to affordable agricultural and home loans to over 4,000 rural communities nationwide and save family farmers and producers over $400 million in annual interest expenses, according to the American Bankers Association.

A financial safety net, more reforms

While ACRE represents a step in the right direction, a holistic approach is needed to help rural communities thrive and avoid loan defaults.
From adverse weather to lower commodities prices, businesses in rural America and the agricultural sector face unique challenges. Higher risks mean more expensive loans.

Community banks are bracing for possible fallout in their farm and ranch operations after a February update by the  USDA projected that net farm income will drop by 16%, or $25.9 billion, from 2022 to $136.9 billion in 2023. 

“Ensuring a robust crop insurance program is in place is crucial to the agricultural sector and for community banks,” Scanlan says. “Crop insurance allows farmers to repay their loans and maintain access to credit. ” 

ICBA has also advocated for the passage of a new farm bill, which provides a safety net for farmers and ranchers. 

Other suggestions for policymakers include streamlining USDA-guaranteed farm and rural development loan programs, reducing the regulatory burden to avoid passing higher loan costs to consumers, and opposing the expansion of the Farm Credit System.

This can be done by increasing the loan limits on USDA-guaranteed farm loans to $3.5 million for farm real estate loans and $3 million for farm operating loans. 

“This would help producers deal with dramatic increases in farmland prices in recent years and higher inflation-driven production expenses,” Scanlan says.
ICBA has also proposed a “USDA Express” loan program, which would allow lenders, in exchange for a lower guarantee of 50% to 75%, to receive USDA loan approval within 36 hours.

“Lenders would make the credit decision, allowing for a quicker turnaround time while serving Congress’ objective to expedite credit access for producers,” Scanlan says.
Bankers also fear that the cost of loans and mortgages is likely to increase after the Consumer Financial Protection Bureau (CFPB) enacts in the coming years the Small Business Data Collection Rule, known as Section 1071. Under the rule, the Dodd-Frank Wall Street Reform and Consumer Protection Act amended the Equal Credit Opportunity Act (ECOA) to require financial institutions to compile, maintain, and submit to the Bureau certain data on applications for credit for women-owned, minority-owned, and small businesses.

“If implemented, financial institutions would be required to collect and report data on credit applications that could compromise a customer’s financial privacy and would impose significant compliance costs on community banks and other lenders,” Scanlan says.

Rep. Freenstra did not respond to requests for an interview.