Agricultural bankers will likely find themselves subject to additional reporting and disclosure requirements, courtesy of the Dodd-Frank Act and the Consumer Financial Protection Bureau the law established. But their biggest competition in rural America will not.
“We have the whole Dodd-Frank landslide headed our way,” the American Bankers Association’s John Blanchfield said in an interview with CFPB Journal. “For commercial lenders, including ag lenders, we are going to see increased reporting requirements in terms of who is the customer, how much did they ask for, how much did they receive – a lot of very intrusive questioning that will increase the time lenders spend with their customers and also increase their reporting burden.”
The Farm Credit System – with $160 billion in loans to 500,000 borrowers – “is exempt from 99 percent of all Dodd-Frank requirements, which gives them a tremendous advantage,” said Blanchfield, senior vice president at the ABA Center for Agricultural and Rural Banking.
The nation’s biggest agricultural lenders – including Wells Fargo and Bank of the West – will be subject to CFPB examination. In fact, 24 percent of all agricultural loans were made by banks with more than $10 billion in assets according to year-end 2010 data, the University of Illinois reports.
Other banks and credit unions also will fall under the CFPB’s consumer lending oversight in one way or another. Yet as a government-sponsored enterprise, Farm Credit doesn’t have to worry about an additional layer of regulatory scrutiny.
That’s because the CFPB is explicitly barred, by law, from having anything to do with any Farm Credit lender.
“It just points out the irony of that because the Farm Credit System has, over the last 10 to 15 years, has become a significant consumer lender,” Blanchfield said. “It just shows you how the politics in Washington favor one lender over another.”
He explained that the Farm Credit Administration, which regulates the FCS, convinced Congress that the Farm Credit System did not play a role in the financial crisis, and that the FCA “is such a superior examiner” that Farm Credit does not require any additional congressional oversight.
“It will cause bankers some heartache,” he said. “If they are not burdened by reporting requirements, disclosure requirements – a lot of the things I believe are coming to the banking industry, they will be able to pass those lower costs on to the customer.” Farm Credit already has a pricing advantage over bankers and other ag lenders because it can access lower-cost funding.
It has been a record year for U.S. agriculture, with U.S. Department of Agriculture projecting that net farm income will be up 25 percent from last year, to $114.8 billion. At the same time, the rapid rise in farmland values, particularly across the Midwest, has some bankers and regulators worried about a bubble.
For now, agriculture is helping rural banks. The profitability of banks with concentrations in agriculture improved in 2010. The average return on assets for agricultural banks was 0.88 percent in the fourth quarter of 2010, compared with 0.64 percent for all commercial banks, notes Paul Ellinger at the University of Illinois’ Department of Agricultural and Consumer Economics.
However, increased regulation may diminish the impact of these gains.
“While the financial health of agricultural banks has improved, these institutions face new and significant challenges,” Ellinger writes. “New regulations from the Dodd-Frank Wall Street Reform and Consumer Protection Act will add regulatory compliance costs. Typically, as a share of total operating costs, these compliance costs are greater for smaller banks. There will likely be continued pressure to merge institutions and gain potential cost economies and synergies.”