Comment Letter on FCS Proposed Rule on Farmers' Notes

October 14, 2004

Mr. S. Robert Coleman
Director, Regulation & Policy Division
Office of Policy & Analysis
Farm Credit Administration
1501 Farm Credit Drive
McLean, Virginia 22102
via email to:

Dear Director Coleman: On behalf of the Community Bankers Association of Illinois ("CBAI"), I am submitting this comment letter in response to the Farm Credit Administration's recently proposed rule concerning the purchase or financing of Farmers' Notes by Farm Credit System ("FCS") institutions. With more than 500 financial institutions as members and more than 150 associate members, CBAI is among the largest state-organized financial institution trade associations in the United States. Of particular relevance is the fact that CBAI represents community banks that have close business ties with small businesses and suppliers in a state in which agriculture is a major professional and economic factor. CBAI's community-based financial institutions have a direct interest in the Farm Credit Administration's proposal. CBAI is not persuaded that there is a need for a federally-subsidized lender to gain authority to purchase or finance Farmers' Notes when such financing is a strong suit of community banks, particularly in agricultural states. The proposed rule would allow FCS entities to engage in financing in competition with, not in cooperation with, community banks. Although not necessarily intended by the Farm Credit Administration, the proposal threatens to take traditional, well-established financing relationships away from community banks. Agricultural producers and suppliers would be able to by-pass community banks and do business directly with FCS entities. From CBAI's perspective, the proposal provides no added value to agricultural producers and suppliers, because community banks already serve this market. It is potentially harmful to the safety and soundness of the banking system, because it diverts a conventional and steady source of credit business away from community banks in favor of the government-subsidized FCS at a time when many community banks are fighting numerous other financial competitors for safe and mutually rewarding banking relationships. It also further, and unnecessarily, harms the relationship between community banks and FCS entities by creating this added conflict of interests. CBAI urges the Farm Credit Administration to reconsider its proposed rule regarding Farmers' Notes. CBAI is not convinced that the need for the proposal, in any form, has been sufficiently established. In any event, no proposal should be advanced that allows FCS entities to secure agricultural financing business at the expense of community banks that are already serving this market. Any proposal should ensure that the role of community banks is protected, and that FCS entities are not allowed to by-pass community banks in the pursuit of providing financing to agricultural producers and suppliers. Thank you for your attention to these comments. Please feel free to contact me if you have any questions regarding CBAI's position on this proposal. Sincerely,

Jerry D. Cavanaugh
General Counsel
Community Bankers Association of Illinois

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