WASHINGTON, D.C. — Legislation introduced in the U.S. House in late April could lead to lower interest rates for rural real estate borrowers, according to the Congresswoman who sponsored the bill.

 

The Enhancing Credit Opportunities in Rural America (ECORA) Act was introduced by Rep. Lynn Jenkins (R-Kan.). A similar measure she sponsored last fall didn’t receive a vote on the House floor. The current bill was assigned to the House Ways and Means Committee on April 27.

 

ECORA (House Resolution 2205) stipulates when a local community bank lends to a farmer and the loan is secured by agricultural real estate, interest on the loan is not taxable, Jenkins said. In addition, interest on a bank loan secured by a single-family home that is the principal resident of the borrower isn’t taxable if the home is in a specified rural area or community.

 Interest from operating loans isn’t covered by the legislation. The bill creates a targeted tax incentive for agricultural and rural lending to help farmers and ranchers, she noted. “Agricultural production and the prosperity of farmers is critical to the local economies in rural communities,” Jenkins explained. “However, low commodity prices pose a serious threat to agriculture and the thousands of jobs connected to the sector in rural America.

 

“(The bill will result) in lower interest rates for qualified borrowers in those rural areas as producers continue to adapt to an environment of challenging commodity prices and other financial constraints.” Exempting loan interest from taxes gives banks an opportunity to work with farm borrowers, said Mark K. Scanlan, senior vice president of agriculture and rural policy for the Independent Community Bankers of America (ICBA).

 “The outlook for commodity prices over the next couple of years isn’t good,” he said. “There’s a growing level of financial tension. In general, if lenders have a little flexibility, they can stick with a borrower. This is going to help banks help farm customers stay in business.”

 

Since the economic downturn began a few years ago, farmers have seen their working capital and financial reserves erode, Scanlan said. “Lenders, in looking at a farmer’s loan application, want to see they have the ability to repay the loan,” he explained. “Things have become a lot more intense for people.

 “For some lenders in rural areas, all their loans are agriculture-related. It just raises a lot of red flags when you have situations of financial instability. There could eventually be pressures by regulators to reduce the concentration of agricultural loans for borrowers having trouble cash-flowing.”

 Net farm income has fallen from $123 billion in 2013 to $62.3 billion forecast for this year, according to the USDA. Strict mortgage and appraisal regulations are causing some banks to opt out of rural mortgage lending, the ICBA noted. The legislation would help rural community banks, said Robert Hartwig, legal counsel for the Iowa Bankers Assoc. “It would make (banks) more competitive and reduce the cost of capital for farmers,” he explained. “Many of our members would support the bill.”

 

Rural banks are focused on cash flow as they’re looking at potential loans, Hartwig said. “In general, balance sheets are still pretty good, especially if they own land. Even though land pricesin Iowa are down (about 6 percent annually over the last three years), our land out here is still extremely expensive. But it is harder for some borrowers without a land base. Off-farm income comes back into play more than in the past.”

 The number of problem cases rural bankers have to work with is small, Hartwig said.

 

“Lenders are very hands-on, very goal-oriented (with borrowers). They’re working to restructure debt and reach goals that are realistic. Times are tight and bankers are doing what they can to help farmers restructure debt,” he added.