A bill was recently introduced in Congress, known as the Enhancing Credit Opportunities in Rural America Act (“ECORA”) of 2021. ECORA was previously introduced in 2019, but did not move forward in the legislative process. Proponents intend ECORA to help lower the costs of financing farm and ranch real estate, thereby creating new opportunities for producers to borrow operating funds. Congressional representatives Ron Kind (D-WI) and Randy Feenstra (R-IA) introduced ECORA in the U.S. House. Senator Jerry Moran (R-KS) introduced the bill in the Senate. The bill seeks to amend the Internal Revenue Service code to assist certain financial institutions and the farmers and ranchers who borrow from those institutions.
Specifically, the text of the legislation proposes a removal of taxation on gross income from agricultural real estate loans or leasehold mortgages that are made by financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”). In other words, FDIC-backed banks will not pay tax on the interest they receive as a result of lending money for the purchase of agricultural land.
The type of FDIC-insured lending institutions the ECORA is primarily focused on benefiting are community banks. Community banks are locally owned and operated lending institutions that serve the needs of a community in a small geographic area. These types of banks are common in rural, lightly populated regions. Usually, community banks offer loans to small businesses, individuals, and agricultural producers within the community who may not qualify for a similar loan at a larger financial institution. However, community banks are often unable to provide borrowers with sufficiently favorable terms and low interests rates because community banks typically have limited financial resources. The goal is for the new tax exemptions to reduce overall lending costs for community banks, thereby providing an avenue for these banks to offer more competitive agricultural real estate loans to producers.
Providing certain agricultural real estate lenders with a tax exemption for specific types of income is not a new concept. The tax exemption proposed under the ECORA would offer community banks a similar exemption as has already been provided to the Farm Credit System (“FCS”). The FCS, which was established by Congress under the Federal Farm Loan Act of 1916, is the largest agricultural lender in the U.S. and provides agricultural real estate loans to many farmers and ranchers across the nation. Currently, the FCS is exempt from certain taxes, including the income earned from real estate lending. Because of the tax exemptions, the FCS is able to offer loans to producer-borrowers at more competitive rates.
According to ECORA sponsors, community banks would be able to provide agricultural real estate loans that offer more competitive rates if the ECORA became law. The sponsors s claim that the exemption from taxes on interest from agricultural real estate loans reduces the costs associated with making these loans, which enables community banks to provide loans that offer favorable terms and lower interest rates. Therefore, the representatives intend for the bill to allow producers to obtain real estate financing from community banks at loan terms and interests rates comparable to a loan made by the FCS.
Additionally, the proponents of the bill believe the proposed tax exemption will level the agricultural real estate lending market between the FCS and community banks. Currently, the FCS is able to provide agricultural real estate loans as a result of the savings the FCS receives from its tax exemptions. According to the sponsors of the bill, community banks could do the same with the savings from the proposed tax exemption because these banks could offer new loans and extend loan limits to more producers in the communities they service. Thus, supporters of the ECORA claim that farmers and ranchers will have more access to credit, meaning these producers would not have to rely solely on the FCS for an agricultural real estate loan.
The ECORA has some bipartisan support in Congress, as well as support from private financial organizations including the American Bankers Association and the Independent Community Bankers of America. According to the sponsors of the ECORA , the tax exemption would incentivize community banks to continue offering agricultural real estate loans to the farmers and ranchers within their communities. Furthermore, the representatives claim the tax exemption proposed under the bill offers a simple solution to help producers without implementing new government payments or programs. Although the proponents of the bill are looking for support from other members of Congress, the bill still has a long way to go and there is no guarantee this bill will become law. This article will be updated as warranted by new developments.
To read the ECORA Act, click here.
To track the ECORA Act as it progresses through the legislative process, click here.