[Federal Register Volume 60, Number 126 (Friday, June 30, 1995)]
[Rules and Regulations]
[Pages 34090-34104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16097]
=======================================================================
-----------------------------------------------------------------------
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 618, and 620
RIN 3052-AB43
Organization; General Provisions; Disclosure to Shareholders;
Technical Assistance and Financially Related Services; Member Insurance
AGENCY: Farm Credit Administration.
ACTION: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA or Agency), by the Farm
Credit Administration Board (Board), issues a final regulation
governing Technical Assistance and Financially Related Services and
Member Insurance. Subpart A of the final regulation defines technical
assistance, financial assistance and financially related services and
clarifies what types of services the Farm Credit System (System or FCS)
institutions are authorized to provide. The final regulation maintains
the FCA's ability to regulate safety and soundness risks while allowing
FCS institutions greater flexibility to exercise statutory authorities.
The existing prior approval requirement is replaced with a list of
authorized services, a post-review process for all services that have
been authorized by the FCA, and a procedure for obtaining FCA
authorization to offer a new service that has not been previously
reviewed and authorized. The final rule replaces the FCA Board Policy
Statement on Out-Of-Territory Financially Related Services (FCA-PS-50
BM-10-June-93-03) and the FCA Bookletter on Out-Of-Territory
Financially Related Services dated
[[Page 34091]]
September 3, 1993. The final Member Insurance regulation clarifies
existing rules and reduces regulatory burdens wherever possible.
EFFECTIVE DATE: The final regulation shall become effective upon the
expiration of 30 days after publication in the Federal Register, during
which either or both Houses of Congress are in session. Notice of the
effective date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Linda C. Sherman, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)
883-4498, TDD (703) 883-4444,
or
Joy E. Strickland, Senior Attorney, Regulatory Operations Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: On October 31, 1994, the FCA proposed
amendments to its regulation on financially related services and member
insurance. 59 FR 54399. Under title I, section 1.12; title II, sections
2.5 and 2.12 (15); and title III, section 3.7 of the Farm Credit Act of
1971, as amended (the Act), the FCA is responsible for promulgating
regulations governing the offering and administering of technical
assistance, financial assistance, and financially related services
(hereinafter referred to as ``related services'') by banks and
associations.
Farm Credit System institutions have expressed a desire to serve
the evolving needs of farmers and ranchers more effectively through
their statutory authority for providing related services. The FCA
understands the System's desire to offer the fullest range of related
services allowable under statutory authorities, as long as safety and
soundness risks can be managed.
The FCA has concluded that, under most circumstances, it is
appropriate to replace the current prior approval requirement with
specific regulatory criteria for determining which services can be
offered and under what circumstances. However, in its role as a safety
and soundness regulator, the FCA will continue to review new services
in order to ensure that they are legally authorized and do not present
excessive risk to the System. The FCA believes this is a reasonable
approach and that it is impracticable to prescribe specific regulations
for new services that have yet to be offered by the System. Consistent
with the FCA's role as an arm's-length regulator, the final rule
requires an institution offering a service to assume primary
responsibility for the related services it provides. The FCA will
ensure safety and soundness and compliance primarily through use of its
examination and supervisory powers.
I. Regulatory Burden
The final regulation accomplishes a significant reduction in
regulatory burden for System institutions and reduces the FCA's
administrative costs of assuring compliance with the regulation. It
replaces an outdated prior approval requirement with regulatory
guidance that holds individual institutions more accountable for their
activities. The remaining regulatory costs are justified in order to
meet statutory requirements and address safety and soundness concerns.
II. Public Comments
The comment period on the proposed regulation at Sec. 618.8000
closed on December 30, 1994. The FCA received a total of 116 comment
letters from the public. These included 111 letters from System
institutions in addition to the letters from the Farm Credit Council
(FCC) on behalf of its membership; the American Bankers Association
(ABA); the Independent Bankers Association of America (IBAA); the
Savings and Community Bankers Association (SCBA); and Minnesota Mutual
Insurance Corporation (Minnesota Mutual). Prior to finalizing its
comments, the FCC received input and concurrence on its comments from
its membership and a work group established by System institutions to
study related services. The comments received from System institutions
included letters from directors/stockholders and employees of the
institutions.
Two additional letters were received after the comment period
closed, one from the Kentucky Bankers Association (KBA) and one from an
FCS association. Because the KBA's comments were essentially the same
as those made by the ABA, the responses to the ABA comments address the
comments made by the KBA. The FCS association's comments were
essentially the same as the majority of those received from other
System institutions and are similarly addressed.
With a few exceptions, the comments from System institutions and
the FCC were overwhelmingly supportive. They concluded that the FCA has
achieved an appropriate balance between its statutory responsibility to
focus on safety and soundness issues and the need to remove unnecessary
regulatory burdens. They identified the reduction in prior approval
requirements as an example of significantly reducing regulatory burden.
The exceptions include disagreement with the proposed rule on out-of-
territory related services, and 11 System institutions suggested
additional revisions to the process, the eligibility criteria, and the
insurance issues.
The trade industry groups were more critical of the proposed
regulation. They expressed concerns that it exceeds the System's
statutory authorities, that it may create possible competitive
disadvantages for commercial banks, and that it may pose safety and
soundness risks by reducing involvement by the FCA and System banks.
The trade industry groups also commented on a number of specific points
in the proposed regulation.
The following narrative summarizes general concerns raised by the
trade industry groups (ABA, IBAA, TBA, and SCBA) about the proposed
regulation, addresses specific comments received on the various
sections of the regulation during the comment period, and responds to
those comments.
III. General Comments
The trade industry groups are concerned that the proposed
regulation would allow System institutions to exceed existing statutory
authorities; they believe any expansion of authorities would be more
appropriately addressed through legislative means. They further believe
the proposed rule allows System institutions greater latitude to
provide services that are not justified by the needs of the borrowers.
The IBAA also believes that elements of the proposed rule may increase
safety and soundness risks or allow a System institution to compete
unfairly against private corporations. It concludes that these changes
would cause the FCA to give up much of its mandated regulatory
oversight and power to control abuses of these functions. Finally, the
trade industry groups suggest that, with this proposal, the FCA is not
only permitting but also encouraging the System to violate the statute.
The FCA believes the Act clearly authorizes System institutions to
offer a variety of related services, subject to regulation by the FCA
for safety and soundness concerns. Further, the Supreme Court has
recently confirmed that a bank regulator is to be given great deference
in interpreting the statute it is charged to enforce.1 The statute
clearly
[[Page 34092]]
authorizes System institutions to provide financial and technical
assistance to borrowers, applicants, and members and to make available
to them related services appropriate to their on-farm and aquatic
operations under regulations prescribed by the FCA. Therefore, the FCA
believes it is well within its authority to define by regulation such
related services, the conditions under which they can be offered, and
to whom they can be offered. Furthermore, the FCA believes that its
interpretation of these statutory authorities must take into account
changing conditions in the agricultural and financial sectors. The
FCA's role as a safety and soundness regulator requires that it openly
recognize changing conditions and respond accordingly.
\1\ See, Nations Bank v. Variable Annuity Life Insurance
Company, 786 F. Supp. 6639 (SD Tex. 1991), rev'd 998 F. 2d 1295 (5th
Cir. 1993), rev'd U.S. Dkt. No. 93-1612 (Jan. 8, 1995).
---------------------------------------------------------------------------
The IBAA commented that it has long opposed measures to expand the
powers granted to System institutions and objected to the publication
of the proposed rule prior to a new congressional session. The FCA
disagrees and points out that the final rule is well within the FCA's
statutory authority and, like the statute, the proposed regulation
limits authorized services to the on-farm operations of persons or
entities eligible to borrow from the System. Further, farm related
businesses and rural home borrowers were specifically not included as
eligible recipients for related services.
The trade industry groups also commented that the proposed rule
would lead to, or encourage, predatory loan pricing by System
institutions. However, much of the comment by the ABA is not relevant
to the regulation being promulgated because the objection deals
directly with loan pricing, not related services. They also objected to
a statement in the preamble suggesting that the rule would allow
related services even if priced at cost or at a slight loss in order to
increase customer satisfaction or attract new customers. The ABA
contends that this aspect of the proposed rule encourages the bundling
of below-cost services with loans in such a manner that loan packages
would be priced below market rates. Contrary to this assertion, the
proposed and final rule discourage such packaging. For example,
Sec. 618.8015 retains the existing requirement to disclose separately
the cost of any related service from loan fees and, if the service is
required as a condition of the loan, to inform the recipient that
purchasing the service from a System institution is optional. Thus, the
regulation does not encourage related services to be bundled with
loans. In addition, in most cases there is no requirement that the
purchaser have a lending relationship in order to receive a related
service.
The IBAA claims that for safety and soundness reasons below-market
pricing of services should not be allowed and that the FCA should
oversee the pricing of such products. The FCA believes that the
feasibility analysis required by Sec. 618.8020 will ensure that the
pricing of each related service is justified. Each institution offering
such a service must conduct a feasibility analysis, which includes
pricing and an evaluation of the market. Related service programs will
also be examined by the Agency to ensure they are being operated in a
safe and sound manner.
A. Section-by-Section Analysis of Comments Received
1. Section 618.8000--Definitions
The FCA received several comments on the definition of related
services in proposed Sec. 618.8000(b). The ABA believes the definition
exceeds what is contemplated by the statute because it contains the
phrase ``pertains to'' the recipient's on-farm operations rather than
the phrase ``appropriate to'' that is used in the existing regulation
and the statute. The ABA contends that ``appropriate to'' is narrower
and more carefully tailored than ``pertains to'' and requires a
considerably stronger nexus between the farm operation and the related
service. The FCA did not intend for the definition of related services,
as proposed, to expand the types of services that may be provided under
the statute, but believed that the proposed rule defined related
services using a more common term. In order to be responsive to the
commenters and alleviate any concerns that the definition of related
services has expanded System institutions' authorities beyond those
granted in the statute, the definition in the final rule has been
modified to mirror the wording in the statute.
The IBAA commented that although the proposed regulation defines
the term ``related services'' to include, but not be limited to,
technical assistance, financial assistance, financially related
services, and insurance, it did not specify what types of activities
these terms might encompass. Further, the IBAA is opposed to the
addition of ``financial assistance'' as a related service because it
believes financial assistance should be addressed through regulations
governing lending or similar functions. The FCA noted in the proposed
regulation that several terms are used in the statute to describe a
category of non-lending type activities in which System institutions
are authorized to engage. Financial assistance and technical assistance
are two such terms used in section 3.7(b) of the Act to describe the
non-lending services banks for cooperatives are authorized to provide
to their customers. For the purpose of this regulation, financial
assistance does not include making loans or leases or any other type of
lending activity. Confusion over these terms is the primary reason that
the FCA proposed using a single term to reference the types of services
that may be provided by the different types of System institutions. In
fact, the IBAA's comment further supports the need for one general term
rather than continuing to use several terms, such as financial
assistance, that could have different meanings. The IBAA's arguments
for change were not convincing; therefore, the final regulation remains
as proposed in this regard.
The FCC agreed with the FCA's statement in the proposed preamble
that related services should be broadly construed. The FCC also agreed
that the definition should not include advertising or purely
promotional activities, but it suggested that services provided by
third parties (with the cooperation of a System entity), which present
little, if any, risk of financial liability to the System entity,
should likewise not be considered ``related services.''
The FCA confirms its statement in the preamble to the proposed rule
that advertising and purely promotional activities are not intended to
be included within the definition of related services. The FCA further
acknowledges that the distinction between promotional activities and
related services can be unclear. Although it is easy to conclude that
passing out pens with a Farm Credit logo is a purely promotional
activity, and that providing farm recordkeeping for eligible borrowers
is a related service, there are many activities that will fall in
between.
The FCA also recognizes that System institutions participate in
various business arrangements through third parties, and it is often
difficult to determine whether an institution is, in fact, offering a
related service by cooperating with a third party provider. Assisting
individual borrowers in preparing their tax returns is clearly a
related service, whereas renting out an association conference room for
a 4-H Club lecture is not a related service. However, when the service
is provided by a third party in cooperation with a System institution,
the line between
[[Page 34093]]
what is or is not a related service will often be more difficult to
draw.
The FCA concludes that neither advertising and promotional
activities, nor services provided by third parties, should be
automatically excluded from the definition of related service in the
final rule. Rather, a case-by-case evaluation must be made for the
activities based on a number of factors. The level of risk in a
particular service, even if provided by a third party, is not the sole
deciding factor as to whether a proposed service meets the definition
of a related service. Likewise, the mere existence of a third party as
the service provider is not determinative as to whether an activity is
or is not a related service. In addition, the lack of profitability is
not necessarily determinative when evaluating whether promotional
activities are related services. Various factors (such as the nature of
the activity, who provides the service, and the level of involvement
and responsibility of both parties) should be used in evaluating
whether an activity is properly considered a ``related service.'' The
statute requires that related services provide assistance to eligible
borrowers in managing their on-farm operations and should always be
used as a guide when questions arise.
Four associations commented that the FCA should define related
services in such a way as to eliminate activities that are necessarily
incidental to lending or leasing activities (such as appraisal
services) and are reasonably and customarily performed in the business
of rural or agricultural lending and leasing. These associations
contend that such an exclusion from the definition of related services
would eliminate unnecessary regulatory burdens such as the need for
approving the feasibility of activities that are inherently feasible
because they are normal and customary activities of institutions in
their primary business of lending and leasing.
The FCA addressed this issue in the preamble to the proposed
regulation. See 59 FR 54402, October 31, 1994. The commenters have
provided no information that would cause the FCA to resolve this issue
in a different manner. The fact that an institution customarily
performs a service as part of its lending function does not
automatically mean that the service, when provided on an independent
fee basis, would not be a related service. Nor does it necessarily
follow that establishing a program to provide a service on a fee basis
will always make good business sense for an institution. Each activity
must be evaluated to determine the statutory authority that enables the
institution to engage in the activity and what statutory restraints
exist on the exercise of that authority. As discussed in the preceding
paragraph, there is no bright-line test or absolute standard that the
Agency could adopt in the regulation to categorically exclude certain
types of activities. The FCA is not convinced that it is necessary to
exclude certain activities from the definition of related services;
thus, the definition has been adopted as proposed.
The FCC commented that the definition of System banks and
associations in proposed Sec. 618.8000(c) should be modified to
incorporate service corporations in order to eliminate any uncertainty
as to whether those entities are authorized to offer related services.
In the preamble to the proposed rule, the FCA noted that because
section 4.25 of the Act grants service corporations the powers and
authorities of Farm Credit banks, they would continue to be authorized
to provide related services. In addition, Sec. 611.1136 of this chapter
provides that service corporations are subject to the regulations
governing banks and associations. Nevertheless, although the FCA does
not believe it is required, service corporations have been included in
the final definition of ``System banks and associations'' in order to
eliminate any uncertainty.
Unless specifically excepted, all provisions of part 618 apply to
service corporations, and service corporations may offer those services
that System banks are authorized to offer. With regard to eligibility
criteria, service corporations are authorized to provide services to
entities eligible to borrow from the owners of the service corporation,
as prescribed in Sec. 618.8005(d). The FCA notes, however, that certain
service corporations may be restricted by charter or the special
purposes for which they were created from offering related services or
certain types of related services. For example, service corporations
are prohibited by section 4.25 of the Act from offering insurance.
Service corporation charters may also include special restrictions on
the manner in which they can offer related services or on the manner in
which certain provisions of part 618 of this chapter apply to their
offering of services. Finally, the Related Services List may also
contain special conditions that affect how a service corporation can
offer a related service.
2. Section 618.8005--Eligibility
The IBAA commented that the proposed regulation was not clear as to
whether marketers and processors would be eligible for related services
regardless of whether they were eligible for borrowing. It further
stated that if such entities were eligible for related services, but
not eligible for borrowing, then the eligibility criteria were too
vague and ambiguous. The IBAA believes that marketers and processors
should only be eligible for related services if a debtor-creditor
relationship already exists between the entity and a System
institution.
In response, the FCA notes that Sec. 618.8005(a) of the proposed
regulation provides that Farm Credit banks and associations may offer
related services to persons eligible to borrow as defined in
Sec. 613.3045 of the regulations, which provides the requirements for
on-farm throughput for lending eligibility. Therefore, marketers and
processors must be eligible to borrow from a System institution in
order to receive related services. On the other hand, the Act does not
require that only current borrowers may receive related services (apart
from credit life and disability insurance), and the Agency declines to
impose such a limitation by regulation. Accordingly, the suggestions
regarding the eligibility of marketers and processors were not adopted.
The FCC and two associations recommended that Sec. 618.8005 be
revised to enable System banks and associations to provide related
services to farm-related businesses and rural homeowners. The FCA
believes that a change in the Act is required before farm-related
businesses and rural homeowners could be considered eligible recipients
of related services. Currently, the Act restricts related services
offered by Farm Credit banks and associations to those that are
appropriate to on-farm or aquatic operations. Farm-related businesses
and rural homeowners who do not have farm or aquatic operations would
not be eligible for services that must, by statute, be appropriate to
such operations.
Numerous System commenters expressed support for proposed
Sec. 618.8005(d), now Sec. 618.8005(e), which authorizes the provision
of related services to recipients that would not otherwise meet the
requirements of Sec. 618.8005(a) through (c). As proposed, this
provision was limited to services provided that were a ``part of or
pertained to'' a transaction between an eligible borrower and the
recipient of the service. Based on a concern that this language might
permit an expansion of related services beyond the Agency's intentions,
the language has been modified in the final rule. The rule now states
that the service may be provided only if it is ``requested by the
eligible
[[Page 34094]]
borrower or necessary to the transaction.'' As a result, appraisals,
loan servicing, and other services that are necessary to a transaction
with an eligible borrower may be provided to any party to the
transaction. In situations in which the related service may be useful,
but perhaps not necessary, it may be provided to any party to the
transaction at the request of the eligible borrower.
The IBAA does not believe that this authority is necessary or
justifiable and believes that it constitutes an unwarranted expansion
of authorized services. As noted in the preamble to the proposed rule,
this provision was included in order to accommodate eligible borrowers
who were not able to receive related services directly due to
circumstances involving their transactions with non-eligible entities.
See 59 FR 54402, October 31, 1994. For example, an eligible borrower
who needs an appraisal of agricultural real estate in connection with a
loan application with a commercial bank or the former Farmers Home
Administration (FmHA) is typically precluded from obtaining it, because
the commercial bank regulations and FmHA procedures generally require
that the eligible borrower's appraisal be procured by the lender. The
FCA has determined that the purposes of the Act would be frustrated if
eligible borrowers could not receive related services solely because
the regulations of other Federal agencies or the transactional
requirements with other entities preclude them from directly
contracting for the services from System institutions. Further, the FCA
has concluded that System institutions are authorized by statute to
provide related services for persons eligible to borrow, even if a non-
eligible entity is involved in the transaction and may be the party
that actually obtains the service on behalf of the person eligible to
borrow.
For these reasons, the FCA believes that Sec. 618.8005(e) is
necessary in order to ensure that eligible borrowers are able to
receive related services and is justified by the Act under factual
situations presented to the FCA. The FCA further believes that this
provision, as modified in the final rule, ensures that the System will
continue to be able to appropriately serve farmers and ranchers as
Congress intended.
One of the associations that commented favorably on
Sec. 618.8005(e) suggested that this authority could be used in
situations in which an intermediary business would be providing a
bundle of services that include some offered by System institutions.
However, it noted that in some instances it may be difficult if not
impossible to trace the end-user of the information and services.
Therefore, it urged the FCA to interpret Sec. 618.8005(e) to allow
services to be provided to those business entities because the services
would ultimately benefit eligible farmers and ranchers and members of
the agricultural community. The FCA is unable to interpret
Sec. 618.8005(e) to allow related services to be provided in situations
in which the transaction and the eligible borrower receiving the
services cannot be readily identified as such. Although the FCA
recognizes that farmers and agriculture in general may benefit from
System institutions being able to provide services to other non-
eligible entities that in turn serve agricultural interests, the FCA
does not believe that a general benefit to agriculture is sufficient to
meet the eligibility requirements of the Act. Therefore, related
services may only be provided pursuant to Sec. 618.8005(e) when an
identifiable eligible borrower is a party to the same transaction.
In the preamble to the proposed regulation, the FCA noted that
banks for cooperatives would continue to be subject to the requirements
of section 3.7(b) of the Act and Sec. 613.3120 when providing related
services in connection with export and import transactions pursuant to
proposed Sec. 618.8005(d), now Sec. 618.8005(e). Subsequent to the
approval of the proposed regulation on September 29, 1994, the Farm
Credit System Agricultural Export and Risk Management Act (Pub. L. 103-
376, October 19, 1994) removed the requirement in section 3.7(b) that a
voting stockholder of the bank substantially benefit from services
provided in connection with export transactions. The FCC requested that
FCA clarify the impact of this statutory amendment in the final rule.
The FCA confirms that in light of Pub. L. 103-376, the requirements of
3.7(b) and Sec. 613.3120 of this chapter (that a voting stockholder
must substantially benefit from related services) only apply in
connection with import transactions.
After considering all of the comments received on Sec. 618.8005,
adding new paragraph (d), clarifying the scope of paragraph (e), and
addressing legislative amendments, the FCA has adopted Sec. 618.8005 as
modified.
3. Section 618.8010--Related Services Authorization Process
Comments and suggestions in this area were received from the ABA,
IBAA, SCBA, FCC, and four System associations and included
recommendations on the following issues. A large majority of the System
institutions commented positively on the changes made to this section,
supported the streamlined process, and felt the proposed regulation
would reduce regulatory burdens.
The ABA is concerned that the scope of the sample RS List, in
Appendix A of the proposed rule, exceeds the definition of related
services in the proposed regulation. However, it does not reference any
specific service or give examples of how it considers the definition to
be improperly interpreted. The FCA has concluded that all of the listed
related services fall within the definition of related services in
proposed and final Sec. 618.8000(b) and within System institutions'
statutory authorities.
The ABA also perceived the preamble to the proposed rule as
allowing System institutions to provide services that might currently
be offered in the System but which had not previously been approved.
The FCA did not intend to permit any institution to offer unauthorized
services. However, the Agency did not previously approve all types of
technical assistance programs which would now come under the definition
of related service. Consequently, the proposed regulation included a
cautionary statement and a sample list because once the final RS List
is published, no service may be offered unless it is on the list. The
FCA was not notified during the public comment period of any related
service being offered that was not on the sample RS List, thus
confirming the Agency's conclusion that all services currently being
offered are already on the sample RS List. The only comments received
pertaining specifically to the sample RS List focused on how some of
the insurance services or special conditions were described on the
list. The sample RS List was modified slightly to reflect these
suggestions and will be published both as an appendix to the final
regulation and in a bookletter subsequent to the finalization of this
regulation. (See comments on the RS List at the end of this preamble.)
The ABA commented that no related service should be approved unless
the public has at least 60 days to comment on it. Similarly, the IBAA
recommended that System institutions be required to file a Notice of
Intent, which would state that a related service is going to be
offered, in order to allow entities outside the System to object to
programs that would place them at a competitive disadvantage. The
proposed rule does not require mandatory public comments on all
services but allows the FCA to publish new services where appropriate.
[[Page 34095]]
While there is no statutory requirement for publication of services
or a public notice and comment period, the Agency believes that its
evaluation of new services, particularly complex or controversial
service proposals, will be aided by public comment. It was for this
reason that the FCA published the sample RS List with the proposed
regulations. As a result, there is a greater standard of public
disclosure than existed previously under the prior approval rule.
However, there may be situations in which public comment is not
necessary or beneficial to the safety and soundness of the System and
may impose a burden on System institutions while having little, if any,
overriding benefit. An example would be a potential service that is
very similar to one already on the RS List. Finally, whether or not
services are published for comment, the FCA will continue to measure
all new service proposals against the statutory authorities and
evaluate them based on safety and soundness concerns. Therefore, the
proposed regulation was not changed in response to these comments.
Regarding the commenters' desire for public notice of new services
and general concerns over competition between System institutions and
other banking institutions, Congress authorized such competition when
it enacted the related service provisions in 1971. Competition was a
major issue at the time the legislation was enacted and one that was
thoroughly debated.2 Public notice and comment requirements were
not placed in the Act, and it would not be appropriate for the FCA to
limit the offering of related services under the statute simply because
offering the service might have a competitive impact on non-System
entities. The FCA's mission of ensuring the safety and soundness of
System institutions would preclude it from unnecessarily limiting the
System's ability to successfully compete with other entities that share
its market.
\2\ See, Pub. L. 92-181 (Dec. 10, 1971) and its legislative
history.
---------------------------------------------------------------------------
The SCBA is concerned that the regulation permits System
institutions to provide services without effective regulatory oversight
and congressional scrutiny. It states that the proposal does far more
than reduce regulatory burden and is inconsistent with congressional
actions dealing with the System, commercial banks, and savings
institutions. To the contrary, the FCA believes that the regulation
maintains a distinction between determining whether a new service is
authorized under the statute and evaluating the feasibility of
implementing a particular program at a particular institution.
Elimination of the prior approval of each related service program
relieves regulatory burden. This does not eliminate the FCA's
responsibility for safety and soundness, but merely shifts oversight to
the examination and enforcement processes. Determination of statutory
authorities continues to be closely controlled in the approval process
and, contrary to the SCBA's comment, is not inconsistent with recent
congressional actions.
The FCC and four associations expressed concern that System
institutions will be precluded from offering a new service because
another institution's proposal was previously denied. They asked for
clarification on whether the denial or modification of a service
proposed by a specific institution is intended to apply to only that
institution or to all institutions. While the FCA's intent to consider
new services as Systemwide initiatives was clear, they expressed
concern that disapproval of a proposed new service would preclude a
resubmission that appropriately addresses the reasons for denial. This
result was not intended by the Agency. Approvals or denials are not
expected to be specific to the institution making the request. Action
on new services will generally be based on the type of service proposed
and not on how the service program will be implemented by a given
institution. As long as a particular type of service is authorized, it
will be put on the RS List, but it could be limited to certain types of
institutions or subject to various conditions to address safety and
soundness concerns. Notwithstanding this, disapproval of a particular
service request does not preclude approval of a different request at
another time. The FCA expects, however, that any subsequent request
would satisfactorily address the concerns noted in previous
disapprovals. There may also be services that either are not authorized
under the statute or present so many inherent risks to safety and
soundness that it would be inappropriate for any System institution to
provide them.
The FCC also commented that if a request for a new service is
denied, the notification of denial should include an explanation for
the denial. The FCA agrees. While this was intended to be understood in
the proposed regulation, proposed Sec. 618.8010(b)(5) has been modified
to clarify this point.
The FCC and three associations commented that the process could be
improved by requiring the FCA to immediately notify an institution upon
receipt of a related service proposal and provide an FCA contact for
future reference. Also, once the FCA determines a proposal is complete,
the commenters felt the institution should be notified in writing that
the 60-day approval process has begun. This suggestion is consistent
with existing FCA practices and administrative processes. The FCA
intends to provide immediate notification of receipt of a new service
proposal, including a preliminary conclusion as to the completeness of
the proposal and when the 60-day period begins. If more information is
needed later or complex issues arise, such as requesting the charter of
a new organization to provide such services, the FCA may choose to
extend this period for another 60 days. Because these actions are
already a part of FCA's administrative practices, changes were not made
to the proposed regulation.
The FCC recommended that the FCA should notify the applying
institution of the results of its actions within the 60-day timeframe
for acting on proposed new related services. In addition, the FCC
suggested that notice of FCA's decision to other System institutions
should occur after written notice is given to the requesting
institution. The FCA agrees that notification should be included within
the 60-day period and that notice to the requesting institution should
occur first; Sec. 618.8010(b)(5) has been modified accordingly.
The SCBA and IBAA commented that a well-defined, narrow list of
permissible related services should be included in the final rule to
prevent unauthorized, and possibly unsound, services from being
provided by System institutions. It believes unauthorized services may
not be detected in a timely manner through the examination process.
They suggested that, at a minimum, institutions should notify the FCA
of their intent to offer these services for the first time. The FCA
believes that the ``Related Services List'' attached to the final rule
is a well-defined list of permissible related services. Proposed
Sec. 618.8010(c)(3) would have required institutions to notify the FCA
examination team of their intent to offer a service program within 30
days of implementing a related service already on the RS List. The FCA
agrees, however, that a prior notification could be beneficial in
preventing an unauthorized and possibly unsafe or unsound service
program from being implemented because it would give the examiners an
opportunity to discuss a proposed service program with the offering
institution prior to implementation.
[[Page 34096]]
Therefore, the final regulation at Sec. 618.8010(c)(3) has been
modified to require notification to the FCA 10 business days before an
institution may begin to offer a service already on the RS List.
The IBAA and the SCBA commented on the elimination of the prior
approval of related service programs, the additional elimination of the
prior approval of district and bank policies, and the elimination of
the requirement for annual bank reviews of association services. The
commenters concluded that elimination of these types of oversight
activities jeopardizes the safety and soundness of System institutions
and weakens the Agency's monitoring and control over System
institutions. They further believe that reliance on the examination
process alone is inadequate. The IBAA also commented on the removal of
the records requirement in the current regulation at
Sec. 618.8000(b)(4).
The FCA does not believe that elimination of the FCA prior approval
or the annual bank review function creates significant safety and
soundness risks, but rather, that the final regulation eliminates
duplicative evaluations of authorities to provide new services. Program
risks that are incurred by individual institutions offering related
services can be adequately controlled by a number of factors,
including: (1) Special conditions placed on the RS List for services
raising special concerns; (2) mandatory feasibility analysis prior to
offering any related service programs; (3) bank oversight and review
through feasibility analyses and certain conditions imposed through
general financing agreements (GFAs); (4) notification of the
appropriate Office of Examination field office before a service is
first offered; and (5) periodic examination of program operations and
results by the FCA with appropriate follow-up in exercising its
supervisory power as warranted. The final regulation and other existing
regulations are adequate to address safety and soundness concerns and
provide the FCA with appropriate oversight of the process.
4. Section 618.8015--Policy Guidelines
There were no specific comments received on this section of the
proposed regulation, and the final regulation is adopted as proposed.
5. Section 618.8020--Feasibility Requirements
Three System commenters stated that the final rule should recognize
that the extent of the feasibility analysis required is dependent on
whether or not the service is offered for a profit and the overall
risks of the service to the institution. The FCA agrees that the extent
of the analysis will vary; however, it does not agree that
profitability is the sole determining factor. In fact, it is
conceivable that a service that is ``low-priced'' or ``free'' to the
recipient would still bear a cost to the institution and would require
more extensive analysis to justify offering it. The extent of the
analysis should be appropriate to the level of institution involvement
and the financial and operational risks in a service.
Four other System commenters urged the FCA to explain in its
commentary that the final rule could be interpreted as minimizing the
regulatory requirements for offering certain types of services. They
conclude that services that are normal and customary activities of
institutions in their primary business of lending and leasing should be
considered inherently feasible and, therefore, not subject to the
regulation. The FCA disagrees with the commenters. Although converting
a lending-related activity into a fee service will often prove
feasible, this will depend on many factors, including market demand,
pricing opportunities, and capital position. The cost benefit analysis
required by Sec. 618.8020(b) will enable the institution to determine
whether offering a fee service will promote its business objectives.
The ABA commented that it believes that the FCA's approach to
meeting the statute's feasibility requirement is flawed because the
proposed regulatory language does not offer a definition of feasibility
but instead states that feasibility is a function of an overall cost/
benefit analysis based on the evaluation of the market, pricing,
competition, expected financial returns, operational risks, financial
liability and conflicts of interest. The commenter further states that
the proposed rule does not address issues of managerial and financial
capability to provide a related service, i.e., management structure,
employee qualifications, and capital position. Lastly, the commenter
recommended that a detailed and specific feasibility determination be
required from each institution for each related service to be offered.
The IBAA also believes that the feasibility criteria are too loose, but
it did not elaborate.
The FCA agrees with the commenters that managerial and financial
capabilities ought to be addressed in the feasibility analysis.
Although the proposed rule contains various managerial and financial
assessments, Sec. 618.8020(b)(1) has been modified to include a
specific requirement for an evaluation of the consistency of the
program with the institution's capital plan. Section 618.8020(b)(3)(i)
continues to require ``[a]n evaluation of the operational costs and
risks involved in offering the program, such as management and
personnel requirements, training requirements, and capital outlays.''
The recommendation for a detailed and specific feasibility
determination is also already reflected in the rule. Section 618.8020
begins with a requirement that an institution document program
feasibility for every related service program it provides.
Regarding the criticism that the proposed rule offers no definition
of feasibility, the FCA believes that the approach taken is
comprehensive and will be effective. The final rule specifies the cost
and benefit criteria by which feasibility must be determined. It
requires an institution to analyze the program against an array of
business factors and to document its conclusion that this analysis
demonstrates the program's feasibility.
The IBAA urged that the feasibility analysis include a
demonstration that a need for the service exists. The FCA believes that
a prudent feasibility analysis would necessarily include an evaluation
of the market and a discussion of the need for a particular service. In
fact, Sec. 618.8020(b)(2) specifically requires an evaluation of
market, pricing and competition issues.
6. Section 618.8025--Feasibility Reviews
The proposed rule reduces the role of the bank when an association
is offering a related service. The IBAA believes that more oversight
should be maintained because association activity ultimately places the
bank and, therefore, the taxpayer at risk.3 In particular, the
commenter believes that there is a danger of a bank simply ``rubber
stamping'' programs without giving adequate review of feasibility and,
therefore, the proposed rule does not meet the statutory requirement.
The FCA disagrees with this conclusion. The statute requires the bank
to determine the feasibility of each related service offered by an
institution, but it is silent regarding who must do the actual
feasibility analysis. The most appropriate persons to do the analysis
are the persons who will be providing the service. The bank will then
fulfill its oversight duties by verifying that the
[[Page 34097]]
analysis is complete and that the analysis establishes the feasibility
of the service. The bank also has considerable supervisory control
through regulatory and funding mechanisms such as its GFAs.
Furthermore, the FCA will be scrutinizing the banks' reviews and
general oversight of association and service corporation operations as
a part of the examination function.
\3\ The FCA notes that pursuant to section 4.4 and other
sections of the Act, the United States is not liable for obligations
of System institutions. Thus, there is no direct risk to the
taxpayers.
---------------------------------------------------------------------------
The IBAA also believes that the FCA should review the feasibility
of programs offered by individual associations to ensure safety and
soundness. The FCA agrees with this comment and believes that the
proposed and final rules do not indicate otherwise. In fact, the
preamble to the proposed rule states that the examination function will
evaluate compliance, performance, and safety and soundness. The FCA
firmly believes that the ongoing examination function is fully capable
of protecting the public and the investor.
One System institution proposed that association boards of
directors, rather than the district bank, be given the authority to
verify and certify the adequacy of program feasibility and concluded
that the FCA could issue a cease and desist order if it later
determines that the feasibility analysis for a service is incomplete.
The FCA clarifies that association boards already have the authority to
verify feasibility. In fact, they are expected to approve the offering
of all related services and, by doing so, approve the adequacy of the
feasibility analysis. In addition, the FCA does not believe that the
commenters suggested approach would fulfill the statutory requirement
for bank determination of feasibility.
Three System commenters asked for clarification regarding the
feasibility analysis for those services that are currently being
offered at the time the final rule becomes effective. They also
concluded that if a bank review is only needed on a first-time service,
then an institution need not resubmit a feasibility analysis for a
service that was previously offered.
The FCA agrees that for those services that are being offered prior
to the effective date of the final rule, an institution does not need
to resubmit a feasibility analysis. However, for those situations where
an institution formerly offered a particular service, but is not
currently offering it, Sec. 618.8025 has been modified to require bank
review of feasibility for any service that an institution did not offer
during the most recently completed business cycle (generally 1 year).
In other words, in addition to services never offered before,
previously offered but currently inactive services will require bank
review of the feasibility analysis.
In summary, proposed Sec. 618.8025(a) was modified to require bank
review for any service that an institution will be offering that it did
not offer during the most recently completed business cycle. Because
service corporations are referenced in the definition of ``System banks
and associations,'' Sec. 618.8025(b) has been added to require that,
prior to offering a related service for the first time, a service
corporation's feasibility analysis must be verified by the owners of
the service corporation. If the owners all agree, any one bank with
significant ownership interest can be delegated this responsibility.
7. Section 618.8030--Out-of-Territory Related Services
One Farm Credit Bank and two affiliated associations raised
concerns about providing related services outside of an institution's
chartered lending territory. The proposed regulation at Sec. 618.8030
allows System institutions to provide related services outside of their
chartered territories, provided they obtain the consent of at least one
FCS bank or association authorized to lend (i.e., direct lender) in
that territory. Further, the proposed rule does not distinguish between
an institution having the right to invite a third party service
provider into its territory or consenting to an unsolicited request to
offer out-of-territory services.
The commenters are concerned about the competitive implications of
allowing such activities and feel the FCA should impose additional
conditions beyond simply receiving the consent of at least one
institution. They believe the competition will result because most
related services will be purchased in conjunction with a lending
relationship, and an institution's opportunity to offer out-of-
territory services will be broader than the authority to extend credit
out-of-territory. While the bank agrees that requiring the consent of
all institutions chartered to serve a given territory could interfere
with an institution's right to determine what services it wishes to
provide its members, it also believes that the related service
regulation should not create an unlevel playing field for System
institutions sharing the same geographic territory.
The commenters suggest requiring System institutions that want to
offer out-of-territory services to offer such services to all
institutions sharing the same territory on the same or equitable terms
and conditions. They argue that concern for the System's future well-
being justifies this additional burden, which they perceive as minimal.
The bank suggests that having authority to offer services outside of a
chartered lending territory could have a significant impact. The
commenter's suggestion would provide each institution with an equal
opportunity to negotiate for a service to be provided in its territory.
Institutions could decline to authorize another institution to provide
services to its customers on its behalf, but no one institution would
be in a position to prevent any other FCS institutions from reaching
agreements and providing services to their customers.
The FCA understands the commenter's concerns regarding intra-System
competition, but it also notes that related services differ from
lending and that services are not always offered in the same manner as
loan products. While some intra-System competition for loans exists,
System institutions are limited by charter to providing specific types
of loans for certain purposes (i.e., short-, intermediate-, or long-
term loans). By contrast, intra-System competition is inherent in the
way eligibility for related services is determined, because related
services can be provided to an entity that is ``eligible to borrow''
from an institution. Thus, for example, both PCAs and FLBAs are
authorized to provide services to the same borrowers in their chartered
territories.
The Agency has concluded that the commenters proposal does not
solve many of the problems associated with the additional competition
created by out-of-territory related services. Under the commenter's
proposal, the requirement for an opportunity to negotiate for the
service could lead to cumbersome, protracted negotiations, could pose
more than a minimal burden on System institutions, and would still
result in only one institution being required to give its consent for
an out-of-territory institution to compete with another institution in
the territory.
Notwithstanding that some competition inherently exists in
providing related services in a given territory, the Agency recognizes
that the provision of related services out-of-territory creates the
potential for additional intra-System competition. Thus, the Agency
believes that the proposed rule should be modified to address some of
the issues raised by the commenters. The final regulation has been
modified to limit competition without consent in situations where
services are already being provided to borrowers. Final
Sec. 618.8030(a) provides that an out-of-territory institution must
obtain the consent of all chartered institutions currently offering the
same
[[Page 34098]]
service in the territory in which the service will be provided.
Consent must be obtained regardless of whether the institution is
offering the service itself or through an out-of-territory System
institution or a third party. If no institution in the territory is
offering the same service that the out-of-territory institution wishes
to offer, the out-of-territory institution need only obtain the consent
of any one direct lender chartered to serve the territory.
The Agency believes that the final regulation balances the
territorial rights of institutions, the rights of institutions to
control the manner in which they conduct their business, and the needs
of borrowers for related services. If borrowers in a territory already
have access to a particular related service, there is no compelling
need to allow additional competition from an out-of-territory
institution without the consent of the institutions currently offering
the same services. Although the Agency believes that this is the most
appropriate resolution of the out-of-territory issue, the Agency
welcomes additional comments on Sec. 618.8030.
Another comment by the IBAA on out-of-territory related services
concerned retaining a requirement in the existing rule that the service
provided within the offering (out-of-territory) institution's chartered
territory remain the primary component of that institution's services.
The comment is grounded in terms of cooperative principles in that a
key premise for forming a cooperative is to primarily do business with,
and for the benefit of, its own members. While the FCA acknowledges
this premise, it believes that decisions on business practices are best
left to the membership and local boards of directors, rather than the
FCA. The restriction advocated by the IBAA could impair the ability of
Farm Credit institutions to meet their customers' needs for related
services, particularly when the service in question is unique or not
widely available from other sources. It should also be noted that a
System bank board is free to impose more stringent requirements for
their territory (such as is recommended in the three comment letters)
than the minimal ones being set forth by the FCA.
Four System associations commented that the proposed relaxation of
the limitations on out-of-territory service offerings should be
considered in the context of the FCA's proposed policy statement on
``Non-Exclusive Territories'' (59 FR 17543, April 13, 1994). These
associations submitted comments on the proposed policy statement
earlier in 1994. The FCA considered all of the comments on the proposed
policy statement in drafting Sec. 618.8030 and believes the final rule
is an appropriate resolution to related service issues at this time.
However, the FCA notes that adoption of a final board policy statement
on non-exclusive territories may require future changes to the
regulation.
The IBAA expressed safety and soundness concerns about permitting
System institutions to expand related service programs beyond the
boundaries of their chartered lending territories. It stated that the
FCA needs to exert oversight in this area if institutions significantly
expand programs in large or distant geographic areas. The IBAA believes
that allowing institutions to market services nationwide would
contradict current statutory language that requires the FCA to charter
institutions to serve specific areas.
There are no geographic restrictions in the Act on the ability of
the FCA to issue or amend institution charters. See, Act, sections
5.17, 1.3, 2.0, and 2.10. In fact, the Agency has the authority to
issue nationwide charters or amend an existing charter to authorize
nationwide activities. Further, the regulation requires an appropriate
feasibility analysis covering an institution's ability to manage its
proposed service program operation in all areas where the program is
offered. The examination function will ensure that all institution
activities, regardless of where conducted, are conducted in a safe and
sound manner. Therefore, the FCA does not agree with the IBAA and has
made no changes in response to its comments on this issue.
Section 618.8030(d) has been added in order to address service
corporations. A service corporation may provide related services
outside of its chartered territory (i.e., the chartered territory of
its owners) subject to the requirements of Sec. 618.8030(a)-(c).
However, service corporations cannot give consent to an out-of-
territory institution to offer services in the service corporation's
(or its owners) territory.
B. Subpart B--Member Insurance
1. Section 618.8040--Authorized Insurance Services
The IBAA commented that the proposed regulation allows out-of-
territory associations to offer credit or term life and credit
disability insurance to any individual who has a borrowing relationship
with a System institution, but not necessarily with the bank or
association selling the insurance. The IBAA is concerned that this will
allow a single institution to sell insurance nationwide and believes
that such ``expansion'' should not be allowed because System
institutions are chartered to serve specific areas and local farmers.
As noted earlier, the FCA has the authority to charter institutions to
serve specific territories, which may include nationwide charters.
Further, the FCA does not agree that this would result in an expansion
of insurance services. The proposed and final rule simply permit System
institutions to serve their members' needs without obligating each
association to have the ability to offer the insurance products itself.
The IBAA disagreed with the FCA's conclusion that the System should
be able to sell spouses credit insurance because a spouse may have a
contractual liability for the debt by operation of state law. The basis
for its disagreement is that the FCA has not established a need for the
System to provide such a service. The FCA notes that the insurance
would be sold to the borrower, on the life of the spouse, not sold
directly to the spouse. There is no statutory requirement that the FCA
establish a need for a service before the System is authorized to offer
it. However, when an institution decides to offer a particular related
service, as a part of its feasibility analysis, it must evaluate the
potential market for that service in the areas in which the service
will be offered. The FCA directs the commenters to the preamble to the
proposed regulation for supporting discussion on this issue (59 FR
54405, October 31, 1994). No change was made to the final regulation in
response to this comment.
The IBAA also commented that, by eliminating the requirement that a
debtor-creditor relationship exist for System institutions to provide
other insurance products, such as crop insurance, and by allowing
``members'' to be eligible to buy crop insurance, the FCA has exceeded
congressional intent by allowing the System to provide insurance to
non-System borrowers. The FCA notes that the legislative history of
section 4.29 of the Act indicates that the debtor-creditor relationship
applies only to credit or term life and credit disability insurance (or
similar types) in that this insurance must be ``appropriate to protect
the loan commitment in the event of death or disability of the
debtors.'' See 59 FR 54399, October 31, 1994. Therefore, the debtor-
creditor requirement for ``other'' insurance was removed in order to
allow System institutions to exercise the full authority granted by the
Act. As a result, for ``other'' types of insurance, purchasers need
only be eligible to borrow (as with other types of related services).
[[Page 34099]]
Because section 4.29 of the Act only authorizes borrowers or
members to purchase insurance, the Agency felt it was necessary to
define ``member'' in the proposed regulation. The FCA did not intend
for the definition of member to be interpreted to mean that persons not
eligible to borrow could purchase ``other'' insurance from System
institutions. In order to clarify this point, the FCA revised the
definition of member in Sec. 618.8040(b)(2) of the final rule to
include the phrase ``eligible to borrow.''
2. Section 618.8040(b)(6)
Several commenters asked that the 5-percent limitation on
compensation for sale of insurance be removed from the final
regulation. One association did not object to the 5-percent limitation
for full-time loan officers who also sell insurance as a part of their
job. However, the commenter felt this limitation was too restrictive
for full-time insurance salespersons and those persons involved in
direction or management of insurance sales. The association further
believes that such a limitation is not needed because the conflict of
interest between loan making and insurance is not present, and it
argued that such a limitation would restrict its ability to attract and
motivate highly qualified insurance personnel.
The FCA continues to believe that unrestricted incentive
compensation based on volume of insurance sales may lead to conflicts
of interest or coercion in the case of loan officers and other
employees involved in the lending operations of an institution.
However, the FCA also recognizes that the potential for conflicts of
interest or coercion is significantly less with regard to full-time
insurance personnel. The FCA also agrees that in the case of full-time
insurance sales personnel, such a limitation could impair an
institution's ability to attract the best qualified people to these
positions. Accordingly, proposed Sec. 618.8040(b)(6) is modified so
that, with respect to full-time insurance personnel or full-time
managers and supervisors of insurance departments, the 5-percent
limitation only applies to the sale of credit life and similar types of
insurance (insurance that pays on a loan or mortgage in the event of
death or disability of the debtor).
One commenter suggested that the final regulation should include
commentary notes stating that insurance is the only service with
regulatory restrictions on employee incentive compensation. The FCA
does not believe that this is necessary because the regulatory
structure and language make it clear that the restriction on employee
incentive compensation applies only to insurance.
C. Public Comments Received on the Sample Related Services List
The FCC commented that under Farm Business Consulting and
Cooperative Business Consulting Services, the requirement that
institutions must have procedures in place to ``ensure conflicts of
interest do not occur between the credit and the business consulting
functions'' is too burdensome. The FCC suggested that the special
condition should require that institution ``policies address and manage
conflicts of interest to reduce risk to the entity by avoiding or
disclosing certain conflicts as may be appropriate.'' The FCA
recognizes that, as stated, the condition could be onerous. The Agency
expects institutions to eliminate conflicts of interest whenever
possible and operationally feasible. However, there may be instances
when such conflicts cannot be eliminated, but with proper operating
procedures, can be managed in such a way as to limit the risk posed to
the institution to an acceptable level. Language in the attached RS
List was modified to more clearly state this requirement.
Minnesota Mutual commented that the sample RS List did not include
two types of insurance services, individual term life and mortgage
accidental death insurance, currently offered by System institutions.
The FCC also commented that ``Group Term Life Insurance'' should be
changed to ``Term Life Insurance'' to conform to section 4.29(a)(1) of
the Act. Although the FCA intended that these types of insurance be
included within those on the RS List, the list has been modified to
more accurately reflect these concerns.
The FCC commented that crop hail insurance and multiple-peril crop
insurance should be combined into one category of single- and multiple-
peril insurance in order to accommodate other types of single-peril
crop insurance that may be available or become available in the future.
After researching the legislative history of the 1980 amendments to the
Act, the FCA believes that it is appropriate to limit the types of crop
insurance that the System could sell to hail and multiple-peril crop
insurance as is plainly stated in the Act. Accordingly, the FCA did not
make this suggested change to the RS List.
As a final note, a small number of technical changes were made to
proposed part 618, subparts A and B, in order to enhance the clarity of
the regulations. Technical changes were also made to parts 611 and 620
in order to conform with the regulatory changes in part 618.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, parts 611, 618, and 620 of
chapter VI, title 12 of the Code of Federal Regulations are amended to
read as follows:
PART 611--ORGANIZATION
1. The authority citation for part 611 continues to read as
follows:
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,
4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12
U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,
2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.
L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003 and 1004.
Subpart G--Mergers, Consolidations, and Charter Amendments of
Associations
Sec. 611.1125 [Amended]
2. Section 611.1125 is amended by removing the word ``financially''
in paragraph (b)(2).
PART 618--GENERAL PROVISIONS
3. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Sec. 618.8030 [Redesignated as 618.8040]
4. In subpart B, Sec. 618.8030 is redesignated as new
Sec. 618.8040.
5. Subpart A is revised to read as follows:
Subpart A--Related Services
Sec.
618.8000 Definitions.
618.8005 Eligibility.
618.8010 Related services authorization process.
618.8015 Policy guidelines.
618.8020 Feasibility requirements.
[[Page 34100]]
618.8025 Feasibility reviews.
618.8030 Out-of-territory related services.
Subpart A--Related Services
Sec. 618.8000 Definitions.
For the purposes of this subpart, the following definitions shall
apply:
(a) Program means the method or procedures used to deliver a
related service. This distinguishes the particulars of how a related
service will be provided from the type of activity or concept.
(b) Related service means any service or type of activity provided
by a System bank or association that is appropriate to the recipient's
on-farm, aquatic, or cooperative operations, including control of
related financial matters. The term ``related service'' includes, but
is not limited to, technical assistance, financial assistance,
financially related services and insurance, but does not include
lending or leasing activities.
(c) System banks and associations means Farm Credit Banks,
agricultural credit banks, banks for cooperatives, agricultural credit
associations, production credit associations, Federal land bank
associations, Federal land credit associations, and service
corporations formed pursuant to section 4.25 of the Act.
Sec. 618.8005 Eligibility.
(a) Farm Credit Banks and associations may offer related services
to persons eligible to borrow as defined in Secs. 613.3010, 613.3020
(a)(1), (a)(2), (b), and 613.3045 of this chapter.
(b) Banks for cooperatives may offer related services to entities
eligible to borrow as defined in Secs. 613.3110 and 613.3120 of this
chapter.
(c) Agricultural credit banks may offer related services
appropriate to on-farm and aquatic operations of persons eligible to
borrow specified in paragraph (a) of this section and may offer related
services appropriate to cooperative operations of entities eligible to
borrow as specified in paragraph (b) of this section.
(d) Service corporations formed pursuant to section 4.25 of the Act
may offer related services to persons eligible to borrow from the
owners of the service corporation, pursuant to paragraphs (a), (b),
(c), and (e) of this section.
(e) System banks and associations may provide related services to
recipients that do not otherwise meet the requirements of this section
in connection with loan applications, loan servicing, and other
transactions between these recipients and persons eligible to borrow as
defined in paragraphs (a), (b), or (c) of this section, as long as the
service provided is requested by an eligible borrower or necessary to
the transaction between the parties. Such services include, but are not
limited to, fee appraisals of agricultural assets provided to any
Federal agency, commercial banks, and other lenders.
Sec. 618.8010 Related services authorization process.
(a) Authorities. System banks and associations may only offer
related services that meet the criteria specified in this regulation
and are authorized by the FCA.
(b) New service proposals. (1) A System bank or association that
proposes or intends to offer a related service that the FCA has not
previously authorized must submit to the FCA, in writing, a proposal
that includes a description of the service, a statement of how it meets
the regulatory definition of ``related services'' in Sec. 618.8000(b),
and the risk analysis cited in Sec. 618.8020(b)(3). The FCA will
evaluate the proposed service based on the information submitted, and
may also consider whether there are extenuating circumstances or other
compelling reasons that justify the proposed service or support a
determination that the service is not authorized. This evaluation will
focus primarily on Systemwide issues rather than on institution or
program-specific factors.
(2) When authorizing a proposed related service, at its discretion,
the FCA may impose special conditions or limitations on any related
service or program to offer a related service.
(3) At its discretion the FCA may, at any time during its
evaluation of a proposed related service, publish the proposed related
service in the Federal Register for public comment.
(4) Within 60 days of the FCA receiving a completed proposal,
including any additional information the FCA may require, the FCA will
act on the request to authorize a new service. The FCA shall approve
the request, deny the request, or publish the service for public
comment in the Federal Register. For good cause and prior to the
expiration of the 60 days, the FCA may extend this period for an
additional 60 days.
(5) Within the time period established in paragraph (b)(4) of this
section, the FCA shall notify the requesting institution of its
actions. Following notification of the requesting institution, the FCA
will notify all System banks and associations of its determination on
the proposed service by bookletter or other means. If a service is not
authorized, the reasons for denial will be included in the
notifications to the System and the requesting institution.
(c) Previously authorized services. (1) For related services that
have been authorized by the FCA, any System bank or association may
develop a program and subsequently offer the related service to
eligible recipients, subject to any special conditions or institutional
limits placed by the FCA. These programs will be subject to review and
evaluation during the examination and enforcement process.
(2) The FCA shall make available to all System banks and
associations a list of such related services (``related services list''
or ``list'') and will update the list in accordance with paragraph
(b)(5) of this section. The list will contain the following:
(i) A description of each related service; and
(ii) The types of institutions authorized to offer each type of
related service;
(iii) Identification of any special conditions on how the related
service may be offered. The special conditions and description of the
service will be fully detailed in FCA's notice to System institutions
under paragraph (b)(5) of this section.
(3) At least 10 business days prior to implementing a related
service program already on the list, the System bank or association
must notify the FCA Office of Examination field office responsible for
examining that institution in writing and provide it with a description
of the proposed related service program.
Sec. 618.8015 Policy guidelines.
(a) The board of directors of each System bank or association
providing related services must adopt a policy addressing related
services. The policy shall include clearly stated purposes, objectives,
and operating parameters for offering related services and a
requirement that each service offered be consistent with the
institution's business plan and long-term strategic goals. Such policy
shall also be subject to review under an appropriate internal control
policy.
(b) All related services must be offered to recipients on an
optional basis. If the institution requires a related service as a
condition to borrow, it must inform the recipient that the related
service can be obtained from the institution or from any other person
or entity offering the same or similar related services.
(c) All fees for related services must be separately identified
from loan interest charges and disclosed to the recipient of the
service prior to providing or implementing the service.
[[Page 34101]]
Sec. 618.8020 Feasibility requirements.
For every related service program a System bank or association
provides, it must document program feasibility. The feasibility
analysis shall include the following:
(a) Support for the determination that the related service is
authorized; and
(b) An overall cost-benefit analysis that demonstrates program
feasibility, taking into consideration the following items:
(1) An analysis of how the program relates to or promotes the
institution's business plan and strategic goals, and whether offering
the service is consistent with the long-term goals described in its
capital plan;
(2) An analysis of the expected financial returns of the program
which, at a minimum, must include an evaluation of market, pricing,
competition issues, and expected profitability. This analysis should
include an explanation of how the program will contribute to the
overall financial health of the institution; and
(3) An analysis of the risk in the program, including:
(i) An evaluation of the operational costs and risks involved in
offering the program, such as management and personnel requirements,
training requirements, and capital outlays;
(ii) An evaluation of the financial liability that may be incurred
as a result of offering the program and any insurance or other measures
that are necessary to minimize these risks; and
(iii) An evaluation of the conflicts of interest, whether real or
perceived, that may arise as a result of offering the program and any
steps that are necessary to eliminate or appropriately manage these
conflicts.
Sec. 618.8025 Feasibility reviews.
(a) Prior to an association offering a related service program for
the first time, the board of directors of the funding bank must verify
that the association has performed a feasibility analysis pursuant to
Sec. 618.8020. The bank review is limited to a determination that the
feasibility analysis is complete and that the analysis establishes that
it is feasible for the association to provide the program. Any
conclusion by the bank that the feasibility analysis is incomplete or
fails to demonstrate program feasibility must be fully supported and
communicated to the association in writing within 60 days of its
submission to the bank.
(b) Prior to a service corporation offering a service for the first
time or offering a service that it did not offer during the most
recently completed business cycle (generally 1 year), the owners of the
service corporation must verify that the service corporation has
performed a feasibility analysis pursuant to Sec. 618.8020. If the
owners all agree, one bank with a significant ownership interest can be
delegated this responsibility.
Sec. 618.8030 Out-of-territory related services.
(a) System banks and associations may offer related services
outside their chartered territories subject to the following
conditions:
(1) The System bank or association obtains consent from all
chartered institutions currently offering the same type of service in
the territory in which the service is to be provided; or
(2) If no System bank or association is currently offering the same
type of service in the territory, then the out-of-territory institution
must obtain the consent of at least one direct lender institution
chartered in the territory in which the related service is to be
provided.
(3) The consent obtained pursuant to paragraphs (a)(1) and (a)(2)
of this section shall be in the form of a written agreement with
specific terms and conditions including timeframes.
(b) System banks and associations providing out-of-territory
services must fulfill all requirements of subparts A and B of this part
618.
(c) An institution that consents to another bank or association
providing a related service in its chartered territory must meet the
requirements of this section, but need not comply with the other
requirements of subparts A and B of this part 618, unless the program
consented to imposes a financial obligation on the consenting
institution. If a financial obligation exists, then the consenting
institution must comply with Secs. 618.8015, 618.8020 and 618.8025.
(d) Service corporations must follow the requirements of this
section in offering related services out-of-territory. A service
corporation cannot consent to an out-of-territory institution providing
services in its chartered territory.
6. Newly designated Sec. 618.8040 is amended by revising paragraph
(b)(1); by removing paragraph (b)(10); by redesignating existing
paragraphs (b)(2) through (b)(9) as new paragraphs (b)(3) through
(b)(10); by adding a new paragraph (b)(2); by removing the reference
``Sec. 618.8030(b)(3)(i)'' and adding in its place, the reference
``Sec. 618.8040(b)(4)(i)'' in newly designated paragraph (b)(3); and by
revising newly designated (b)(6) to read as follows:
Subpart B--Member Insurance
Sec. 618.8040 Authorized insurance services.
* * * * *
(b) Bank and association board policies governing the provision of
member insurance programs shall be established within the following
general guidelines:
(1) A System bank or association may provide credit or term-life or
credit-disability insurance only to persons who have a loan or lease
with any System bank or association, without regard to whether such
institution is the provider. Term-life insurance coverage may continue
after the loan has been repaid or the lease terminated, provided the
member can reasonably be expected to borrow again within 2 years, and
provided the continuation of insurance is not contrary to state law.
(2) A debtor-creditor relationship is not required for the sale of
other insurance specified in paragraph (a) of this section, as long as
purchasers are members of a System bank or association. For the
purposes of this section, ``member'' means someone eligible to borrow
who is a stockholder or participation certificate holder and who
acquired stock or participation certificates to obtain a loan, for
investment purposes, or to qualify for other services of the
association or bank.
* * * * *
(6) Bank and association personnel shall not benefit from insurance
sales by receipt of commissions or gifts from underwriting insurance
companies. However, employees may participate in an incentive plan
under which incentive compensation is provided based on the sale of
insurance.
(i) In any single year, for all employees except full-time
insurance personnel or full-time supervisors or managers of insurance
departments, incentive compensation attributable to sales of all types
of insurance cannot exceed an amount equivalent to 5 percent of the
recipient's annual base salary.
(ii) In any single year, for full-time insurance personnel and
full-time supervisors and managers of insurance departments, incentive
compensation for sales of credit life and similar types of insurance
(i.e. insurance that pays on a loan or mortgage upon the death or
disability of the debtor) cannot exceed an amount equivalent to 5
percent of the recipient's annual base salary.
(iii) No incentive compensation limit applies to sales of other
insurance (crop, title, etc.) by full-time insurance personnel or full-
time supervisors or managers of insurance departments.
* * * * *
[[Page 34102]]
PART 620--DISCLOSURE TO SHAREHOLDERS
7. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart B--Annual Report to Shareholders
Sec. 620.5 [Amended]
8. Section 620.5 is amended by removing the word ``financial'' and
adding in its place, the word ``related'' each place it appears in
paragraph (a)(3).
Dated: June 26, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
BILLING CODE 6705-01-P
[[Page 34103]]
[GRAPHIC][TIFF OMITTED]TR30JN95.053
[[Page 34104]]
[GRAPHIC][TIFF OMITTED]TR30JN95.054
[FR Doc. 95-16097 Filed 6-29-95; 8:45 am]
BILLING CODE 6705-01-C
