[Federal Register Volume 64, Number 178 (Wednesday, September 15, 1999)]
[Rules and Regulations]
[Pages 49959-49961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23966]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 64, No. 178 / Wednesday, September 15, 1999 /
Rules and Regulations
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FARM CREDIT ADMINISTRATION
12 CFR Part 615
RIN 3052-AB80
Funding and Fiscal Affairs, Loan Policies and Operations, and
Funding Operations; FCB Assistance to Associations
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: In this final rule, we amend the Farm Credit Administration
regulation currently entitled ``Additional investments of Farm Credit
Banks.'' We remove the requirement that Farm Credit Banks and
agricultural credit banks (collectively referred to as banks) obtain
our prior approval before making certain transfers of capital to
affiliated associations. Instead, we require banks to take into account
certain considerations, and to notify bank shareholders and us, before
making such transfers. This amendment benefits banks and their
associations because it provides clear guidelines and streamlined
procedures for banks to follow when they wish to transfer capital to
associations. It also enables them to transfer the capital in a more
timely manner.
EFFECTIVE DATE: This regulation will become effective 30 days after
publication in the Federal Register during which either one or both
houses of Congress are in session. We will publish a notice of the
effective date in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Dale L. Aultman, Policy Analyst, Office of Policy and Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)
883-4444, or
Jennifer A. Cohn, Attorney, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.
SUPPLEMENTARY INFORMATION:
I. Background
On February 18, 1999, we proposed an amendment to Sec. 615.5171,
which implements the authority of banks to purchase nonvoting stock in
and to pay in surplus to affiliated associations (64 FR 8018). In the
proposed amendment, we termed such purchases and payments ``financial
assistance.'' We proposed replacing the requirement that banks obtain
our prior approval before providing financial assistance to affiliated
associations with a prior notification requirement. In addition, we
defined and provided examples of financial assistance, set forth
various considerations that banks must take into account before
providing financial assistance, and required banks to notify their
shareholders within a reasonable time of providing the assistance. We
proposed this amendment as part of our commitment to keep regulatory
prior approvals in our regulations only when the Farm Credit Act of
1971, as amended (Act), requires them or when safety and soundness
concerns exist.
We received two comments on the proposed amendment. One comment was
from the Farm Credit Council (Council), representing its member banks
and associations, and the other comment was from CoBank, ACB (CoBank).
Both commenters generally supported the proposed amendment, although
they both suggested some changes. We considered these comments in
making changes to our final rule.
II. Scope of Rule
We change the title of this final regulation to ``Transfers of
capital from banks to associations.'' In the rule text, we clarify that
the rule applies to ``preferential transfers of capital'' and
``nonroutine transfers of capital.'' We make these changes from the
proposed amendment, which covered ``financial assistance,'' in response
to the Council's concern that the term ``financial assistance'' appears
limited to transfers made to assist distressed associations. These
changes confirm that the rule applies to all transfers of capital that
are preferential or nonroutine, not just to transfers made to assist
distressed associations.
III. Definitions in this Regulation
In our proposed amendment, we provided examples of the transfers of
capital that the rule covers. The final rule includes these examples
and adds definitions of the terms ``transfer of capital,''
``preferential transfer of capital,'' and ``nonroutine transfer of
capital.''
A. Transfer of Capital
We define ``transfer of capital'' as any payment or forbearance by
a bank to an affiliated association. We add this definition to clarify
that the term is not limited to the examples of transfers listed in the
regulation. These examples include:
The purchase of nonvoting stock or participation
certificates;
The payment of cash;
Debt forgiveness or reduction;
Interest rate concessions or interest-free loans;
The transfer of loans at other than fair market value;
The reduction or elimination of standard loan servicing or
other fees; and
The assumption of operating or other expenses, such as
legal fees or insurance premiums.
B. Preferential Transfer of Capital
We define ``preferential transfer of capital'' as a transfer of
capital that is not available to all ``similarly situated'' affiliated
associations. We add this definition in response to a comment by the
Council. The Council recommended the term ``similarly situated'' to
recognize that the rule does not apply if a bank treats associations
differently based on differences in size, asset quality, management,
financial performance, and the like, provided that the different
treatment has a rational basis. The rule does apply if a bank treats
associations differently when those associations are of similar size,
asset quality, management, and financial performance. For example, the
rule would apply if a bank made an interest rate concession to one
association but not to other associations that were similarly situated.
C. Nonroutine Transfer of Capital
We define ``nonroutine transfer of capital'' as a transfer of
capital that is not available in the ordinary course of business. We
add this definition in
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response to the Council's concern that, without a definition, the rule
might be construed to cover transfers made in the ordinary course of
business. This definition clarifies that transfers in the ordinary
course of business are not subject to this regulation. Transfers in the
ordinary course of business may include bank payment of dividends or
patronage, normal adjustments to interest rates, bank equalization of
purchased equities, and other similar transfers. Routine transfers are
often, but not always, addressed in bylaws, General Financing
Agreements, loan participation agreements, and loan servicing
agreements.
In the preamble to our proposed amendment, we noted that we would
consider loss-sharing agreement transfers to be subject to this rule.
The Council expressed concern that we would consider transfers made
under ``endorsement liability'' agreements also to be subject to this
rule. The Council pointed out that banks and associations make
transfers under these agreements, which allocate risks and benefits
associated with specific assets, in the ordinary course of business. We
agree, and clarify that the rule covers only those loss-sharing
agreement transfers that are based on the troubled financial condition
of the association receiving the transfer. Banks make transfers under
these latter agreements infrequently, and therefore, these transfers
are nonroutine.
IV. Considerations for Preferential or Nonroutine Transfers
In our final regulation, we require that, before authorizing a
preferential or nonroutine transfer of capital, a bank's board of
directors must take into account and document the following
considerations:
Whether the transfer is in the best interests of all of
the bank's shareholders;
Whether the bank will be able to achieve its capital
adequacy and business plan goals after making the transfer; and
Whether the transfer is the ``least cost'' alternative
available and will enable the association to maintain sound, adequate,
and constructive service to borrowers.
These considerations contain changes, made in response to comments from
the Council, from our proposed amendment.
The Council provided both general comments on the applicability of
the considerations and specific comments on individual considerations.
In its general comments, the Council agreed that the first and second
considerations are relevant, and should apply, to all preferential or
nonroutine transfers. The Council asserted, however, that the third
consideration is relevant, and should apply, only to transfers made to
assist distressed associations. We believe, however, that all three of
these considerations are relevant to most preferential or nonroutine
transfers. In fact, under the current prior approval regulation, we
have applied the third consideration in approving transfers to
nondistressed associations. Accordingly, in the final rule we keep
these three considerations, with some changes.
Our proposed amendment included a fourth consideration that would
have required the bank board to take into account and document whether
the transfer was necessary, feasible, and the ``least cost''
alternative available. We remove the necessary and feasible
consideration in the final rule because a bank will make these
determinations when it reviews the remaining three considerations. We
continue to believe that in deciding whether to make a transfer, a bank
should take into account whether that transfer is less costly than
other alternatives. Accordingly, we retain ``least cost'' and move it
to the third consideration.
The Council also made two specific comments on individual
considerations. First, the Council expressed concern that our proposed
consideration requiring the bank board to take into account whether the
bank will continue to be financially sound and maintain adequate
capital after the transfer was too subjective. We understand this
concern, and we change the consideration to require the bank board to
take into account whether the transfer will prevent the bank from
achieving its capital adequacy or business plan goals, as the Council
suggested. We emphasize that the bank's capital adequacy and business
plan goals must ensure that the bank will be financially sound and
maintain adequate capital.
Second, the Council commented that the proposed consideration
requiring the bank board to take into account whether the transfer
would ``enable the association to maintain service to borrowers'' was
not objective enough, because it did not set standards on the service.
We agree and clarify that the bank must take into account whether the
transfer will enable the association to maintain ``sound, adequate, and
constructive'' service in accordance with section 1.1 (a) of the Act.
We point out that the rule requires that a bank board ``take into
account and document'' whether the transfer satisfies these
considerations. The rule does not, however, require that banks satisfy
these considerations in all cases. The rule does not, for example,
require that the transfer be the ``least cost'' alternative available,
merely that the bank board take into account and document its rationale
in selecting the best solution taking into account all considerations,
not just this consideration. Moreover, the rule does not set out the
manner in which the bank board must take into account and document the
considerations. In some cases, board minutes could provide satisfactory
documentation of the considerations. Where appropriate, a bank board
may decide that a particular consideration is not applicable. If so,
the board must document why it believes the consideration is not
applicable.
V. Notification Requirements
The final rule requires banks to provide their shareholders and us,
before making a preferential or nonroutine transfer, with: (1) A
description of the transfer, and (2) the banks' documentation of the
three considerations discussed in section IV of this preamble. The
proposed amendment would have required banks to notify their
shareholders within a reasonable time after the transfer. The Council
requested that we require banks to notify shareholders in advance so
the shareholders can evaluate transfers before they are made. We agree
with the Council and change the rule to include the same notification
requirement to shareholders (at least 30 days before a transfer) as we
require for notification to us. While a bank may disclose the name of
the association receiving a transfer, it need not do so if, after
considering the specific circumstances, it determines the disclosure
would be inappropriate.
CoBank agreed that when it makes a preferential or nonroutine
transfer to an affiliated association, it should be required to notify
its affiliated associations. CoBank asserted, however, that when it
makes such a transfer it should not be required to notify its
approximately 2,000 cooperative association equityholders (including
farmer cooperatives, rural utilities and international customers) who
borrow under title III of the Act. CoBank argued that such notification
would be ``somewhat burdensome'' and that it would be difficult to
explain the transfer to its title III equityholders. We believe,
however, that CoBank's title III equityholders have the same interests
as association shareholders in being able to evaluate transfers made to
affiliated associations. Accordingly, the rule continues to require
that all banks (including CoBank) notify all
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shareholders before they make preferential or nonroutine transfers to
affiliated associations.
List of Subjects in 12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, amend part 615 of chapter
VI, title 12 of the Code of Federal Regulations to read as follows:
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
1. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
2. Revise the heading of subpart F to read as follows:
Subpart F--Property, Transfers of Capital, and Other Investments
3. Revise Sec. 615.5171 to read as follows:
Sec. 615.5171 Transfer of capital from banks to associations.
(a) Definitions for this section.
(1) Transfer of capital means any payment or forbearance by a Farm
Credit Bank or agricultural credit bank (collectively, bank) to an
affiliated association, including but not limited to:
(i) The purchase of nonvoting stock or participation certificates;
(ii) The payment of cash;
(iii) Debt forgiveness or reduction;
(iv) Interest rate concessions or interest-free loans;
(v) The transfer of loans at other than fair market value;
(vi) The reduction or elimination of standard loan servicing or
other fees; and
(vii) The assumption of operating or other expenses, such as legal
fees or insurance premiums.
(2) Preferential transfer of capital means a transfer of capital
that is not available to all similarly situated affiliated
associations.
(3) Nonroutine transfer of capital means a transfer of capital that
is not available in the ordinary course of business.
(b) Considerations for preferential or nonroutine transfers of
capital. Before authorizing a preferential or nonroutine transfer of
capital, a bank board of directors must take into account and document
whether:
(1) The transfer of capital is in the best interests of all of the
shareholders;
(2) The bank will be able to achieve its capital adequacy and
business plan goals after making the transfer of capital; and
(3) The transfer of capital is the ``least cost'' alternative
available and will enable the association to maintain sound, adequate,
and constructive service to borrowers.
(c) Notification requirements. At least 30 days before making a
preferential or nonroutine transfer of capital to an affiliated
association, banks must provide shareholders and the Chief Examiner of
the Farm Credit Administration with a description of the transfer and
the documentation required by paragraph (b) of this section.
Dated: September 8, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-23966 Filed 9-14-99; 8:45 am]
BILLING CODE 6705-01-P
