[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57913-57916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28583]
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FARM CREDIT ADMINISTRATION
12 CFR Ch. VI
RIN 3052-AB53
Statement on Regulatory Burden
AGENCY: Farm Credit Administration.
ACTION: Final Statement on Regulatory Burden.
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SUMMARY: This is the second phase of an ongoing effort by the Farm
Credit Administration (FCA) to reduce regulatory burdens on the Farm
Credit System (FCS or System). Many System institutions responded to
the FCA's request for comments by identifying regulations that they
consider to be burdensome. The FCA deleted several unnecessary or
obsolete regulations in the first phase of this project. This document
informs the public of those regulations that the FCA will retain
without amendment because they are necessary to: (1) Implement or
interpret the Farm Credit Act of 1971, as amended (Act), or (2) protect
the safety and soundness of the System. The FCA also identifies pending
or future actions that will respond to the remaining regulatory burden
issues.
EFFECTIVE DATE: November 24, 1995.
[[Page 57914]]
FOR FURTHER INFORMATION CONTACT:
W. Eric Howard, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)
883-4498, TDD (703) 883-4444,
or
Richard A. Katz, 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:
I. Background
On June 10, 1993, the FCA Board approved a Statement on Regulatory
Burden (Statement) seeking public comment on the appropriateness of
requirements that the FCA regulations impose on the FCS. See 58 FR
34003 (June 23, 1993). More specifically, the FCA asked the public to
identify regulations that either duplicate other governmental
requirements, are not effective, or impose a burden that is greater
than the benefit derived. In response to the notice, System
institutions or their trade associations requested that the FCA repeal
or amend several regulations.
In the first phase of this project, the FCA reduced unnecessary
regulatory burdens on the FCS by repealing several regulations and two
Agency prior approval requirements. See 60 FR 20008 (Apr. 24, 1995); 60
FR 27401 (May 24, 1995).
Today, the FCA notifies the FCS and other interested parties of
those regulations that it will retain without amendment. Although
System institutions sought the repeal or modification of the
regulations identified below, the FCA, consistent with its Statement on
Regulatory Philosophy,\1\ concludes that these regulations are either
required by statute or are necessary for safety and soundness. For
these reasons, the FCA will not delete or amend the following
regulations: Secs. 611.1122; 614.4070; 614.4165; 614.4335; 614.4336;
614.4337; and 615.5172. An explanation of the FCA's rationale for these
particular regulatory requirements follows.
\1\ See 60 FR 26034, May 16, 1995.
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II. Regulations That Will Be Retained Without Revision
A. Merger Requirements
Two commenters suggested that the FCA revise Sec. 611.1122, which
establishes timing and disclosure requirements for the merger of FCS
institutions. One of the commenters asserted that the regulation
mandates excessive periods for review and consideration of merger
applications. As a result, the commenters believe that Sec. 611.1122
unnecessarily postpones the effective date of such mergers. The
commenters suggested that the FCA develop new procedures to expedite
mergers of FCS banks and associations. In addition, one of the
commenters advised the FCA to revise Sec. 611.1122 because it requires
too many disclosures to members.
Section 7.11 of the Act requires the FCA to act upon merger
applications within 60 days of their receipt. In the event that the FCA
fails to act within the 60-day period, the affected institutions are
authorized by section 7.11 of the Act to submit their merger or
consolidation plan directly to their shareholders. The 60-day period
provides the FCA with sufficient time to review: (1) Complex
transactions, or (2) multiple mergers or consolidations that are being
processed concurrently. Although the Act allows the FCA 60 days to
consider a proposed merger between System institutions, the Agency does
not always require 60 days to process each merger application. The FCA
acts upon the vast majority of corporate restructuring applications
within the prescribed time period. However, the FCA requires the
flexibility offered by section 7.11 of the Act and Sec. 611.1122 in
order to process complex transactions. Although the FCA will not repeal
the 60-day timeframe for processing corporate applications, it is
considering approaches that could shorten the time for processing
noncomplex or noncontroversial corporate applications.
Commenters claim that Sec. 611.1122 requires too many disclosures
to institution shareholders about pending consolidations and mergers.
These commenters suggest that the FCA amend the regulation so it would
require the merging or consolidating institutions to provide their
shareholders with a brief summary of the proposed transaction. However,
the commenters suggest that the regulation continue to require a
complete disclosure to the FCA about such corporate restructurings.
In the FCA's view, a brief summary of the proposed transaction does
not adequately protect the right of shareholders to make informed
decisions about the future of their institutions. When two or more
institutions combine, stockholders exchange their equity interest in
the original institution for stock in a larger institution. As owners
of each FCS bank or association, the shareholders/borrowers have a
right to make informed decisions about the future of their institution.
For this reason, the FCA will not amend the disclosure requirements in
Sec. 611.1122.
B. Chartered Territories
A Farm Credit Bank (FCB) and its Federal land bank associations
(FLBAs) have requested that the FCA repeal Sec. 614.4070 so that System
institutions no longer have the authority to make or participate in
loans outside their chartered territories. According to sections 1.5(6)
and 2.2(13) of the Act, the lending authorities of FCS banks and
associations are subject to FCA regulations. Furthermore, section
5.17(a)(9) of the Act authorizes the FCA to prescribe regulations that
are necessary or appropriate for carrying out the Act, while section
5.17(a)(5) allows FCA regulations to confer approval upon certain
actions of FCS institutions. In the absence of Sec. 614.4070, FCS banks
and associations would only be authorized to make or participate in
loans inside their chartered territories.
The repeal of Sec. 614.4070 would deprive System institutions of
the flexibility, under certain conditions, to finance borrowers who
conduct operations outside their chartered territories. The consent and
notification requirements in Sec. 614.4070 prevent unrestrained
competition between System institutions. At this time, the FCA declines
to modify or repeal Sec. 614.4070 because it balances the needs of
borrowers and System institutions.
C. Borrower Stock Requirements for Loans Sold Into Secondary Markets
Two commenters requested that the FCA repeal Sec. 614.4335(a),
which requires borrowers whose loans are destined for sale in a
secondary market to purchase stock in System institutions. These
commenters claim that this stock-purchase requirement places System
lenders at a disadvantage with their competitors.
The FCA responds that the stock-purchase requirement in
Sec. 614.4335 derives from section 4.3A(c) of the Act. Section 4.3A(c)
of the Act states that all System institutions must sell stock when
they make loans to new borrowers ``notwithstanding any other provision
of this Act.'' Furthermore, section 4.3A(g) of the Act states that
section 4.3A controls if it is inconsistent with any other provision of
the Act except section 4.9A.
Prior to 1987, former sections 1.16(c) and 2.13(f) of the Act
expressly waived the requirement that borrowers purchase stock for
loans that were destined for sale to, or participation
[[Page 57915]]
with, non-System lenders. However, sections 1.16(c) and 2.13(f) of the
Act were repealed by the Agricultural Credit Act of 1987 (1987 Act).\2\
Furthermore, section 301 of the 1987 Act consolidated the stock
capitalization requirements for all Farm Credit banks and associations
into section 4.3A of the amended Act, which indicates that all
borrowers are required, without exception, to purchase stock in the
System bank or association that makes their loans. The Act, as amended,
no longer contains any provision that explicitly exempts borrowers
whose loans are originated for sale from complying with the statutory
stock-purchase requirement. The committee reports and the congressional
debates to the 1987 Act are silent as to reasons why Congress amended
the Act so it no longer exempts loans that are destined to secondary
markets from the stock-purchase requirement. In fact, there is no
indication in the legislation that Congress considered the impact
section 4.3A of the Act would have on the: (1) Ability of FCS banks and
associations to sell loans to non-System lenders; and (2) development
of the Federal Agricultural Mortgage Corporation (Farmer Mac) as a
secondary market for agricultural and rural home loans.
\2\ Pub. L. 100-233, 101 Stat. 1568, (Jan. 6, 1988).
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The FCA is aware that the stock-purchase requirement for loans
destined to secondary markets causes inconvenience to System lenders
and their borrowers. Nevertheless, Sec. 614.4335(a) is consistent with
the plain language of section 4.3A of the Act. However, the FCA
observes that FCS banks and associations have flexibility within the
confines of section 4.3A of the Act to devise practical solutions that
will minimize the difficulties associated with the borrower stock
requirements. For example, a recent FCA Bookletter, OE-403 (Dec. 23,
1994), concluded that FCS banks and associations are not required to
sell stock if they ``table fund'' loans for non-System lenders that are
certified Farmer Mac poolers.
D. Borrower Rights and Loan Sales
Two commenters requested that the FCA amend Sec. 614.4336 so that
borrower rights would not apply to loans that are sold to established
secondary markets or non-System lenders. These commenters assert that
borrower rights increase the transaction costs associated with the sale
of loans to other lenders. More importantly, non-System institutions
usually will not purchase loans that are subject to borrower rights
requirements.
In order to fully respond to the commenters, the FCA has examined
those provisions of the Act that govern borrower rights on FCS loans.
According to sections 4.14A(a) (5) and (6) of the Act, borrower rights
attach only to loans that System banks (other than banks for
cooperatives), associations, and other financing institutions make to
farmers, ranchers, and aquatic producers and harvesters. Furthermore,
the disclosure requirements in section 4.13 of the Act do not apply to
consumer loans that are subject to the Truth in Lending Act, 15 U.S.C.
1601 et seq. Thus, borrower rights requirements do not attach to home
loans that System banks and associations make to rural residents who
are not agricultural or aquatic producers. For this reason, the
borrower rights provisions in title IV of the Act do not impede the
sale of non-farm rural home loans to the Federal National Mortgage
Association, the Federal Home Loan Mortgage Corporation, Farmer Mac, or
non-System lenders.
According to section 8.9(a) of the Act, borrower rights do not
apply to agricultural mortgage loans that collateralize Farmer Mac
securities. Furthermore, section 8.9(b) of the Act prescribes specific
procedures for detaching borrower rights from agricultural mortgage
loans that FCS lenders sell to Farmer Mac poolers. Two regulations,
Secs. 614.4336(a)(1) and 614.4367(b), implement these statutory
authorities.
Some System institutions have expressed strong opposition to
Sec. 614.4336(a)(2), which prescribes two alternatives for resolving
borrower rights when loans are sold to non-System lenders that are not
Farmer Mac poolers. More specifically, Sec. 614.4336(a)(2) requires the
FCS lender to either: (1) Incorporate these statutory borrower rights
into the loan agreement so that the purchaser assumes these
obligations; or (2) obtain the borrower's signed, written consent to
the sale, including the relinquishment of borrower rights. As noted
earlier, System institutions assert that Sec. 614.4336(a)(2)
effectively precludes the sale of most loans to non-System lenders.
Some System lenders have opined that the sale of loans to non-
System institutions automatically extinguishes borrower rights. The FCA
fully responded to this claim when Sec. 614.4336(a)(2) was adopted as a
final regulation in 1992. See 57 FR 38237 (Aug. 24, 1992). From the
FCA's perspective, the rationale for Sec. 614.4336(a)(2) remains valid.
As explained in the preamble to Sec. 614.4336(a)(2), the FCA finds
no support in either the Act or its legislative history for the claim
that the loan sale authorities of FCS institutions supersede the
borrower rights provisions in title IV of the Act. In fact, the
System's loan sale authorities already existed at the time that the Act
was amended to guarantee certain protections to FCS borrowers. In this
context, Sec. 614.4336(a)(2) balances the statutory authority of System
lenders to sell their loans with the borrower rights provisions of the
Act. The FCA observes that Sec. 614.4336(a)(2) prevents potential
disputes that could erupt if borrower rights issues are left unresolved
when loans are sold to non-System lenders who are not Farmer Mac
poolers. Uncertainty over the status of borrower rights may also deter
an informed non-System lender from purchasing loans from FCS banks and
associations.
The approach advocated by the commenters would allow FCS
institutions to unilaterally deprive borrowers of their statutory
rights without their consent. Accordingly, the FCA will retain
Sec. 614.4336(a) because it implements the Act by equitably balancing
borrower rights with the authority of FCS banks and associations to
sell loans to non-System lenders.
Recently, the FCA has received inquiries about the application of
borrower rights to loans that are guaranteed by other Federal agencies.
This issue is currently under consideration at FCA.
E. Disclosures
Under Sec. 614.4337(a), an FCS bank or association that sells a
loan to another lender is required to disclose to the borrower
specified information about the purchaser, the servicing agent,
borrower rights, and changes in the loan terms. Two commenters
suggested that the disclosure of loan sales and the corresponding
reporting requirements in Sec. 614.4337(a) are unnecessary because they
should be handled by the purchaser of the loan, rather than the FCS
institution.
The FCA believes that the disclosure requirements in
Sec. 614.4337(a) are the responsibility of the seller, not the
purchaser, of System loans. As previously discussed, the Act imposes
borrower stock and borrower rights requirements on loans that are
originated by System banks and associations. These institutions are in
the best position to explain the impact of the sale on these matters.
Furthermore, disclosures concerning servicing rights were added to this
regulation after a General Accounting
[[Page 57916]]
Office report criticized certain System loan sale practices that
created hardships for many borrowers. See 57 FR 38237 (Aug. 24, 1992).
As Sec. 614.4337 addresses the obligations of System institutions that
originate and subsequently sell the borrowers' loans, the FCA will not
repeal this regulation.
F. Investment in Farmers' Notes
Several FCBs and associations requested that the FCA either
eliminate or modify the full-recourse requirement in Sec. 615.5172,
which authorizes PCAs and ACAs to invest in Farmers' Notes. This
regulation authorizes PCAs and ACAs, in accordance with the policies
prescribed by the boards of their funding banks, to invest in notes and
other obligations evidencing the purchase of farm equipment, machinery,
and supplies by farmers and ranchers from private dealers and
cooperatives. The regulation requires that the debtors on these
Farmers' Notes must be eligible to borrow from PCAs and ACAs. More
importantly, Sec. 615.5172(d) states that ``all notes in which the
association invests shall be endorsed with full recourse against the
cooperative or dealer.''
Commenters claimed that this full-recourse requirement adversely
impacts System competitiveness in the short-term credit market and
restrains their business opportunities.
The commenters asserted that: (1) The recourse requirement should
be a credit decision of the association, and (2) the full-recourse
requirement is unrelated to safety and soundness.
Although the FCA realizes that the full-recourse requirement in
Sec. 615.5172(d) may deprive PCAs and ACAs of some profitable business
opportunities, it implements several provisions of the Act. The
Farmers' Notes program derives from section 2.2(10) of the Act, which
authorizes associations to invest their funds, as approved by their
funding bank, pursuant to FCA regulations. Therefore, the regulation
implements the investment authorities, not the lending powers, of PCAs
and ACAs. Because the full-recourse requirement precludes PCAs and ACAs
from assuming any credit risk on Farmers' Notes, Sec. 615.5172(d)
ensures that these instruments are treated as investments rather than
loans.
The full-recourse requirement prevents PCAs and ACAs from extending
credit to an eligible borrower without complying with provisions of the
Act that govern their lending authorities and capitalization
requirements. Farm Credit banks and associations lack authority under
sections 1.5(16) and 2.2(11) of the Act, respectively, to purchase
operating loans from non-System lenders. Furthermore, the commenters'
recommendation is incompatible with provisions of the Act that require:
(1) System institutions to accord borrower rights on agricultural or
aquatic loans, and (2) farmers to purchase voting stock when they
obtain credit from a System lender. For these reasons, the FCA cannot
delete or modify the full-recourse requirement in Sec. 615.5172(d)
without an amendment to the Act to allow System banks and associations
to purchase loans from non-FCS lenders.
III. Future Efforts To Reduce Unnecessary Regulatory Burdens on FCS
Institutions
All remaining regulatory burden issues that System institutions
raised during the comment period are being addressed in separate
regulatory projects that have already been assigned to specific FCA
task forces. Within the past 2 years, the FCA has responded to some
System concerns about regulatory burdens by adopting final investment
and related services regulations. This summer, the FCA proposed new
eligibility regulations that are designed to relieve unnecessary
regulatory burdens on the FCS while simultaneously enforcing statutory
requirements and promoting safety and soundness. The FCA work groups
are considering possible amendments to existing regulations that
govern: (1) General Financing Agreements; (2) Agency prior approvals;
(3) quarterly reports to shareholders; (4) letters of credit for
international trade; (5) credit underwriting standards and independent
credit judgments on loan participation; and (6) the 10-day notification
requirement for changes in interest rates. Separately, the FCA will
review whether Sec. 611.330 could be amended so that FCS institutions
could, under certain conditions, use ballots containing identity codes
in non-weighted elections without compromising voter secrecy and the
integrity of the electoral process. The Agency also plans to reevaluate
the regulatory timeframes associated with the reconsideration of
mergers, consolidations, and other corporate restructurings that have
been approved by an institution's shareholders under Sec. 611.1122(k).
Sections 4.9 and 5.17(a)(3) of the Act specifically require reports
about young, beginning, and small farmer programs at FCS institutions.
The FCA has no latitude to grant relief from these statutory reporting
requirements. However, the Agency is currently considering whether
Sec. 614.4165(d) is still necessary because other methods may be
appropriate for ensuring compliance with the statutory reporting
requirements for young, beginning, and small farmer programs.
As part of its strategic plan, the FCA is considering comprehensive
revisions to the Loan Accounting and Reporting System (LARS) and Call
Report requirements. As results are achieved from this strategic goal,
unnecessary or duplicative LARS and Call Report requirements on System
institutions will be eliminated. However, changes to these reporting
requirements and further changes to regulatory requirements must be
accomplished without any adverse impact on the ability of the FCA to
discharge its safety and soundness responsibilities under the Act.
Except for the specific issues outlined above that may be addressed
in ongoing regulation projects, the FCA considers this its final
response to comments received pursuant to its regulatory burden
request.
Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28583 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P
