[Federal Register Volume 62, Number 231 (Tuesday, December 2, 1997)]
[Rules and Regulations]
[Pages 63644-63647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31569]
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FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AB78
Loan Policies and Operations; Loan Sales Relief
AGENCY: Farm Credit Administration.
ACTION: Direct final rule with opportunity for comment.
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SUMMARY: The Farm Credit Administration (FCA), through the FCA Board
(Board), issues a direct final rule amending its regulations relating
to loan sales into a secondary market. This action conforms FCA
regulations to recent statutory amendments to the Farm Credit Act of
1971, as amended, (Act) made by sections 206 and 208 of the Farm Credit
System Reform Act of 1996 (1996 Act). These amendments provide that
loans designated by Farm Credit System institutions for sale into a
secondary market are not subject to minimum stock purchase or borrower
rights requirements.
DATES: If no significant adverse comment is received on or before
January 2, 1998, these regulations shall be 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. If
significant adverse comment is received, the FCA will publish a notice
of withdrawal of the regulations and indicate how the Agency expects to
proceed with further rulemaking.
ADDRESSES: Comments may be submitted via electronic mail to ``comm@fca.gov'' or facsimile transmission to (703) 734-5784. Comments
also may be mailed or delivered to Patricia W. DiMuzio, Director,
Regulation Development Division, Office of Policy Development and Risk
Control, Farm Credit Administration, 1501 Farm Credit Drive, McLean,
Virginia 22102-5090. Copies of all communications received will be
available for review by interested parties in the Office of Policy
Development and Risk Control, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Regulation Development Division, Office
of Policy Development and Risk Control, (703) 883-4498, TDD (703) 883-
4444;
or
William Larsen, Senior Attorney, Legal Counsel Division, Office of
General Counsel, (703) 883-4020, TDD (703) 883-4444.
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SUPPLEMENTARY INFORMATION: The Farm Credit System Reform Act of 1996
i made significant changes in title VIII of the Act, which
governs the secondary market for agricultural loans. The 1996 Act also
provided regulatory relief to Farm Credit System (FCS) institutions.
This rulemaking conforms FCA regulations with provisions of the 1996
Act that grant relief from minimum stock purchase requirements and
borrower rights for Loans designated by FCS institutions for sale into
a secondary market.ii
I. Changes Pursuant to Section 206 of The 1996 Act
Section 206 of the 1996 Act amended section 4.3A of the Act by
granting relief from stock purchase requirements for loans designated
for sale into a secondary market. As amended, section 4.3A of the Act
establishes that an institution's bylaws may provide that: (1) For
loans made on or after enactment of section 206 that are designated for
sale into a secondary market, no voting stock or participation
certificate (collectively, equity or equities) purchase requirement
shall apply; and (2) for loans made before the enactment of section 206
that are sold into a secondary market, all equities purchased with
respect to these loans shall, subject to the institution meeting its
regulatory minimum permanent capital requirements, be retired. Section
206 further provides that if such designated loans are not sold into a
secondary market within 180 days, the otherwise applicable equity
purchase requirement shall then apply. However, an institution's bylaws
may provide that if a designated loan is subsequently sold into a
secondary market, the equities relating to the loan shall be retired.
Pursuant to these amendments to section 4.3A of the Act, the FCA is
making conforming amendments to Sec. 614.4335 pertaining to borrower
stock requirements. Amended Sec. 614.4335(a) provides that, in general,
a borrower must meet the institution's minimum borrower stock purchase
requirement as a condition of obtaining a loan. However, under amended
Sec. 614.4335(b), an institution's bylaws may provide that the
institution's minimum borrower stock purchase requirement does not
apply if a loan is designated, at the time the loan is made, for sale
into a secondary market. Amended Sec. 614.4335(b) also implements the
statutory requirement that if a designated loan is not sold into a
secondary market upon the expiration of 180 days, the minimum borrower
stock purchase requirement will apply to the loan.
Further reflecting the 1996 Act amendments to section 4.3A of the
Act, Sec. 614.4335 is amended to add provisions concerning the
retirement of borrower stock for loans sold into a secondary market.
Amended Sec. 614.4335(c)(2) states that an institution's bylaws may
provide that all outstanding voting stock held by a borrower with
respect to a loan shall be retired when the loan is sold into a
secondary market. Thus, if the institution's bylaws so provide, if a
designated loan is sold into a secondary market after 180 days, all
outstanding stock with respect to the loan shall be retired. An
institution's bylaws also may provide that all stock held by a borrower
with respect to a loan made before the enactment of the 1996 Act and
sold into a secondary market shall be retired.
Existing provisions of Sec. 614.4335 that require an institution to
meet minimum permanent capital requirements and specify the treatment
of loans sold with or without recourse are not affected by the 1996 Act
amendments and are redesignated to Sec. 614.4335(c)(1). Finally,
amended Sec. 614.4335(d) provides that paragraphs (b)(1) and (c)(2)
apply regardless of whether the institution retains a subordinated
participation interest in a loan or pool of loans or contributes to a
cash reserve.
II. Changes Pursuant to Section 208 of The 1996 Act
Section 208 of the 1996 Act amended section 4.14A of the Act by
changing the definition of the term ``loan'' to exclude from that
definition loans designated, at the time the loans are made, for sale
into a secondary market. The effect of this statutory change is that
the borrower rights provisions of the Act do not apply to loans
designated, at the time the loans are made, for sale into a secondary
market.iii As is the case with respect to the reattachment
of stock purchase requirements under section 206 of the 1996 Act, if a
designated loan is not sold into a secondary market within 180 days of
designation, borrower rights become applicable unless and until the
loan is subsequently sold into a secondary market.
The FCA is amending Sec. 614.4336 in order to conform it to amended
section 4.14A of the Act. Amended Sec. 614.4336 sets forth treatment of
borrower rights in three loan sale situations: (1) Loan sales to Farm
Credit System institutions; (2) loans designated for sale into a
secondary market; and (3) other loan sales. Under amended
Sec. 614.4336(a), a loan sold to another qualified lender retains
borrower rights. Under amended Sec. 614.4336(b), loans made on or after
February 10, 1996, that are designated at the time they are made for
sale into a secondary market are not subject to borrower rights, unless
the loan is not sold within 180 days of the date of designation. After
180 days, borrower rights apply to a designated loan unless and until
it is subsequently sold into a secondary market. Amended
Sec. 614.4336(c) retains the notice and relinquishment provisions that
currently apply to loan sales to other lenders.
In addition to amending the definition of ``loan'' in section 4.14A
of the Act to remove borrower rights protections from loans designated
for sale into a secondary market, section 208(b) of the 1996 Act
applied the amended definition of ``loan'' to section 8.9(b) of the
Act, effectively removing the section 8.9(b) borrower rights
protections that applied before a loan was sold into the secondary
market for agricultural loans established by title VIII of the Act.
This statutory change requires the removal of current Sec. 614.4367(b)
to conform FCA regulations to the amended Act. In its current form,
Sec. 614.4367(b) implemented section 8.9(b) of the Act by requiring
certain disclosures for loans that will or may be pooled for sale into
the secondary market. The required disclosures included notice that an
applicant could refuse to have his or her loan pooled and thus retain
statutory borrower rights.
Disclosure was also required that, within 3 days of commitment, the
applicant had the right to refuse to allow the loan to be pooled.
Because section 208 of the 1996 Act effectively provides that borrower
rights do not apply to loans designated for sale into a secondary
market, the disclosures and approvals required by Sec. 614.4367(b) no
longer apply. Accordingly, the FCA is removing paragraph (b) of
Sec. 614.4367 and redesignating the remaining paragraphs.
In the event that a designated loan is not sold into the secondary
market within 180 days, the terms of the borrower's loan will change in
two material respects. The borrower is required to purchase stock,
which will increase the effective interest rate on the loan. The
borrower will also be entitled to borrower rights under the Act.
Institutions should ensure that borrowers fully understand their
obligations and rights at the time the loan is made. The FCA has not
included special disclosure obligations for loans designated for sale
into the secondary market because the existing requirements of
Sec. 614.4367 are sufficient to ensure that borrowers are appropriately
informed of: (1) Their obligation to purchase stock if the loan
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is not sold as intended; (2) the change in the effective interest rate
resulting from the stock purchase requirement; and (3) the borrower
rights that will apply.
III. Direct Final Rulemaking
With the promulgation of these regulations, the FCA is using, for
the first time, the ``direct final'' procedure for rulemaking. Direct
final rulemaking permits agencies to adopt noncontroversial rules on an
expedited basis, without going through the usual proposal and final
stages of notice-and-comment rulemaking. Direct final rulemaking was
recommended for promulgation of noncontroversial rules by the
Administrative Conference of the United States (ACUS) in its
Recommendation 95-4, adopted June 15, 1995. Vice President Gore also
recommended direct final rulemaking in his report on the National
Performance Review (NPR) as a means for agencies to streamline the
rulemaking process. See ``Improving Regulatory Systems,'' Accompanying
Report of the NPR, September, 1993.
The FCA is committed to the use of innovative rule-making
techniques to further its strategic goal of implementing effective and
efficient regulations. The FCA believes that the use of direct final
rulemaking in appropriate circumstances offers the means to streamline
the rulemaking process for noncontroversial rules by reducing the time
and resources needed for development, review, clearance, and
publication, while still affording the public adequate opportunity to
comment on or object to a rule.
In direct final rulemaking, the agency gives notice that a rule
will become final at a specified future date unless the agency receives
significant adverse comment on the rule during the comment period
established in the rulemaking notice. The Administrative Procedure Act,
5 U.S.C. 551-59, et seq. (APA), supports this streamlined technique of
rulemaking. Direct final rulemaking is justified under section
553(b)(B) of the APA. Section 553(b)(B) is the APA's ``good cause''
exemption for omitting notice and comment on a rule where an agency
finds ``that notice and public procedure thereon are impracticable,
unnecessary, or contrary to the public interest.'' In direct final
rulemaking, the agency finds that the rule is sufficiently
straightforward and noncontroversial to make normal notice and comment
unnecessary under the APA. However, rather than eliminating public
comment altogether, as would be permissible under section 553(b)(B),
the agency gives the public an opportunity to rebut the agency's
conclusion that public input on the rule is unnecessary.
Notwithstanding this ``good cause'' rationale under section
553(b)(B), direct final rulemaking also meets the basic notice-and-
comment requirements of the APA, although the timing and format of
notice and opportunity for comment necessarily differs from a typical
notice-and-comment rulemaking. If, during the comment period provided,
the agency receives a significant adverse comment on a direct final
rule, the agency commits to withdraw the rule and may either issue
another direct final rule or promulgate the rule in proposed form. A
significant adverse comment is defined as one where the commenter
explains why the rule would be inappropriate, including challenges to
the rule's underlying premise or approach, or would be ineffective or
unacceptable without a change. In general, a significant adverse
comment would raise an issue serious enough to warrant a substantive
response from the agency in a notice-and-comment proceeding.
The FCA believes that the secondary market loan sale amendments fit
the category of rules appropriate for direct final rulemaking. These
changes merely conform the regulations to the 1996 Act. The changes
remove or amend current regulatory requirements that do not reflect the
changes in the Act. As such, the changes are straightforward and
noncontroversial. For these reasons, the FCA does not anticipate that
there will be significant adverse comment on this rulemaking.
Nonetheless, in keeping with the procedures recommended by ACUS for
direct final rulemaking, the FCA is providing a 30-day period from
publication during which members of the public may comment on the rule.
If significant adverse comment is received during the comment period,
the FCA will publish a notice of withdrawal of the rule that will also
indicate how further rulemaking will proceed. If no significant adverse
comment is received, the FCA will publish its customary notice of the
effective date of the rule following the required Congressional waiting
period under section 5.17(c)(1) of the Act.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
For the reasons set out in the preamble, part 614 of chapter VI,
title 12 of the Code of Federal Regulations is amended to read as
follows:
PART 614--LOAN POLICIES AND OPERATIONS
1. The authority citation for part 614 is revised to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.3A, 4.12, 4.12A,
4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E. 4.18, 4.18A, 4.19,
4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13,
8.0, 8.5, 8.9 of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014,
2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094,
2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2154a, 2183,
2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a,
2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-
1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5, 2279aa-9); sec. 413 of
Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart H--Loan Purchases and Sales
2. Sections 614.4335 and 614.4336 are revised to read as follows:
Sec. 614.4335 Borrower stock requirements.
(a) In general. Except as provided in paragraph (b) of this
section, a borrower shall meet the institution's minimum borrower stock
purchase requirements as a condition of obtaining a loan.
(b) Loans designated for sale into a secondary market. (1) An
institution's bylaws may provide that the institution's minimum
borrower stock purchase requirements do not apply if a loan is
designated, at the time it is made, for sale into a secondary market.
(2) If a loan designated for sale under paragraph (b)(1) of this
section is not sold into a secondary market during the 180-day period
that begins on the date of designation, the institution's minimum
borrower stock purchase requirements shall apply.
(c) Retirement of borrower stock. (1) In general. Borrower stock
may be retired only if the institution meets the minimum permanent
capital requirements imposed by the FCA pursuant to the Act or
regulations and, except as provided in paragraph (c)(2) of this
section, in accordance with the following:
(i) Borrower stock may be retired if the entire loan is sold
without recourse, provided that when the loan is sold without recourse
to another Farm Credit System institution, the borrower may elect to
hold stock in either the selling or purchasing institution.
(ii) Borrower stock may not be retired when the entire loan is sold
with recourse.
(iii) When an interest in a loan is sold without recourse, a
proportionate amount of borrower stock may be
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retired, but in no event may stock be retired below the institution's
minimum stock purchase requirements for the interest retained.
(iv) If an institution repurchases a loan on which the stock has
been retired, the borrower shall be required to repurchase stock in the
amount of the minimum stock purchase requirement.
(2) Loans sold into a secondary market. An institution's bylaws may
provide that all outstanding voting stock held by a borrower with
respect to a loan shall be retired when the loan is sold into a
secondary market.
(d) Applicability. In the case of a loan sold into a secondary
market under title VIII of the Act, paragraphs (b)(1) and (c)(2) of
this section apply regardless of whether the institution retains a
subordinated participation interest in a loan or pool of loans or
contributes to a cash reserve.
Sec. 614.4336 Borrower rights in connection with loan sales.
(a) Loan sales to Farm Credit System institutions. Loans made by
qualified lenders (as defined in section 4.14A(a)(6) of the Act) and
interests in such loans that are sold to other qualified lenders are
subject to the borrower rights provisions of title IV of the Act.
(b) Loans designated for sale into a secondary market. (1) Except
as provided in paragraph (b)(2) of this section, the borrower rights
provisions of sections 4.14, 4.14A, 4.14B, 4.14C, 4.14D, and 4.36 of
the Act do not apply to a loan made on or after February 10, 1996, that
is designated for sale into a secondary market at the time it is made.
(2) If a loan designated for sale under paragraph (b)(1) of this
section is not sold into a secondary market during the 180-day period
that begins on the date of designation, the borrower rights provisions
specified as inapplicable pursuant to paragraph (b)(1) of this section
shall apply, provided that if the loan is subsequently sold into a
secondary market, the borrower rights specified in paragraph (b)(1) of
this section become inapplicable beginning on the date of the
subsequent sale.
(c) Other loan sales. (1) Except for loans sold to another Farm
Credit institution or designated for sale into a secondary market, a
qualified lender must comply with one of the following two requirements
before selling a loan or interest in a loan that is subject to the
borrower rights provisions of title IV of the Act:
(i) Include provisions in the contract with the borrower, or a
written modification thereto, that ensure that the purchaser of the
loan will be obligated to accord the borrower the same rights qualified
lenders must provide under the Act; or
(ii) Obtain from the borrower a signed written consent to the sale
that explicitly states that the borrower relinquishes the statutory
borrower rights. The consent to the loan sale and the relinquishment of
the borrower rights shall have no effect until the loan is actually
sold and shall be ineffective in the event that the lender or any other
Farm Credit System institution repurchases the loan or any interest
therein.
(2) Before obtaining the borrower's consent to the sale of the loan
and the relinquishment of borrower rights pursuant to paragraph
(c)(1)(ii) of this section, the lending institution shall disclose in
writing to the borrower:
(i) A full and complete description of the statutory rights that
the borrower is asked to relinquish;
(ii) Any changes in the loan terms or conditions that will occur if
the loan is not sold; and
(iii) The fact that the relinquishment of the statutory borrower
rights will not become effective unless the loan is actually sold and
shall become ineffective in the event that the lender or any other Farm
Credit System institution repurchases the loan or any interest therein.
(3) The making of a loan may not be conditioned on the borrower's
consent to its sale and relinquishment of statutory borrower rights.
Subpart K--Disclosure of Loan Information
Sec. 614.4367 [Amended]
3. Section 614.4367 is amended by removing paragraph (b) and
redesignating paragraphs (c) through (e) as paragraphs (b) through (d).
Dated: November 24, 1997.
Nan P. Mitchem,
Acting Secretary, Farm Credit Administration Board.
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\i\ Pub. L. 104-105 (February 10, 1996).
ii Generally, for each loan made by a qualified
lender, a borrower is subject to minimum stock purchase requirements
of 2 percent of the loan or $1,000, whichever is less. The borrower
rights provisions of the Act impose certain disclosure and other
obligations on lenders.
iii The specific borrower rights under the Act that
are affected by the section 4.14A definitional change include
reconsideration of actions (sec. 4.14), restructuring distressed
loans (sec. 4.14A), effect of restructuring on borrower stock (sec.
4.14B), review of restructuring denials (sec. 4.14C), protection of
borrowers who meet all loan obligations (sec. 4.14D), and right of
first refusal (sec. 4.36).
As enacted, the language of section 208 of the 1996 Act amending
the definition of ``loan'' leaves no doubt that Congress intended to
include the section 4.36 borrower's right of first refusal among the
borrower rights that become inapplicable when a loan is designated
for sale into a secondary market. This is consistent with section
8.9(a) of the Act, which specifically exempts loans pooled under
title VIII from section 4.36 borrower rights. However, section 208
of the 1996 Act did not amend the introductory paragraph of section
4.14A(a), which limits the applicability of the section's
definitions to those ``used in this part [C of title IV].'' Since
section 4.36 is located in part G (``Miscellaneous'') of title IV,
it could technically be argued that the amended definition of
``loan'' does not apply to section 4.36. Notwithstanding this
apparent drafting inconsistency, the FCA believes Congressional
intent is clear and interprets the 1996 Act to exempt loans
designated for sale into a secondary market from the section 4.36
borrower's right of first refusal.
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[FR Doc. 97-31569 Filed 12-1-97; 8:45 am]
BILLING CODE 6705-01-P
