99-3980. Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; FCB Assistance to Associations

[Federal Register Volume 64, Number 32 (Thursday, February 18, 1999)]
[Proposed Rules]
[Pages 8018-8020]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3980]


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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: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency), is proposing 
to repeal a regulatory requirement that a Farm Credit Bank or an 
agricultural credit bank (collectively referred to as a bank) obtain 
FCA prior approval before giving financial assistance to an affiliated 
association. Instead, the proposed rule would require a bank to 
consider various standards before providing financial assistance and 
notify both the FCA and bank shareholders. We expect this rule change 
to reduce regulatory burden on banks.

DATES: Please send your comments to us on or before March 22, 1999.

ADDRESSES: You may mail or deliver written comments to Patricia W. 
DiMuzio, Director, Regulation and Policy Division, Office of Policy and 
Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
Virginia 22102-5090 or send them by facsimile transmission to (703) 
734-5784. You may also submit comments via electronic mail to ``[e-mail]'' or through the Pending Regulations section of our 
website at ``www.fca.gov.'' You may review copies of all comments we 
receive in the Office of Policy and Analysis, Farm Credit 
Administration.

FOR FURTHER INFORMATION CONTACT: Dale L. Aultman, Policy Analyst, 
Office of Policy and Analysis, Farm Credit Administration, McLean, VA 
22102-5090, [phone], TDD [phone], or Jennifer A. Cohn, 
Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, [phone], TDD [phone].

SUPPLEMENTARY INFORMATION: This action furthers our strategic plan 
commitment to consider eliminating regulatory prior approvals that are 
not required by the Farm Credit Act of 1971, as amended (Act), or are 
not based on safety and soundness concerns. The proposed regulation 
would eliminate the existing requirement in Sec. 615.5171 that the FCA 
approve, in advance, any financial assistance from a bank to its 
affiliated associations. This change is appropriate for two reasons:
     The existing regulation's prior approval requirement runs 
counter to our current approach to supervising risk in Farm Credit 
System (System) institutions. Consistent with our role as arm's-length 
regulator, we have found that we can replace many prior approval 
requirements with simple notification requirements.
     Our new, much stronger, capital regulations will help to 
ensure that a bank will not imperil its own capital position in 
providing assistance to an association. See 62 FR 4449, January 30, 
1997, for a more detailed discussion of our capital regulations.

I. Scope and Application of Sec. 615.5171

    Section 1.5(11) of the Act provides that each Farm Credit Bank 
shall have the power, subject to our regulation, to ``purchase 
nonvoting stock in, or pay in surplus to * * * associations in its 
district.'' Section 615.5171 implements this provision of the Act as 
follows: ``Farm Credit Banks may purchase nonvoting stock and 
participation certificates of and pay in surplus to associations in 
their respective districts when authorized by the bank board of 
directors on a case basis and approved by the Farm Credit 
Administration.''
    The regulation applies to any bank purchase of association 
nonvoting stock and participation certificates. The regulation does not 
discuss voting stock because banks are not eligible association 
borrowers/members and thus are not permitted to hold association voting 
stock. The regulation also refers to the bank's statutory authority to 
``pay in surplus'' to associations. FCA's interpretations of the ``pay 
in surplus'' language have resulted in a broad application of the prior 
approval requirement for financial assistance transactions.
    In general, it has been our practice to consider a bank to have 
triggered the prior approval requirement of this regulation when it 
purchases nonvoting stock or participation certificates or takes other 
action to pay in surplus to improve the capital position of an 
association. Thus, the FCA has required prior approval for the 
following types of transactions:
    (1) Cash gifts;
    (2) Debt forgiveness or compromise of indebtedness;
    (3) Interest rate concessions;
    (4) Interest free loans;
    (5) Transfer of loans at less than fair market value;
    (6) Reduction or elimination of standard loan service fees;
    (7) Assumption of operating or other expenses (e.g., legal fees, 
insurance premiums, etc.); and

[[Page 8019]]

    (8) Special compensation.
    As currently interpreted, Sec. 615.5171 also applies to 
transactions pursuant to loss-sharing agreements between banks and 
their affiliated associations. Under Sec. 614.4340 of this chapter, any 
System institution may enter into an agreement to share loan and other 
losses with any other System institution. The agreements can involve 
the sharing of losses to protect against stock and participation 
certificate impairment, or for any other purpose. The agreements may 
address losses that arise in the future or that were recognized before 
the date of the agreement.
    System institutions may execute loss-sharing agreements without FCA 
prior approval. In contrast, the FCA must approve in advance 
transactions pursuant to a loss-sharing agreement that result in a bank 
transferring capital or surplus to an association. Our proposed rule 
would eliminate Agency prior approval of such loss-sharing 
transactions, but would still require a bank to notify us before 
carrying out the transaction.
    We have not interpreted the current regulation to cover routine 
business transactions and agreements between the banks and 
associations, such as a General Financing Agreement. Thus, 
Sec. 615.5171 does not cover payment of dividends or patronage, normal 
adjustments to interest rates, bank equalization of purchased equity 
investments, and similar matters ordinarily addressed in an 
institution's bylaws. Our proposed rule would not change this approach.

II. Approval of Financial Assistance Under Sec. 615.5171

    Generally, we have approved bank financial assistance to an 
association under the following circumstances:
    (1) The bank would continue to be financially sound after providing 
assistance. The financial assistance would not place the bank's capital 
at risk prior to association capital.
    (2) The financial assistance has a reasonable chance of returning 
the association to financial stability and self-sufficiency. Similarly, 
financial assistance provided to facilitate a merger of a troubled 
association would result in a reasonable chance for financial stability 
and continued service to borrowers.
    (3) The proposed financial assistance is the ``least cost'' option 
available.
    We have also ensured that other bank shareholders were informed of 
the financial assistance and that their interests were adequately 
considered by the bank board. In addition, in reviewing the purpose of 
proposed financial assistance requests, we have focused on ensuring 
that one association was not unduly advantaged compared to other 
affiliated associations. We have incorporated these general criteria 
for approval of financial assistance into the standards and notice 
sections of the proposed regulation.

III. The Proposed Regulation

    We propose that the prior approval requirement contained in 
Sec. 615.5171 be removed and replaced with the following provisions:
    (1) To clarify when the regulation is applicable, we have added a 
definition of financial assistance. This definition lists bank 
transactions with affiliated associations that we consider to be 
financial assistance. In general, financial assistance transactions are 
those in which a bank conveys a direct or indirect financial benefit 
to, or enters into contractual arrangements with, an affiliated 
association on a preferential basis not available on similar terms to 
all affiliated associations. On the other hand, we clarify that 
financial assistance does not include routine business transactions or 
transactions available on similar and nonpreferential terms to all 
affiliated associations.
    (2) We have added a list of standards that a bank board must 
consider before authorizing financial assistance to an affiliated 
association. These standards are designed to ensure that financial 
assistance is in the best interests of the shareholders of the banks as 
well as the receiving association. Bank boards that give financial 
assistance must document their consideration of these standards.
    (3) We have replaced the current prior approval requirement with a 
requirement for prior notification to FCA. This should provide greater 
flexibility to the banks and associations, while allowing us to 
identify and address safety and soundness concerns before a bank takes 
assistance action. During the 30-day notification period, we may need 
to request additional information. We also may exercise our enforcement 
authorities under title IV, part A, and title V, part C, of the Act.
    (4) We have added a requirement for post notification to 
shareholders. This will ensure that all shareholders of the bank 
(associations and other financing institutions) are appropriately 
informed of the bank's assistance action. Banks may inform shareholders 
before assistance is given, and, in general, should inform shareholders 
as soon as practicable of any assistance actions.
    The FCA will continue to coordinate with the Farm Credit System 
Insurance Corporation in financial assistance matters to ensure that 
all pertinent Insurance Fund issues are appropriately identified and 
addressed.

List of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, part 615 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
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. The heading of subpart F is revised to read as follows:

Subpart F--Property, Assistance, and Other Investments

    3. Section 615.5171 is revised to read as follows:


Sec. 615.5171  Financial assistance by Farm Credit Banks and 
agricultural credit banks to affiliated associations.

    (a) Financial assistance. (1) Farm Credit Bank and agricultural 
credit bank (collectively, bank) financial assistance to affiliated 
associations includes, but is not limited to:
    (i) Purchasing an affiliated association's nonvoting stock or 
participation certificates; and
    (ii) Paying in surplus to an affiliated association in the form of:
    (A) Cash;
    (B) Debt forgiveness or compromise of indebtedness;
    (C) Interest rate concessions;
    (D) Interest free loans;
    (E) Transfer of loans between the bank and the association at a 
value advantageous to the association relative to fair market value;
    (F) Reduction or elimination of standard loan service fees;
    (G) Assumption of operating or other expenses (e.g., legal fees, 
insurance premiums, etc.); and
    (H) Any other preferential payment or compensation not available on 
similar terms to all affiliated associations.

[[Page 8020]]

    (2) Financial assistance does not include routine business 
transactions providing financial benefits that are available on similar 
and nonpreferential terms to all affiliated associations.
    (b) Standards for financial assistance. Before authorizing 
financial assistance to an affiliated association, a bank board of 
directors must consider and document whether:
    (1) The financial assistance is necessary, feasible, and the 
``least cost'' alternative available;
    (2) The financial assistance is in the best interests of all of the 
shareholders;
    (3) The bank will continue to be financially sound and maintain 
adequate capital after providing the financial assistance; and
    (4) The financial assistance will enable the association to 
maintain service to borrowers.
    (c) Notification requirements. (1) Banks must notify the Chief 
Examiner of the Farm Credit Administration at least 30 days prior to 
providing financial assistance to an affiliated association.
    (2) Banks must notify their shareholders within a reasonable time 
of providing financial assistance to an affiliated association.

    Date: February 12, 1995.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-3980 Filed 2-17-99; 8:45 am]
BILLING CODE 6705-01-P