[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Rules and Regulations]
[Pages 11303-11304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6648]
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FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AB52
Loan Policies and Operations
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), adopts amendments to the regulations
governing disclosure of loan information. The FCA removes the
requirement that Farm Credit institutions give borrowers 10 days prior
notification of a change in the interest rate on their variable rate
loans and replaces it with a 10-day post notification for interest rate
changes for administered rate loans and a 30-day notice if the loan is
tied to an external index. The current requirement to notify borrowers
of a decrease in interest rate no later than on the day of the decrease
has been changed to the same standard as an increase. This action would
reduce the burden on institutions of a delay in interest rate changes
while still providing borrowers with timely notice of a change. The
final regulation also deletes reference to eligible borrower stock as a
technical amendment.
EFFECTIVE DATE: The 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:
Robert Child, 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 Enforcement Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4019, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: On November 24, 1995 (60 FR 57962), the FCA
Board published for comment a proposed amendment to
Sec. 614.4367(c)(3). The existing regulation requires Farm Credit
institutions to provide notification to borrowers of an increase in the
borrowers' interest rates 10 days prior to the effective date of the
change and implements section 4.13 of the Farm Credit Act of 1971, as
amended (Act). The proposed regulation would have permitted a rate
change notification 10 days after the effective date of the rate
change. The FCA received nine comments in response to the proposed
regulations. Commenters included the Farm Credit Council (FCC), seven
Farm Credit institutions, and a state agriculture department.
Subsequent to the FCA Board's adoption of the proposed regulation,
section 4.13 of the Act was amended by the Farm Credit System Reform
Act of 1996, Pub. L. 104-105 (Feb. 10, 1996). Section 4.13 of the Act
now provides that notice to the borrower of a change in interest rate
may be made within a reasonable time after the effective date of an
increase or decrease in the interest rate. The FCA believes that the
proposed regulations were consistent with the recently enacted
legislation and that the final regulation implements the requirements
of the legislation. The following discussion contains a summary of the
comments and the final amendment to Sec. 614.4367(c)(3).
I. Summary of Comments
The FCC and several Farm Credit institutions expressed their
general support of the proposed regulation and some commented that if
adopted, the regulation would provide additional flexibility to Farm
Credit institutions in making interest rate changes without any
significant disadvantage to borrowers. The individual Farm Credit
institution commenters, however, urged the FCA to provide institutions
with even greater flexibility in making interest rate changes than was
proposed. Four institutions commented that the notification of an
increase in interest rates should be extended to 30 days after the
effective date of the change for all loans, including those loans not
tied to an external index. Three of those institutions also suggested
that no notice is necessary for decreases in interest rates, while the
other commented that the notification should be the same regardless of
the direction of the change in rates.
In support of a 30-day post notification, the institutions stated
that they would be able to reduce mailing costs by including the notice
in the regular monthly billing notices. They also noted that it is
unlikely that borrowers would attempt to fix their rates or re-finance
their loans if notified of rate increases within 10 days as proposed.
Even if some borrowers might desire to do this, the lenders indicated
that such action could rarely be accomplished within 10 days. The
institutions felt that it is more likely that borrowers use the rate
change notification to monitor the trends in lenders' rates and will
take action after observing the trend in rates. For this reason, the
institutions asserted that a 30-day post notification is just as useful
to borrowers as a 10-day notification, and the 30-day notice results in
much less work and cost for the lenders.
The institutions' basis for requesting no notification for a
decrease in rates is that most lenders will likely take actions
necessary to promote and preserve customer relations. Thus, lenders
would want to notify borrowers of decreases in rates regardless of FCA
disclosure requirements. Such notification could be in combination with
notices of news about the interest rate market, a marketing
opportunity, or information on a new program or service.
Three institutions commented that there should be no regulatory
requirements for notification of a change in interest rates. One
institution noted that a notification requirement is too onerous for
loans tied to an external index, and that other non-System lenders are
not required to notify borrowers of rate changes on similar loan
products priced to LIBOR (London Interbank Offered Rate) or prime
indexes. Another institution commented that notification serves no
purpose and
[[Page 11304]]
that if the FCA believes that the statute requires notice, such notice
should be in the least burdensome means possible. The institution noted
that the least burdensome requirement would be to require notice of an
increase in conjunction with regularly scheduled billing notices, and
that a less favorable alternative would be 30 days post notice for
increases and no notice for decreases. The remaining Farm Credit
institution commenter stated that changing the prior notification to a
10-day post notification would not reduce any administrative or cost
burden on the institution because existing loan products and systems
are designed to meet current regulations and would be contractually out
of sync with a post-notification system. The commenter asserted that
the proposed amendments do not help institutions that have loans tied
to external indexes and Congress did not intend to require prior or
post notice for such loans. The commenter contended that loans that are
priced to an external index should be exempt from any notice
requirements as long as: (1) The interest rate is tied to an index
entirely outside the control of the Farm Credit System; (2) the index
is widely publicized; (3) interest rate disclosures clearly referencing
the index are made when the loan is originated and closed; and (4)
disclosures are required for any change to the index or the margin
points (or spread).
The state agriculture department commented that as a matter of
principle, debtors ought to be notified in advance of interest rate
increases on their loans. The commenter asserted that the minimum
economic advantage that may be gained by lenders would be more than
offset by the negative perception the proposed changes would create in
the eyes of borrowers. Further, the commenter contended that many
farmers do not receive financial publications containing external
indexes, and if they did, they would not necessarily be able to
determine the change in their interest rate from a change in the index.
The commenter finally noted that it did not believe post-notification
would significantly reduce burden on Farm Credit institutions and that
if institutions are concerned about mailing costs, they could delay a
change in interest rates so that the required notice could coincide
with another regular mailing.
II. Response to Commenters and Discussion of Final Regulation
In response to the commenters who asserted that the FCA should
eliminate any notification requirements for changes in interest rates,
the plain language of section 4.13 of the Act, as recently amended,
requires notification to borrowers of a change in their interest rates.
Further, the FCA has reviewed the legislative history of the amendment
and is not aware of any expressed Congressional intent to exempt loans
tied to external indexes from the notice requirement. In addition, the
recent amendment to section 4.13 clearly requires notification of an
increase or decrease in the interest rate. Therefore, the FCA
interprets the Act as requiring notification of increases or decreases
in interest rates for all loans within a reasonable time of the
effective date of the change. The final regulation contains what the
FCA concludes to be a reasonable time for notification under the Act,
after giving consideration to the views of the commenters, the needs of
borrowers for timely notice, and the FCA's desire to reduce burden on
Farm Credit institutions.
The final regulation requires a 10-day post notification for
interest rate changes for administered rate loans. For loans tied to an
external index, prompt notification is required, but must be given
within 30 days of the change in interest rate. The FCA carefully
considered the comments addressing the 30-day post notification
requirement for all loans and finally determined that the need to
provide timely information to borrowers outweighed the regulatory
burden that a 10-day post notice may entail. Although administered rate
loans may closely follow changes in the prime rate or the institution's
cost of funds, many variables may go into a decision to change an
administered rate. Thus a borrower with an administered rate loan
cannot be as certain of a rate change merely by following the prime
rate or other index as is the case of a loan that is clearly tied to an
external index. For those loans that are clearly priced to an external
index, however, the FCA believes that delaying the notice by 20 days
does not seriously disadvantage the borrower and may result in less
burden on the institutions, in part, by reducing mailing costs. In
those situations, borrowers can likely determine the change in their
rates sooner than 30 days by following the changes in the index. The
final regulation, both where a 10-day and 30-day post notification is
permitted, will allow the institutions to make changes in borrowers'
interest rates more quickly than under a prior-notification
requirement.
The FCA is also amending Sec. 614.4367(a)(4) which addresses
disclosures to purchasers of stock. All references to protected
eligible borrower stock are eliminated because the issuance of such
stock is no longer authorized.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
For the reasons stated 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 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4014a, 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, 4.12, 4.12A, 4.13,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 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 of
the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018,
2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122, 2124,
2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a,
2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa,
2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639; sec.
207 of Pub. L. 104-105, 110 Stat. 162.
Subpart K--Disclosure of Loan Information
Sec. 614.4367 [Amended]
2. Section 614.4367 is amended by removing the words ``Except with
respect to eligible borrower stock under section 4.9A of the Act,'' and
capitalizing the word ``a'' in paragraph (a)(4); by removing the words
``the effective date of a decrease in the interest rate and not later
than 10 days before the effective date of an increase in the interest
rate.'' and adding in its place, the words ``10 days after the
effective date of a change in the interest rate. However, if the
interest rate is directly tied to an external index that is widely
publicized, the notice of change must be made promptly but not later
than 30 days after the change in interest rate.'' at the end of
paragraph (c)(3).
Dated: March 12, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-6648 Filed 3-19-96; 8:45 am]
BILLING CODE 6705-01-P
