[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Proposed Rules]
[Pages 56873-56878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28480]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 614, 616, 618, and 621
RIN 3052-AB63
Loan Policies and Operations; Leasing; General Provisions;
Accounting and Reporting Requirements
AGENCY: Farm Credit Administration.
ACTION: Reproposed rule; request for comment.
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SUMMARY: The Farm Credit Administration (FCA) through the Farm Credit
Administration Board (Board) seeks additional comment on a rule to
amend its regulations that provide Farm Credit System (System)
institutions regulatory guidance concerning leasing activities. The
reproposed rule addresses the comments received on the proposed rule
and streamlines the regulations where appropriate. The reproposed rule
provides clear and concise regulations pertaining to the System's
leasing activities and clarifies existing regulations that apply to
leasing.
DATES: Please submit your comments on or before December 7, 1998.
ADDRESSES: You may send us your comments via electronic mail to
regcomm@fca.gov'' or through the Pending Regulations section of the
FCA's interactive website at ``www.fca.gov.'' You may also mail or
deliver your 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 FAX number (703) 734-5784. You
may review copies of all comments we receive in the Office of Policy
and Analysis, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Office of Policy and Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)
883-4444,
or
James M. Morris, Senior Counsel, Office of General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.
SUPPLEMENTARY INFORMATION: On October 15, 1997, the FCA published a
proposed rule that would replace the existing regulatory guidance
relating to System institutions' leasing activities (62 FR 53581). The
Farm Credit Leasing Services Corporation (FCL) and AgriBank, FCB
(AgriBank) provided specific comments on the proposed rule. Ag Credit
Agricultural Credit Association and AgFirst, Farm Credit Bank submitted
general comments. After considering the four comment letters received,
we revised the proposed rule and now seek additional comment. We have
renumbered all sections in the reproposed part 616 and note the new
section numbers as part of our discussion of the reproposed amendments.
1. Authority and Lessee Eligibility
As originally proposed, Sec. 616.6100(a), (b), and (c) generally
restated sections 1.11(c)(2), 2.4(b)(4), and 3.7(a) of the Farm Credit
Act of 1971, as amended (Act). Because it is unnecessary to restate the
Act in our regulations, we have omitted these paragraphs. The
reproposed rule designates the remaining paragraph (d) as Sec. 616.6400
and requires that an institution document that the lease of equipment
or facility is authorized under its leasing authorities. In the
reproposed rule, Sec. 616.6100 results from the redesignation of
Sec. 616.6110, discussed below.
2. Purchase and Sale of Interests in Leases
The existing definition of a ``loan'' in Sec. 614.4325(a)(3)
includes leases and generally applies the loan purchase and sale rules
to leases. This approach has proven unsatisfactory because the
interests in a loan and lease are different; a lease cannot be divided
into a principal amount and interest payments. The proposed rule
intended to accommodate these differences by providing a new definition
tailored to leases. We proposed to define a lease participation in
Sec. 616.6000(d) as a fractional undivided interest in: (1) All of the
lease payments; (2) the residual value of all of the property leased;
or (3) all of the lease payments and the residual value of all of the
property leased.
AgriBank and the FCL raised technical concerns with the proposed
approach. AgriBank suggested a clarification to the definition of
``interests in leases'' in proposed Sec. 616.6000(a). The FCL
recognized the difficulty of treating lease interests in the same
manner as loan interests and requested further clarification. After
considering these comments, we have concluded that a different and
simpler approach is needed. The reproposed rule does not differentiate
between ``participation'' interests in leases and other types of lease
interests that can be purchased and sold. Reproposed Sec. 616.6100
(Sec. 616.6110 in the proposed regulation), would authorize a System
institution to purchase from any lessor any interest (including a
participation interest) in a lease for equipment or facilities used in
the operations of eligible borrowers. Specifically, the reproposed rule
would:
(1) Eliminate the distinctions concerning the authority to purchase
``lease interests'' and ``lease participation interests'';
(2) Eliminate cross-title restrictions on the purchase of lease
interests; and
(3) Eliminate the retention requirement concerning the purchase of
lease interests from outside the System. At present, this provision
requires that the servicer of the lease have at least a 10-percent
ownership interest in the lease in order for a System institution to
purchase an interest from a non-System lessor. We conclude that
requiring the servicer to have an ownership interest is not necessary
to manage risk and is not required by law.
The reproposed rule omits as no longer necessary the definition of
a lease participation in proposed Sec. 616.6000(d) and the definition
of a participating institution in proposed Sec. 616.6000(e). Reproposed
Sec. 616.6000(b) would define ``lease'' to include only those leases
for equipment or facilities that are used in the operations of persons
eligible to borrow under part 613 of this chapter.
Eliminating the distinctions between ``lease interests'' and
``participation interests'' enables us to shorten the regulation by
eliminating proposed Sec. 616.6115. Reproposed Sec. 616.6100 would
incorporate relevant provisions from proposed Sec. 616.6115. The
following information explains how we combined these provisions:
[[Page 56874]]
We rewrote paragraph (a) of Sec. 616.6100, as reproposed,
to allow System institutions to purchase leases and interests in
leases. The definition of ``lease'' would continue to limit the types
of leases in which System institutions can purchase an interest, that
is, leases of equipment or facilities used in the operations of
eligible borrowers.
We clarified that paragraph (b) of Sec. 616.6100, as
reproposed, would reflect that the policy requirement applies only if
an institution buys or sells interests in leases.
We removed paragraph (b)(1) of proposed Sec. 616.6110,
because there are no restrictions limiting to whom a System institution
may sell interests in leases. We renumbered and clarified paragraphs
(b)(2) through (b)(7) in reproposed Sec. 616.6100.
We restructured paragraph (c), which contained
requirements roughly parallel to Sec. 614.4325(d) requirements
applicable to loans, to incorporate requirements contained in proposed
Sec. 616.6115(a) and to add a provision concerning transactions through
agents.
We did not change paragraph (d).
We removed paragraph (e) of proposed Sec. 616.6110 because
it duplicates a provision in Sec. 616.6100(b).
We redesignated paragraphs (f) and (g) as paragraphs (e)
and (f) without change.
AgriBank also suggested adding language to the regulation that
would permit lease transactions through agents parallel to loan
transactions permitted by Sec. 614.4325(h). We agree that lease
transactions through agents should be permitted on the same basis as
Sec. 614.4325(h) permits for loans. Reproposed Sec. 616.6100(c)(8)
incorporates the rules contained in Sec. 614.4325(h). This provision
would require a written agency agreement and periodic review of the
agency relationship. If a funding bank serves as an association's
agent, the agency agreement must provide for termination of the
agreement upon 60-days notice to the bank. In addition, the agreement
must provide that an association can require repurchase of the interest
in a lease if the interest does not comply with either the agency
agreement or the association's underwriting standards. Finally, a
technical change is necessary in order to delete the term ``lease''
from the Sec. 614.4325(a)(3) definition of a ``loan'' for purposes of
subpart H, since that subpart would no longer apply.
3. Customer Choice of Lease Provider
Proposed Sec. 616.6120 would have required an institution making
out-of-territory leases to obtain the concurrence of at least one
institution offering similar leasing services in the territory. Upon
reconsideration, we are deleting this requirement from the reproposed
regulation in order to provide System institutions with additional
flexibility to make leases beyond their designated territory. The
reproposed rule would not require a System lessor to satisfy any notice
or concurrence requirements in order to serve lessees beyond the
lessor's territory. The reproposed regulation is now Sec. 616.6200.
4. Leasing Policies, Procedures, and Underwriting Standards
The proposed Sec. 616.6200 would have required a System institution
engaged in leasing to adopt a written policy (or policies) and
underwriting standards. One provision of the proposed regulation would
have required that a System lessor adopt written policies and
procedures that require management to establish a prudent residual
value at the inception of the lease. The FCL agreed with proposed
Sec. 616.6200 in general, but requested that we delete the word
``prudent'' as a modifier of the phrase ``residual value'' in proposed
Sec. 616.6200(d). We have eliminated the term ``prudent'' from proposed
Sec. 616.6200(d) and from the introductory text of Sec. 616.6200
because it is unnecessary and the written policies and procedures must
reflect lease practices that control risk. We have clarified in the
reproposed regulation that policies must address the appropriateness of
all terms and conditions, including the residual value. We also make a
clarifying change to proposed Sec. 616.6200 to replace the general
reference to part 614 with the specific reference to the requirements
of Sec. 614.4150. To ensure that the list in proposed Sec. 616.6200
does not duplicate any requirement of Sec. 614.4150, we have omitted
proposed Sec. 616.6200(a) and (b) and redesignated the remaining
paragraphs. The reproposed rule is now Sec. 616.6300.
5. Investment in Leased Assets
We received no comments on the proposed provision concerning
investment in leased assets, Sec. 616.6210, which would authorize an
institution to purchase property to lease if the acquisition of such
property is consistent with the type of leasing being conducted or
planned in the future. The reproposed rule is now Sec. 616.6500.
6. Lending and Leasing Limits
We received one comment on the proposal to make leases and loans to
a single borrower subject to a ``lending and leasing limit.'' This
provision would limit an institution's exposure to risk from a single
borrower. The FCL sought clarification of the provision that allows
certain interests sold to be excluded from computing the total loans
and leases to a borrower. Proposed Sec. 614.4358(b)(5) would have
excluded interests in leases sold if the sale agreement met three
specific requirements. The third requirement, the subject of the FCL's
comment, is that the agreement under which the interest is sold must
provide for the sharing of all payments on a pro rata basis according
to the percentage interest in the lease. The FCL commented that it is
unclear how Sec. 614.4358(b)(5)(iii) applies when the participation
interest is solely the residual value. We revised the reproposed rule
in response to this comment. The pro rata sharing requirement would
apply only to lease payments.
We have made these additional changes to implement the leasing and
lending limit regulations in subpart J of part 614 include:
We clarified that the definition of ``borrower'' includes,
for the purposes of subpart J, any customer to whom an institution has
made a lease or a commitment to make a lease. See Sec. 614.4350(a).
We expanded the definition of ``loan'' includes all types
of leases (operating, financing, and lease interests). See
Sec. 614.4350(c).
The reproposed rule would prohibit a System institution
from making a lease or a loan if the consolidated amount of all loans
and leases to a single borrower exceeds a specific percentage of the
institution's lending and leasing limit base. See Secs. 614.4352
through 614.4355.
The reproposed rule would prohibit the FCL from making
leases to a single lessee or any related entities that exceed 25
percent of the FCL's ``lending and leasing limit base.'' See
Sec. 614.4356.
We added the outstanding lease balances to the items
included in the computation of obligations. See Sec. 614.4358(a)(1).
All leases, except those that are permitted under
Sec. 614.4361, must comply with the leasing and lending limits at all
times. See Sec. 614.4360(d).
7. Portfolio Limitations
Proposed Sec. 616.6230 would have limited leases made by Farm
Credit Banks (FCBs), agricultural credit banks (ACBs), production
credit associations (PCAs), Federal land credit associations and
agricultural credit associations (ACAs), and the FCL to processing and
marketing operations of agricultural or aquatic producers who supply
less than
[[Page 56875]]
20 percent of the throughput. That provision would have included low-
throughput processing and marketing leases in computing loan portfolio
restrictions contained in sections 1.11(a)(2) and 2.4(a)(1) of the Act.
Loans and leases made to borrowers who supply less than 20 percent of
the throughput used in a processing or marketing operation would have
been subject to the 15-percent portfolio ceiling in Sec. 613.3010(b).
Proposed Sec. 616.6230(b) would have imposed this 15-percent portfolio
limitation on the FCL for leases it makes to processing or marketing
operations.
Upon reconsideration, we have concluded that the Act does not
impose portfolio limitations on leases to processing and marketing
operations. In the absence of a statutory requirement or a safety and
soundness concern, we do not believe such a limitation on leasing
activity is necessary. Therefore, we have not included proposed
Sec. 616.6230 in the reproposed rule.
8. Stock Purchase Requirements
We read the Act to impose a stock purchase requirement in
connection with some leases, but not others. The Act authorizes FCBs to
lease facilities and equipment to ``persons eligible for credit.'' In
contrast, the Act authorizes PCAs and Banks for Cooperatives (BCs) to
lease equipment only to ``stockholders,'' but does not prescribe any
minimum stock purchase requirement. Therefore, lessees who lease
equipment from PCAs, ACAs, BCs, or ACBs under titles II or III of the
Act must be stockholders.
Because cooperatives operate on a one-person, one-vote basis, the
number of shares of stock does not affect membership rights. Therefore,
the purchase of a single share of stock is sufficient to satisfy the
stockholder requirement. Institutions may also satisfy the stock
requirement by counting outstanding shares stockholders already own.
The stock requirement in the reproposed rule would not apply to the FCL
because its stockholders are System banks, rather than its lease
customers. The disclosure requirements for equities issued as a
condition to obtain a lease would be the same as disclosure
requirements for equities issued as a condition to obtain a loan as
required under Sec. 615.5250(a) and (b) of this chapter.
AgriBank inquired whether System institutions could issue
participation certificates to lessees, rather than stock. Because both
stock and participation certificates satisfy the membership
requirements of the Act, the FCA has allowed System institutions to use
either one. We inserted the phrase ``or one participation certificate''
into the reproposed rule after the phrase ``at least one share of
stock,'' in order to clarify that an institution may issue one
participation certificate to satisfy the stock purchase requirement if
authorized by the institution's bylaws. The reproposed rule is now
Sec. 616.6700.
9. Disclosure Requirements
The proposed rule contained two disclosure requirements. Proposed
Sec. 616.6250(a) would have required that lease applicants be provided,
not later than the time of lease closing, a copy of all lease documents
signed by the lessee. In addition, proposed Sec. 616.6250(b) would have
required a System institution to render its decision on the lease
application in as expeditious a manner as is practical and provide
prompt written notice of its decision to the applicant.
The FCL questioned what constitutes ``lease closing.'' The FCL
submits that if the term means lease commencement, this provision could
pose a problem for System lessors because it is an industry practice
for leases to commence on delivery and acceptance of the equipment by
the lessee, while the paperwork may not be finalized until later. The
FCL recommended that we omit the phrase ``not later than the time of
lease closing'' or alternatively, replace it with the phrase ``within a
reasonable time following lease closing.'' The reproposed rule is
revised to require that copies be provided to a lessee within a
reasonable time following lease closing.
The FCL and AgriBank opposed the proposed requirement to provide
notice of adverse action on applications. The FCL contends that
requiring System lessors to provide notice of adverse action would
increase administrative costs and result in an uneven playing field
compared to System competitors. The FCL suggested, as an alternative,
the adoption of a threshold similar to that contained in Federal
Reserve Board Regulation M, which only applies to consumer leases of
less than $25,000. AgriBank recommended that the FCA eliminate entirely
the requirement to provide notice of adverse action because the
requirement would go beyond current legal and regulatory requirements
for other lessors.
The FCA has deleted this requirement in the reproposed rule.
However, the reproposal continues to require that an institution
provide written notice of its decision on the application. While the
FCA believes little additional burden would result from providing the
reason(s) for adverse action, it is not required by law. The FCA
continues to believe that providing such a notice is a good business
practice. The reproposed rule is now Sec. 616.6800.
The existing leasing regulations in Secs. 618.8050 and 618.8060
will be deleted upon the effective date of the final rule. The
reproposed rule also makes conforming technical changes to
Secs. 614.4710 and 621.7.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 616
Agriculture, Banks, banking, leasing.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Penalties, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, parts 614, 618 and 621 are
proposed to be amended and part 616 is proposed to be added to chapter
VI, title 12 of the Code of Federal Regulations 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, 1.11, 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, 4.18A, 4.19,
4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6,
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, 2019, 2071, 2073, 2074, 2075, 2091,
2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149,
2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5);
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart H--Loan Purchases and Sales
Sec. 614.4325 [Amended]
2. Section 614.4325 is amended by removing the word ``leases,''
from paragraph (a)(3).
3. The heading of subpart J is revised to read as follows:
[[Page 56876]]
Subpart J--Lending and Leasing Limits
4. Section 614.4350 is amended by revising paragraphs (a) and (c)
to read as follows:
Sec. 614.4350 Definitions.
* * * * *
(a) Borrower means an individual, partnership, joint venture,
trust, corporation, or other business entity (except a Farm Credit
System association or other financing institution that complies with
the criteria in section 1.7(b) of the Act and the regulations in
subpart P of this part) to which an institution has made a loan or a
commitment to make a loan either directly or indirectly. For the
purposes of this subpart, the term ``borrower'' includes any customer
to whom an institution has made a lease or a commitment to make a
lease.
* * * * *
(c) Loan means any extension of, or commitment to extend, credit
authorized under the Act whether it results from direct negotiations
between a lender and a borrower or is purchased from or discounted for
another lender, including participation interests. The term ``loan''
includes loans and leases outstanding, obligated but undisbursed
commitments to lend or lease, contracts of sale, notes receivable,
other similar obligations, guarantees, and all types of leases. An
institution ``makes a loan or lease'' when it enters into a commitment
to lend or lease, advances new funds, substitutes a different borrower
or lessee for a borrower or lessee who is released, or where any other
person's liability is added to the outstanding loan, lease or
commitment.
* * * * *
Sec. 614.4351 [Amended]
5. Section 614.4351 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base'' each place they appear
in the heading and in the entire section.
Sec. 614.4352 [Amended]
6. Section 614.4352 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base'' in paragraphs (a) and
(b)(1); and by adding the words ``and leasing'' between the words
``lending'' and ``limits'' in paragraph (b)(2).
Sec. 614.4353 [Amended]
7. Section 614.4353 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base''.
Sec. 614.4354 [Amended]
8. Section 614.4354 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base''.
Sec. 614.4355 [Amended]
9. Section 614.4355 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base'' in the introductory
paragraph; and by removing the word ``lending'' in the headings of
paragraphs (a) and (b).
Secs. 614.4356--614.4360 [Redesignated]
10. Sections 614.4356 through 614.4360 are redesignated as
Secs. 614.4357 through 614.4361; and a new Sec. 614.4356 is added to
read as follows:
Sec. 614.4356 Farm Credit Leasing Services Corporation.
The Farm Credit Leasing Services Corporation may enter into a lease
agreement with a lessee if the consolidated amount of all leases and
undisbursed commitments to that lessee or any related entities does not
exceed 25 percent of its lending and leasing limit base.
11. Newly designated Sec. 614.4358 is amended by adding the words
``and leasing'' between the words ``lending'' and ``limit'' in the
introductory text of paragraphs (a) and (b); by adding the words ``and
lease balances outstanding'' after the word ``loans'' the first place
it appears in paragraph (a)(1); by removing the reference
``Sec. 614.4358'' and adding in its place the reference
``Sec. 614.4359'' in paragraph (a)(3); by redesignating existing
paragraph (b)(5) as paragraph (b)(6); and by adding a new paragraph
(b)(5) to read as follows:
Sec. 614.4358 Computation of obligations.
* * * * *
(b) * * *
(5) Interests in leases sold when the sale agreement provides that:
(i) The interest sold must be:
(A) An undivided interest in all the lease payments or the residual
value of all the leased property; or (B) A fractional undivided
interest in the total lease transaction;
(ii) The interest must be sold without recourse; and
(iii) The sharing of all lease payments must be on a pro rata basis
according to the percentage interest in the lease payments.
* * * * *
Sec. 614.4359 [Amended]
12. Newly designated Sec. 614.4359 is amended by adding the words
``and leasing'' between the words ``lending'' and ``limit'' in
paragraphs (a) introductory text, (b), and (c); by removing the
reference ``Sec. 614.4356'' and adding in its place, the reference
``Sec. 614.4357'' in paragraph (a)(1)(iii); and by removing the
reference ``Sec. 614.4358'' and adding in its place, the reference
``Sec. 614.4359'' in the heading for column two in Table 1.
13. Newly designated Sec. 614.4360 is amended by adding the words
``and leasing'' between the words ``lending'' and ``limit'' in the
heading and in paragraphs (a), (b), (c), and (d); by removing the
reference ``Sec. 614.4360'' and adding in its place, the reference
``Sec. 614.4361'' in paragraph (a); by removing the reference
``Sec. 614.4359(b)(3)'' and adding in its place, the reference
``Sec. 614.4360(b)(3)'' in paragraph (c); by redesignating paragraph
(d) as paragraph (e); and by adding a new paragraph (d) to read as
follows:
Sec. 614.4360 Lending and leasing limit violations.
* * * * *
(d) All leases, except those that are permitted under the
provisions of Sec. 614.4361, reading ``effective date of this subpart''
in Sec. 614.4361(a) and ``effective date of these regulations'' in
Sec. 614.4361(b) as ``effective date of this amendment,'' shall be in
compliance with the lending and leasing limit on the date the lease is
made, and at all times thereafter.
* * * * *
Sec. 614.4361 [Amended]
14. Newly designated Sec. 614.4361 is amended by adding the words
``and leasing'' between the words ``lending'' and ``limits'' in each
place they appear in paragraphs (a) and (b); and by removing the
reference ``Sec. 614.4359'' and adding in its place, the reference
``Sec. 614.4360'' in paragraph (b).
Subpart Q--Banks for Cooperatives and Agricultural Credit Banks
Financing International Trade
Sec. 614.4710 [Amended]
15. Section 614.4710 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limits'' in the last sentence of
the introductory paragraph and in paragraphs (a)(2) and (a)(3).
16. A new part 616 is added to read as follows:
PART 616--LEASING
Sec.
616.6000 Definitions.
616.6100 Purchase and sale of interests in leases.
[[Page 56877]]
616.6200 Out-of-territory leasing.
616.6300 Leasing policies, procedures, and underwriting standards.
616.6400 Documentation requirements.
616.6500 Investment in leased assets.
616.6600 Leasing limits.
616.6700 Stock purchase requirements.
616.6800 Disclosure requirements.
Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 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, 3.9,
3.10, 3.20, 3.28, 4.3, 4.3A, 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C,
4.14D, 4.14E, 4.18, 4.18A, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9,
5.10, 5.17, 7.0, 7.2, 7.3, 7.6, 7.8, 7.12, 7.13 of the Farm Credit
Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073,
2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129,
2130, 2131, 2141, 2149, 2154, 2154a, 2199, 2200, 2201, 2202, 2202a,
2202c, 2202d, 2202e, 2206, 2206a, 2211, 2212, 2213, 2214, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279a-3, 2279b, 2279c-1,
2279f, 2279f-1).
PART 616--LEASING
Sec. 616.6000 Definitions.
For the purposes of this part, the following definitions shall
apply:
(a) Interests in leases means ownership interests in any aspect of
a lease transaction, including, but not limited to, servicing rights.
(b) Lease means any contractual obligation to own and lease, or
lease with the option to purchase, equipment or facilities used in the
operations of persons eligible to borrow under part 613 of this
chapter.
(c) Sale with recourse means a sale of a lease or an interest in a
lease in which the seller:
(1) Retains some risk of loss from the transferred asset for any
cause except the seller's breach of usual and customary warranties or
representations designed to protect the purchaser against fraud or
misrepresentation; or
(2) Has an obligation to make payments to any party resulting from:
(i) Default on the lease by the lessee or guarantor or any other
deficiencies in the lessee's performance;
(ii) Changes in the market value of the assets after transfer;
(iii) Any contractual relationship between the seller and purchaser
incident to the transfer that, by its terms, could continue even after
final payment, default, or other termination of the assets transferred;
or
(iv) Any other cause, except that the retention of servicing rights
alone shall not constitute recourse.
Sec. 616.6100 Purchase and sale of interests in leases.
(a) Authority to purchase interests in leases. A Farm Credit System
institution may purchase leases and interests in leases.
(b) Policies. Each Farm Credit System institution that sells or
purchases interests in leases shall do so only in accordance with a
policy adopted by its board of directors that addresses the following:
(1) The types of leases in which the institution may purchase or
sell an interest and the types of interests which may be purchased or
sold;
(2) The underwriting standards to be applied in the purchase of
interests in leases;
(3) Such limitations on the aggregate lease payments and residual
amount of interests in leases that the institution may purchase from a
single institution as are necessary to diversify risk, and such
limitations on the aggregate amounts the institution may purchase from
all institutions as are necessary to assure that service to the
territory is not impeded;
(4) Identification and reporting of leases in which interests are
sold or purchased;
(5) Requirements for securing from the selling lessor in a timely
manner adequate financial and other information concerning the lessee
needed to make an independent judgment; and
(6) Any limitations or conditions to which sales or purchases are
subject that the board deems appropriate, including arbitration.
(c) Purchase and sale agreements. Each agreement to purchase or
sell an interest in a lease shall, at a minimum:
(1) Identify the particular lease(s) to be covered by the
agreement;
(2) Provide for the transfer of lessee information on a timely and
continuing basis;
(3) Identify the nature of the interest(s) sold or purchased;
(4) Specify the rights and obligations of the parties and the terms
and conditions of the sale;
(5) Contain any terms necessary for the appropriate administration
of the lease, including lease servicing and monitoring of the servicer
and authorization and conditions for action in the event of lessee
distress or default;
(6) Provide for a method of resolution of disagreements arising
under the agreement;
(7) Specify whether the contract is assignable by either party; and
(8) In the case of lease transactions through agents, comply with
the provisions of Sec. 614.4325(h) of this chapter, reading the term
``lease'' or ``leases'' in place of the term ``loan'' or ``loans,'' as
applicable.
(d) Independent judgment. Each institution that purchases an
interest in a lease shall make a judgment on the payment ability of the
lessee that is independent of the originating or lead lessor and any
intermediary seller or broker prior to the purchase of the interest and
prior to any servicing action that alters the terms of the original
agreement, which judgment shall not be delegated to any person(s) not
employed by the institution. A Farm Credit System institution that
purchases a lease or any interest therein may use information, such as
appraisals or inspections, furnished by the originating or lead lessor,
or any intermediary seller or broker; however, the purchasing Farm
Credit System institution shall independently evaluate such information
when exercising its independent judgment. The independent judgment
shall be documented by a payment analysis that considers factors set
forth in Sec. 616.6300. The payment analysis shall consider such
financial and other lessee information as would be required by a
prudent lessor and shall include an evaluation of the capacity and
reliability of the servicer. Boards of directors of jointly managed
institutions shall adopt procedures to ensure that the interests of
their respective shareholders are protected in participation between
such institutions.
(e) Sales with recourse. When a lease or interest in a lease is
sold with recourse, it shall be accorded the following treatment:
(1) The lease shall be considered, to the extent of the recourse or
guaranty, a lease by the purchaser to the seller, as well as a lease
from the seller to the lessee, for the purpose of determining whether
total leases to a lessee are within the lending and leasing limits
established in subpart J of part 614.
(2) The amount of the lease subject to the recourse agreement shall
be considered a lease sold with recourse for the purpose of computing
capital ratios.
(f) Similar entity lease transactions. The provisions of
Sec. 613.3300 of this chapter that apply to interests in loans made to
similar entities shall apply to interests in leases made to similar
entities. In applying these provisions, the term ``loan'' shall be read
to include the term ``lease'' and the term ``principal amount'' shall
be read to include the term ``lease amount.''
Sec. 616.6200 Out-of-territory leasing.
A System institution may make leases outside its chartered
territory. A System institution making out-of-territory leases is not
required to provide notification to, or obtain concurrence from, other
System institutions.
[[Page 56878]]
Sec. 616.6300 Leasing policies, procedures, and underwriting
standards.
The board of each institution engaged in lease underwriting shall
set forth a written policy (or policies) and procedures governing such
activity that reflect lease practices that control risk and comply with
all applicable laws and regulations. Any leasing activity shall comply
with the lending policies and loan underwriting requirements in
Sec. 614.4150 of this chapter. An institution engaged in the making,
purchasing, or syndicating of leases also must establish written
policies and procedures that address the additional risks associated
with leasing. Written policies and procedures shall address the
following, if applicable:
(a) Appropriateness of the lease amount, purpose, and terms and
conditions, including the residual value established at the inception
of the lease;
(b) Process for estimating the leased asset's market value during
the lease term;
(c) Types of equipment and facilities the institution will lease;
(d) Remarketing of leased property and associated risks;
(e) Property tax and sales tax reporting;
(f) Title and ownership of leased assets;
(g) Title and licensing for motor vehicles;
(h) Liability associated with ownership, including any
environmental hazards or risks;
(i) Insurance requirements for both the lessor and lessee;
(j) Classification of leases in accordance with generally accepted
accounting principles; and
(k) Tax treatment of lease transactions and associated risks.
Sec. 616.6400 Documentation requirements.
Each institution shall adequately document that any asset it leases
is within its statutory authority.
Sec. 616.6500 Investment in leased assets.
An institution may acquire property to be leased, if the
acquisition of the property is consistent with the leasing then
conducted by the institution or is consistent with a business plan for
expansion of the institution's existing leasing business or for entry
into the leasing business.
Sec. 616.6600 Leasing limits.
All leases made by Farm Credit System institutions shall be subject
to the lending and leasing limits prescribed in subpart J of part 614
of this chapter.
Sec. 616.6700 Stock purchase requirements.
(a) Each System institution making an equipment lease under titles
II or III of the Act shall require the lessee to purchase at least one
share of stock or one participation certificate in accordance with its
bylaws, unless the lessee already owns stock in the institution making
the lease. This provision does not apply to the Farm Credit Leasing
Services Corporation.
(b) The disclosure requirements of Sec. 615.5250(a) and (b) of this
chapter shall apply to stock (or participation certificates) purchased
as a condition for obtaining a lease.
Sec. 616.6800 Disclosure requirements.
(a) Each System institution shall furnish to each lessee a copy of
all lease documents signed by the lessee in connection with the lease,
within a reasonable time following lease closing.
(b) Each System institution shall render its decision on a lease
application in as expeditious a manner as is practical. Upon reaching a
decision on a lease application, the institution shall provide prompt
written notice of its decision to the applicant.
PART 618--GENERAL PROVISIONS
17. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Subpart C--Leasing
Subpart C--[Removed and Reserved]
18. Subpart C, consisting of Secs. 618.8050 and 618.8060, is
removed and reserved.
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
19. The authority citation for part 621 continues to read as
follows:
Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C.
2252, 2279aa-11).
Subpart C--Loan Performance and Valuation Assessment
Sec. 621.7 [Amended]
20. Section 621.7 is amended by removing the reference
``Sec. 614.4358(a)(2)'' and adding in its place, the reference
``Sec. 614.4359(a)(2)'' in paragraph (a)(2)(iii).
* * * * *
Dated: October 20, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-28480 Filed 10-22-98; 8:45 am]
BILLING CODE 6705-01-P
