[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Proposed Rules]
[Pages 60219-60222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29998]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 63, No. 216 / Monday, November 9, 1998 /
Proposed Rules
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FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 614, and 618
RIN 3052-AB87
Organization; Loan Policies and Operations; General Provisions;
Chartered Territories
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: This proposed rule will amend Farm Credit Administration (FCA
or Agency) regulations to provide customers of the Farm Credit System
(FCS, Farm Credit, or System) with the opportunity to do business with
the FCS lender of their choice. The rule proposes to amend regulations
to permit farmers, ranchers, and other eligible customers to seek
financing and related services from any association or FCS bank
operating under title I or II of the Farm Credit Act of 1971, as
amended (Act). The rule proposes to eliminate geographic barriers that
often prevent an FCS lender from serving customers with operations
beyond its designated territory. At the same time, the rule proposes to
ensure every eligible customer's continued access to FCS credit and
services. It also continues to obligate each Farm Credit Bank (FCB),
agricultural credit bank (ACB), and association to extend sound,
adequate, and constructive credit and offer related services to
eligible customers within its chartered territory. An institution that
extends credit or offers related services to borrowers beyond its
designated territory must adopt a board policy and a business plan that
adequately guide these activities. The rule also proposes to make
conforming amendments to other regulations.
DATES: Please send your comments to us on or before February 8, 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 ``comm@fca.gov'' 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:
S. Robert Coleman, Senior Policy Analyst, Office of Policy and
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TDD (703) 883-4444;
or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703)
883-4444.
SUPPLEMENTARY INFORMATION:
I. General
The FCA proposes to repeal the restrictions in several existing
regulations so eligible customers can seek financing and related
services from the System institution of their choice. This is the first
major step to implement the FCA Board's Philosophy Statement on Intra-
System Competition adopted July 14, 1998. We believe that the existing
notice and consent restrictions on lending and related services have
become burdensome to both borrowers and System institutions. This has
been heightened by significant changes in agriculture and the financial
markets. The removal of these restrictions will allow associations and
System banks operating under title I or II of the Act to increase
operating efficiencies and offer better service to creditworthy and
eligible borrowers. With the removal of these existing restrictions,
System lenders must modify their policies and business plans as
necessary to ensure that they continue to operate in a safe and sound
manner.
We believe that the most efficient and least disruptive way to
provide customers greater flexibility in selecting their FCS lender and
service provider is through modification of existing regulations. The
rule proposes to amend the regulations in parts 611, 614, and 618 to:
Repeal the existing notification and consent requirements
for lending and related services in Secs. 614.4070 and 618.8030;
Allow eligible customers to apply for credit and related
services from any association or Farm Credit bank operating under title
I or II of the Act;
Require each association or Farm Credit bank operating
under title I or II of the Act to continue to fulfill its obligation to
serve all eligible and creditworthy customers within its designated
territory; and
Continue to promote safety and soundness by requiring each
System lender to develop appropriate policies and revise its business
plans before material amounts of credit or related services are
extended beyond its designated territory.
II. History and Background
Section 1.1 of the Act states that the mission of the FCS is to
furnish, on an ongoing basis, sound, adequate, and constructive credit
and related financial services to America's agricultural and aquatic
producers, their cooperatives, and other eligible rural residents. The
FCS is organized as a nationwide network of cooperative banks,
associations, and service corporations that are owned and controlled by
the farmers, ranchers, aquatic producers or harvesters, and
cooperatives that borrow from them. The charter of each System bank and
association designates a geographic territory in which the institution
will exercise its authorities. Although the two System banks that
operate under title III of the Act have national charters to furnish
credit and related services to cooperatives and rural utilities, all
other System banks and associations have designated territories that
cover a specified geographic region.
In the past, the FCA has used its broad power to charter, regulate,
and examine System institutions in a way that generally promoted
exclusive territories. This policy, which worked well for the
agricultural sector in earlier times, now unnecessarily restricts
customers' choice of lenders and service providers and hinders the
System's ability to provide ample, efficient, and high-quality credit
and related services. Consolidations in many sectors of the
agricultural economy have created fewer, larger, and more vertically
integrated producers that operate in several locations and require more
diversified financial services.
[[Page 60220]]
Additionally, consolidations in the financial services markets and
rapidly changing technologies are creating new sources and methods of
delivery for credit and related services that transcend geographic
boundaries.
The positive aspects of the former policy have eroded over the past
decade as agriculture, in general, and the FCS, in particular, have
restructured in response to significant economic changes. As a result
of this restructuring, a notable amount of geographic competition has
come about in the System. Both title III banks now operate nationally,
providing cooperative customers with a choice of lender. In over 130
counties across the country more than one FCS association now offers
the same type of financing to eligible borrowers. Thus, in many parts
of the country we have seen substantial departures from the notion of
exclusive territories. Customers have benefited from this change.
Furthermore, no safety and soundness concerns have arisen from FCS
institutions that jointly serve these shared designated territories.
Existing Sec. 614.4070 is an obstacle to the ability of consumers
to transact business with the System lender that best fits their needs.
The current rule details a complex and burdensome set of notice and
consent requirements that depend on the location of the customer's
operations and headquarters. In most instances, the customer may do
business only with the FCS lender that serves the territory in which
the customer conducts operations. As a general rule, existing
Sec. 614.4070 prohibits an FCS lender from serving customers operating
beyond the institution's designated territory unless the FCS
institution designated to serve that territory consents. The existing
regulation requires notice whenever a System lender finances the out-
of-territory activities of an existing borrower who also conducts
operations and maintains headquarters in its chartered territory.
Another provision of existing Sec. 614.4070 specifies that out-of-
territory lending should not constitute a significant shift of loan
volume away from the institution's designated territory.
Although some System lenders give the necessary consent freely upon
a customer's request, others do not. The burden of obtaining consent
and, at times not receiving it, impede the System's ability to serve
the needs of eligible customers as Congress intended.
III. Customer Choice for Credit and Related Services
We believe that each FCS institution operating under title I or II
of the Act needs greater flexibility to serve all eligible customers,
without regard to the location of the customer's operations so long as
the services are conducted safely and soundly. For this reason, the FCA
proposes to amend Sec. 614.4070 so that eligible customers can freely
apply for credit and financial services from the FCS institution of
their choice. This approach will benefit the public by increasing the
sources and availability of credit and improving the quality of
services available from System lenders. Additionally, this rule
proposes to provide System institutions with a more flexible regulatory
environment so they can improve their operating efficiencies and better
serve their customers.
Designating service territories through the chartering process has
been, and will remain, the principal method of ensuring that every
eligible customer has access to an FCS lender, as Congress intended.
Proposed Sec. 614.4070(a) reaffirms that each association and FCS bank
that operates under title I or II of the Act is obligated to serve
eligible and creditworthy farmers, ranchers, aquatic producers or
harvesters, farm-related businesses, and rural homeowners in its
designated territory. This obligation encompasses the responsibility to
offer an appropriate array of loan products and related services to all
types of agricultural and aquatic operations within the bounds of
safety and soundness. The designated territory also defines each
lender's obligation under the Act to be responsive to the needs of
young, beginning, and small farmers. Proposed Sec. 614.4070(a) will
ensure that every eligible customer will continue to have an FCS lender
that is committed to providing credit and related services in that
customer's area.
Proposed Sec. 614.4070(b) permits eligible farmers, ranchers,
aquatic producers or harvesters, farm-related businesses, and rural
homeowners to seek financing and related services from any association
or FCS bank operating under title I or II of the Act. The proposed
regulation also allows a bank or association to extend credit,
participate in loans, and provide related services to any eligible
applicant under its respective title I or II authorities. Implementing
this authority for loan participations should help strengthen the
System's safety and soundness. In particular it will benefit an FCS
lender that has a high concentration of loans in only a few
agricultural commodities in its designated territory. These
institutions are especially vulnerable to fluctuations in commodity
prices and downturns in the agricultural economy. Additionally,
geographic restrictions raise concerns because institutions face
increased risk to their loan portfolios from adverse weather, disease,
and pest damage. Buying and selling participations in loans with other
FCS institutions and lenders in other regions of the country help
institutions diversify their loan portfolios and limit their exposure
to risk in a single commodity and in a specific geographic area. This
proposal includes conforming amendments that repeal restrictions on
loan participations in existing Secs. 614.4000(d), 614.4010(e),
614.4030(b), 614.4040(b), and 614.4050(c).
Proposed Sec. 614.4070 also enhances customer choice for related
services. Some associations and FCS banks operating under title I or II
of the Act offer their customers related services while other
institutions offer none. This proposal will repeal Sec. 618.8030, which
contains the same consent and notice restrictions applicable to loans.
This change will enable FCS customers to obtain related services even
if their local FCS association does not offer the service they require.
Sound business principles dictate the importance of developing and
adopting a well-reasoned policy and business plan before any company
implements a new or expanded program. New programs for FCS
institutions, including the offering of credit and related services
provided by this proposed rule, present new opportunities and new risks
for System lenders. Proposed Sec. 614.4070(c) is designed to ensure
that such programs are operated under the appropriate direction and
control of each institution's board of directors.
The FCA Board expects that each FCS institution board will adopt a
policy, or revise its existing policy, to address any additional risks
created by new programs before an institution conducts a material
amount of business with customers in new geographic markets. In
considering whether the new business is material, an institution should
aggregate the volume of its loans, leases, participations and other
interests, and related services. Additionally, each institution should
integrate the opportunities and risks created by the new programs into
its operational and strategic business plans, as discussed in
Sec. 618.8040. In general, the policy and business plan should assess
the institution's risk-bearing capacity and servicing capabilities to
meet the needs of customers who reside in or conduct operations beyond
the institution's designated territory. The institution board, in
developing its policy and revising its business plan, should
specifically:
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Consider how programs for providing credit and related
services to a broader customer base will affect organizational
efficiency, customer service, risk management, and operational
capabilities;
Establish specific operating objectives and strategies for
such programs;
Direct and control the institution's lending and related
service activities conducted beyond its designated territory, ensuring
that such activities are conducted in a safe and sound manner;
Establish the types and amount of loans, loan
participations, and related service activity to be permitted in new
geographic markets;
Assess risk associated with providing loans and related
services in the new markets, establish risk-tolerance levels in
relation to the institution's risk-bearing capacity, and consider loan
portfolio concentrations; and
Ensure existing loan underwriting criteria for loans and
related services that will be offered in new geographic markets are
appropriate, taking into consideration the institution's management
capabilities and credit expertise, and the servicing requirements of
loans made outside its designated territory.
We expect the institution's board, as part of its obligations under
the Act, to continue to ensure that the institution sufficiently meets
the credit and related services needs of eligible customers within its
designated territory, as required by proposed Sec. 614.4070(a). At the
same time, we also expect each institution to maintain safe and sound
operations, including adequate risk-bearing capacity for any new
programs. As part of the board's responsibilities to ensure the
continued safe and sound operations of its institution, we encourage
each board to monitor, through periodic reporting requirements, the
amount, quality, risk, and profitability of loans made to customers
located in new geographic markets.
FCA examiners will evaluate each program in view of the potential
risks and possible effects on the institution's financial condition,
its asset quality, capital, and earnings capacity. To help implement
these regulatory revisions in the most safe and sound manner, we will
issue additional guidance to our examiners and FCS institutions once
the rule becomes final.
IV. Conforming Amendments
Two additional FCA regulations, Secs. 611.1124 and 614.4525,
contain consent requirements that limit the ability of customers to
choose their FCS lender. We propose to revise these regulations.
Section 611.1124 addresses loan transfers that occur when the FCA
modifies association charters to transfer territory from one
association to another. Under existing Sec. 611.1124(f)(6), loans are
usually transferred to the association that acquires the territory,
unless the associations agree otherwise. With the proposed change to
Sec. 614.4070, there is no reason to assume that any territory transfer
would necessarily result in the sale of loans in that territory. As
amended, proposed Sec. 611.1124(f)(6) simply requires the association
to advise its shareholders whether loans will be sold in connection
with the transfer of territory and, if so, the terms of the sale.
The FCA also proposes to repeal provisions in Sec. 614.4525(b) so
that cooperation may be enhanced on special loan programs between
System lenders and dealers and cooperatives that serve different
geographical markets. Additionally, we are proposing to eliminate
paragraphs (c) and (d) because the permissive provisions of these two
paragraphs are unnecessary. FCS lenders do not need regulatory
authority to make contracts with others to facilitate loan applications
and closings, because this authority is clearly within their express
powers under the Act. This proposal would retain existing paragraph (a)
and the remainder of paragraph (b), recognizing that institutions
developing and implementing special lending programs should have
appropriate policies in place providing board direction and control.
Additionally, the FCA is proposing to delete Sec. 614.4080 in its
entirety. This regulation originally addressed cross-territory lending
by the banks for cooperatives, but is no longer applicable since both
banks that have title III authorities now have national charters as
authorized by the Act.
The FCA is also aware that System institutions have entered into a
wide variety of agreements to serve customers in different geographic
markets. Given the proposed changes to Sec. 614.4070 and related
regulations, the FCA requests comment on whether such agreements raise
issues that should be addressed in the final rule.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
For the reasons stated in the preamble, parts 611, 614, and 618 of
chapter VI, title 12 of the Code of Federal Regulations are proposed to
be amended to read as follows:
PART 611--ORGANIZATION
1. The authority citation for part 611 continues to read as
follows:
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,
4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12
U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,
2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.
L. 100-233, 101 Stat. 1568, 1638; sec. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003 and 1004.
Subpart G--Mergers, Consolidations, and Charter Amendments of
Associations
2. Section 611.1124 is amended by removing the phrase ``Each
borrower whose real estate or operations is located in a territory that
will be transferred'' in the first sentence of paragraph (l) and adding
in its place, the phrase ``Each borrower whose loan is sold as
described in paragraph (f)(6) of this section,''; by removing the last
sentence of paragraph (l); and by revising paragraph (f)(6) to read as
follow:
Sec. 611.1124 Territorial adjustments.
* * * * *
(f) * * *
(6) A statement of whether loans will be sold in connection with
the transfer of territory and, if so, the terms of the sale.
* * * * *
PART 614--LOAN POLICIES AND OPERATIONS
3. 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, 4.3A, 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, 7.8, 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,
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2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2097, 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, 2279c-1, 2279f, 2279f-1,
2279aa, 2279aa-5, 2279aa-9); sec. 413 of Pub. L. 100-233, 101 Stat.
1568, 1639.
Subpart A--Lending Authorities
Sec. 614.4000 [Amended]
4. Section 614.4000 is amended by removing paragraph (d)(2); by
removing the words ``and paragraph (d)(2) of this section'' in
paragraph (d)(1); and by redesignating paragraphs (d)(1), (d)(1)(i),
and (d)(1)(ii) as paragraphs (d) introductory text, (d)(1) and (d)(2),
respectively.
Sec. 614.4010 [Amended]
5. Section 614.4010 is amended by removing paragraph (e)(2); by
removing the words ``and paragraph (d)(2) of this section'' in
paragraph (e)(1); and by redesignating paragraphs (e)(1), (e)(1)(i),
and (e)(1)(ii) as paragraphs (e) introductory text, (e)(1) and (e)(2),
respectively.
Sec. 614.4030 [Amended]
6. Section 614.4030 is amended by removing paragraph (b)(2); by
removing the words ``and paragraph (b)(2) of this section'' in
paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i),
and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2),
respectively.
Sec. 614.4040 [Amended]
7. Section 614.4040 is amended by removing paragraph (b)(2); by
removing the words ``and paragraph (b)(2) of this section'' in
paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i),
and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2),
respectively.
Sec. 614.4050 [Amended]
8. Section 614.4050 is amended by removing paragraph (c)(2); by
removing the words ``and paragraph (c)(2) of this section'' in
paragraph (c)(1); and by redesignating paragraphs (c)(1), (c)(1)(i),
and (c)(1)(ii) as paragraphs (c) introductory text, (c)(1) and (c)(2),
respectively.
9. Subpart B is revised to read as follows:
Subpart B--Credit Extensions, Related Services and Designated
Territories
Sec. 614.4070 Credit extensions, related services, and designated
territories--Farm Credit Banks, agricultural credit banks, Federal land
bank associations, Federal land credit associations, production credit
associations, and agricultural credit associations.
(a) Each association or Farm Credit bank operating under title I or
II of the Act must furnish sound, adequate, and constructive credit and
related services pursuant to section 1.1(a) of the Act to creditworthy
and eligible borrowers who reside in or conduct operations in its
designated territory.
(b) Eligible customers may seek financing and related services from
any association or Farm Credit bank operating under title I or II of
the Act, and the Farm Credit bank or association may exercise its
powers under subpart A of this part and part 618 of this chapter to
make loans, participate in loans, and provide related services to any
eligible borrower.
(c) Each association or Farm Credit bank that conducts a material
amount of business beyond its designated territory must adopt a board
policy and business plan that address such activities.
Subpart O--Special Lending Programs
Sec. 614.4525 [Amended]
10. Section 614.4525 is amended by removing paragraphs (c) and (d);
and by removing the second sentence in paragraph (b).
PART 618--GENERAL PROVISIONS
11. 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 A--Related Services
Sec. 618.8030 [Removed]
12. Section 618.8030 is removed.
Date: November 4, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-29998 Filed 11-6-98; 8:45 am]
BILLING CODE 6705-01-P
