[Federal Register Volume 64, Number 123 (Monday, June 28, 1999)]
[Unknown Section]
[Pages 34515-34519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16149]
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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: Final rule.
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SUMMARY: This final rule clarifies existing regulations and provides
Farm Credit System (FCS or System) institutions with more regulatory
guidance about leasing activities. The rule reflects comments received
from two public comment periods.
EFFECTIVE DATE: These regulations will become effective 30 days after
publication in the Federal Register during which either or both houses
of Congress are in session. We will publish a document announcing the
effective date in the Federal Register.
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, we published a proposed
rule to replace the existing regulatory guidance about System
institutions' leasing activities (62 FR 53581). After considering the
six comment letters received, we made revisions and asked for
additional comment on a reproposed rule (63 FR 56873, Oct. 23, 1998).
We received five comment letters on the reproposed rule; four from
System banks and one from the Farm Credit Leasing Services Corporation
(Leasing Corporation). The commenters commented about borrower rights,
notice of action on applications, stock purchase requirements, and out-
of-territory leasing.
[[Page 34515]]
I. Discussion of Comments
A. Borrower Rights
One commenter requested clarification of our interpretation that
statutory borrower rights requirements do not apply to leasing. As
stated in the preamble to the original proposal (62 FR 53581, Oct. 15,
1997), borrower rights do not apply to lease transactions.
B. Notice of Action on the Application
We received two comments on reproposed Sec. 616.6800, which
requires that each institution provide the applicant written notice of
its decision on a lease application. The first comment suggested the
rule should allow verbal notice. The second comment suggested the
notice could be either express or implied, allowing the lessor to
notify an applicant of approval by delivering lease documents to the
applicant without a separate written notice of approval.
We believe that a written notice is appropriate to protect the
interests of a lease applicant and to document that an institution has
complied with this requirement. However, the notice does not have to be
in a particular form and the delivery of written lease documents would
satisfy the notice requirement.
C. Stock Purchase Requirements
One bank requested a clarification of Sec. 614.4232, which requires
that a lessee be a ``voting stockholder'' for a loan to a domestic
lessor for leases on equipment or facilities (leveraged leases). Under
Sec. 616.6700, an institution may satisfy the requirement that an
equipment lessee be a stockholder by issuing either one share of stock
or one participation certificate. The final regulation makes a
conforming amendment to Sec. 614.4232 by removing the term ``voting''
to clarify that the bylaws could provide that a person owning one share
of stock or one participation certificate would be considered a
``stockholder'' for purposes of this section.
D. Out-of-Territory Leasing
Final Sec. 616.6200 provides farmers, ranchers, cooperatives, and
other FCS customers flexibility to choose an FCS lessor regardless of
whether they are located within that lessor's ``territory.'' Section
616.6200 does not require an FCS lessor to satisfy any notice or
concurrence requirements to serve lessees beyond the lessor's
territory.
We received two comments on Sec. 616.6200. One Farm Credit Bank
(FCB) commented: ``We commend you for removing territorial challenges
through the addition of Sec. 616.6200. This will contribute toward
System institutions being able to more effectively serve lease
customers.'' While expressing appreciation for ``the efforts of the FCA
to improve the regulatory environment in which System institutions
operate,'' a second FCB suggested that ``any elimination of geographic
operating territories with respect to leasing should be coordinated
with the review of the proposed elimination of geographic boundaries
with respect to lending activities under Sec. 614.4070, and action on
this aspect of the leasing regulation should be deferred until such
time as FCA has reviewed all comments on the proposed revision to
section 614.4070.'' We do not believe that action on the reproposed
leasing rule must be delayed until we consider proposed amendments to
Sec. 614.4070, the customer choice rule. Our adoption of Sec. 616.6200,
allowing potential customers to choose an FCS lessor regardless of
whether they are located within that lessor's territory, neither
depends on nor determines the fate of the proposed out-of-territory
lending rule. See 63 FR 60219 (Nov. 9, 1998); 63 FR 69229 (Dec. 16,
1998).
It is clear in the Farm Credit Act of 1971, as amended (Act) that
the express statutory authority to lease is separate and distinct from
the authority to lend. Section 2.4(b)(4) of the Act expressly
authorizes production credit associations (PCAs) (and agricultural
credit associations (ACAs) pursuant to section 7.8) to own and lease
equipment, or lease with option to purchase. Section 1.11(c)(2)
expressly authorizes FCBs (and agricultural credit banks (ACBs)
pursuant to section 7.2) to own and lease equipment or facilities, or
lease with option to purchase, and authorizes Federal land credit
associations pursuant to section 7.6 to own and lease facilities, or
lease with option to purchase. Section 3.7(a) expressly authorizes
banks for cooperatives (BCs) (and ACBs pursuant to section 7.2) to own
and lease equipment, or lease with option to purchase. The Act clearly
creates express leasing authorities separate from lending authorities,
and in no case does the Act expressly restrict the geographic location
of lease customers.
The Farm Credit Administration (FCA) and the Farm Credit banks have
long recognized the distinct nature of loans and leases in connection
with the creation of the Leasing Corporation. Section 4.25 of the Act,
which authorizes the establishment of service corporations, provides
that a service corporation cannot ``extend credit.'' Our interpretation
is that this provision does not apply to leases. Thus, the chartering
of the Leasing Corporation was authorized because leases are not
extensions of credit.
The second FCB commented that ``FCA has * * correctly * * *
analyzed the statutory basis for leasing authorities as being
independent of that for lending authorities,'' but indicates concern
that ``the operational impact of out-of-territory leasing activity
would be comparable to the impact of out-of-territory lending.'' For
more than 10 years, the Leasing Corporation has had authority to
compete nationwide with all other FCS lessors for all types of leasing
business. Section 616.6200 establishes that other FCS lessors have the
ability to compete nationwide with the Leasing Corporation on a level
playing field.
II. Summary of Significant Provisions of Final Rule
A. Purchase and Sale of Interests in Leases
The final regulation authorizes 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 final regulation:
(1) Eliminates distinctions concerning the authority to purchase
``lease interests'' and ``lease participation interests.'' The
definition of ``lease'' limits the types of leases in which System
institutions can buy an interest, that is, leases of equipment or
facilities used in the operations of eligible borrowers;
(2) Eliminates cross-title restrictions on the purchase of lease
interests to provide more flexibility because there is no statutory
restriction; and
(3) Eliminates the retention requirement concerning the purchase of
lease interests from outside the System. Requiring the servicer to have
an ownership interest is not necessary to manage risk and is not
required by law.
The following two provisions are parallel to provisions that apply
to loans: (1) Permit lease transactions through agents on the same
basis that is permitted for loans; and (2) provide for the purchase of
participations in leases made to similar entities on generally the same
basis as the purchase of participations in similar entity loans.
B. Lending and Leasing Limit
The final rule takes a consistent approach to limiting
concentration of risk in individual System institutions. Limits on the
financing (whether in the form of loans or leases) a System institution
can provide to any one
[[Page 34516]]
customer protect against unnecessarily large risks to an institution's
capital. Therefore, all loans and leases to a single customer will be
measured against an institution's lending and leasing limit. The
leasing limit for the Leasing Corporation under the final rule will
limit its risk exposure in a manner similar to the lending and leasing
limit that will apply to other System institutions.
The definition of ``borrower'' includes any customer to
whom an institution has made a lease or a commitment to make a lease.
The definition of ``loan'' includes all types of leases
(operating, financing, and lease interests).
The rule prohibits a System institution from making a
lease or a loan if the consolidated amount of all loans and leases to a
single borrower exceeds 25 percent of the institution's lending and
leasing limit base (except for loans made under title III of the Act,
which vary between 10 percent and 50 percent depending on the type of
loan and associated risk).
The rule prohibits the Leasing Corporation from making
leases to a single lessee or any related entities that exceed 25
percent of the Leasing Corporation's lending and leasing limit base.
The rule adds the outstanding lease balances to the items
included in the computation of obligations.
All leases, except those permitted under Sec. 614.4361,
must comply with the leasing and lending limit at all times.
C. Out-of-Territory Leasing
The final rule provides System institutions with more flexibility
to make leases outside their chartered territory. A System lessor is
not required to satisfy any notice or concurrence requirements in order
to serve lessees beyond the lessor's territory.
D. Leasing Policies, Procedures, and Underwriting Standards
The final regulation provides only a basic framework for leasing
policies, procedures, and underwriting standards. From a safety and
soundness perspective, System institutions engaged in leasing need to
have adequate policies and procedures that address both loan and lease
underwriting to ensure prudent management of both activities. From a
payment risk perspective, we require institutions engaged in leasing to
comply with the minimum loan underwriting standards in Sec. 614.4150
regarding the minimum amount of financial information required of the
applicant since the risks are very similar for loans and leases. The
loan underwriting regulations require written policies and procedures
to address underwriting standards such as the minimum supporting credit
and financial information required, credit analysis procedures, and
repayment capacity of the applicant. The complexity and depth of the
policies and underwriting standards should be consistent with the
current or planned leasing activities and the institution's risk-
bearing ability.
E. Documentation
We require each institution to document that the leased equipment
or facility is authorized to be leased under its leasing authorities.
Equipment ordinarily is considered to be movable personal property.
Facilities include property that is attached, often permanently, to
real estate. Certain agricultural property may have attributes of both.
We do not provide a specific regulatory definition of equipment and
facility. We expect each System institution involved in leasing to have
the necessary expertise to make such a determination, and we will
review such determinations during the course of our examination
process.
F. Investment in Leased Assets
Section 616.6500 authorizes an institution to buy property to
lease, if buying such property is consistent with the type of leasing
activity being conducted or planned in the future. The purpose of this
provision is to prohibit System institutions from speculating in the
acquisition of property or facilities.
G. Stock Purchase Requirements
We read the Act to impose a stock purchase requirement in
connection with some leases, but not others. 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. An institution may also issue one
participation certificate to satisfy the stock purchase requirement if
authorized by the institution's bylaws. The stock requirement does not
apply to the Leasing Corporation 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).
H. Disclosure Requirements
The final regulation contains two disclosure requirements designed
to protect an applicant's interest. The first requires that lease
applicants be provided a copy of all lease documents signed by the
lessee within a reasonable time following lease closing. The second
requires 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.
I. Portfolio Limitations
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.
III. Conforming Changes
The existing leasing regulations in Sec. Sec. 618.8050 and 618.8060
will be deleted upon the effective date of the final rule. The final
rule makes conforming technical changes to Sec. Sec. 614.4710 and
621.7. The final rule also makes a technical change in Sec. 614.4351
and Sec. 618.8440 to correct erroneous citations. We also clarify in
Sec. 616.6300 that although a board of directors sets policy, it must
direct management to develop procedures that reflect lease practices
that control risk.
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
amended and part 616 is added to
[[Page 34517]]
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 E--Loan Terms and Conditions
2. Section 614.4232 is amended by removing the word ``voting'' from
the introductory text, and revising paragraph (c) to read as follows:
Sec. 614.4232 Loans to domestic lessors.
* * * * *
(c) The lessee must hold at least one share of stock or one
participation certificate; and
* * * * *
Subpart H--Loan Purchases and Sales
Sec. 614.4325 [Amended]
3. Section 614.4325 is amended by removing the word ``leases,''
from paragraph (a)(3).
4. The heading of subpart J is revised to read as follows:
Subpart J--Lending and Leasing Limits
5. 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 to which an institution
has made a loan or a commitment to make a loan either directly or
indirectly. Excluded are a Farm Credit System association or other
financing institution that comply with the criteria in section 1.7(b)
of the Act and the regulations in subpart P of this part. 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. This includes 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]
6. 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; and by removing the reference
``Sec. 615.5201(j)'' and adding in its place the reference
``Sec. 615.5201(l) in paragraph (a).
Sec. 614.4352 [Amended]
7. 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]
8. Section 614.4353 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base''.
Sec. 614.4354 [Amended]
9. Section 614.4354 is amended by adding the words ``and leasing''
between the words ``lending'' and ``limit base''.
Sec. 614.4355 [Amended]
10. 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).
Sec. Sec. 614.4356-614.4360 [Redesignated]
11. Sections 614.4356 through 614.4360 are redesignated as
Sec. Sec. 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.
12. 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) 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]
13. 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.
14. Newly designated Sec. 614.4360 is amended by adding the words
``and leasing'' between the words ``lending'' and ``limit'' in the
heading and each place they appear 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
[[Page 34518]]
(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 permitted under 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,'' must comply with the lending and leasing limit on the
date the lease is made, and at all times after that.
* * * * *
Sec. 614.4361 [Amended]
15. 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]
16. 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).
17. 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.
616.6200 Out-of-territory leasing.
616.6300 Leasing policies, procedures, and underwriting standards.
616.6400 Documentation.
616.6500 Investment in leased assets.
616.6600 Leasing limit.
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).
Sec. 616.600 Definitions.
For the purposes of this part, the following definitions 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 buy interests in leases. A Farm Credit System
institution may buy leases and interests in leases.
(b) Policies. Each Farm Credit System institution that sells or
buys interests in leases must do so only under a policy adopted by its
board of directors that addresses the following:
(1) The types of leases in which the institution may buy or sell an
interest and the types of interests which may be bought or sold;
(2) The underwriting standards for the purchase of interests in
leases;
(3) Such limits on the aggregate lease payments and residual amount
of interests in leases that the institution may buy from a single
institution as are necessary to diversify risk, and such limits on the
aggregate amounts the institution may buy 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 bought;
(5) Requirements for securing from the selling lessor in a timely
manner adequate financial and other information about the lessee needed
to make an independent judgment; and
(6) Any limits or conditions to which sales or purchases are
subject that the board considers appropriate, including arbitration.
(c) Purchase and sale agreements. Each agreement to buy or sell an
interest in a lease must, 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 bought;
(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
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 buys an interest in
a lease must 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. This must occur before the purchase of the interest
and before any servicing action that alters the terms of the original
agreement. The institution must not delegate such judgment to any
person(s) not employed by the institution. A Farm Credit System
institution that buys a lease or any interest in a lease may use
information, such as appraisals or inspections, provided by the
originating or lead lessor, or any intermediary seller or broker;
however, the buying Farm Credit System institution must independently
evaluate such information when exercising its judgment. The independent
judgment must be documented by a payment analysis that considers
factors set forth in Sec. 616.6300. The payment analysis must consider
such financial and other lessee
[[Page 34519]]
information as would be required by a prudent lessor and must include
an evaluation of the capacity and reliability of the servicer. Boards
of directors of jointly managed institutions must adopt procedures to
ensure 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:
(1) For the purpose of determining the lending and leasing limit in
subpart J of part 614 of this chapter, the lease must be considered, to
the extent of the recourse or guaranty, a lease by the buyer to the
seller, and in addition, the seller must aggregate the lease with other
obligations of the lessee; and
(2) The lease subject to the recourse agreement must be considered
an asset 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 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.
Sec. 616.6300 Leasing policies, procedures, and underwriting
standards.
The board of each institution engaged in lease underwriting must
adopt a written policy (or policies). Management, at the direction of
the board, must develop procedures that reflect lease practices that
control risk and comply with all applicable laws and regulations. Any
leasing activity must comply with the lending policies and loan
underwriting requirements in Sec. 614.4150 of this chapter. An
institution engaged in the making, buying, or syndicating of leases
also must adopt written policies and procedures that address the
additional risks associated with leasing. Written policies and
procedures must 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.
Each institution must 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 that is consistent
with current or planned leasing programs.
Sec. 616.6600 Leasing limit.
All leases made by Farm Credit System institutions shall be subject
to the lending and leasing limit in subpart J of part 614 of this
chapter.
Sec. 616.6700 Stock purchase requirements.
(a) Each System institution, except the Farm Credit Leasing
Services Corporation, making an equipment lease under titles II or III
of the Act must require the lessee to buy or own at least one share of
stock or one participation certificate in the institution making the
lease, in accordance with its bylaws.
(b) The disclosure requirements of Sec. 615.5250(a) and (b) of this
chapter apply to stock (or participation certificates) bought as a
condition for obtaining a lease.
Sec. 616.6800 Disclosure requirements.
(a) Each System institution must give to each lessee a copy of all
lease documents signed by the lessee within a reasonable time following
lease closing.
(b) Each System institution must make its decision on a lease
application as soon as possible and provide prompt written notice of
its decision to the applicant.
PART 618--GENERAL PROVISIONS
18. 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--[Removed and Reserved]
19. Subpart C, consisting of Sec. Sec. 618.8050 and 618.8060, is
removed and reserved.
Subpart J--Internal Controls
Sec. 618.8440 [Amended]
20. Section 618.8440 is amended by removing the reference ``or
(d)'' in paragraph (b)(6).
PART 621--ACCOUNTING AND REPORTING REQUIREMENTS
21. 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]
22. 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: June 18, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-16149 Filed 6-25-99; 8:45 am]
BILLING CODE 6705-01-P
