[Federal Register Volume 61, Number 157 (Tuesday, August 13, 1996)]
[Proposed Rules]
[Pages 42092-42127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19890]
[[Page 42091]]
_______________________________________________________________________
Part II
Farm Credit Administration
_______________________________________________________________________
12 CFR Part 613, et al.
Eligibility and Scope of Financing; Loan Policies and Operations;
Funding and Fiscal Affairs, Loan Policies and Operations, and Funding
Operations; General Provisions; Definitions; Disclosure to
Shareholders; Nondiscrimination in Lending; Capital Adequacy and
Customer Eligibility; Proposed Rule
Federal Register / Vol. 61, No. 157 / Tuesday, August 13, 1996 /
Proposed Rules
[[Page 42092]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 613, 614, 615, 618, 619, 620, and 626
RIN 3052-AB10
Eligibility and Scope of Financing; Loan Policies and Operations;
Funding and Fiscal Affairs, Loan Policies and Operations, and Funding
Operations; General Provisions; Definitions; Disclosure to
Shareholders; Nondiscrimination in Lending; Capital Adequacy and
Customer Eligibility
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA) through the FCA Board
(Board) publishes for comment proposed amendments (reproposed rule) to
the current regulations governing the capital adequacy provisions and
the customer eligibility provisions for Farm Credit System (Farm
Credit, FCS, or System) institutions. This rule adds core surplus and
total surplus standards for banks, associations, and the Farm Credit
Leasing Services Corporation (Leasing Corporation); adds a collateral
ratio for banks; and adds procedures for setting higher capital
standards for individual institutions and for issuing capital
directives, when warranted. This rule also incorporates recent
statutory amendments to the Farm Credit Act of 1971, as amended (Act),
which govern the eligibility rules for lending under title III of the
Act and provide Farm Credit banks and associations new authorities to
participate with non-System lenders in loans to similar entities.
Subsequent to the closing of the comment period for the original
proposal, the Farm Credit System Reform Act of 1996 (1996 Reform Act)
was enacted, necessitating certain conforming changes in the rule. The
reproposal eliminates restrictions in the current eligibility
regulations that are not required by the Act and makes other technical,
clarifying, and conforming changes. This rule relocates the
nondiscrimination in lending regulations to a new part without change.
DATES: Written comments should be received on or before September 12,
1996.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination, Farm
Credit Administration, McLean, VA 22102-5090 or sent by facsimile
transmission to FAX number at (703) 734-5784. Copies of all
communications received will be available for examination by interested
parties in the Office of Examination, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, and John J. Hays, Policy
Analyst, Office of Examination, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4498, TDD (703) 883-4444,
or
Rebecca S. Orlich, Senior Attorney, and 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: The FCA published proposed amendments to the
capital provisions of its regulations for Farm Credit institutions on
July 25, 1995. See 60 FR 38521. Proposed amendments to the eligibility
and scope of financing provisions of its regulations were published on
September 11, 1995. See 60 FR 47103. The 90-day comment periods expired
on October 25 and December 11, 1995, respectively. The FCA received
over 300 comment letters from a wide audience in response to these
proposed amendments. In response to the concerns of the commenters, the
FCA has decided to repropose the amendments. Additionally, the
proposals regarding System capital adequacy and customer eligibility
requirements have been combined in a single rulemaking.
I. Summary of the Reproposed Rule
A. The capital provisions of the reproposed regulations incorporate
the following provisions:
1. The 7-percent total surplus ratio remains unchanged from the
originally proposed regulations.
2. The unallocated surplus ratio contained in the originally
proposed rule has been renamed the core surplus ratio and has been
expanded to include other equities that are perpetual in nature and
function. The minimum core surplus ratio would remain at 3.5 percent
and include an institution's:
Undistributed earnings/unallocated surplus;
Perpetual stock; and
Nonqualified allocated equities.
The aforementioned stock and equities could not be subject to an
established practice or plan of retirement or distribution. For an
association, the core surplus ratio would be calculated net of its net
investment in its affiliated bank.
3. The computation of the net collateral ratio for banks excludes
the effect of market fluctuations on the value of eligible investments,
and the minimum standard is revised from the 104-percent standard in
the original proposal to 103 percent of total liabilities.
4. The use of risk-sharing agreements or similar contractual
arrangements would be permitted on a temporary basis as part of an
association's initial effort to reach the 3.5-percent core surplus
ratio. After building its core surplus to 3.5 percent, each association
would be required to maintain capital at this level net of its bank
investment.
5. The remaining provisions of the originally proposed regulations
setting forth procedures for establishing individual institution
capital ratios and for issuing capital directives are reproposed in
substantially the same form as originally proposed.
B. The eligibility provisions applicable to title I and title II
lenders have been substantially narrowed from the original proposal and
incorporate the following changes:
1. All bona fide farmers, ranchers, and aquatic producers or
harvesters remain eligible to borrow from the FCS for any agricultural
or aquatic purpose. However, the reproposed regulation imposes
additional restrictions on System loans for other credit needs. Under
this reproposal, non-resident foreign nationals, farm owners who do not
engage in agricultural production or farm management, and only legal
entities meeting certain farmer ownership and agricultural activity
tests could not obtain FCS financing for non-agricultural business
needs. The reproposed regulation, however, permits individuals who are
citizens and permanent residents of the United States and certain legal
entities to obtain limited FCS financing for a non-agricultural
business purpose if they actively farm, ranch, or fish. Non-
agricultural business purposes could not exceed the market value of the
borrower's agricultural assets. Under the reproposed regulation, active
farmers could obtain System financing for their housing and domestic
needs without restriction, but owners of agricultural land could borrow
for their housing and domestic needs only in an amount that does not
exceed the value of their agricultural assets. Non-resident foreign
nationals could borrow for housing and domestic needs that are
reasonably related to their agricultural operations. Finally, the FCA
rescinds its original proposal to prohibit Farm Credit Banks (FCBs) and
direct lender associations from extending credit to cooperatives and
other entities that are eligible to borrow from a title III bank.
[[Page 42093]]
2. The reproposed regulation would permit a legal entity to obtain
financing for a processing or marketing operation only if a majority of
ownership is held by eligible borrowers.
3. The reproposed regulation clarifies that farm-related businesses
can receive System financing only if they provide farm-related services
that are directly related to the agricultural production of farmers and
ranchers. No business activities unrelated to agriculture may be
financed under this authority.
4. The reproposed regulation pertaining to rural housing would
repeal a provision in the existing regulation that permits System
lenders to finance non-farm rural homes in open country that has been
annexed by a municipality of more than 2,500 persons. The FCA also
would withdraw its original proposal to permit System lenders to offer
home equity lines of credit without limitation on the borrower's use of
the credit proceeds.
C. The reproposed regulations governing domestic and international
lending by title III banks would implement the relevant provisions of
the 1996 Reform Act and make other clarifying changes.
D. The reproposed regulation pertaining to the authority to
participate in loans made to similar entities reflects two significant
changes from the proposed regulation. First, the reproposed regulation
would rescind a restriction in the original proposal that would have
enabled a System institution to participate only in those similar
entity loans that were compatible with its lending authority. Second,
this reproposal would delete the non-statutory out-of-territory
concurrence requirement in the proposed rule.
II. Public Comments Received
The FCA received 126 comments in response to the proposed capital
adequacy regulations. Six were telephone inquiries from System
institutions requesting clarification of specific provisions or
providing general impressions of the proposed regulations. The FCA
received 120 comment letters, including a comment letter from the
System's Presidents' Finance Committee, which reflected the views of
many System banks and associations (System joint comment). Of the
remaining comments, three were from System banks (AgFirst FCB, Western
FCB, and St. Paul Bank for Cooperatives (St. Paul BC)), one was from
the Leasing Corporation, 37 were from System associations, 26 were from
cooperatives that were borrowers/shareholders of a System bank, 46 were
from borrowers/shareholders of a single agricultural credit association
(ACA), five were from various state and national cooperative councils
(the National Council of Farmer Cooperatives, the North Carolina State
Grange, the Minnesota Association of Cooperatives, the Cooperative
Council of North Carolina, and the Virginia Council of Farmer
Cooperatives (VCFC)), and one was from the American Bankers Association
(ABA) on behalf of its commercial bank members. In addition, several
groups of System representatives made oral presentations of their views
to Agency staff.
These commenters supported the general goals of the proposed
capital regulations. The System, in its joint comment, stated that it
was prepared to embrace regulations that encourage the building of a
sound capital structure in System institutions and that promote
confidence in the System by borrowers/shareholders, investors, and the
public. The commenters noted specific areas of agreement with the FCA
on a number of requirements. As described more fully below, however,
each of the commenters objected to various provisions of the proposal.
The ABA supported the proposed regulations to the extent that they
``stiffened'' capital requirements for System institutions but did not
believe the proposal was sufficiently stringent.
The 191 comments received on the eligibility proposals included
letters from seven Farm Credit banks: the FCB of Wichita; AgFirst FCB;
the St. Paul BC; CoBank, Agricultural Credit Bank (CoBank); AgAmerica,
FCB; the FCB of Texas; and AgriBank, FCB. Letters were also received
from 70 Farm Credit associations, 29 commercial banks, 13 credit
unions, 17 trade associations, 45 System borrowers, six members of
Congress, and four government agencies. Trade association commenters
were: the Farm Credit Council (FCC) on behalf of the eight banks and
approximately 230 associations comprising the FCS; the Tenth District
Federation of Production Credit Associations (Tenth District PCAs)
representing the 17 production credit associations (PCAs) in Louisiana,
New Mexico, and Texas; the Western District FCC representing the System
lenders in Arizona, California, Hawaii, Idaho, Nevada, and Utah; the
ABA, the Independent Bankers Association of America (IBAA), the
Community Bankers of Kansas, the North Dakota Bankers Association
(NDBA), the South Dakota Bankers Association, the Community Bankers
Association of North Carolina (CBANC), each representing their member
banks; the Credit Union National Association, representing more than
12,300 credit unions through their State league affiliates; the New
York Credit Union League, the North Dakota Credit Union League (NDCUL),
the Indiana Credit Union League, each on behalf of their member credit
unions; the VCFC on behalf of 80 member cooperatives in Virginia; the
Farmers' Legal Action Group, Inc. (FLAG), a non-profit law center of
the National Family Farm Coalition, which represents 38 farm and rural
advocacy organizations in over 30 States; and the Maine Potato Board
(MPB).
Letters from government agencies included the North Dakota
Department of Agriculture; the Vermont Department of Agriculture, Food
and Markets; the Ohio Department of Commerce, Division of Financial
Institutions; and the Federal Reserve Board. Six of the letters
received from members of Congress transmitted letters on behalf of
their constituents.
All of these commenters approved of the FCA's goals of
consolidating, streamlining, and clarifying the eligibility
regulations, and no commenter objected to regulatory relief for FCS
banks and associations. Individual commercial banks, their trade
associations, and FLAG, however, asserted that many of the proposed
regulations exceed the FCA's objective of reducing regulatory burdens
on the FCS and would expand System financing beyond the mandate of the
Act. Some of these commenters recommended that the FCA withdraw the
proposed eligibility regulations and refer these issues to Congress for
hearings on rural credit.
III. The Reproposed Rule
After considering the comments received on the proposed regulations
and further deliberating on the issues, the FCA reproposes a rule
governing capital adequacy and customer eligibility for FCS financing
as one. The FCA responds to the specific concerns of the commenters as
it explains the provisions of the reproposal.
A. Core Surplus Ratio Capital Standard
The FCA originally proposed that institutions have unallocated
surplus of at least 3.5 percent of risk-weighted assets. For this
purpose, unallocated surplus included common stock and noncumulative
perpetual preferred stock held by nonborrowers, provided that the
institution adhered to a policy of not retiring the stock. For
associations, the net investment in the affiliated bank would have been
subtracted from the unallocated surplus.
[[Page 42094]]
A number of respondents (primarily agricultural cooperatives,
cooperative councils, System associations, and association borrowers)
commented on the proposed unallocated surplus ratio. They challenged
the concept of differentiating between allocated and unallocated
capital on the ground that it created a bias against cooperative
principles. They argued that patron ownership, as characterized by
allocated capital, provides the same protection to the institution as
unallocated capital and should not be given a lower priority. Borrowers
from the System that were themselves cooperatives expected this
requirement of the originally proposed regulation to result in lower
patronage distributions and, accordingly, to increase the effective
interest rates of their loans. They were concerned that the regulations
conveyed a message that allocated capital is of lower quality than
unallocated. These groups provided the following comments:
Allocated and unallocated capital provide the same level
of institution protection.
Cooperative principles are diluted if patron ownership is
discouraged. Cooperative principles encourage matching of current
earnings or losses with current patrons through earnings or loss
distributions and discourage accumulation of high levels of unallocated
capital. Unallocated surplus as defined in the proposed regulation
would conflict with these principles.
Subchapter T tax treatment under the Internal Revenue Code
could be threatened if significant levels of earnings are diverted to
unallocated surplus. The commenters viewed this as being detrimental to
capital accumulation in the System and believed that such a treatment
could result in double taxation of System earnings.
The commenters countered the FCA's statement that unallocated
surplus provides a buffer to protect owners of allocated capital by
stating that cooperative principles promote sharing the risks and
rewards of the organization with patrons. Furthermore, some respondents
stated that retaining substantial earnings that could otherwise be
distributed to patrons might cause some business to move to
competitors.
Forty-six (46) comments on this issue were from borrowers/
shareholders of a single ACA. These borrowers expressed their view that
the proposed unallocated surplus ratio requirement would greatly reduce
patronage in their association. They objected to this result, stating
that patronage allocations save taxes, enable the association to build
capital, and have encouraged many borrowers who left their association
in the 1980s to return.
Several of the associations and a bank suggested that all of the
allocated surplus be counted in the 3.5-percent surplus requirement.
However, some of the commenters also acknowledged that the FCA might be
reluctant to include the entire amount of allocated equities and,
therefore, suggested, at a minimum, counting nonqualified allocated
equities. Nonqualified allocated equities are patronage allocations on
which the institution generally pays no cash to patrons at the time of
the allocation and which are included in the institution's taxable
income. Should the institution make distributions of the allocations to
the patrons/borrowers at some future date, the patrons/borrowers
recognize taxable income at that time, and the institution may then
recapture a substantial portion, if not all, of the taxes paid
previously. One System association commented that nonqualified
allocated surplus ``carries a much lower degree of sensitivity with
members because they do not incur any tax liability until it is
revolved.'' Numerous commenters, including the System in its joint
comment, made similar statements regarding borrowers' reduced
expectations of distributions with respect to nonqualified allocated
equities.
Two commenters described classes of stock that they believe merit
treatment as unallocated surplus. One association described a class of
non-voting stock it has issued as patronage, rather than in connection
with making a loan to a borrower. The association asserted that,
because no shares have ever been retired, the stock has the same
features of permanence and stability as unallocated surplus and thus
should be included in the unallocated surplus ratio calculation. The
association stated that it has informed the recipients of the stock
that the stock will not be retired except in the unlikely event of
liquidation of the association and that the value of the stock springs
from the prospect of dividends that may be paid in the future, not from
the prospect of retirement. The Leasing Corporation also asserted that
the Class A stock and the Class C stock it has issued to Farm Credit
banks have features of permanence and should likewise be included in
the unallocated surplus ratio. Class A stock totaling $1.7 million is
held equally by all Farm Credit banks, and such stock has been retired
only in connection with bank mergers. Class C stock is issued and
retired based on the amount of the net lease investments allocated to
each bank.
Many System banks and associations objected to the requirement that
an association deduct its net investment in its affiliated bank when
computing its unallocated surplus ratio calculation. The following is a
summary of the comments made by the commenters:
The proposal would reduce the amount of earnings on which
taxes could be minimized.
The proposal could result in the elimination of noncash
patronage distributions and provide an undesirable incentive to operate
at or just above cost for the institutions. This could damage the
financial position of the entire System.
The proposal violates the provisions of the Farm Credit
Banks and Associations Safety and Soundness Act of 1992 (1992
amendments) and is contrary to the FCA Board's policy statement on
regulatory burden.
A significant tax consequence will be incurred and reduced
retained earnings will result because of some possible future financial
difficulty. This does not make good business sense.
There is no evidence that the potential increased tax
liability is offset by any safety and soundness benefits.
A number of commenters qualified their assertions that bank-equity
assets should be included in an association's unallocated surplus ratio
calculation. For example, one commenter stated that bank-equity assets
should be counted as the same quality as other investments if the
``control issue'' were adequately addressed. Another commenter stated
that there is no evidence that accumulating earnings at the bank has a
negative impact on association survival, as long as earnings remain
accessible to the association.
The System in its joint comment proposed an alternative method for
calculating the unallocated surplus ratio for associations. It proposed
that an association be permitted to count the after-tax value of its
investment in its funding bank, so long as the bank would continue to
meet all regulatory capital standards after a pro forma retirement of
the association's allocated investment. Only if the bank would fail to
meet one or more capital requirements, would the association be
required to deduct the entire value of its allocated bank investment.
Several institutions also suggested that a portion of the
investment in the bank be deducted from the unallocated surplus and the
rest of the investment be deducted from the allocated surplus. This
would, according to the commenters, accomplish what they
[[Page 42095]]
described as the FCA's goal of requiring adequate capital that is
``interchangeable'' or ``fungible.''
In response to all of these comments, the FCA has made a number of
revisions in the reproposed rule. The term ``unallocated surplus
ratio'' has been replaced with the term ``core surplus ratio,'' and the
types of equities or accounts that may be included in the ratio have
been expanded. The core surplus ratio minimum is 3.5 percent of the
risk-adjusted asset base, unchanged from the minimum in the originally
proposed rule, and includes all of the equities in the proposed rule's
unallocated ratio, which are: Unallocated surplus, perpetual common
stock held by non-borrowers, and noncumulative perpetual preferred
stock held by non-borrowers, provided that the institution has no
established plan or practice of retiring such stock. Core surplus
includes three additional categories of equities or accounts that are
considered by the FCA to be as permanent and stable as unallocated
surplus. These equities or accounts are:
1. Nonqualified patronage allocations, allocated to institution
borrowers other than other System institutions, made from earnings that
the institution has included in its gross taxable income at the time of
allocation and that are not subject to distribution according to an
established plan or practice. An institution operating on a Subchapter
T basis would not be able to take a tax deduction for these allocations
until they are distributed, at which time the tax liability would be
passed to the recipient. In the event that a nonqualified patronage
allocation is distributed, other than as a part of a pro rata
distribution of all nonqualified allocations that were allocated in the
same year, any remaining nonqualified allocations allocated in the same
year will be disallowed from treatment as core surplus.
2. Perpetual stock held by borrowers other than other System
institutions that was not purchased as a condition of obtaining a loan,
provided that the institution has no established plan or practice of
retiring the stock. In the event that any such stock is retired other
than on a pro rata basis, all other stock of the same class or series
that was issued in the same year that the retired stock was issued will
be disallowed from treatment as core surplus.
3. Newly developed or modified capital instruments or balance sheet
entries or accounts that the FCA determines are the functional
equivalent of a component of core surplus. The FCA may permit one or
more System institutions to include all or a portion of such
instrument, entry, or account as core surplus, permanently or on a
temporary basis.
The reproposed rule also provides that, with respect to equities
that are included in core surplus, if the FCA finds that a particular
equity has characteristics or terms that diminish its contribution to
an institution's ability to absorb losses, the FCA may require the
deduction of all or a portion of such equity from core surplus.
The purpose of the conditions pertaining to retirement and
distribution of equities held by borrowers is to assure that amounts
treated as core surplus are not retired, canceled, or applied against a
borrower's indebtedness on a defaulted loan or at the request of
individual borrowers. These conditions would not prevent an institution
from exercising its statutory right to make such retirements or
cancellations. However, should such retirements or cancellations occur,
the remaining allocated amounts and stock could not be counted in the
core surplus ratio. They could, however, continue to be counted in the
total surplus ratio and permanent capital of the institution. The
conditions placed on the equities' inclusion in core surplus merely
recognize that this practice negates the desired stability features of
these types of equities. The provision would not apply to borrower
equities canceled in connection with a restructured loan, if an
association is required to cancel the equities pursuant to section
4.14B of the Act. If an association is statutorily required to cancel
the equities, the remaining equities of the same class or series and
issued in the same year as the canceled stock or equities will continue
to be treated as core surplus.
The core surplus requirement would replace the current requirement
in Sec. 615.5330 that the BC and the agricultural credit bank (ACB) add
at least 10 percent of net earnings after taxes to unallocated surplus
until the unallocated surplus ratio reaches half of the minimum
permanent capital requirement.
The reproposed rule adds a definition of ``perpetual stock or
equity'' as stock or equity that does not have a maturity date, cannot
be redeemed at the option of the holder, and has no other provisions
that will require the future redemption of the issue.
The FCA continues to believe that institutions need a certain
amount of capital that is not subject to regular distribution or
retirement according to an established plan or practice. It is the
FCA's position that such capital is necessary to protect institutions
during periods of stress, which are part of the cyclical nature of the
System institutions' business. In addition, System institutions are
vulnerable to industry-wide or regional problems due to the high
concentrations of certain commodities and loan volume in the
agricultural sector. Consequently, in the reproposed rule the Agency
excludes from the core surplus ratio any allocated equities that the
recipient has included in his or her gross income and that the
recipient can reasonably expect the institution to revolve in the near
future.
The FCA is persuaded that the included types of equities are
sufficiently permanent and stable and should qualify as core surplus
when: No tax liability has yet been incurred by the recipient, there is
no plan or practice of distributing or retiring them on an established
or fixed basis, and there is no reasonable expectation by the recipient
regarding when the equities will be distributed or retired. Several
System institutions have issued such stock or nonqualified allocations.
In those cases where the borrowers have been notified of such
allocations, it is the FCA's understanding that the institutions have
informed their borrowers that such equities may only be distributed or
stock retired, if ever, at an unspecified date in the future and solely
at the discretion of the institution's board of directors. None of
these equities have been retired by the institutions, and, as one such
institution stated, there is a much lower degree of ``sensitivity''
with members because they do not incur tax liability until the equity
is revolved.
The FCA believes that permitting the inclusion of nonqualified
equities meeting the reproposed rule's distribution conditions would
eliminate most of the disincentives believed by several commenters to
be embedded in the originally proposed rule for an institution to
operate on a Subchapter T basis. The FCA believes that the revisions in
the reproposed rule strike the appropriate balance between cooperative
principles and safety and soundness objectives. The reproposed rule
permits an institution to allocate its patronage-based income (using
nonqualified allocations) and increase its core surplus ratio at the
same time.
Although the reproposed rule does not limit the amount of
nonqualified allocations that can be included in the core surplus, the
FCA expects that institutions would retain a healthy portion of the
core surplus in unallocated surplus. This completely uncommitted
capital is especially important to the institution during periods of
stress, when operating losses or provisions to the allowance for loan
[[Page 42096]]
losses may result. Accordingly, should the regulations be adopted,
future FCA examinations would include an assessment of the composition
of core surplus, which will be reflected in the evaluation of the
institution's capital and operating performance.
The Class A stock issued by the Leasing Corporation and held by
Farm Credit banks would qualify as core surplus. Class A stock
represents the owner Farm Credit banks' initial investment in the
Leasing Corporation, and retirement has occurred only with bank
mergers. This stock has demonstrated a high degree of permanence and
exhibits similar attributes to unallocated surplus. Accordingly, it
would be eligible to satisfy the 3.5-percent core surplus and the 7-
percent total surplus requirements. The Leasing Corporation's Class C
stock, however, represents stock purchased by the owner banks based on
lease activity in their respective trade/geographic territories. As a
result, Class C stock fluctuates with lease volume (much the same as
the level of borrower stock in associations fluctuates with the amount
of outstanding loans), and the stock level is adjusted quarterly. Due
to steadily increasing lease volume, Class C stock has increased over
the past 5 years. Since Class C stock fluctuates with lease volume,
however, it does not, as currently structured, have the stability and
permanence attributes of surplus and consequently cannot be included in
either surplus ratio.
The reproposed rule requires deduction of the association's net
investment in its funding bank from core surplus for the purpose of
computing the core surplus ratio for associations. This provision is
unchanged from the proposed rule. The FCA required this deduction
because of its strong belief that the retention of at least a minimum
amount of capital that is not invested in (and therefore at risk and
controlled by) the association's funding bank is critical to the
financial health and autonomy of an association. When capital is
retained at the bank, it is vulnerable to losses due to bank
operations, as well as assistance programs for troubled associations in
the district, and these are matters beyond the association's control.
In a circumstance where most or all of the associations in a district
become stressed, their investments in the bank could become most
vulnerable at the time they are most needed.
The FCA considered proposals of commenters, including the proposals
in the System's joint comment, to revise the calculation in the
proposed rule to include a portion of the net investment in the bank.
These proposals do not provide assurance that the association would be
able to survive independently in the event of a bank's financial
adversity or failure. Because one of the primary reasons for
establishing the minimum core surplus requirement is to assure
association access to stable capital at all times, the commenters'
proposals do not fully achieve the purpose of the core surplus ratio
standard. The FCA believes that the ``control issue'' cannot be
adequately addressed.
Further, an association cannot have guaranteed access to its
investment in the bank without the occurrence of a taxable event, the
very situation some commenters seek to avoid by accumulating earnings
at the bank.
The FCA does not favor the commenters' proposal to deduct the net
investment in the bank partly from the core surplus and partly from the
total surplus of an association. The proposal does not meet the FCA's
goal to ensure that each institution holds a minimum level of capital
that is neither at risk at another System institution nor subject to
expected regular revolvement to borrowers.
As in the originally proposed rule, the reproposed rule will not
permit inclusion of an association's net investment in its bank in the
core surplus ratio calculation of either institution. The FCA has
excluded the amount of the investment in the bank from both the bank's
and the association's core surplus ratios because of the uncertainty of
its accessibility by either institution. If an association were to
fail, its investment in the bank would be offset against the bank's
direct loan and thus eliminate that portion of capital on the bank's
balance sheet. If the bank were to fail, the association's entire
investment would become vulnerable to loss.
The FCA does not agree with comments that the originally proposed
unallocated surplus ratio computation, including deduction of the net
investment in the bank, is inconsistent with the provisions of the 1992
amendments to the Act. Those amendments provided that a bank and an
association may, for the purpose of computing their permanent capital,
agree on which institution could count as permanent capital the
earnings of the bank that have been allocated to the association. The
originally proposed rule did not make any changes to the permanent
capital computation regarding the treatment of these allocated earnings
to which the 1992 requirement relates, and neither would the reproposed
rule. Measures such as the surplus ratios and the collateral ratio for
banks are proposed to be added to better ensure the financial health of
System institutions.
Furthermore, as described below, the total surplus ratio
computation would include the association's investment in the bank in
either the association's or the bank's allocated surplus, in conformity
with the institution's allotment agreement. As importantly, the
investment is counted in the net collateral ratio for banks, a critical
ratio reflecting liquidity and access to financial markets by the
System as a whole, to the same extent that it is included in bank
permanent capital. However, the FCA believes that a measurement of
capital not committed to the borrower and not available to absorb loss
at another System institution is needed to adequately evaluate the
ability of a direct lender association to survive independently of its
funding bank.
The FCA notes that, despite some commenters' objections that the
unallocated surplus ratio computation would inappropriately dissipate
association capital by requiring that there be taxable earnings at the
association level, nearly every taxable association in the System has
had taxable earnings at the association level in the past 8 years. The
FCA does not expect these associations to have to change their own
capital adequacy plans significantly in order to achieve or maintain
the minimum core surplus ratio standard (or, for that matter, the total
surplus standard).
One of the frequently cited objections to the core surplus ratio
calculation--that the requirement would result in higher interest rates
or lower patronage distributions to borrowers--would be the result of
any requirement that an institution accumulate and retain additional
capital. Nevertheless, the goals of an institution to provide the
lowest possible prices or the highest possible patronage distributions
must be balanced against the obligation to maintain necessary reserves.
The FCA has concluded, based on its experience as the regulator of
System institutions as well as its knowledge of the problems that other
types of financial institutions have faced, successfully and
unsuccessfully, that a certain amount of the highest quality of
uncommitted, accessible capital is critical to the long-term health and
survival of institutions. The FCA believes that strong core surplus
capital levels are necessary to ensure a viable System and minimize
risk to its creditors and investors, including shareholders.
[[Page 42097]]
Under the reproposed rule, the core surplus ratio must be
calculated by the institution as of each monthend as follows:
The ratio numerator:
Undistributed earnings/unallocated surplus (as defined in the FCA
Call Report instructions);
Plus: Certain perpetual common or noncumulative preferred stock
(held by entities other than System institutions) that was not
purchased as a condition of obtaining a loan, provided that the
institution has no established plan or practice of retiring the stock;
Plus: Nonqualified patronage allocations held by persons or
entities other than other System institutions, provided that the
institution has no established plan or practice of retiring such
nonqualified patronage;
Less: For associations only, the net investment in its affiliated
bank, which is--
Total investment in bank:
Less: Investment in association by bank;
Less: Agency/servicing investment in bank;
Less: Participations investment in bank;
Divided by--
The ratio denominator:
Risk-adjusted asset base per the permanent capital regulations,
excluding the net impact of unrealized gains or losses on available-
for-sale securities;
Less: For associations only, the net investment in its affiliated
bank.
B. Total Surplus Ratio
The FCA originally proposed a requirement that each institution
hold at least 7-percent total surplus, adjusted according to the
permanent capital allotment agreement. Total surplus included the
capital treated as unallocated surplus for the proposed unallocated
surplus ratio, as well as certain allocated equities and stock.
No specific objections to the total surplus ratio were received.
Accordingly, the total surplus ratio minimum of 7 percent of the risk-
adjusted asset base and calculation of the ratio are reproposed without
substantive change from the proposed rule. Equities that could be
included in this ratio would be all of those equities that are included
in core surplus for the core surplus ratio, as well as: (1) Allocated
surplus and stock subject to a discretionary revolvement plan of 5
years or more; and (2) term stock with an original maturity of at least
5 years which is not retirable prior to its maturity (reduced by 20
percent in each of the last 5 years of the life of the instrument).
Double-counting of capital would be eliminated according to applicable
allotment agreements.
The calculation of the total surplus ratio, calculated by the
institution as of each monthend with a minimum requirement of 7
percent, is as follows:
The ratio numerator:
Undistributed earnings/unallocated surplus per FCA Call Report;
Plus: Certain perpetual common or noncumulative perpetual preferred
stock not purchased as a condition of obtaining a loan;
Plus: Certain nonqualified and qualified allocated equities;
Plus: Term stock with an original maturity of at least 5 years;
Less: For associations only, an amount equal to the amount of
allocated bank equities counted as permanent capital by the bank;
Less: For banks only, an amount equal to the amount of bank
equities counted as association capital.
Divided by--
The ratio denominator:
Risk-adjusted asset base per the permanent capital regulations,
excluding the net impact of any unrealized gains or losses on
available-for-sale securities;
Less: For associations only, allocated bank equities counted as
permanent capital by the bank;
Less: For banks only, an amount equal to the amount of bank
equities counted as association capital.
C. Collateral Ratio
The FCA originally proposed that all System banks should maintain a
net collateral ratio of 104 percent of eligible assets (described in
existing Sec. 615.5050), less an amount equal to the amount of bank
equities counted as association permanent capital, divided by total
liabilities.
The FCA received numerous comments regarding the originally
proposed 104-percent net collateral ratio requirement. All of the
commenters on this issue took exception to the 104-percent level,
asserting that the 103-percent level established by the System's Market
Access Agreement (MAA) was sufficient. Commenters further asserted that
the FCA had endorsed the MAA. They alleged that the higher regulatory
requirement was inconsistent with the FCA's ``endorsement'' of MAA.
One commenter expressed concern that the 104-percent collateral
ratio requirement was counterproductive to building capital at the
association level. This commenter stated that the thrust of the FCA's
proposed rule was to encourage associations to build higher levels of
capital. However, the high bank collateral requirement would result in
the banks accumulating more capital through higher direct loan rates,
which would reduce the association's ability to be competitive and
accumulate higher levels of capital.
The System's joint comment highlighted several perceived weaknesses
in the wording of the originally proposed collateral requirement.
Specifically, it said that the proposed rule incorrectly referred to a
``collateral position'' required by FCA regulations and the Act. The
System pointed out that neither Sec. 615.5050 nor the Act uses the term
``collateral position'' but rather compares certain assets defined as
collateral with certain obligations requiring collateralization. The
System added that the proposed regulation ``incorrectly'' used total
liabilities as the denominator, rather than ``obligations requiring
collateralization.'' The System recommended revising the proposed net
collateral ratio definition to explicitly eliminate the application of
FAS No. 115, in accordance with a statement in the proposed rule's
supplementary information that the effect of FAS No. 115 was intended
to be excluded from all of the proposed ratios. FAS No. 115 is a
statement of generally accepted accounting principles (GAAP) requiring
financial statements to include the net effect of unrealized gains and
losses resulting from available-for-sale securities.
The FCA notes that its approval of the System banks' MAA did not
constitute, and should not be interpreted as, a restriction on the
FCA's authority to establish appropriate minimum capital or collateral
standards. Moreover, any comparison of the rule's collateral ratio
standard to the 103-percent collateral level in the MAA or the
collateral calculation that is set forth for funding purposes in
Sec. 615.5050 is inappropriate because the standards are calculated
differently. The MAA standards and funding requirement do not include a
deduction for a bank's equities that are not counted as permanent
capital by that bank according to its allotment agreement. The
reproposed rule's collateral standard would require this deduction.
Furthermore, the rule's denominator is total liabilities, not
``collateralized debt obligations'' as currently required by the MAA
and Sec. 615.5050.
The FCA reproposes a net collateral ratio requirement with
substantially the same calculation as in the originally proposed rule.
The FCA believes that the net collateral ratio in this rule would be a
more precise measure of the
[[Page 42098]]
financial health of System banks than the collateral ratio in the MAA.
A collateral ratio net of any bank assets counted as permanent capital
by associations eliminates the double-leveraging of capital in System
institutions. Using total liabilities as the denominator instead of
``collateralized obligations'' makes the ratio more meaningful as a
safety and soundness measure and prevents a bank from leveraging its
balance sheet by obtaining funds from non-System sources, which are not
classified as ``collateralized obligations.'' The FCA strongly believes
that the net collateral ratio is a critical measure of financial health
and provides an early measure of a bank's ability to obtain funds from
the market place. Severe safety and soundness concerns arise if
sufficient collateral is not available for banks to offer investors who
purchase System debt instruments. The net collateral ratio in this rule
is intended to provide an early ``tripwire'' to help avoid such severe
situations.
The FCA reproposes a minimum net collateral ratio standard of 103
percent, reduced from the 104-percent requirement in the originally
proposed rule. In light of the increased capital requirements of the
two surplus standards for both banks and associations that the FCA is
reproposing, a collateral standard of 103 percent will be sufficient in
most cases to ensure the maintenance of a minimum level of protection
and implementation of supervisory measures should market forces cause a
decline in the underlying value of collateral. This standard generally
provides additional assurance that a bank will maintain sufficient
collateral for continued access to capital markets, because the System
banks' MAA does not limit access to the capital markets until a bank's
collateral ratio, as defined in the MAA, drops below 102 percent.
The reproposed rule's net collateral requirement provides an
earlier trigger for supervisory involvement than the MAA computation or
the collateral requirement for funding purposes. It would provide a
level of protection for operating and other forms of risk at the bank,
and it is similar to the leverage ratios required by other regulators.
The FCA has determined that the exclusion of the effect of FAS No.
115 from the computation of the net collateral ratio could result in a
differential treatment of eligible investments, according to whether
they are designated as available for sale or held to maturity. Under
Sec. 615.5050, a bank's entire investment portfolio must be valued at
the lower of cost or market. Accordingly, applying the exclusion of the
effect of FAS No. 115 will not negate the effect of temporary
fluctuations in the market value against a bank's entire investment
portfolio, because unrealized holding gains and losses under FAS No.
115 apply only to the portion of a bank's investments classified as
available for sale, not to investments classified as held to maturity.
To ensure that the objective of this ratio is uniformly attained, the
reproposed rule would require all eligible investments held by a bank
to be valued based on their amortized costs for the purposes of
calculating its net collateral ratio.
Under the reproposed rule, the net collateral ratio is calculated
as follows:
The ratio numerator is a bank's net collateral, which equals:
A bank's total eligible collateral as defined by Sec. 615.5050
(except that eligible investments as described in Sec. 615.5140 are to
be valued at their amortized cost),
Less: An amount equal to that portion of the allocated investments
of affiliated associations that is not counted as permanent capital of
the bank.
Divided by--
The ratio denominator, which equals:
The bank's total liabilities.
D. Compliance Issues
The originally proposed rule required institutions below applicable
minimum surplus and collateral standards to develop and submit a
capital plan acceptable to the FCA for achieving minimum standards. An
association below the unallocated surplus standard on the effective
date of the rule had the option of including a Risk-Sharing Agreement
with its affiliated bank as part of its capital plan. An association
falling below the minimum standard after the rule's effective date
could include a Risk-Sharing Agreement only with FCA approval.
Institutions meeting the goals of FCA-approved capital plans would be
deemed to be in compliance with minimum surplus and collateral
standards. In addition, the FCA sought comment on whether the Risk-
Sharing Agreement should be a permanent option for associations.
Two issues pertaining to compliance were raised by commenters. The
first issue concerned how much time institutions will have to come into
compliance with the ratios. The originally proposed rule required an
institution not meeting applicable surplus or collateral requirements
to submit to the FCA a capital plan for achieving and maintaining the
standards, with appropriate annual progress toward meeting the
standards. In the supplementary information to the proposed rule, the
FCA stated that it expected capital plans submitted by institutions
below the minimum surplus or collateral requirements to include a
reasonable timeframe for achieving the minimum surplus or collateral
standards.
The St. Paul BC expressed significant concern about the
``subjective nature'' of the reasonable timeframe ``requirement'' for
achieving the minimum capital standards. The BC stated that a timeframe
set by the FCA could restrict the bank from adequately serving its
membership, require the accelerated restructuring of the balance sheet
(apparently by having to reduce assets), and require a significant
amount of patronage earnings to be retained as unallocated surplus. The
BC said that the impact would be to: (1) Reduce earnings and patronage
refunds; (2) dissipate capital; (3) significantly weaken its
competitive position; and (4) potentially jeopardize the advantages of
operating on a Subchapter T basis for tax purposes. Over two dozen of
the bank's stockholders sent letters with essentially the same comment
as the bank. One respondent stated that the FCA would appear to have
``absolute discretion'' in determining what constitutes a reasonable
timeframe. Two Farm Credit associations also expressed concern with the
subjective nature of a ``reasonable timeframe.''
The System in its joint comment stated that the FCA has an
obligation to document in the regulation, and provide opportunity for
comment on, the standard of care that should uniformly be employed by
FCA staff for determining the ``reasonable timeframe.'' Furthermore,
the System said that, due to the very sensitive nature of the System's
cooperative relationship with its stockholders, the determination of a
reasonable timeframe should be specified or outlined in FCA policy or
regulation rather than being potentially applied judgmentally by the
FCA staff, which may result in an uneven application of the criteria.
The second compliance issue concerned whether an association could
employ a Risk-Sharing Agreement as a permanent alternative to reaching
a core surplus level of 3.5 percent. Some of the commenters stated that
risk-sharing, if permitted on a permanent basis, would address the
safety and soundness concerns raised by the FCA without an
association's incurring a tax liability. Nevertheless, the proposed
Risk-Sharing Agreement was criticized as too complicated and also as
being a poor vehicle to recapture previously paid taxes. The proposed
rule required risk-sharing to begin when losses exceeded
[[Page 42099]]
the current year's earnings. Commenters noted that this might prevent
an association from recouping some of the taxes that might be
recoverable from previous years and recommended that some mechanism be
implemented to delay the risk-sharing trigger until all available taxes
have been recouped.
The System's joint comment included a description of a
``contractual conversion mechanism'' that was, in its view, simpler
than the proposed rule's Risk-Sharing Agreement and that contained
activation provisions that would maximize tax benefits due to operating
losses and help to mitigate an association's economic adversity. The
System suggested that an association be permitted to include such a
conversion provision in its capital plan until the end of 2006 without
FCA approval.
In the reproposed rule, the FCA has made several significant
changes to the compliance provisions from the originally proposed rule.
First, the FCA believes that the use of a capital plan (which is
referred to as a ``capital restoration plan'' in the reproposed rule to
distinguish it from other capital plans) to achieve minimum surplus or
collateral ratios should be an option only for those institutions that
are below a minimum standard on the effective date of this rule. For
institutions that fall below a minimum surplus or collateral standard
subsequent to the effective date of this rule, the FCA would address
the noncompliance in the same way it treats other instances of
noncompliance with FCA regulations. The Agency would decide on a case-
by-case basis what supervisory action, if any, to take with respect to
the violation--from simply requiring the institution to submit a
capital restoration plan to a more formal action. Any decision in this
regard would depend on the level of an institution's capital and the
severity of its problems. The FCA has proposed this change in order to
have greater flexibility to impose requirements commensurate with the
seriousness of the situation, or to take no formal action if the
noncompliance appears minor, not due to mismanagement of the
institution, and likely to be short-lived.
Second, the FCA has deleted from the reproposed rule the definition
of ``Risk-Sharing Agreement'' in order to give associations more
latitude in devising mechanisms to achieve initial compliance with the
core surplus requirement. The FCA agrees with commenters that different
types of contractual arrangements, including arrangements that enable
an association to take advantage of tax provisions for distressed
institutions, could be an acceptable part of an association's plan to
restore capital.
Third, the FCA has added a requirement to report noncompliance with
the surplus or collateral ratios to the FCA within 20 calendar days of
the end of the month as of which the noncomplying ratio was computed.
Fourth, the FCA has placed a limit of 180 days from the effective
date of the rule for an institution not in compliance on the effective
date to submit, and the FCA to approve, a capital restoration plan. The
FCA believes that placing a limit on the time during which an
institution has to submit an acceptable plan adds certainty and
finality to the initial approval process.
Finally, in response to commenters' suggestions, the FCA has added
to the compliance provision in the reproposed rule a list of factors to
be considered by the Agency in approving compliance plans. The factors
include, as applicable:
1. The conditions or circumstances leading to the institution's
falling below minimum levels (and whether or not they were caused by
actions of the institution or were beyond the institution's control);
2. The exigency of those circumstances or potential problems;
3. The overall condition, management strength, and future prospects
of the institution and, if applicable, affiliated System institutions;
4. The institution's capital, adverse asset (including nonaccrual
and nonperforming loans), allowance for loss, and other ratios compared
to the ratios of its peers or industry norms;
5. How far an institution's ratio is below the minimum;
6. The estimated rate at which the institution can reasonably be
expected to generate additional earnings;
7. The effect of the business changes required to increase capital;
8. The institution's previous compliance practices, as appropriate;
9. The views of the institution's directors and senior management
regarding the plan; and
10. Any other facts or circumstances that the FCA deems relevant.
Notwithstanding the concerns of commenters regarding the
``reasonable timeframe'' in which noncomplying institutions would be
expected to achieve all minimum surplus and collateral standards, the
FCA is not persuaded that the rule should specify a single timeframe in
which institutions must meet the standards. The Agency continues to
believe that not specifying a timeframe would allow maximum flexibility
and latitude to determine the best course for building capital ratios
to at least the minimum levels. In view of the wide range in both the
amount of shortfall and the reasons for that shortfall among
institutions not meeting the proposed requirements, the FCA concludes
that no specific timeframe would be suitable in every case. The FCA
anticipates that it would approve capital restoration plans that
project appropriate annual progress toward compliance. The Agency
recognizes that capital restoration plans must be realistic and that
long-term plans may be appropriate in some circumstances.
E. Stock Retirement Provisions
The FCA originally proposed to permit institution boards of
directors to delegate discretion in the retirement of borrower stock to
management as long as, after retirement, an institution would meet all
of its applicable surplus and collateral requirements and its permanent
capital ratio would remain above 9 percent. The FCA received two
comments on the proposal. The ABA was troubled by the possibility that
System institutions would be able to continue to retire stock, albeit
with the specific approval of the board of directors, if the
institution's permanent capital were below 9 percent. The trade
association's particular concern was apparently the potential for
insider abuse. The ABA recommended that stock retirements be prohibited
when permanent capital is below 9 percent and that the proposal be
revisited by the FCA to prevent conflicts of interest with insiders. A
System association criticized the FCA's proposal as eliminating any
flexibility on the part of management with respect to stock retirements
and as setting too high a standard that would result in inappropriate
involvement by a regulator at a point where an institution still has a
relatively strong permanent capital position. The association suggested
that management be allowed to retire ``de minimis'' amounts of stock as
long as the permanent capital remains above 8 percent.
The FCA reproposes the originally proposed stock retirement
provisions without change. Accordingly, as long as after retirement an
institution's core surplus and total surplus ratios (and, for banks,
the collateral ratio) would meet or exceed applicable minimum
standards, and the permanent capital position would remain above 9
percent, the retirement of borrower stock could be delegated by the
institution's board of directors to its management.
The FCA notes that the ABA's proposal that no redemption of
borrower stock be permitted if the association's capital falls below 9
[[Page 42100]]
percent is inconsistent with System institutions' statutory right to
retire stock at the sole discretion of the board, as long as the
institution meets its permanent capital standard. Although the FCA
recognizes that there is a potential for abuse of discretion by
institution board members in the retirement of their own equities, the
FCA monitors retirements of stock owned by directors in the examination
process and has never yet found this kind of abuse.
The System association's suggestion that institution management be
allowed to retire ``de minimis'' amounts of stock under delegated
authority until the institution's permanent capital falls to 8 percent
was also not accepted because, as the FCA interprets this suggestion, a
stock retirement in an amount equal to as much as 1 percent of
permanent capital would be considered to be ``de minimis.''
Furthermore, the FCA does not believe that the restrictions the
reproposed regulation would place on delegation of stock retirements
would be onerous or would significantly affect the institution's
ability to operate in a flexible manner.
F. Individual Institution Capital Ratios and Capital Directives
Subpart L, Establishment of Minimum Capital Ratios for an
Individual Institution, and subpart M, Issuance of a Capital Directive,
are reproposed in substantially the form in which they were originally
proposed. The FCA does not agree with the suggestion of a commenter to
eliminate the application of civil money penalties in cases where an
individual institution capital ratio was not met but the otherwise
applicable ratios were met, because the FCA's reason for setting a
higher ratio in the first place would be its judgment that the
institution would not be operating in a safe and sound manner if it
were below the individually set ratio. The FCA also has not included a
commenter's suggestion to establish an office of ombudsman. Should
concerns arise regarding the fair application of individual institution
ratios or capital directives to different institutions in the System,
the FCA would address those concerns on a case-by-case basis.
G. Other Capital Issues
1. Nine commenters, including the System's joint comment, raised
concerns with the current practice of risk-weighting unused loan
commitments with remaining maturities in excess of 1 year. Because this
issue requires further study, it will be considered by the FCA in the
next phase of its review of capital regulations.
2. One commenter suggested that the surplus standards should not be
applicable to Federal land bank associations (FLBAs) that do not have
exposure to loan losses, as provided for in Sec. 615.5210(e)(9). The
reproposed rule would make no changes in the application of surplus
requirements to all FLBAs, because the Agency believes that these
requirements would be minimal and would pose no hardship on any FLBA.
Furthermore, FLBAs with no exposure to loan losses have very minimal
levels of risk-adjusted assets to capitalize. The FCA believes that it
is appropriate for every institution to have at least some level of
positive surplus funds based on the level of operations. For this
reason, the FCA has concluded that it is appropriate to have the same
requirement apply to all associations, including FLBAs. The FCA notes
that funds that are earned at the bank and distributed to the FLBAs are
not taxable, adding no tax burden to the FLBAs.
3. Other provisions of the proposed rule pertaining to the
exclusion of the impact of unrealized gains and losses on available-
for-sale securities, as well as technical and conforming changes, are
reproposed in the same form in which they were proposed.
H. Limitations on Financing Non-Agricultural Credit Needs of Bona Fide
Farmers, Ranchers, Aquatic Producers or Harvesters
Under reproposed Sec. 613.3000, all bona fide farmers, ranchers,
and aquatic producers or harvesters would be eligible for FCS financing
of their agricultural or aquatic needs. The reproposal would place
limitations on all other credit to farmers, however, using criteria
that are more specific and appropriate than those in the existing
regulation. The reproposed regulation would distinguish individual
farmers who actively produce agricultural products or manage a farming
operation from passive farm owners, who meet the definition of a bona
fide farmer only because they own agricultural land. Retired farmers
who have been engaged in agricultural production, including
incapacitated farmers, who own agricultural land and assume some
portion of their tenant's production risk, would also be considered
active farmers. Under the reproposed rule, active farmers would be
given limited access to FCS financing for their other credit needs, but
access becomes more limited or completely precluded for passive farm
owners and non-resident foreign nationals.
1. Non-Agricultural Business Needs of the Borrower
The reproposed regulation would allow FCS banks and associations to
finance the non-agricultural business needs of citizens and permanent
residents of the United States who are eligible under
Sec. 613.3000(a)(3)(i). This financing would be limited to an amount
that does not exceed the market value of the borrower's agricultural
assets. The reproposed regulation does not permit System lenders to
offer non-agricultural business financing to non-resident foreign
nationals or individuals who are eligible because they own agricultural
land as a passive investment pursuant to Sec. 613.3000(a)(3)(ii).
The reproposed regulation does not represent a substantial change
from the existing regulation on this point. The reproposal continues to
link a borrower's access to FCS financing to his or her involvement in
agriculture. The existing regulation views a farmer's involvement in
agriculture as a continuum, ranging from full-time, to part-time, to a
person ``whose business is essentially other than farming.'' It states
as a guiding principle that the purposes for which credit may be
extended ought to become more restricted as a borrower's status becomes
further away from being a full-time farmer. The reproposal
distinguishes instead between a farmer who actively engages in
agricultural production or farm management and one who simply owns farm
land. Only the active farmer is permitted to borrow for non-
agricultural business needs. Moreover, the reproposal contains a
precise limit on the amount of such credit that may be extended.
Although both the existing and reproposed regulations ensure that the
System retains its focus on agricultural lending, the new approach
relies on exact and objective standards that are more meaningful and
easier to apply.
2. Housing and Domestic Needs
Reproposed Sec. 613.3000(d)(1) would authorize citizens and
permanent residents of the United States who are active farmers to
obtain System financing for their housing and domestic needs without
restriction other than their creditworthiness. Such borrowers have
strong ties to agricultural or aquatic production and FCS financing for
their housing and domestic needs should not alter their status as
farmers, ranchers, and aquatic producers or harvesters.
Reproposed Sec. 613.3000(d)(3) would allow individuals who own
agricultural
[[Page 42101]]
land as a passive investment to obtain System financing for their
housing and domestic needs in an amount that does not exceed the market
value of their agricultural assets. Persons who are eligible solely
because they own farm land are primarily engaged in vocations other
than agriculture.
In addition, reproposed Sec. 613.3000(d)(2) would allow non-
resident foreign nationals who actively engage in agricultural or
aquatic production in the United States to obtain System financing for
housing and domestic needs that are reasonably related to their
agricultural or aquatic operations located in the U.S.A.
More specifically, active farmers who are non-resident foreign
nationals could obtain System financing only for a house that is
located on or near their farm or ranch. Additionally, the FCA intends
that the FCS extend credit to non-resident foreign nationals only for
those housing and domestic needs that enable the borrower to conduct a
farming operation in the United States. The FCA believes that non-
resident foreign nationals who are active farmers should not be allowed
unrestricted System financing for their housing and domestic needs
because they lack a permanent presence in the United States.
Like the existing regulation, this proposal allows active farmers
to obtain credit for their housing and domestic needs. It would
expressly permit certain other farmers to borrow from the FCS for their
housing and domestic needs but with the restrictions described above,
which are intended to ensure that such credit is generally appropriate
to their farming operations.
3. Definition of Agricultural Assets
Because the amount of financing to an eligible borrower for other
credit needs is limited to the market value of the borrower's
agricultural assets, this term was the subject of a number of comments.
The FCA's originally proposed regulation did not define ``agricultural
assets,'' although the preamble to proposed Sec. 613.3000(a) stated
that agricultural assets included ``real estate, a home that is located
on a farm or ranch, equipment, chattel, and livestock.''
System commenters asked the FCA to define ``agricultural assets''
in the regulation. They proposed a more expansive definition of
``agricultural assets'' that, in their view, would reflect the
diversity of agriculture. The FCC's comment suggested that
``agricultural assets'' include ``all tangible and intangible assets
reasonably necessary to, derived from, used in, or available for use in
the borrower's agricultural or aquatic operation, including the
borrower's personal residence, regardless of its location.'' The
comment recommended that tangible and intangible assets include all
personal property and financial assets used in the borrower's operation
and the proceeds that are derived from the sale of agricultural assets.
Under the System's proposal, receivables, cash, investments purchased
with proceeds from the sale of agricultural assets, trademarks, motor
vehicles, aircraft, seagoing vessels, and other personal property would
be agricultural assets. System commenters also believed that off-farm
residences should qualify as agricultural assets because farmers and
producers in the fishing, timber, and nursery industries often live
off-site.
As requested by the commenters, the FCA has incorporated a
definition of ``agricultural assets'' into the reproposed regulation.
The definition in reproposed Sec. 613.3000(a)(1), however, is more
narrow than the FCC's recommendations. The FCA has excluded
intangibles, such as goodwill and trademarks, from the definition of
``agricultural assets'' because the establishment of a definitive
market value prior to sale is difficult to derive and, therefore,
oftentimes unreliable. Personal property such as motor vehicles,
aircraft, and seagoing vessels qualify as agricultural assets if the
borrower uses them for agricultural or aquatic production. Similarly,
cash, investments, and sale proceeds are not agricultural assets until
they are reinvested in the borrower's farming, ranching, or aquatic
operations. However, reproposed Sec. 613.3000(a)(1) does classify
working capital as an agricultural asset. Working capital includes
accounts receivables from agricultural sales, inventory used in the
borrower's agricultural or aquatic business, and cash proceeds that are
reinvested in the farming, ranching, or aquatic enterprise.
Under the reproposed regulation, the principal residence of a
farmer who is eligible under reproposed Sec. 613.3000(a)(3)(i) would be
considered an agricultural asset regardless of whether it is located on
agricultural land. This approach treats all active farmers equitably
irrespective of where they live or type of their agricultural endeavor.
Because the value of agricultural assets will determine the amount of
funds available for other credit needs, these assets must be valued
appropriately. Documentary support for the value should be included in
the loan file.
I. Financing for Legal Entities
The FCA proposed to allow any legal entity that is chartered in the
United States to qualify as an eligible System borrower if it met the
definition of a bona fide farmer, rancher, aquatic producer or
harvester. Such legal entities would be able to obtain financing for
any of their agricultural needs. The FCA proposed, however, to limit
System financing of the non-agricultural credit needs of legal
entities. Under the original proposal, legal entities would not have
been eligible for financing for their other credit needs if they were
publicly traded or less than 50 percent of the borrower's assets were
used in agricultural or aquatic production. The FCA's original proposal
would have allowed all other legal entities to receive financing for
non-agricultural purposes in an amount that did not exceed the market
value of their agricultural assets. The FCA reasoned that this approach
would continue to authorize System banks and associations to finance
the other credit needs of family farm corporations and other small- and
medium-sized legal entities that are closely held by bona fide farmers,
ranchers, and aquatic producers or harvesters. The restrictions in
proposed Sec. 613.3000(d)(3) were designed to ensure that previously
ineligible agribusiness corporations and conglomerates could obtain FCS
financing only for their agricultural or aquatic needs.
The FCA received 17 comments about its proposed limitations on the
financing of legal entities. All System commenters supported the FCA's
proposal to repeal the existing eligibility restrictions on legal
entities because they believe that the organizational structure of the
borrower should not determine eligibility. However, System commenters
opposed various aspects of the proposed restrictions on their ability
to finance the non-agricultural credit needs of certain legal entities.
In contrast, commercial banks, their trade associations, and FLAG
opposed the FCA's proposal to revise the eligibility and scope of
financing criteria for legal entities. These comments addressed whether
certain legal entities should be eligible for agricultural credit and
the extent to which they should be permitted to borrow from the System
for their other credit needs. One commenter asserted that family farm
corporations are the only legal entities that should qualify for System
financing. Others believed a legal entity should be eligible for
agricultural credit only if agriculture is its primary focus. Another
commenter favored retaining the three-pronged
[[Page 42102]]
eligibility test in former Sec. 613.3020(b). Two other commenters
suggested that legal entities should be ineligible to borrow from Farm
Credit banks and associations unless they are owned by farmers,
ranchers, or aquatic producers or harvesters who actively engage in
agricultural or aquatic production.
Both System and non-System commenters opposed the FCA's proposal to
deny publicly traded corporations access to System funding for their
non-agricultural credit needs. Some System commenters opposed excluding
publicly traded corporations from such financing because they believe
that current and potential System borrowers will, in the future, raise
capital by selling their equities on public exchanges.
Other commenters opposed the FCA's approach toward publicly traded
corporations because, in their view, it was not sufficiently
restrictive. They expressed concern that a privately owned conglomerate
would be able to obtain System financing for its non-agricultural
activities by simply restructuring its subsidiaries so that 50 percent
of their assets would be used in agricultural production.
After considering all the comments, the FCA has decided to: (1)
Retain the eligibility criteria for legal entities in proposed
Sec. 613.3000(a)(4); and (2) revise proposed Sec. 613.3000(d)(3), which
addresses the authority of FCS banks and associations to finance the
non-agricultural credit needs of legal entities. Under reproposed and
redesignated Sec. 613.3000(a)(5), a legal entity will qualify as a bona
fide farmer if it meets the eligibility criteria in reproposed
Sec. 613.3000(a)(3)(i). Reproposed Sec. 613.3000(a)(5) includes a
technical correction that adds tribal authorities to the list of
governmental units under whose laws legal entities can be organized.
Reproposed Sec. 613.3000(c) authorizes System banks and associations to
extend credit to an eligible legal entity for any agricultural or
aquatic purpose.
Reproposed Sec. 613.3000(d)(4) would continue to restrict which
legal entities could obtain financing for non-agricultural business
needs and the amount of such credit. A legal entity could obtain non-
agricultural financing only if more than 50 percent of its equity is
owned by individuals who actively engage in agricultural or aquatic
production to generate income and either more than 50 percent of its:
(1) Assets are used in agricultural or aquatic production; or (2)
income is derived from agricultural or aquatic activities. Moreover,
the credit would be limited to an amount that does not exceed the
market value of its agricultural assets at the time the loan is closed.
Because the reproposed regulation would require the borrower to meet
these requirements at the time the loan is closed, a System lender
would not be able to finance the other credit needs of a legal entity
unless its agricultural activities, after the extension of credit,
would exceed its non-agricultural activities.
The FCA believes that the reproposed regulation will strike an
appropriate balance among the concerns of all commenters. In response
to System concerns, reproposed Sec. 613.3000 would repeal all
regulatory restrictions that previously prevented System banks and
associations from providing agricultural credit to corporate farmers.
The reproposed regulation permits all bona fide farmers, including all
legal entities, to obtain System financing for any agricultural or
aquatic purpose. However, both individual and corporate farmers must be
eligible under Sec. 613.3000(a)(3)(i) before they can borrow from the
FCS for their non-agricultural business needs, and then only in an
amount that does not exceed the market value of their agricultural
assets. This ensures that only farmers who actively engage in
agricultural or aquatic production could obtain System financing for
their non-agricultural business needs.
The reproposed regulation effectively prevents publicly traded
corporations from obtaining System financing for their non-agricultural
needs unless more than 50 percent of the equity is held by active
farmers, ranchers, and aquatic producers or harvesters are allowed to
borrow from the FCS for such purposes. Additionally, these changes
would keep lending to legal entities agriculturally focused because:
(1) A majority of the income or assets of such borrowers must be
related to agricultural or aquatic production; and (2) the amount of
non-agricultural credit may never exceed the market value of any
borrower's agricultural assets.
The FCA disagrees with commenters who favor enabling the System to
finance the other credit needs of all legal entities engaged in
agriculture. Because the primary mission of the FCS is to finance
agriculture and aquaculture, FCA regulations have consistently imposed
restrictions of some type on non-agricultural loan purposes to System
borrowers. The FCA believes the availability of non-agricultural credit
for both individuals and legal entities should be proportionally
related to the borrower's involvement in agricultural or aquatic
production. Farmer ownership, combined with agricultural assets or
agricultural income, are the best measures of whether a legal entity
focuses on agriculture. Accordingly, the reproposed regulation would
ensure that such lending is proportional, while giving the FCS ample
flexibility to respond to the evolving needs of all agricultural
producers in a rapidly changing economic environment.
The FCA also disagrees with commenters who suggest that the
regulation should favor individual borrowers over legal entities. The
FCA observes that the Act does not accord individuals preference over
legal entities. For this reason, FCA regulations should not influence
the decision whether to conduct agricultural or aquatic operations in
an individual capacity or as a legal entity.
J. Nationality of the Borrower
The FCA received ten comments about proposed
Sec. 613.3000(a)(3)(ii), which governs the eligibility of non-resident
foreign nationals who have been admitted into the United States
pursuant to a provision in 8 U.S.C. 1101(a)(15) that authorizes such
individuals to own property, or to operate or manage a business in this
country. System commenters generally supported the FCA's original
proposal while other commenters opposed it. System commenters opined
that the proposed regulation was consistent with the Act, which imposes
no eligibility restriction on foreign nationals. Some System commenters
suggested that the FCA extend eligibility to foreign national legal
entities that have not established a domestic subsidiary because no
Federal law precludes System banks or associations from lending to such
parties.
In contrast, a commercial bank opined that the FCA's proposal was
``unfair and unwarranted'' because American citizens would compete with
foreign nationals for funding from the FCS. Three commenters asserted
that loans to non-resident foreign nationals are inherently unsafe and
unsound. One commenter believes that System loans to non-resident
foreign nationals slow the national economy and worsen the trade
deficit between the United States and other countries. Two other
commenters claimed that FCS financing to non-resident foreign nationals
forces small family farms out of business. A trade association
questioned whether the Act authorizes the FCS to finance foreign
nationals.
The FCA disagrees with the argument that the FCS lacks the legal
authority to extend credit to farmers, ranchers, and aquatic producers
and harvesters who
[[Page 42103]]
are not American citizens. Section 1.1(a) of the Act states that the
mission of the FCS is to improve the ``income and well-being of
American farmers and ranchers.'' Neither that provision or any other
provision of the Act explicitly or implicitly restricts eligibility for
System loans to American citizens. The general rulemaking provisions of
section 5.17(a)(9) of the Act allow the FCA to enact regulations that
govern the eligibility of foreign nationals to borrow from FCS
institutions.
Since 1976, FCA regulations have allowed certain foreign nationals
who have been lawfully admitted into the United States for permanent
residence and conduct agricultural or aquatic operations within its
territory to borrow from System banks and associations that operate
under titles I or II of the Act. Legal entities that are owned or
controlled by eligible foreign nationals also qualify for System
financing under existing FCA regulations.
Foreign nationals and foreign national legal entities that lawfully
engage in agricultural or aquatic production in the United States
invest their capital, labor, time, and effort in the American
agricultural economy. In this context, these persons contribute
primarily to the economy of the United States, not their country of
origin. Contrary to the comments of commercial bankers, the United
States benefits from the endeavors of these farmers, just as it does
from any other farmer who helps supply abundant and affordable food to
the American consumer.
The FCA also rejects arguments that loans to foreign nationals are
inherently unsafe and unsound. Although loans to non-resident foreign
nationals may expose System banks and associations to different risks,
the FCA notes that the FCS, like all lenders, should have the
capability to identify and manage the risks associated with lending to
non-resident foreign nationals.
The reproposed regulation, however, further restricts the access of
non-resident foreign nationals to the System for their other credit
needs. The original proposal would have authorized non-resident foreign
nationals to obtain System financing for their housing, domestic, and
non-agricultural business needs in an amount that does not exceed the
market value of their agricultural assets in the United States. In
contrast, reproposed Sec. 613.3000(d)(2) prohibits such borrowers from
obtaining System financing in any amount for non-agricultural business
needs. The FCA believes that the additional restriction on loans to
non-resident foreign nationals is justified because their legal status
limits their activities within the United States. As a general rule,
the visas of non-resident foreign nationals do not allow them wide
latitude to change their business activities within the United States.
Accordingly, the reproposed regulation ensures that FCS lending to
foreign nationals is limited to agricultural purposes and housing and
domestic needs that are reasonably related to the borrower's farming
operation in the United States.
The FCA does not agree with the commenters' recommendation that the
regulation allow System lenders to finance foreign national legal
entities that have not established a domestic subsidiary. Reproposed
Sec. 613.3000(b) treats all United States corporations exactly alike
regardless of the nationality of their owners. This approach simplifies
the regulation and avoids any safety and soundness issues that could
arise from the absence of a domestic charter by the borrower. Because
foreign corporations that produce agricultural products in the United
States are able to establish a subsidiary under domestic laws, any such
creditworthy enterprise that desires financing from an FCS lender will
be eligible to obtain it.
One System association suggested that Mexican or Canadian farmers
or ranchers who obtain farm-related services in the United States
should be eligible for FCS financing. More specifically, the commenter
recommended that the FCA authorize System banks and associations to
finance Mexican ranchers who periodically bring their cattle into Texas
to use local feedlots. The commenter believes that such an approach
would be consistent with the spirit of the North American Free Trade
Agreement (NAFTA).
The FCA does not accept this suggestion. Doing so would require the
FCA to expand the definition of a bona fide farmer or rancher to
individuals who neither conduct an agricultural operation inside the
United States nor own agricultural land in the United States. Such
parties farm or ranch outside of the United States, where the FCS has
no authority to lend under titles I and II of the Act.
K. Legal Entities Eligible To Borrow From a BC or ACB
Under the FCA's original proposal, legal entities that are eligible
to borrow from a BC or ACB would not have qualified for financing from
an FCB or FCS association. Although the FCA acknowledged that some
cooperatives have outstanding loans with FCBs and associations, the
Agency expressed concern that the revised eligibility standard for
legal entities might significantly expand competition within the FCS.
Accordingly, the FCA invited comment on the appropriateness of a
regulatory prohibition on FCB and association loans to cooperatives and
asked commenters to offer alternative solutions.
The FCA received 84 letters of comment on its proposal to deny
eligible title III borrowers access to financing at FCBs and direct
lender associations. Although the St. Paul BC, CoBank, and a pair of
jointly managed associations favored this proposal, six FCBs, 49
associations, the Tenth District PCAs, 16 agricultural cooperatives and
one individual opposed it.
Most FCBs and direct lender associations contended that titles I
and II of the Act permit them to lend to agricultural cooperatives and
related entities that are also eligible BC or ACB borrowers. Many
commenters claimed that a regulatory prohibition on FCB and association
loans to cooperatives and their related entities is contrary to the
language and intent of the Act. Many commenters asserted that this
proposal was contrary to the FCA's Regulatory Philosophy Statement,
because a ban on FCB and association loans to eligible title III
borrowers is not necessary to implement or interpret the Act or promote
safety and soundness. Some FCS associations claimed that the FCA's
original proposed regulation lacked balance because it would allow a BC
or ACB to serve FCB and association customers.
As requested by the FCA, several commenters offered alternatives
that address the Agency's concerns about intra-System competition. Many
commenters suggested that the FCA delete this prohibition from the
regulation and initiate a negotiated rulemaking, or impanel an Advisory
Committee pursuant to section 5.12 of the Act, to address all intra-
System competition issues. Several associations suggested that the
regulation require FCBs and their associations to obtain consent from a
title III lender before they extend credit to a cooperative or related
entity.1 A jointly managed FLCA and PCA advised the FCA to allow
an FCB or direct lender association to make loans below a specified
dollar amount to cooperatives without the consent of a title III
lender. If the loan exceeded this
[[Page 42104]]
threshold, the FCB or direct lender would be required to either: (1)
Obtain consent from a title III lender; or (2) sell a participation
interest in the loan to the St. Paul BC or CoBank. An FCB and one of
its affiliated associations suggested that the regulation authorize
FCBs and associations to lend only to those cooperatives that engage in
or finance agricultural production.
---------------------------------------------------------------------------
\1\ Former regulations in subpart B of part 616 controlled
intra-System competition by allowing title I and II lenders to lend
to small cooperatives with the concurrence of the district BC. 12
CFR 616.6040 was originally adopted by the FCA in 1979. See 44 FR
69633 (Dec. 4, 1979). It was repealed in 1990. See 55 FR 24888 (June
19, 1990).
---------------------------------------------------------------------------
The FCA has decided to withdraw the proposal to prohibit lending by
FCBs and associations to borrowers also eligible under title III. The
removal of this prohibition from the regulation acknowledges the status
quo within the FCS. Currently, titles I and II lenders finance certain
cooperatives and their related entities under their statutory powers.
The FCA finds that permitting this continued overlap is preferable to
the alternative approaches suggested by some commenters. The consent
requirement could unacceptably burden the loan approval process for
both System lenders and their borrowers. The FCA has no basis for
setting a specific dollar limit for loans to cooperatives that would be
responsive to smaller cooperatives' needs.
The FCA is aware that intra-System competition causes deep concern
within the FCS and can have significant implications for the FCS as a
whole. As noted earlier, many commenters have suggested that the FCA
address intra-System competition issues, using a participatory
approach, such as a negotiated rulemaking or an Advisory Committee. The
FCA believes this recommendation merits further consideration. It will
continue to monitor competition among System institutions and consider
methods to address these issues. The FCA continues to encourage System
institutions to resolve specific issues regarding intra-System
competition by mutual agreement.
L. Other Issues Raised by Commenters
1. Definition of Bona Fide Farmer, Rancher, and Aquatic Producer or
Harvester
Proposed Sec. 613.3000(a)(2) would define a bona fide farmer,
rancher, or aquatic producer or harvester as an individual or legal
entity that either: (1) Produces agricultural products, or produces or
harvests aquatic products to generate income; or (2) owns agricultural
land. The preamble to the proposed regulation noted that this
definition does not represent a significant departure from the existing
regulation.
One FCB and several of its affiliated associations sought
modification to this definition. First, these commenters recommended
that the FCA change the term ``produces agricultural products'' to
``engages in the production of agricultural products,'' to clarify that
eligibility is not determined by farmer's actual crop yield. These
commenters expressed concern that proposed Sec. 613.3000(a)(2) could
result in a bona fide farmer becoming ineligible for an operating loan
due to a crop failure in a previous year. Although the FCA has not
incorporated the commenters' recommendation into the reproposed
regulation, the Agency reaffirms its position that crop failures do not
affect borrower eligibility.
The same FCB and an affiliated association requested that the FCA
revise proposed Sec. 613.3000(a)(2)(i) to encompass parties who provide
for the husbandry of wild and domesticated animals. The FCA has always
regarded husbandry of farm and ranch animals as an agricultural
activity and believes that no additional regulatory changes are needed.
The FCB and many of its affiliated associations also asked the FCA
to clarify whether the term ``eligible borrower'' in proposed
Secs. 613.3000(b) and 613.3010 refers to parties who already have
outstanding System loans. The FCA responds that eligibility is not
determined by whether the applicant is a current FCS borrower. Instead,
``eligible borrower'' refers to bona fide farmers, ranchers, and
aquatic producers or harvesters who qualify for System financing under
Secs. 613.3000(b) and 613.3010.
2. GSE Status
Many commercial banks and credit unions questioned whether System
financing for the other credit needs of agricultural and aquatic
producers is compatible with GSE status because they believe GSE status
gives the FCS unfair competitive advantages over commercial banks,
credit unions, and other lenders. Some commenters asserted that the FCS
should be allowed to compete with other lenders for non-agricultural
loans to farmers only when such System lending will fulfill a market
need that has been neglected by non-GSE lenders.
The FCA disagrees and observes that the Act expressly authorizes
System lenders to finance a farmer's other credit needs. Section 1.1(c)
of the Act reflects Congress' expectation that the FCS will be a
competitive source of loans to agricultural and aquatic producers. It
is precisely this competition that achieves the express objectives of
Congress of increasing the availability and reducing the cost of credit
to agriculture, aquaculture, and other rural needs that are specified
by the Act. These comments overlook the primary purpose of the FCS,
which is to provide reliable credit to agriculture at all times,
including those periods when commercial lenders find it unprofitable or
too risky to lend to agriculture. To continue to perform this function
as the methods and modalities of agriculture change, the FCS must be
free of unnecessary regulatory restrictions that impede its flexibility
to meet the credit needs of agricultural producers.
3. Need for Outstanding Agricultural Loans
Two commercial bank trade associations objected to permitting
System lenders to finance a farmer's other credit needs unless the
borrower has an outstanding agricultural loan from the FCS.
The FCA believes that allowable financing for other credit needs
should be related to the borrower's involvement in agriculture, rather
than whether there is an agricultural loan outstanding to the borrower.
Therefore, the FCA has responded to the commenters' concern by limiting
FCS financing for a non-agricultural business need to active farmers
eligible under Sec. 613.3000(a)(3)(i). As in the proposed regulation,
the amount of such credit would be limited to the market value of the
borrower's agricultural assets. The reproposed regulation would not
allow the FCS to extend non-agricultural business credit to passive
owners of agricultural land.
The Act does not require that a borrower have an outstanding
agricultural loan from a System lender in order to obtain financing for
another purpose. Rather, it grants the FCA discretion to determine the
limitations on non-agricultural lending to farmers and ranchers. The
reproposed regulation would preserve the System's agricultural focus by
limiting the amount of credit available for non-agricultural business
purposes and would make it available only to active farmers. This
approach ensures that non-agricultural business lending is proportional
to each borrower's commitment to agriculture.
4. Partnership With Commercial Lenders
A State agency suggested that the regulation require System lenders
to participate with commercial banks in non-agricultural business loans
and use commercial bank underwriting standards for such loans. The FCA
does not agree that this should be a requirement.
[[Page 42105]]
5. Asset Limitation for Non-Agricultural Lending
Two commercial bank commenters opposed the FCA's proposal to link
the amount of non-agricultural credit to the market value of the
borrower's agricultural assets. One commenter claimed that this
proposal would establish a credit union bond for the FCS. This comment
seems to indicate that any borrower who meets the regulatory definition
of a ``bona fide farmer'' can obtain System financing for any credit
need. The FCA disputes this allegation because the amount of a farmer's
agricultural assets does not establish eligibility for a System loan,
but rather limits the borrower's access to the FCS for non-agricultural
business loans.
These commenters urged the FCA to use agricultural income, not
agricultural assets, as the standard for limiting a farmer's access to
the FCS for non-agricultural business credit because they believe that
income is a better barometer of a borrower's relationship to
agriculture. The commenters noted that an income test would more
effectively ensure that System lending for non-agricultural purposes is
not concentrated on older and wealthier part-time farmers, who may have
substantial agricultural assets, but derive a small amount of income
from these assets.
After considering this suggestion, the FCA continues to believe
that agricultural assets, not agricultural income, provide a more
useful and readily available measure of a borrower's involvement in
agriculture. Agricultural income is too volatile to be an accurate
measure of a borrower's overall commitment to agriculture because
income tends to fluctuate from 1 year to the next. Further,
agricultural income as a sole measure may not provide the FCS with
sufficient flexibility to provide financing that enables farmers to
remain on the farm, as Congress intended. In contrast, ownership of
agricultural assets tends to increase gradually over time because a
significant capital investment is needed to acquire agricultural land,
equipment, and chattel. Assets generally collateralize debt and provide
the financial means to borrow during periods of low income.
6. Loans to Certain Classes of Borrowers
Several commercial bank commenters favored retaining eligibility
restrictions on part-time farmers and other types of farmers who they
believe have tenuous ties to agriculture. For example, some comments
stated that farmers with minimal agricultural production should be
precluded from obtaining System financing for non-agricultural
purposes. These commenters generally believed that Congress did not
intend for the FCS to extend credit to passive owners of agricultural
land, part-time farmers, or farmers with minimal production.
The Act does not require a minimum level of involvement in
agriculture for a farmer to qualify for FCS financing. Section 1.1(b)
of the Act specifically states that the objective is to provide ``[a]
permanent system of credit for agriculture which will be responsive to
the credit needs of all types of agricultural producers having a basis
for credit.'' The FCA's proposal to update its eligibility regulations
so they respond to the changes in agriculture is fully supported by the
Act and its legislative history.
The reproposed regulation would implement sections 1.1(b), 1.9(1),
1.11(a), and 2.4(a) of the Act by enabling the FCS institutions to be
responsive to the credit needs of all types of agricultural producers
while diversifying repayment sources of its agricultural loan
portfolios. The reproposal would ensure that the FCS can continue to
fulfill its statutory mission to meet the credit needs of agriculture,
which is undergoing significant restructuring and consolidation.
Diversification of lending within the agricultural sector also promotes
safety and soundness by reducing risks and increasing earnings and
capital.
The FCA recognizes the increasingly important role that off-farm
income plays in allowing farmers to stay on their farms. For this
reason, reproposed Sec. 613.3000 would grant Farm Credit banks and
associations additional flexibility to finance part-time farmers than
is allowed by existing regulations. Because the reproposed regulation
limits the funds available for the borrower's non-agricultural business
needs, FCS lending to such borrowers is kept well within the boundaries
of the Act.
Other commercial banking interests expressed concerns about FCS
loans to borrowers who plan to convert land to a non-agricultural use.
They favor retaining a provision in existing Sec. 613.3005(a), which
states that ``credit shall not be extended where investment in
agricultural assets for speculative appreciation is a primary factor.''
The FCA shares the commenters' concerns about loans to a party who
purchases agricultural land with the intent to eventually convert it to
a higher-valued, non-agricultural use. The reproposed regulation should
effectively control this activity because it would prohibit a passive
investor in agricultural land from obtaining System loans for a non-
agricultural business purpose.
After considering the comments of all interested parties, the FCA
has revised Sec. 613.3000, and reproposes it for further comment. The
FCA's approach is responsive to the credit needs of agriculture in
today's environment, and it eliminates unnecessary paperwork
requirements and reduces other regulatory burdens on System
institutions. It balances the needs of System institutions and their
borrowers with the concerns of commercial banks and credit unions. The
reproposed regulation clearly recognizes that the primary mission of
the FCS is to finance agricultural credit needs, while allowing limited
financing of other credit needs, of farmers, ranchers, and aquatic
producers or harvesters as specified by the Act.
M. Processing or Marketing Regulation
The FCA originally proposed to redesignate, restructure, and revise
the regulation that enables FCBs, ACBs, and direct lender associations
to finance the processing or marketing activities of bona fide farmers,
ranchers, and aquatic producers or harvesters under titles I and II of
the Act, simplifying and clarifying existing Sec. 613.3045 and
eliminating unnecessary regulatory burdens.
As originally proposed by the FCA, Sec. 613.3010(a)(1) would have
relaxed a regulatory requirement that bona fide farmers, ranchers, and
aquatic producers or harvesters own 100 percent of an eligible
processing or marketing operation. Instead, the FCA's original proposal
would have required farmers, ranchers, and aquatic producers or
harvesters to own a ``controlling interest'' in a processing or
marketing operation, and the Agency sought input from interested
parties about how this term should be defined.
Comments on proposed Sec. 613.3010 were received from the FCC,
three Farm Credit banks, 17 Farm Credit associations, seven Farm Credit
borrowers, and the CBANC, IBAA, and MPB. Seven System borrowers and the
MPB offered comments in general support of the amendments. One borrower
stated that removing existing restrictions would strengthen the
System's ability to finance emerging needs, and another borrower stated
that the amendments would allow the financing of more value-added
agricultural products. CoBank expressed concern that the proposed
regulation would expand the authorities of FCBs and FCS associations to
finance
[[Page 42106]]
processing or marketing enterprises and thereby increase intra-System
competition. The CBANC opposed proposed Sec. 613.3010 because it would
broaden the authority of System banks and associations to finance
processing or marketing operations.
The commenters identified three specific areas of concern related
to proposed Sec. 613.3010. First, System commenters and the IBAA
responded to the FCA's request for guidance about how the term
``controlling interest'' should be defined in Sec. 613.3010(a)(1).
Second, System commenters questioned whether the Act requires borrowers
to ``consistently'' supply throughput. Finally, the IBAA objected to
the repeal of the documentation requirements of Sec. 613.3045(e)
raising a question about whether the paperwork obligations of
Sec. 613.3045(e) are required by law.
1. Farmer Control
The FCA requested guidance about how the regulation should define
``controlling interest'' in a separate processing or marketing unit
that is eligible to borrow from an FCB, ACB, or direct lender
association. Several FCS respondents urged the FCA to adopt the FCC's
suggested definition of ``controlling interest,'' which is patterned
after section 2(a)(2) of the Bank Holding Company Act, (BHCA), 12
U.S.C. 1841(a)(2), and section 10 of the Homeowners' Loan Act (HOLA),
12 U.S.C. 1467a. Although the St. Paul BC and CoBank did not oppose the
FCC's recommendation, they expressed concern about intra-System
competition for processing or marketing loans. These commenters cited
passages in the legislative history to sections 1.11(a) and 2.4(a) of
the Act to suggest that Congress may not have intended to expand
eligibility beyond bona fide farmers, ranchers, and aquatic producers
or harvesters to a new class of ``agribusiness'' borrower. The IBAA
claimed that the Act requires bona fide farmers, ranchers, and aquatic
producers or harvesters to own 100 percent of the processing or
marketing unit, in order for the enterprise to be ``directly related''
to the borrowers' farming operations. Several respondents also asked
the FCA to clarify whether Sec. 613.3010(a)(1) requires a processing or
marketing operator to have an outstanding FCS agricultural or aquatic
loan.
Rather than define ``controlling interest,'' Sec. 613.3010(a)(1)
would require bona fide farmers, ranchers, and aquatic producers or
harvesters to own more than 50 percent of the voting stock or equity of
an eligible processing or marketing operation. This approach balances
the needs of titles I and II lenders for greater flexibility to finance
processing or marketing operations with the limitations in sections
1.11(a) and 2.4(a) of the Act. Sections 1.11(a) and 2.4(a) of the Act
allow titles I and II lenders to lend only to processing or marketing
operations that are ``directly related'' to the borrowers' agricultural
or aquatic activities. According to several passages in the legislative
history, Congress intended that titles I and II lenders would finance
only the processing or marketing operations of farmers, ranchers, and
aquatic producers or harvesters who are already eligible to borrow from
these institutions for their agricultural or aquatic activities.2
Another passage in the legislative history indicates that current
sections 1.11(a) and 2.4(a) of the Act do not authorize FCBs and their
affiliated associations to ``finance a new class of borrowers,'' 3
while a colloquy between two Senators suggests that the intent was to
prohibit ``agribusiness marketers and processors'' from borrowing from
titles I and II institutions.4
---------------------------------------------------------------------------
\2\ S.R. No. 96-837, 96th Cong., 2d. Sess. 47 (June 26, 1980).
\3\ Id.
\4\ Colloquy between Senators Stewart and Zorinsky, 126 Cong.
Rec. 16560 (Dec. 13, 1980).
---------------------------------------------------------------------------
The FCA disagrees with the view that the Act requires agricultural
or aquatic producers to own all of the equity of a separate processing
and marketing operation. Nothing in the plain language of sections
1.11(a) and 2.4(a) of the Act or their legislative history supports
this position. In fact, a passage in the legislative history indicates
that Congress expressly contemplated joint processing or marketing
ventures between agricultural or aquatic producers and investors as
long as ineligible parties do not ``exercise substantial control of the
facility or activity financed by the loan.'' 5 The 100-percent
ownership requirement in existing Sec. 613.3045(b)(2)(iii) is a
regulatory policy, which the FCA has discretion to change.
---------------------------------------------------------------------------
\5\ Id.
---------------------------------------------------------------------------
The FCA believes that the 100-percent ownership requirement in
existing Sec. 613.3045(b)(2)(iii) is overly restrictive. For example,
it denies otherwise eligible farmer-owned processing or marketing
operations alternative credit options merely because employees or
investors own a minority interest in the business. Agriculture and
aquaculture would benefit from the relaxation of this ownership
requirement because the reproposed regulation is designed to increase
the availability of affordable and dependable credit for businesses
that add value to farm products and commodities.
The FCA declines to adopt the System's suggestion that it define
``controlling interest'' units by importing provisions of the BHCA and
the HOLA into Sec. 613.3010(a)(1). Under the System's proposal,
eligible borrowers would be deemed to hold a controlling interest in a
processing or marketing unit if they: (1) Directly or indirectly or
acting through one or more other persons own, control, or have power to
vote 25 percent or more of the voting shares of the legal entity; (2)
control in any manner the election of a majority of the directors,
trustees, general partners, or managers of the legal entity; or (3)
they own, control, or have power to vote at least 5 percent or more of
the voting shares of the legal entity and directly or indirectly
exercise a controlling influence over the management or policies of the
legal entity. System commenters have not explained why the ``control''
standards in the BHCA and the HOLA are suitable for processing and
marketing operations that would qualify for financing under sections
1.11(a) and 2.4(a) of the Act.
The FCA believes that the definition of ``control'' in the BHCA and
the HOLA are inappropriate for Sec. 613.3010, because it would enable
System banks and associations to finance processing or marketing
operations that are substantially controlled by parties who are not
bona fide farmers, ranchers, and aquatic producers or harvesters.
In response to the inquiry from an FCB and some of its affiliated
associations, the FCA confirms that this regulation would not require
an applicant for a processing or marketing loan to have an outstanding
agricultural or aquatic loan with a System bank or association.
2. Throughput Requirements
Fifteen System commenters objected to the proposed requirement for
borrowers to ``consistently'' produce some of the throughput used in
the processing or marketing operation. The FCC and most System banks
and associations stated that neither the current regulation's use of
the word ``sustained,'' nor the proposed regulation's use of the term
``consistently,'' are justified by the plain language of the Act. These
commenters claim that sections 1.11(a)(1) and 2.4(a)(1) of the Act only
require borrowers to ``supply some portion'' of the total throughput.
Two commenters suggested the FCA amend Sec. 613.3010(a)(2) so it would
allow FCBs and associations to finance borrowers
[[Page 42107]]
who are ``capable of producing some portion of the throughput.''
Several commenters suggested that the FCA remove this requirement
because it implied that the borrower would cease being eligible for
financing when market conditions dictated that they process crops
through another processor/marketer. All commenters, except the BC and
ACB, would prefer to have the regulations restate the statutory
language.
The FCA disagrees with the commenters. Although the words
``consistently'' or ``sustained basis'' do not appear in the text of
sections 1.11(a) and 2.4(a) of the Act, such a term is needed in the
regulation in order to implement the statutory requirement that
eligible processing or marketing operations be ``directly related'' to
the borrowers' agricultural or aquatic production activities. The
legislative history explains that the Act requires ``a demonstrated
relationship between the total processing and marketing activities and
the applicant's own production.'' 6
---------------------------------------------------------------------------
\6\ S.R. No. 96-837, supra.
---------------------------------------------------------------------------
In order to provide FCBs, ACBs, and direct lender associations with
greater flexibility to finance processing or marketing operations under
the scope of sections 1.11(a) and 2.4(a) of the Act, reproposed
Sec. 613.3010(a)(2) would require the borrower or its owners to
``regularly'' supply throughput. The term ``consistently'' implies that
there can be no variation in the level or timing of the borrower's
throughput contribution, whereas the term ``regularly'' provides the
borrower with greater flexibility to address unexpected problems in
supplying throughput.
The FCA does not accept the suggestion of several System commenters
that the regulation confer eligibility on processing or marketing
borrowers who are ``capable'' of producing throughput because the mere
capacity to contribute throughput, without more, does not satisfy the
Act's requirement that borrowers ``supply'' throughput.
3. Regulatory Burdens
The IBAA opposes the repeal of the documentation requirements in
existing Sec. 613.3045(e), asserting that this provision is necessary
to implement statutory eligibility requirements. The FCA disagrees.
Compliance with eligibility requirements is adequately assured through
the lenders' internal policies and the examination and enforcement
powers of the FCA. Existing Sec. 613.3045(e) dictates detailed
management and operational procedures to System institutions. Such
``command and control'' requirements are incompatible with the FCA's
Regulatory Philosophy Statement and the President's initiative to
reduce regulatory burdens under the National Performance Review.
Accordingly, the FCA continues to propose the repeal of
Sec. 613.3045(e).
No comments were received on the provisions in paragraph (b)
addressing the portfolio limitations and, therefore, the FCA has not
revised this provision in its reproposal.
N. Farm-Related Business Regulation
The FCA originally proposed to redesignate and revise the
regulation that authorizes FCBs, ACBs, and direct lender associations
to make loans to farm-related businesses. Existing Secs. 613.3050 and
619.9120 would have been replaced with a new regulation, Sec. 613.3020,
which is closely aligned with the plain language of sections 1.9(2),
1.11(c)(1), and 2.4(a)(3) of the Act. This change would have repealed
existing regulatory requirements that are not required by the Act. The
FCA proposed these revisions because existing Secs. 613.3050 and
619.9120 are unnecessarily restrictive and appear to frustrate the
ability of System banks and associations to finance statutorily
eligible and creditworthy farm-related businesses, needlessly denying
many farm-related businesses a competitive credit option. The preamble
to the FCA's original proposal noted that farm-related business loans
comprise less than 1 percent of all System loans, and many FCS banks
and associations have no farm-related business loans in their
portfolios.
The FCA received 58 comments about proposed Sec. 613.3020. Of this
total, 26 comments were received from System banks, associations, and
the FCC. The FCA also received comments from three commercial banks and
four banking trade associations, four credit unions and one of their
trade associations, three State government agencies, 17 individuals,
and FLAG.
Most of the comment letters from commercial banks, credit unions,
and their trade association pertained to competition between private
sector lenders and the FCS. FLAG opposed the proposed regulation
because it would create opportunities for outside investors, who do not
contribute to the prosperity of local farm communities, to obtain FCS
funding for farm-related businesses. The FCA has already responded to
these concerns in earlier sections of this preamble.
The individual commenters and three State government agencies
supported proposed Sec. 613.3020 because it would bolster the
agricultural economy by enabling FCS banks and associations to provide
affordable credit to local farm-related businesses that serve farmers
and ranchers. These commenters stated that farm-related businesses
provide essential services to production agriculture and rural America.
One State Government agency asserted that the FCS should only finance
businesses (other than farming, ranching, and aquatic operations) that
add value to agricultural products.
A number of commenters requested clarifications or modifications to
this regulation.
1. Types of Services
Under Sec. 613.3020(a) of the original proposal, an individual or
legal entity who furnishes services to farmers and ranchers that are
directly related to their agricultural operations would be eligible to
borrow from System lenders. Two commenters claimed that the language of
proposed Sec. 613.3020(a) is too broad and ambiguous because virtually
any business in an agriculture community, including a gas station or
accounting firm, could argue that it is an eligible farm-related
business.
To prevent any such misinterpretation, the FCA revises proposed
Sec. 613.3020(a) to clarify that a business must furnish ``farm-related
services'' in order to qualify for System financing. Businesses that
offer non-agricultural services to farmers and ranchers do not qualify
as eligible farm-related businesses under sections 1.11(c)(1) and
2.4(a)(3) of the Act. Some examples of ``farm-related services'' that
would be covered by the reproposed regulation are: (1) Spraying crops;
(2) harvesting; (3) transporting agricultural commodities to grain
elevators, livestock markets or other markets, and other processing
centers; (4) custom feed mixing operations; (5) veterinary services;
(6) drying or preserving farm commodities or products; (7) repairing
and servicing farm implements, equipment and machinery; (8) computer
and aerial mapping of soil and crop conditions; (9) nutritional
analysis for livestock production; and (10) specialized animal
husbandry services. Reproposed Sec. 613.3020 would no longer require an
eligible farm-related business to furnish services on the farms or
ranches of its customers because the plain language of sections
1.11(c)(1) and 2.4(a)(3) of the Act and their legislative history do
not impose an ``on-farm'' requirement.
2. Custom-type Services
Commercial bank commenters opposed the FCA's proposal to repeal
[[Page 42108]]
Sec. Sec. 613.3050(a) and 619.9120, which required eligible farm-
related businesses to furnish ``custom-type services'' to farmers and
ranchers. ``Custom-type services'' are functions that farmers and
ranchers can perform for themselves, but instead hire outside
contractors to perform these tasks. One commenter suggested that an
amendment to the Act would be necessary before the FCA could repeal
this regulatory requirement.
The FCA disagrees that sections 1.11(c)(1) and 2.4(a)(3) of the Act
limit eligibility for financing to those businesses that furnish
``custom-type services'' to their customers. Although passages in the
legislative history to the Act contain examples of ``custom-type
services'' that farmers and ranchers may perform for themselves, these
examples appear illustratory. The FCA finds no evidence to support the
contention that sections 1.11(c)(1) and 2.4(a)(3) of the Act preclude
System banks and associations from financing farm-related services that
are directly related to agricultural production. Under the
circumstances, the repeal of Secs. 613.3020(a) and 619.9120 would
advance the purpose and objectives of the Act because farmers today
rely on technologically advanced services that they cannot perform for
themselves. Such services enable farmers and ranchers to: (1) Increase
their income; (2) reduce their operating costs; (3) improve farm
productivity; and (4) satisfy consumer demands for improved food
quality and specialty food products.
3. Financing Other Purposes
Several commercial bank trade associations asserted that proposed
Sec. 613.3020(b)(1) would actually enable an eligible borrower who
derives more than 50 percent of its income from furnishing farm-related
services to obtain System financing for non-agricultural purposes.
The FCA proposed Sec. 613.3020(b)(1) so that FCS banks and
associations could, to the extent allowed by sections 1.11(c)(1) and
2.4(a)(3) of the Act, finance farm-related businesses that sell some
agricultural goods or inputs that are not consumed in its services to
farmers and ranchers. The FCA intended that proposed
Sec. 613.3020(b)(1) would allow FCBs, ACBs, and direct lender
associations to provide ``whole firm'' financing to businesses that
primarily furnish farm-related services to farmers and ranchers. Under
the FCA's proposal, the following farm-related businesses, for example,
could become eligible for System loans because they derive more than
half of their income from providing farm-related services separately
from selling farm goods or inputs: (1) Veterinary services that sell
medications and supplemental feed mixes directly to farmers and
ranchers; (2) farm equipment repair and maintenance services that also
sell spare parts to their customers; and (3) crop fertilizing services
that sell mixtures that farmers will apply to the soil between routine
service calls. Because the borrower must derive more than 50 percent of
its income, as measured on a gross sales or net sales basis, from
furnishing farm-related services, the proposed regulation was designed
to ensure that System banks and associations extend ``whole firm''
financing only to a farm-related business that primarily provides
services, rather than goods or inputs, to its customers.
Sections 1.11(c)(1) and 2.4(a)(3) of the Act do not authorize FCBs,
ACBs, and direct lender associations to finance the non-agricultural
activities of farm-related businesses, and this was not the intent of
the FCA. The FCA has revised this provision to ensure that financing
under this section is provided only for farm-related business purposes.
Reproposed Sec. 613.3020(b) would authorize an FCB, ACB, or direct
lender association to finance: (1) All of the farm-related business
activities of an eligible borrower who derives more than 50 percent of
its annual income (as consistently measured on either a gross sales or
net sales basis) from furnishing farm-related services that are
directly related to the agricultural production of farmers and
ranchers; or (2) only the farm-related services activities of an
eligible borrower who derives 50 percent or less of its annual income
(as consistently measured on either a gross sales or net sales basis)
from furnishing farm-related services that are directly related to the
agricultural production of farmers and ranchers. This revision will
prevent System banks and associations from financing the borrower's
non-agricultural enterprises.
4. Income Test
The FCC and most System commenters suggested that the FCA revise
proposed Sec. 613.3020(b) so that a farm-related business could obtain
System financing for all of its needs if some minimum percentage of its
operations, as measured either on an income or asset basis, consists of
furnishing farm-related services to farmers and ranchers. The FCC and
most System institutions suggested that the FCA authorize System
lenders to finance all of the needs of a business that derived at least
20 percent of income from furnishing farmers and ranchers with farm-
related services. Two other commenters suggested that the FCA set the
threshold at 10 percent or lower.
These commenters urged the FCA to lower the 50-percent threshold in
proposed Sec. 613.3020(b) because they assert that System banks and
associations will be unable to compete in this segment of the
agricultural credit market unless they can finance all of the
borrower's operations. These commenters note that farm-related
businesses usually conduct diversified operations that include farm
supply and other types of business in addition to farm-related
services. The commenters believe that the proposed approach may be
unworkable because these diversified operations experience seasonal
fluctuations in demand and are unlikely to segregate their diversified
operations in their financial statements.
The FCC and one FCS association suggested an alternative to the
income percentage test that would prevent System banks and associations
from becoming concentrated in loans to businesses that do not primarily
furnish farm-related services to farmers and ranchers. Under this
alternative, the total outstanding loans of each FCB, ACB, or direct
lender association to farm-related businesses that devote less than 50
percent of their operations to farm-related services would be limited
to 15 percent of the institution's total outstanding loans at the end
of the preceding fiscal year.
Although a portfolio limitation could achieve this policy result,
the FCA has not adopted this suggestion because it does not believe
that safety and soundness concerns require such controls or that such a
limitation would be consistent with Congressional intent. The
reproposed regulation maintains the threshold for whole firm financing
at 50 percent. Allowing whole firm financing to a business that derives
only a minority of its income from providing agricultural services is
difficult to reconcile with sections 1.11(a)(1) and 2.4(a)(3) of the
Act.
The FCA also declines requests to include assets as an additional
measure of whether a borrower primarily furnishes services or sells
supplies because it is virtually impossible to distinguish whether
certain assets are consumed in providing farm-related services or sold
as supplies.
5. Intra-System Competition
The BC and ACB expressed concern about intra-System competition for
farm-related business loans. Although these two commenters did not
[[Page 42109]]
specifically object to proposed Sec. 613.3020 or the FCC's
recommendations, they supported a provision in proposed
Sec. 613.3000(a)(4) that would prohibit FCBs and direct lender
associations from extending credit to legal entities that are eligible
to borrow from a BC or an ACB. As discussed earlier, reproposed
Sec. 613.3000 would not prohibit FCBs and direct lenders from lending
to certain cooperatives and their related entities. Although the FCA
acknowledges the small overlap of the authorities of System
institutions that operate under titles I, II, or III of the Act to
finance farm-related businesses, neither the Act nor the regulations
permit FCBs and their affiliated direct lender associations to extend
whole firm financing to entities that sell primarily farm supplies.
Therefore, intra-System competition should be limited. The FCA intends
to review this issue again when it considers all aspects of intra-
System competition.
O. Rural Home Regulation
The FCA originally proposed to redesignate and substantially revise
the regulations that govern System loans to non-farm rural homeowners.
The FCA received general comments on rural home lending from 22
parties, including FCS associations, credit unions, commercial banks,
trade associations, borrowers, and a State agency.
Many FCS commenters offered general support for the proposed
revisions to the rural home financing regulations. Borrowers stated
that the amendments would have a positive effect on the rural economy
and may keep more people living in rural America. The FCC stated that
the proposed regulations clarify the authority of the FCS to finance
both non-farm rural homes and the housing needs of agricultural
producers. The FCC also supported the repeal of several regulatory
requirements that are not required by the Act, but restrict the ability
of the FCS to finance the housing and domestic needs of rural home
borrowers. Three borrowers, one trade organization, and one
governmental agency supported the provisions allowing home equity
loans.
Non-System lenders and their trade associations opposed the
proposed amendments. Their comments addressed such topics as potential
customers, the geographic areas where loans could be made, and other
matters. A credit union stated that the proposed regulations would hurt
credit unions because it believed that non-farmers could borrow from
the FCS to build homes, condominiums, and duplexes in non-rural areas.
Another credit union objected to the possibility of increased
competition from FCS rural home financing. Several commercial banking
interests commented that the proposed amendments would expand the
number of non-farmer mortgage borrowers expected to use System
resources, loosening the bond between farmers and ranchers and the FCS.
These comments reflect incorrect assumptions about the rural home
provisions of the Act and FCA regulations. Sections 1.11(b) and 2.4(b)
of the Act allow FCS banks and associations to finance single-family,
moderately priced dwellings in rural areas where the population does
not exceed 2,500 inhabitants for rural residents who are not
agricultural or aquatic producers. The Act also limits such loans to 15
percent of the outstanding loans of System banks and associations.
The proposed regulations distinguished housing loans for farmers
under sections 1.11(a) and 2.4(a) of the Act from home loans for non-
farmers under sections 1.11(b) and 2.4(b) of the Act. Because rural
home loans are limited to 15 percent of outstanding loans and because
only farmer borrowers are voting stockholders of FCS institutions, the
clear separation provided for in the proposed amendments would not
dilute the agricultural focus of the FCS, as some commenters suggest.
1. Loan-to-Value Ratio
Two commercial banking interests commented that the proposed
regulation would permit higher loan-to-value ratios on rural home
loans.
Loan-to-value limitations are set by the Act and not altered by the
regulation. Section 1.10(a) of the Act and Sec. 614.4210(b) require a
long-term mortgage loan to be secured by a first lien interest in real
estate that does not exceed 85 percent of the appraised value of the
mortgaged property, except that FCS banks and associations may finance
up to 97 percent of the appraised value of the property if the loan is
guaranteed by a governmental agency. In addition, section 12 of the
1996 Reform Act 7 recently amended section 1.10(a) of the Act so
that System mortgage lenders can rely on private mortgage insurance
when the loan-to-value exceeds 85 percent. Under these circumstances,
the repeal of the loan-to-value ratio in existing Sec. 613.3040(c) is
compatible with section 1.10(a) of the Act.
---------------------------------------------------------------------------
\7\ Pub. L. 104-105, 110 Stat. 162 (Feb. 10, 1996).
---------------------------------------------------------------------------
2. Owner-Occupied Dwellings
Two commenters objected to the proposed elimination of the
regulatory requirement that the dwelling be owner-occupied. The FCA's
original proposal retained the existing requirement that the home be
used as the primary residence of a rural resident but it would permit
the owner to lease the property to another rural resident. The FCA
believes that eliminating the regulatory owner-occupancy requirement
advances the rationale for this authority, which is to ensure the
availability of housing for rural residents. Therefore, the reproposal
would also repeal the existing regulatory requirement that the borrower
occupy the dwelling.
3. Consumer Protection Laws
A commercial banker questioned whether consumer protection laws
apply to FCS rural home loans. The FCS's rural home lending practices
are subject to the same Federal consumer protection laws and
implementing regulations of the Board of Governors of the Federal
Reserve System and the Department of Housing and Urban Development as
are commercial banks. The FCA proposed to relocate the
nondiscrimination in lending regulations in subpart E of part 613 to a
new part 626 to give them more prominence. These regulations address
the prohibitions of the Equal Credit Opportunity Act (15 U.S.C. 1601 et
seq.) and the Fair Housing Act (42 U.S.C. 3601 et seq.). In addition,
rural home lending transactions are subject to the requirements of the
Truth-in-Lending Act (implemented at 12 CFR 226) and the Real Estate
Settlement Procedures Act (implemented at 24 CFR 3500).
4. Agricultural Loan Priority
One commenter objected to the FCA's decision to delete existing
Sec. 613.3040(d)(3), which reflects the Agency's policy commitment to
Congress that agricultural loans will have priority over non-farm rural
home loans.
The FCA is not rescinding its policy commitment to Congress that
agricultural loans will always have priority over rural home loans.
Indeed, the preamble discussing the proposed deletion of
Sec. 613.3040(d)(3) stated that ``the FCA continues to adhere to this
commitment.'' The FCA's decision to propose deletion
Sec. 613.3040(d)(3) is unchanged because it is a policy statement
rather than an enforceable regulation. The deleted provision added
nothing to the FCA's statutory powers to ensure that the credit needs
of
[[Page 42110]]
agricultural or aquatic producers received priority during a financial
crisis. For these reasons, no party should be concerned by the repeal
of former Sec. 613.3040(d)(3).
5. Definition of Rural Area
The FCA originally proposed to define a ``rural area'' as ``a
designated rural area within a State or the Commonwealth of Puerto Rico
including communities that have a population of not more than 2,500
inhabitants based on the latest decennial census of the United
States.'' The FCA received comments from 17 parties on the definition
of rural area in proposed Sec. 613.3030(a)(3).
No commenters supported the FCA's proposal to rely on the Census to
identify rural areas where the population does not exceed 2,500
inhabitants. Both System and non-System commenters stated that sparse
population is not the sole determinant of a rural area. These
commenters claimed that reliance on the Census ignores the social and
economic characteristics of a rural area. Commercial banks, credit
unions, and their trade associations opposed the FCA's original
proposal because it would allow System banks and associations to
finance housing in the rural pockets of metropolitan areas, where the
commenters claim credit from other lenders is readily available. System
commenters asserted that the Census designations would increase their
regulatory burdens, but decrease their flexibility to offer home
financing to residents of communities that are rural in nature. Some
FCS associations claimed that the proposed regulation would require
them to consult a Census map for each loan application to determine if
the borrower's home is located in a designated rural area. Other FCS
commenters advised the FCA that Census data is not updated frequently
enough to reflect the changing demographics of rural areas. All
commenters advised the FCA that the existing Sec. 613.3040 provides the
most workable definition of a rural area.
These comments have persuaded the FCA that Census information may
not adequately implement the provision of the Act that defines a rural
area. For this reason, the FCA withdraws its original proposal to rely
solely on the Census for determining rural areas.
Reproposed Sec. 613.3030(a)(3) would define a rural area as ``open
country within a State or the Commonwealth of Puerto Rico, and may
include communities that have a population of not more than 2,500
persons.'' The FCA has decided to delete the passage in
Sec. 613.3040(a)(3) that authorized Farm Credit banks and associations
to make loans in open agricultural areas within ``towns'' where the
population exceeds 2,500 inhabitants, subject to Agency prior approval.
This provision addressed special situations where a municipality
annexed the surrounding countryside or two municipalities merged, and
as a result, the population of the new political entity exceeded 2,500
inhabitants. The FCA has rarely used this prior approval authority
during the past 25 years. The reproposed regulation would delete this
provision because it creates unnecessary confusion.
6. Definition of Moderately Priced Housing
The FCA originally proposed a two-part definition for moderately
priced housing. The first part was a safe harbor provision, and it
would have applied to the price of any home that satisfies the criteria
in section 8.0 of the Act pertaining to rural home loans that
collateralize securities that are guaranteed by the Federal
Agricultural Mortgage Corporation (Farmer Mac). Under the second part
of the original proposal, FCS banks and associations would be
authorized to finance ``moderately priced'' rural homes that have a
value no higher than the 75th percentile of housing values in the rural
area where the dwelling is located in accordance with the most recent
edition of the Census of Housing.
The FCA received several comments criticizing this proposed change.
Two FCS associations commented that the amendment would impose
restrictions not found in the Act or in existing regulations and would
limit FCS's ability to serve rural residents. Some FCS associations
commented that proposed Sec. 613.3030(a)(4) is flawed because they
believe that it is neither possible nor desirable to devise a clear
single standard for moderately priced housing in rural areas across the
United States. Although the FCC agreed with FCA's objective of
establishing a clear standard, it stated that the proposal does not
meet this objective because the proposed regulation would provide the
FCS with less flexibility than the former regulation to finance
moderately priced homes.
A commercial bank trade association objected to the definition of
``moderately priced'' homes in proposed Sec. 613.3030(a)(4) because it
allows System lenders to make home loans in rural pockets of
metropolitan areas where the population does not exceed 2,500 persons
pursuant to the latest Census of the United States. This commenter
expressed concern that the proposal would allow the FCS to finance
moderately priced housing on the fringes of urbanized areas, and could
redirect the System away from lending to rural America, farmers and
ranchers.
The FCA received comments from four parties, including three FCS
associations and one trade organization about the use of Farmer Mac
criteria as a safe harbor provision. The FCC supported this provision
because the Farmer Mac criteria have a Congressionally mandated
relationship to the FCS's rural home authorities and are thus suitable
as one possible measure of moderately priced housing. This commenter
urged the FCA to allow additional standards, as well, that would take
into account geographical differences in housing values. Several
associations shared the view that an additional standard is needed that
would recognize higher housing costs in certain areas. As an example,
one association noted that a 2000 square foot home in its territory
would exceed the Farmer Mac criteria.
The FCA also received comments from 22 parties objecting to the use
of Census data to determine the value of moderately priced housing.
Many System institutions commented that the use of Census data is not
required by the Act or the existing regulations. Moreover, they
observed that Census data are not useful for a number of reasons,
including: (1) They are based on subjective estimates of the homeowners
rather than market transactions; (2) the Census survey is conducted
every 10 years and thus the data are soon outdated; and (3) the data
cut across market boundaries which leads to wide and arbitrary
differences in the definition of moderate price between counties or
census blocks.
Six FCS associations provided examples of the adverse effects of
using the Census housing data to determine the value of moderately
priced housing. They commented that using Census data would: (1)
Restrict the market, competitiveness, and spreads; (2) reduce the
current maximum limit the FCS institutions use for moderately priced
housing in some areas by 50 percent or more; and (3) result in a
significant increase in administrative work.
Most System commenters offered specific recommendations for how the
FCA could revise this regulation to determine the value of moderately
priced housing. Fourteen commenters recommended that the Federal Home
Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage
Association (Fannie Mae) limits determine the moderately priced
[[Page 42111]]
standard for System rural home lending. These commenters believed that
the Freddie Mac and Fannie Mae thresholds would avoid the defects of
the Census data and would provide for a level playing field with
competitors. Other commenters suggested that FCA retain the definition
in the existing regulation to provide System lenders with greater
flexibility to use other reasonable methods to determine moderately
priced values. Another frequent suggestion was to authorize System
institutions to rely on any accepted independent study or formula from
a credible regional or national source.
The FCC offered two approaches. First, the Farmer Mac limit would
be used as a safe harbor provision and a higher limit could be adopted
if it were supported by a study that established local standards for
moderately priced housing, based on actual sales. In the alternative,
the FCC suggested that the System could use any combination of Farmer
Mac criteria, Freddie Mac or Fannie Mae guidelines, information
provided by the Department of Housing and Urban Development,
information on income provided by the Census, local sales data, or
market studies.
The FCA continues to believe that the Farmer Mac standard for the
value of a rural home is a useful method for determining moderately
priced housing because the criteria in section 8.0 of the Act are
directly related to home financing in rural areas of 2,500 inhabitants
and the System's rural housing authorities. For this reason, homes that
satisfy the Farmer Mac criteria would be considered moderately priced
under reproposed Sec. 613.3030(a)(4)(i). In response to System comments
that Farmer Mac criteria ignore variations in housing costs in
different rural areas, the FCA points out that section 101 of the 1996
Reform Act clarifies that the Farmer Mac limit of $100,000 (as adjusted
for inflation since 1988) refers to the value of the dwelling only,
exclusive of the value of the land on which it is situated.8 This
statutory clarification provides flexibility for lending in areas where
land values are higher.
---------------------------------------------------------------------------
\8\ Ibid.
---------------------------------------------------------------------------
Reproposed Sec. 613.3030(a)(4)(ii) would also allow FCS lenders to
finance rural homes that are below the 75th percentile of housing
values for the rural area where it is located, as determined by data
from a credible, independent, and recognized national or regional
source, such as a Federal, State, or local government agency, or an
industry source. Each System bank or association will bear the burden
of demonstrating that the price range it selects reflects moderately
priced housing in the specific locale where its rural home loans are
made. FCS institutions may use the Census of Housing data for their
studies but are not be required to do so. If this reproposal is adopted
as a final regulation, the FCA will review the methods used during
examinations of FCS institutions.
The FCA has decided not to incorporate the maximum loan amount used
by Freddie Mac or Fannie Mae into the reproposed regulation. The FCA
believes that the Freddie Mac and Fannie Mae maximum loan amounts may
not be representative generally of moderately priced housing in rural
areas because they include housing values in urban and suburban
communities. Furthermore, the Freddie Mac and Fannie Mae maximum loans
amounts are not necessarily a measure of moderately priced housing.
7. Home Equity Lending
The FCA's original proposal would have allowed non-farm rural
homeowners to obtain home equity loans and lines of credit from System
lenders, secured by the rural home, without a restriction on the
borrower's use of the proceeds.
The FCA received comments from seven parties, including one
commercial bank, five trade associations, one borrower, and one
governmental body on the eligibility requirements for rural home
lending. A Farm Credit borrower supported home equity loans because the
commenter believes that this authority would enhance the ability of the
FCS to finance the agricultural community. The FCC, commenting
generally on the amendments to the rural home lending regulations,
stated that the proposed regulations clarify that FCS institutions may
offer equity line-of-credit loans to rural homeowners. The FCC agreed
that equity line-of-credit loans would enable FCS to better fulfill its
statutory mission of providing an adequate and flexible flow of credit
into rural areas.
The NDCUL and a commercial banker stated without explanation that
the FCS should not be allowed to make home equity loans for consumer
purposes to rural residents who are not farmers, ranchers, or aquatic
producers or harvesters. A State governmental agency opposed the FCA's
proposal as presenting unfair competition with commercial banks and
credit unions. Another commenter contended that home equity consumer
loans to borrowers who are not farmers, ranchers, or aquatic producers
or harvesters are not within the System's statutory mission.
Three banking trade associations also opposed this proposal. One
stated that it does not believe that ``home equity lending comports
with this GSE's statutory reasons for existence.'' It expressed concern
that home equity lending may be used for consumer purposes rather than
housing purposes and that home equity lending would reduce available
FCS funds for rural housing loans because of the portfolio limitation.
The commenter stated that the FCA presents no evidence that such home
equity lending is an unmet need in a very competitive home equity
lending market. Another commenter objected because it does not believe
that there is express authority for home equity lending and that being
a full-service lender to rural residents does not comport with the
System's reason for existence. A third trade association stated that
several of its members questioned the advisability of FCS making home
equity loans because they believe that such loans are risky. This
commenter asked that the FCA provide a detailed explanation of the
underwriting standards that are envisioned for home equity lending. It
also noted that loan proceeds could be for consumer goods, which it
deems as inappropriate for the FCS.
In response to the comments from banking interests, the FCA
rescinds its original proposal regarding home equity lending and
restores the purpose restrictions contained in existing
Sec. 613.3040(c) as reproposed Sec. 613.3030(c). The FCA notes that
System lenders are not precluded from extending authorized credit to
rural homeowners through revolving lines of credit. The reproposal
would, however, require that such credit extensions be limited to the
purposes specified. This change to the proposed rule on home equity
lending makes unnecessary the proposed conforming amendments to
Sec. 614.4222, and those proposed amendments are now withdrawn.
No comments were received on proposed Sec. 613.3030 (a)(1) or
(a)(2), and it is included in the reproposed regulation without
revision. No comments were received on proposed Sec. 613.3030(c), and
it is redesignated as reproposed Sec. 613.3030(d).
P. Allowable Real Estate Security
The FCA received 12 comments about the requirements for the type of
allowable real estate security for long-term mortgage loans in
Sec. 614.4210(a). Most commenters requested that the FCA clarify that
housing for agricultural producers is not subject to the
[[Page 42112]]
limitations on location, type of housing, or price for rural home
lending. Many commenters also supported increased flexibility in the
types of real estate collateral that could be counted toward the
statutory 85-percent loan-to-value limitation.
The FCA reaffirms that the limitations for the type of house and
the value of the house for rural home lending apply only to housing for
individuals who are not farmers, ranchers, or aquatic producers or
harvesters. As stated in the discussion of financing a farmer's housing
and domestic needs, such housing can be financed under farm lending
authorities for a bona fide farmer, rancher, or aquatic producer or
harvester.
The FCA has considered the issue of allowable collateral for long-
term mortgage lending under title I of the Act when it proposed
amendments to the loan underwriting regulations on March 12, 1996. See
61 FR 16403 (April 15, 1996). Under that proposed rule, the FCA would
continue to limit the types of collateral that can secure a mortgage
loan, but it allows flexibility so that the collateral remains
primarily agricultural in nature. The rule also would continue the
requirement that the loan-to-value ratio not exceed 85 percent. The FCA
will consider comments to its proposal of March 12, 1996, before it
adopts final amendments to Sec. 614.4210(a) and other regulations that
govern loan underwriting and collateral standards.
Q. Title III Domestic Lending Regulation
The FCA's original proposal would significantly restructure and
clarify the regulations that govern eligibility and scope of financing
for BCs and ACBs. More specifically, the FCA initially proposed to
redesignate existing Sec. 613.3110 as Sec. 613.3100, and rearrange this
regulation so it addresses the authority of BCs and ACBs to finance the
following class of borrowers: (1) Cooperatives, their parents,
subsidiaries and other related entities that serve agricultural or
aquatic producers; (2) electric, telecommunication, and cable
television utilities; (3) water and waste disposal facilities; and (4)
domestic lessors.
As noted in the preamble to the original proposal, many proposed
revisions reflect provisions of the 1992 amendments 9 and the Farm
Credit System Agricultural Export and Risk Management Act (1994
Act).10 After the comment period for this proposed rulemaking
expired, the 1996 Reform Act was enacted into law. The 1996 Reform Act
amended two provisions in section 3.8 of the Act that govern the
eligibility of certain cooperatives and rural utilities to borrow from
banks that operate under title III of the Act. Accordingly, the FCA has
incorporated these statutory amendments into reproposed Sec. 613.3100.
---------------------------------------------------------------------------
\9\ Pub. L. 102-552, 106 Stat. 4102 (Oct. 28, 1992).
\10\ Pub. L. 103-376, 108 Stat. 3497 (Oct. 19, 1994).
---------------------------------------------------------------------------
Comments were received from the St. Paul BC, CoBank, ABA, IBAA and
NDBA. In general, the comments from the St. Paul BC and CoBank
supported the proposed regulation. These commenters, however, requested
clarification or modification of certain provisions of the original
proposal. CoBank and the St. Paul BC supported the FCA's proposal to
repeal existing Secs. 613.3005 and 613.3110(b)(2), which prescribe
business objectives and management practices for title III banks.
The three commercial bank trade associations endorsed all revisions
that implement amendments to the Act. Otherwise, these three commenters
opposed revisions concerning service cooperatives that provide
financially related services and cable television utilities.
1. Definitions
CoBank objected to the FCA's decision to delete the words ``a
combination of such associations and farmers, ranchers, or producers or
harvesters of aquatic products'' from the definition of a cooperative
in proposed Sec. 613.3100(a)(1). The commenter claimed that this
revision is a ``step backwards'' for certain cooperative combinations.
Because of the commenter's concern, the previous wording is reinserted
into the reproposed regulation with minor stylistic revisions.
The comments from bank trade associations opposed
Sec. 613.3100(a)(5) as proposed, because it would allow a BC or ACB to
finance cooperatives that provide business and financially related
services to their members. These commenters claim that Congress
intended that the BCs and ACBs only finance cooperatives that aid
production agriculture and that such service cooperatives should be
served exclusively by commercial lenders.
CoBank objected that proposed Sec. 613.3100(a)(5) would require an
eligible service cooperative to be ``predominantly'' involved in
providing business and financially related services to farmers,
ranchers, and aquatic producers or harvesters. The commenter observes
that the word ``predominantly'' does not appear in section 3.8(a) of
the Act. CoBank asserted that including it in the definition converts a
scope of financing question into an eligibility issue.
The arguments against permitting title III lending to cooperatives
that provide business and financial services to farmers are not
supported by the Act and its legislative history. Section 3.8(a) of the
Act expressly authorizes BCs and ACBs to finance eligible cooperatives
that furnish ``business services or services'' to farmers, ranchers,
aquatic producers or harvesters, or their cooperatives. This authority
to finance service cooperatives has its origins in the Farm Credit Act
of 1935.11 The legislative history to this provision reveals that
Congress contemplated that these System banks would lend to service
cooperatives that offered financially related services, such as
insurance, to their members.12 In 1980, Congress amended section
3.8(a)(4) of the Act so that service cooperatives would continue to
qualify for FCS loans so long as 60 percent of their members are
farmers, ranchers, or aquatic producers or harvesters. The 1996 Reform
Act enables existing cooperative borrowers to retain their eligibility
for BC or ACB loans if more than 50 percent of their members are
agricultural or aquatic producers. Thus, the Act and its legislative
history clearly refute the belief that BCs and ACBs lack authority to
finance business and financially related service cooperatives.
Furthermore, nothing in the Act or its legislative history supports the
commenters' contention that a BC or ACB is authorized to finance only
cooperatives that assist ``on-farm'' agricultural production. For these
reasons, the FCA rejects the view that FCS banks operating under title
III of the Act lack authority to finance cooperatives that furnish
business and financially related services to agricultural and aquatic
producers.
---------------------------------------------------------------------------
\11\ P.L. No. 87-74, 49 Stat. 317 (June 3, 1935).
\12\ H.R. 155, 74th Cong., 1st Sess. (Feb. 18, 1935) p. 9; Farm
Credit Act of 1935: Hearings on S. 1384 Before the Senate Committee
on Banking and Currency, 74th Cong., 1st Sess. p. 22 (Jan. 29,
1935).
---------------------------------------------------------------------------
The FCA agrees with the comment that the word ``predominantly'' in
proposed Sec. 613.3100(a)(5) is more restrictive than the statute,
since section 3.8(a) of the Act, as amended, establishes specific
thresholds for farmer membership in an eligible service cooperative.
Thus, the FCA deletes the word ``predominantly'' from reproposed
Sec. 613.3100(a)(5).
2. Cooperatives and Other Entities Serving Other Agricultural or
Aquatic Producers
Section 613.3100(b) governs the eligibility of agricultural or
aquatic
[[Page 42113]]
cooperatives and their related entities to borrow from title III
lenders. Other eligible entities include: (1) The parent of an eligible
cooperative; (2) a subsidiary or other legal entity in which an
eligible cooperative has an ownership interest; and (3) a non-profit
entity that satisfies the criteria in section 3.8(b)(1)(D) of the Act.
Section 14 of the 1996 Reform Act amended section 3.8(a) of the Act
to permit the continued eligibility of pre-existing cooperative
borrowers as long as at least 50 percent of the voting control is held
by farmers, ranchers, aquatic producers or harvesters, or their
cooperatives. Section 14 of the 1996 Reform Act also amended section
3.8(b)(1)(D) of the Act so that eligible non-profit entities and their
subsidiaries also benefit from this statutory change. Accordingly,
reproposed Sec. 613.3100(b)(1)(i) and (b)(2)(iii) incorporates these
statutory provisions of the 1996 Reform Act.
Both System commenters expressed support for proposed
Sec. 613.3100(b)(2)(ii), which allows a title III bank to extend credit
to an entity in which an eligible cooperative is a minority owner. Such
financing is limited to the cooperative's percentage of ownership
multiplied by the borrowing entity's total assets. CoBank asked for
clarification on three questions about how title III banks should
measure the borrower's total assets: (1) Are the entity's total assets
measured at the beginning or the end of a capital project? (The
commenter suggested that the end of a project is the better measure.)
(2) How should assets be measured for borrowers with wide seasonal
fluctuations in assets? (The commenter recommended that the seasonal
peak in assets be the appropriate measure.) (3) Should the borrower's
assets be measured according to their book or market value? (The
commenter believes that book value, as the more conservative standard,
is appropriate.)
The FCA believes each of the suggested clarifications is reasonable
and consistent with the intent of section 3.7(b)(2)(A)(ii) of the Act.
However, a uniform method of calculating total assets cannot be
developed for all three scenarios. Thus, the FCA believes that each
title III lender should establish in its lending policies the most
appropriate measure of the borrower's assets depending on the nature of
the credit request. For this reason, the FCA makes no modification to
the reproposed regulation at this time. However, the FCA may issue
regulatory guidance on asset measurement practices in the future.
3. Electric and Telecommunication Utilities
Section 613.3100(c) of the original proposal and the reproposal
contains rural utility lending authorities. The FCA received comments
from CoBank, the St. Paul BC, and the IBAA on proposed
Sec. 613.3100(c). One comment suggested that the FCA retitle the
section to read ``Electric and telecommunications utilities,'' because
cable television is widely recognized as a subset of
telecommunications. The FCA accepts this recommendation and has
incorporated this change into the title of reproposed Sec. 613.3100(c).
CoBank objected to the FCA's proposal to delete from the
regulations explicit reference to farmer-owned utility cooperatives
that are eligible to borrow from a BC or ACB under section 3.8(a) of
the Act, instead of the Rural Utilities Service (RUS) provisions in
section 3.8(b)(1)(A) of the Act. CoBank asserts that such authority
exists in the statute, and therefore, it should be retained in the
regulation even though it is not likely to be used frequently. The FCA
accedes to the commenter's request and incorporates this statutory
authority into reproposed Sec. 613.3100(c)(1)(i). The remaining
provisions of reproposed Sec. 613.3100(c)(1) have been renumbered
accordingly.
The 1996 Reform Act repealed the RUS and Rural Telephone Bank
(RTB) certification requirements in section 3.8(b)(1)(A) of the Act.
Accordingly, reproposed Sec. 613.3100(c)(1)(ii)(C) revises the original
proposal to conform with the revised statute. The St. Paul BC suggested
that the FCA relocate the phrase ``other entities, or the subsidiaries
of such cooperatives'' in paragraph (c)(1)(i)(C) to the end of that
paragraph with appropriate stylistic revisions. The commenter observed
that section 3.8(b)(1)(A) of the Act does not require the subsidiary of
a cooperative or other entity to be eligible for a RUS or RTB loan. The
FCA agrees with the commenter, and reproposed Sec. 613.3100(c)(1)(iii)
will specifically govern loans by title III banks to subsidiaries of
cooperatives and other entities that are eligible to borrow from the
RUS or RTB. The FCA has, accordingly, renumbered the remaining
provisions of reproposed Sec. 613.3100(c)(1).
The St. Paul BC and CoBank requested that the FCA delete
references to RUS and RTB regulations in proposed Sec. 613.3100(c)(2)
because the Act does not subject BCs and ACBs to the scope of financing
provisions of the Rural Electrification Act of 1936, as amended (REA
Act). One comment letter included selected passages from the
legislative history that indicate that Congress did not intend that
title III banks adhere to the same loan purpose restrictions as the RUS
or RTB. These commenters claimed that proposed Sec. 613.3100(c)(2) is
more restrictive than the Act and would deny creditworthy and eligible
rural utilities access to System credit to the full extent of the law.
The commenters have persuaded the FCA that the references in
proposed Sec. 613.3100(c)(2) to RUS and RTB regulations could prevent
BCs and ACBs from financing rural utilities to the extent allowed by
the Act. For this reason, references to the REA Act and RUS and RTB
regulations are omitted from reproposed Sec. 613.3100(c)(2). Instead,
the reproposed regulation would authorize lending for electric or
telecommunication services in a rural area as allowed by the Act.
The IBAA opposed provisions in proposed Sec. 613.3100(c)(2), which
would authorize BCs and ACBs to finance a subsidiary of a rural
electric or telecommunications utility that operates a licensed cable
television carrier. This commenter claimed that the proposed regulation
appears to conflict with the REA Act because it would allow a cable
television subsidiary of a rural utility to borrow from a BC or ACB
even though the REA Act expressly prohibits the RUS and RTB from
financing cable television. In this commenter's view, the proposed
regulation circumvents the REA Act by severing eligibility from scope
of financing.
The IBAA also notes that the System sought legislation in the
spring of 1995 to enhance the ability of the title III banks to finance
the ``rural information highway,'' including telecommunications
services beyond basic telephone service to rural communities. Because
no such legislation was enacted, or introduced, the commenter believes
that title III banks lack the current authority to finance cable
television carriers.
Section 3.8(b)(1)(A) of the Act authorizes BCs and ACBs to finance
rural utilities that are eligible to borrow from the RUS and RTB, and
their subsidiaries. A cable television carrier qualifies for financing
from a title III bank if it is the subsidiary of a rural utility that
is eligible to borrow from the RUS or RTB. Although the Rural
Electrification Act of 1936, as amended, prohibits the RUS or RTB from
financing the cable television subsidiary, section 3.8(b)(1)(A) of the
Act expressly authorizes a BC or ACB to extend credit to the same
subsidiary. The FCA's position is clearly supported by the legislative
history to section
[[Page 42114]]
3.8(b)(1)(A) of the Act, which reveals that Congress specifically
intended to authorize title III banks to finance cable television
carriers that are ineligible for RUS or RTB loans. The sponsor of
section 3.8(b)(1)(A) stated:
In addition, this authority will enable rural telephone systems
and their subsidiaries to obtain financing for certain projects that
contribute to the economic well-being of the telephone system's
service area. Many of these projects undertaken by rural telephone
systems involve so-called non-Act purposes-meaning that such
projects are ineligible for REA financing under the Rural
Electrification Act. These non-Act purposes usually involve
providing of communication services such as cable television
facilities and cellular radio facilities * * * (emphasis added)
The System's 1995 legislative initiative does not affect this existing
authority. The legislative proposal would have expanded the lending
authority of title III banks in a number of respects, including
permitting them to finance cable television carriers that are not
subsidiaries of entities eligible to borrow under the REA Act. Thus,
the comment that FCA's regulation exceeds statutory authority lacks
merit.
The St. Paul BC notes that the restriction on financing to
entities that are partially owned by an eligible utility appears in
proposed Sec. 613.3100(c)(3), but no provision of this regulation
expressly declares such entities to be eligible borrowers.
The FCA agrees that the regulation would be clearer if the
eligibility of such entities were set forth in Sec. 613.3100(c)(1).
Accordingly, the FCA has added a new paragraph (c)(1)(iv), to
reproposed Sec. 613.3100. This addition makes proposed
Sec. 613.3100(c)(3) unnecessary, and it is deleted from the reproposed
regulation.
4. Water and Waste Disposal Facilities
CoBank provided the only comment on this section of the regulation.
The commenter objected to the word ``solely'' in proposed
Sec. 613.3100(d)(2), which governs the financing authority for water
and waste disposal facilities for title III banks. The commenter argues
that such a restriction is not in the Act and that title III banks need
the flexibility to finance ownership transfers so that water and waste
disposal utilities can adjust to changes in their rural customer base
and continue as viable entities. CoBank urges the FCA to construe the
terms ``maintaining'' and ``operating'' in section 3.7(f) of the Act as
allowing title III lenders the flexibility to finance ownership
transfers for water and waste disposal facilities. The commenter
expressed concern that the use of the word ``solely'' in
Sec. 613.3100(d)(2) will have a chilling effect on the types of prudent
financing that BCs and ACBs can provide these borrowers.
Both section 3.7(f) of the Act and Sec. 613.3100(d)(2) authorize
title III banks to extend financing to certain entities for the purpose
of ``installing, maintaining, expanding, improving or operating water
and waste disposal facilities in rural areas.'' As the FCA interprets
section 3.7(f) of the Act, the sale of ownership interests in such
entities is reasonably within the scope of ``maintaining'' or
``operating'' a rural water or waste disposal facility. Therefore,
revision of Sec. 613.3100(d)(2) is unnecessary.
5. Domestic Lessors
The FCA received no comments about proposed Sec. 613.3100(e), which
authorizes BCs and ACBs to make loans to domestic lessors, pursuant to
section 3.7(a) of the Act. This provision remains in the reproposed
regulation without revision.
R. Title III International Lending Regulation
The FCA originally proposed to redesignate and substantially revise
the regulation that implements the international lending authorities of
BCs and ACBs. The new regulation would implement provisions in the 1994
Act, which expanded the authority of BCs and ACBs to finance the
import, export, and international business operations of cooperatives
and other eligible borrowers. The FCA also proposed several conforming
and technical amendments to Secs. 614.4010(d), 614.4020(a), 614.4233,
and subpart Q of part 614 to reflect the expanded international lending
powers of title III banks.
Section 3.7(d) of the Act requires the FCA to consult with the
Board of Governors of the Federal Reserve System (Board of Governors)
whenever it formulates regulations pertaining to the international
lending activities of title III banks so that the new ``regulations
conform to national banking policies, objectives, and limitations.''
The FCA submitted the proposed international lending regulations to the
Board of Governors for review and evaluation on August 9, 1995. On
December 8, 1995, the Board of Governors informed the Chairman of the
FCA, by letter, that it had no objection to the new regulations. The
Board of Governors, however, advised the FCA that increased
international lending increased the risk of loss to BCs and ACBs, which
should be closely monitored.
Comments about the original proposal were received from a
commercial banker, a member of the CoBank board, CoBank, the ABA, IBAA,
and the NDBA. The three commercial bank trade associations supported
Sec. 613.3200 because it implements the 1994 Act. The commercial
banker, however, commented that the expansion or FCS powers would place
the FCS in direct competition with commercial banks for international
loans without any of the regulatory mandates and responsibilities that
commercial bankers face. The FCA responded to similar comments earlier
in this preamble and finds the commercial banker's comment without
foundation. The CoBank board member supported the proposed regulation
as important to the evolving international business environment.
CoBank's response supported most of the proposed regulation, including
the definition of farm supply cooperatives and the treatment of import
and export transactions. CoBank, however, had substantive comments on
the two provisions which are discussed below.
CoBank asserted that provisions in proposed Secs. 613.3200 (d) and
(e), which limit subsidiary financing to international business
``transactions,'' are more narrow than the Act. The comment states that
the Act contains no such limitation and only requires that, subject to
limitations regarding percentage of ownership and plant relocation, the
financing be ``for the purpose of facilitating its domestic or foreign
business operations * * *'' (emphasis added). CoBank also cites a
technical analysis attached to an FCA letter dated August 17, 1994, to
then House Agriculture Committee Chairman de la Garza in support of its
position.
The FCA's use of the terms ``transactions involving international
business operations'' and ``international business transaction''
referred to the foreign business operations of the domestic or foreign
entities, and it was not intended to limit the type of financing that
is authorized by the Act. In order to clear up any confusion, the FCA
has revised the title to reproposed Sec. 613.3200(d) by omitting the
words ``transactions involving.'' Furthermore, the FCA has substituted
``operations'' for ``transaction'' in reproposed Sec. 613.3200(e).
S. Similar Entity Participation Regulation
The FCA proposed Sec. 613.3300 to implement the new authority of
System banks and associations to participate in loans made by non-
System lenders to ``similar entities''--ineligible persons whose
operations are functionally
[[Page 42115]]
similar to those of eligible borrowers. The proposed definition of
``similar entity'' requires that a majority of the entity's income be
derived from, or a majority of its assets be invested in, the conduct
of activities that are performed by eligible borrowers. The FCA
solicited comments on: (1) Whether the regulation should provide a
specific listing of the parties who qualify as similar entities; (2)
whether the regulation ought to provide further guidance about the new
financially related service (FRS) authority; (3) how the regulation can
best accord equitable treatment to both the funding banks and their
affiliated associations; and (4) whether consent for out-of-territory
participations on similar entity loans ought to be required.
The FCA received 37 comment letters on its original proposal
concerning similar entity authority. Comment letters were received from
the FCC, six Farm Credit banks, 27 FCS associations, the ABA, IBAA, and
NDBA.
Comments by FCS institutions were mixed. Some institutions
supported the various definitions and provisions in proposed
Sec. 613.3300, whereas others recommended a broader interpretation of
the statutory provision. The ABA, IBAA, and NDBA believe that the
proposal to permit System banks to participate with non-System lenders
in loans to similar entities exceeds the authority that Congress has
granted. Although the ABA stated that the proposal appears to comply
with recent amendments to the Act, it claims that the expanded
eligibility rules in Secs. 613.3000, 613.3010, and 613.3020 negate the
need for similar entity authority. The IBAA stated that the proposal
appears to go much further in the types of similar entities than
Congress originally anticipated to be eligible. The commenter also
requested more definition and a more narrow interpretation of the
statutory language.
The FCA affirms that its original proposal regarding similar
entities is within the parameters of the Act. Proposed Sec. 613.3300
closely tracked the language of the Act. The fact that System banks and
associations may have greater flexibility to finance eligible borrowers
within the scope of their statutory powers does not render their
similar entity participation authorities unnecessary.
1. Providing a List
Twenty-nine FCS commenters opposed incorporating a specific list of
the parties who qualify as similar entities in the regulation, because
they saw no need for or discernible benefit from having such a list.
Some System institutions commented that to the extent that a list may
be useful, similar entities can be identified through a bookletter or
other guidance. System commenters perceived that any list of eligible
similar entities could be unduly restrictive and that the similar
entity authorities should provide maximum latitude for risk
diversification. The IBAA suggested that the regulation provide such a
listing.
The FCA concludes that the inherent difficulty of anticipating
every type of entity that might qualify and the time required to amend
regulations makes a regulatory listing impracticable for this
authority. Accordingly, the reproposed regulation does not list similar
entities. However, the FCA will monitor such activity through its
examination process and evaluate the need for further guidance.
2. Guidance on Financially Related Services (FRS) Authority
Four FCS associations commented that further guidance on FRS
authorities is not needed because the approved list of services already
exists. CoBank requests that the FCA clarify that the related services
regulations of part 618 do not apply to transaction-type items for
similar entity loans. The commenter believes that unless the lender can
react quickly to a request, the opportunity for participation may be
lost.
The reproposed regulation does not provide any further guidance on
FRS authorities as they pertain to similar entity transactions. The FCA
may, however, provide such other forms of guidance as may be determined
necessary in the future.
3. Definitions
The FCA received no comment on the definition of ``participation''
in Sec. 613.3300(a)(1), which mirrors provisions in sections 3.1(11)
and 4.18A of the Act. Thus, the reproposed regulation does not change
this definition.
Although System institutions generally were supportive of the FCA's
original proposal, many considered the definition of ``similar entity''
to be more narrow and restrictive than the Act. These commenters
asserted that it provides System lenders with little opportunity to
participate in loans to similar entities, because most persons or legal
entities involved in production agriculture already qualify as eligible
borrowers under title I or II. These commenters also recommended that
the FCA revise Sec. 613.3300(a)(2) so it treats a party who is eligible
to borrow directly from certain FCS associations engaged in short-term
lending under Secs. 613.3000, 613.3010, or 613.3020 as a similar entity
for an association engaged in long-term mortgage lending, and vice
versa. In other words, the commenters suggested that a party who is an
eligible borrower for an FCS institution that operates under title I
should qualify as a similar entity for a title II association and a
title II borrower as a similar entity for title I associations. Other
System commenters disagreed with this approach and supported the FCA's
proposal on this issue.
The St. Paul BC commented that the proposed definition could be
read to mean that a party eligible for a loan from an association would
not qualify as a ``similar entity'' with respect to a BC, and vice
versa. Therefore, the commenter proposed specific regulatory language
that would classify an eligible title III borrower as a similar entity
for FCBs and direct lender associations, and vice versa.
The definition of ``similar entity'' in Sec. 613.3300(a)(2) closely
tracks sections 3.1(11)(B)(ii) and 4.18A(a)(2) and provides FCS
institutions with the flexibility allowed by law. The FCA disagrees
with those commenters who assert that the same borrower may be an
eligible borrower under title I, but a similar entity under title II of
the Act. The plain language of section 4.18A(a)(2) of the Act makes it
clear that a similar entity is one who is ineligible to borrow directly
from a title I bank or a direct lender association. Section 4.18A(a)(2)
of the Act makes it equally clear that the eligibility of the borrower,
not the lending powers of a System institution, determines similar
entity status. There is no distinction in the Act between the types of
borrowers who are eligible for financing under title I and title II.
The FCA agrees with the St. Paul BC that a party who is eligible to
borrow under title III of the Act can qualify as a similar entity under
titles I and II of the Act. However, the FCA declines to amend
Sec. 613.3300(a)(2) as the commenter suggests because the commenter's
concerns already are adequately addressed by proposed Sec. 613.3300
(e)(3) and (e)(4), which is redesignated in the reproposed regulation
as Sec. 613.3300 (d)(2) and (d)(3), respectively.
4. Similar Entity Transactions
Ten System commenters considered Sec. 613.3300(b), as originally
proposed, to be too restrictive and they urged the FCA to delete the
words ``for purposes similar to those for which an eligible borrower
could obtain financing from the participating FCS institutions.'' These
commenters believe that the Act
[[Page 42116]]
imposes no such limitation on the phrase ``functionally similar.'' In
addition, the commenters believe that the FCA's original proposal
contradicts the intent of Congress because section 4.18A(b) of the Act
grants title I banks and direct lender associations similar entity
authority ``notwithstanding any other provision of this Act.'' The
commenters strongly supported a broader interpretation of section 4.18A
of the Act.
CoBank objected to a statement in the preamble that identified
certain rural utilities as similar entities. CoBank commented that
there is no statutory basis for limiting participations in similar
entity loans to electric utilities in rural areas. The FCA assures the
commenter that the preamble passage to the proposed regulation only
provided one example of a similar entity. This illustration was not
intended to limit the authority of title III banks to participate in
loans to similar entities.
In conjunction with its recommended definition of similar entity,
the St. Paul BC also recommended a corresponding change be made to
Sec. 613.3300(b) by deleting the language ``that is not eligible to
borrower directly under Secs. 613.3000, 613.3010, 613.3100, or
613.3200.''
The FCA believes that its interpretation clarifying ``functionally
similar'' is consistent with the plain language of the Act and complies
with Congressional intent. The ``notwithstanding'' language in section
4.18A does not negate the rest of this same provision, which states
that FCBs, ACBs, and direct lender associations ``may participate in
any loan of a type otherwise authorized under title I or II. * * *''
Section 4.18A of the Act did not alter the lending authorities of title
I and II lenders. Instead, the similar entity provisions of the Act
authorize such banks and associations to participate with non-System
lenders in loans to ineligible borrowers. Although many commenters
stated that the Act does not define and therefore does not limit the
phrase ``functionally similar,'' the fact that the Act contains this
phrase implies there are some restrictions. For this reason, the FCA
continues to believe that similar entity loans must be for purposes
that are similar to those for which an eligible borrower could obtain
FCS financing. In addition, the FCA did not adopt the recommendation to
eliminate the references to the regulations defining ``eligible
borrower.'' However, the FCA notes that these references do not prevent
a title III bank from participating in a similar entity loan to a party
who is eligible to borrow under titles I and II of the Act but
ineligible to borrow under title III, and vice versa. Therefore,
reproposed Sec. 613.3300(b) is unchanged from the original proposal.
5. Compatibility With Lending Authorities Under Titles I and II of the
Act
System commenters were evenly divided about proposed
Sec. 613.3300(c), which would have required an institution to
participate in only those loans it is authorized to make; i.e., short-
and intermediate-term versus long-term loans. Two FCS banks and several
associations supported the FCA's approach as a reasonable
interpretation of the Act. The commenters believe that proposed
Sec. 613.3300(c) implements the passage in section 4.18A(b) of the Act
that refers to ``any loan of a type otherwise authorized under title I
or II of the Act.'' One commenter states that the term ``authorized''
in the Act implies that a particular institution has the authority in
question to make the loan except for the fact that the borrower is
ineligible, and thus is a similar entity. These commenters also
expressed concern about intra-System competition for similar entity
loans. Some commenters opined that proposed Sec. 613.3300(c) promotes
safety and soundness by requiring System institutions to participate in
loans that are compatible with their expertise.
Two FCBs and six associations opposed proposed Sec. 613.3300(c),
and they asked the FCA to delete it from the regulation. These
commenters assert that Sec. 613.3300(c) is incompatible with the
underlying purpose of sections 3.1(11)(B) and 4.18A of the Act, which
was to promote risk diversification. These commenters believe that the
risk diversification purpose is best served if a System bank or
association can participate in similar entity loans that are
incompatible with their short-, intermediate-, or long-term lending
powers. These commenters opined that proposed Sec. 613.3300(c) is
contrary to the FCA's Regulatory Philosophy Statement of eliminating
regulatory restrictions that neither implement or interpret the Act nor
promote safety and soundness. These commenters claim that proposed
Sec. 613.3300(c) unduly restricts their ability to exercise their
statutory powers.
The FCA has concluded that, while both interpretations of the Act
are reasonable, eliminating this restriction in proposed
Sec. 613.3300(c) gives better effect to the statutory language and the
Congressional purpose of section 4.18A of the Act. The express purpose
of this provision is to assist FCS banks and associations in managing
risk. The FCA agrees that participation in similar entity loans that
differ from an institution's portfolio of either short- and
intermediate-term loans or long-term loans promotes risk
diversification. Additionally, the FCA notes that credit facility loan
transactions, which comprise separate loans with different terms to a
single borrower, are often the subject of loan participations. A rule
that would permit only ACAs, but not FCBs or other associations, to
participate in such transactions could substantially limit the ability
of titles I and II lenders to make use of their similar entity
participation authority. Accordingly, the FCA has omitted this
restriction from the reproposed regulation.
6. Restrictions on Similar Entity Participations
No comments were received on proposed Sec. 613.3300(d), and this
paragraph has been redesignated as paragraph (c) in the reproposed
regulation.
7. Funding Bank Approval
The FCA originally proposed a requirement that a direct lender
association obtain approval from its funding bank before it could
participate in a similar entity loan. The FCA further proposed that a
request for approval from an association could only be denied for
safety and soundness reasons affecting the bank.
The FCC, CoBank, and an FCS association supported proposed
Sec. 613.3000(e)(1). The FCC commented that its members support the
paragraph as written because it provides adequate safeguards. One
association believes that direct lenders should have maximum freedom to
participate in similar entity loans without the regulation specifying
funding bank approval.
The FCA redesignates proposed Sec. 613.3300(e)(1) as reproposed
Sec. 613.3300(d)(1) without further revision. Further, reproposed
Sec. 613.33300(d)(1) directly implements the statutory requirement that
an association obtain approval from its funding bank.
8. Territorial Concurrence
The FCA proposed that the out-of-territory concurrence requirements
in Sec. 614.4070 apply to all titles I and II institutions that
participate with non-System lenders in loans to similar entities.
Ten System institutions supported FCA's territorial concurrence
requirement, but many of these
[[Page 42117]]
commenters suggested some modifications to avoid unnecessary burdens.
These commenters advised the FCA that the consent requirement could
prove burdensome for titles I and II lenders when a similar entity has
operations spread throughout several States. These commenters
recommended that the FCA amend the regulation so it requires consent
only from the FCS lender where the site of the similar entity's home
office is located.
The FCB of Texas believes that the proposed territorial concurrence
requirement is both appropriate and consistent with the Act, because
there is no intrinsic difference between the operations of similar
entities and eligible borrowers that justify different treatment.
Six System institutions opposed the territorial concurrence
requirement in proposed Sec. 613.3300(e)(2), because they believe
operational matters are more appropriately addressed between respective
banks and associations. Another FCS association believes that
territorial concurrence should not be imported from Sec. 614.4070
because it would impede the statutory mandate allowing similar entity
participations and would not further any legitimate anti-competition
policy. AgAmerica, FCB, does not believe that the territorial
concurrence requirement in Sec. 614.4070 should be extended to similar
entity participations because Congress imposed concurrence requirements
only between BCs and FCBs. Therefore, the commenter believes the
regulation should not require titles I and II lenders to obtain any
type of territorial concurrence from each other. One FCS association
requested greater flexibility and recommended that institutions
operating under joint management be allowed to offer products over the
largest territory served by either association.
Several institutions also stated that a relationship with the
original lender would be impaired if the association must seek the
consent of other System institutions, because the originator usually
has a very short time period to line up participants. However, another
FCS association believes that FCS institutions generally should not be
in competition with each other, because the System was created to serve
the same specific public purpose. Many FCS commenters recommended that
FCA address these intra-System competition issues at a later time and
in a broader context. Some commenters suggested that a negotiated
rulemaking be undertaken by the FCA.
After considering these comments, the FCA is persuaded that the
territorial concurrence requirements between title I and II
institutions for similar entity participations is not advisable. As
noted by many commenters, the Act contains no territorial restriction
on similar entity participations other than requiring consensual
arrangements only between title I institutions and title III banks.
Indeed, the Act indicates that the Congress granted this authority in
order to assist System institutions in managing risk. Geographical
diversity is a useful tool for agricultural lenders to reduce their
concentration of risk, and a concurrence requirement could frustrate an
institution's goal to achieve portfolio diversity.
Moreover, the policy reason for imposing the territorial
concurrence requirement for eligible loans do not apply to
participations in loans to ineligible borrowers. The concurrence
requirement in Sec. 614.4070 precludes a System lender from making a
loan to an out-of-territory borrower who is the potential customer of
another System institution without that institution's consent. When the
borrower whose loan is the subject of the participation would not be
eligible for a loan from the System institution serving the borrower's
territory, this concern is not present. In other words, because the
System lender has no authority to make the loan in the first instance,
it has no claim to relinquish through territorial concurrence.
Furthermore, since the amount of such participations is limited to 15
percent of the portfolio, competition for similar entity participations
is not likely to have a serious adverse effect on any institution.
The FCA's decision is also influenced by the concern that a
concurrence requirement could seriously impede the System's ability to
use its new authority to participate in loans to similar entities.
Institutions are often given only a brief opportunity to buy a
participation in a transaction, and the delay resulting from seeking
concurrence may effectively preclude involvement in the transaction.
This outcome is even more likely when the participation involves an
interest in a pool of loans covering a broad geographical territory and
requires the consent of more than one System lender. For these reasons,
the FCA has deleted the territorial concurrence requirement between
titles I and II lenders in reproposed and redesignated
Sec. 613.3300(d), and the remaining paragraphs are renumbered
accordingly.
9. Method of Approval
The FCA originally proposed that all approvals required by
Sec. 613.3300 could be granted on an annual basis and under such terms
and conditions as the various FCS institutions may agree.
Eight System commenters encouraged FCA to promote the development
of standing agreements between entities or even Systemwide agreements.
CoBank recommended a standing agreement rather than annual agreements
for various concurrences because the parties could develop parameters
for all transactions.
The FCA believes that its original proposal provides FCS
institutions with ample flexibility to develop agreements required by
the Act. Agreements among System institutions can specify that consent
by the FCS lender where the similar entity is located will suffice. No
further FCA direction is needed at this time. The other approvals
provided for in this paragraph are consistent with the statutory
requirements. Therefore, proposed Sec. 613.3300(e)(5) is reproposed and
designated as Sec. 613.3300(d)(4) without revision.
10. Borrower Rights
AgFirst and three FCS associations stated that Sec. 613.3300(f)
creates the potential for confusion because it deals with matters that
are clearly set forth in the Act and otherwise in FCA regulations. In
response to the commenters' concern, the FCA agrees and has deleted
this section from the reproposed regulation.
11. Borrower Stock
Twenty-one FCS commenters requested deletion of proposed
Sec. 613.3300(g) because it creates the potential for confusion and
deals with matters that are clearly set forth in the Act and otherwise
in FCA regulations. All commenters also stated that it is not necessary
to reflect in an institution's capitalization bylaws whether or not
participation certificates are required for similar entity loans. Both
the FCC and CoBank indicated that stockholder approval of revisions to
the bylaws under these circumstances is excessive and costly.
The FCA noted in the preamble to the proposed rule that the
requirements of this paragraph are consistent with section 4.3A of the
Act and Sec. 615.5220 of the FCA regulations. The FCA accepts the
commenters justification for deleting this paragraph. However, a System
institution must comply with section 4.3A of the Act if it needs to
sell equities for similar entity participations to meet its capital
requirements, but its current
[[Page 42118]]
bylaws do not already address this matter.
T. Other Proposed Amendments
The FCA received no comments on the proposed amendments to parts
614, 618, 619, and 626. These regulations, except for Sec. 614.4222,
are reproposed without revision. The proposal to amend Sec. 614.4222 is
withdrawn.
IV. Regulatory Impact and FCA Regulatory Philosophy
These reproposed regulations are consistent with the FCA Board's
Policy Statement on Regulatory Philosophy and achieve the Board's
objective of creating an environment that promotes the confidence of
borrowers/shareholders, investors and the public in the System's
financial strength and future viability. See 60 FR 26034, May 16, 1995.
The objective of the reproposed revisions to the capital regulations is
to establish standards that encourage the building of a sound capital
structure in System institutions. The building of a sound capital
structure at each institution would improve the likelihood of an
institution's survival during periods of economic stress and thereby
improve the safety and soundness of the System as a whole. The FCA
believes that these reproposed regulations provide a meaningful
measurement of capital adequacy and would be appropriate for all System
institutions to which they would apply.
The capital provisions of this rule would apply to all System
banks, associations, and the Leasing Corporation. During the last 5
years, most of these institutions have been steadily increasing both
types of surplus identified by the reproposed regulations, and the FCA
estimates that most, if not all, of the institutions would achieve the
minimum standards in 7 years or less if these trends continue.
The reproposed amendments to the customer eligibility regulations
would remove many of the existing restrictions that are not required by
the Act or necessary to implement it. The objective of these reproposed
provisions is to implement the Act's broad authority to finance the
agricultural, aquatic, and other credit needs of bona fide farmers,
ranchers, and aquatic producers or harvesters. These regulations
respond to the concerns of commenters by balancing the rights of System
and non-System lenders.
Most importantly, however, the reproposed regulations would permit
the System to continue to fulfill its statutory mission of providing a
dependable and competitive source of credit for American agriculture as
it evolves in a rapidly changing market place.
List of Subjects
12 CFR Part 613
Agriculture, Banks, banking, Credit, Rural areas.
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 619
Agriculture, Banks, banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 626
Advertising, Aged, Agriculture, Banks, banking, Civil rights,
Credit, Fair housing, Marital status discrimination, Sex
discrimination, Signs and symbols.
For the reasons stated in the preamble, parts 613, 614, 615, 618,
619, 620, and 626 of chapter VI, title 12 of the Code of Federal
Regulations are proposed to be amended to read as follows:
PART 613--ELIGIBILITY AND SCOPE OF FINANCING
1. The authority citation for part 613 is revised to read as
follows:
Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1,
3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27, 5.9, 5.17 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075,
2093, 2122, 2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).
2. Subparts A, B, C, and D of part 613 are revised to read as
follows:
Subpart A--Financing Under Titles I and II of the Farm Credit Act
Sec.
613.3000 Financing for farmers, ranchers, and aquatic producers or
harvesters.
613.3010 Financing for processing or marketing operations.
613.3020 Financing for farm-related service businesses.
613.3030 Rural home financing.
Subpart B--Financing for Banks Operating Under Title III of the Farm
Credit Act
613.3100 Domestic lending.
613.3200 International lending.
Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A
of the Act
613.3300 Participations and other interests in loans to similar
entities.
Subpart A--Financing Under Titles I and II of the Farm Credit Act
Sec. 613.3000 Financing for farmers, ranchers, and aquatic producers
or harvesters.
(a) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Agricultural assets means agricultural land including
facilities and improvements thereon; livestock, machinery, equipment,
working capital, chattel, and vessels that are used for agricultural or
aquatic production; and the principal residence of an individual
borrower who qualifies under paragraph (a)(3)(i) of this section.
(2) Agricultural land means land that is devoted to or available
for the production of agricultural or aquatic products.
(3) Bona fide farmer, rancher, or producer or harvester of aquatic
products means:
(i) An individual or legal entity that generates income by actively
producing agricultural products, producing or harvesting aquatic
products, managing an agricultural or aquatic operation, or an
individual who is a retired farmer who owns agricultural land and
assumes some portion of the production risk of a tenant; or
(ii) An individual or legal entity that owns agricultural land.
(4) Individual means a natural person who is either:
(i) A citizen of the United States; or
(ii) A foreign national who has been lawfully admitted into the
United States for permanent residency pursuant to 8 U.S.C. 1101(a)(20)
(permanent resident), or on a visa pursuant to a provision in 8 U.S.C.
1101(a)(15) (non-resident) that authorizes such individual to own
property or operate or manage a business.
(5) Legal entity means any partnership, corporation, trust, estate,
or other legal entity that is established pursuant to the laws of the
United States, any State thereof, the Commonwealth of Puerto Rico, the
District of Columbia, or any tribal authority and is legally authorized
to conduct a business.
(b) Eligible borrower. A bona fide farmer, rancher, or producer or
harvester of aquatic products is eligible
[[Page 42119]]
to borrow under either title I or II of the Act.
(c) Financing for agricultural or aquatic needs. A borrower who is
eligible under paragraph (b) of this section may obtain financing for
any agricultural or aquatic purpose.
(d) Financing for other credit needs.
(1) Individual eligible borrowers who are either citizens or
permanent residents of the United States, and at a minimum satisfy the
criteria of paragraph (a)(3)(i) of this section, may obtain financing
for:
(i) Their housing and domestic needs; and
(ii) Other business needs in an amount that, at the time the loan
is closed, does not exceed the market value of their agricultural or
aquatic assets.
(2) Individual eligible borrowers who are non-resident foreign
nationals and at a minimum satisfy the criteria of paragraph (a)(3)(i)
of this section may obtain financing for their domestic needs and
housing reasonably related to their agricultural or aquatic operations
in the U.S.A.
(3) Individual borrowers who are eligible only under paragraph
(a)(3)(ii) of this section may obtain financing for their housing and
domestic needs in an amount that, at the time the loan is closed, does
not exceed the market value of their agricultural or aquatic assets.
(4) A legal entity may obtain financing for its other credit needs
in an amount that, at the time the loan is closed, does not exceed the
market value of its agricultural assets, only if more than 50 percent
of voting stock or equity of the borrowing legal entity is owned by
individuals who comply with the requirements in paragraph (a)(3)(i) of
this section and either:
(i) More than 50 percent of the assets of the borrowing legal
entity is used in agricultural or aquatic production; or
(ii) More than 50 percent of the annual income of the borrowing
legal entity is derived from agricultural or aquatic activities.
Sec. 613.3010 Financing for processing or marketing operations.
(a) Eligible borrowers. A borrower is eligible for financing for a
processing or marketing operation under titles I and II of the Act,
only if the borrower meets the following requirements:
(1) The borrower is either a bona fide farmer, rancher, or producer
or harvester of aquatic products, or is a legal entity in which
eligible borrowers under Sec. 613.3000(b) own more than 50 percent of
the voting stock or equity; and
(2) The borrower or an owner of the borrowing legal entity
regularly produces some portion of the throughput used in the
processing or marketing operation.
(b) Portfolio restrictions for certain processing and marketing
loans. Processing or marketing loans to eligible borrowers who
regularly supply less than 20 percent of the throughput are subject to
the following restrictions:
(1) Bank limitation. The aggregate of such processing and marketing
loans made by a Farm Credit bank shall not exceed 15 percent of all its
outstanding retail loans at the end of the preceding fiscal year.
(2) Association limitation. The aggregate of such processing and
marketing loans made by all direct lender associations affiliated with
the same Farm Credit bank shall not exceed 15 percent of the aggregate
of their outstanding retail loans at the end of the preceding fiscal
year. Each Farm Credit bank, in conjunction with all its affiliated
direct lender associations, shall ensure that such processing or
marketing loans are equitably allocated among its affiliated direct
lender associations.
(3) Calculation of outstanding retail loans. For the purposes of
this paragraph, ``outstanding retail loans'' includes loans, loan
participations, and other interests in loans that are either bought
without recourse or sold with recourse.
Sec. 613.3020 Financing for farm-related service businesses.
(a) Eligibility. An individual or legal entity that furnishes farm-
related services to farmers and ranchers that are directly related to
their agricultural production is eligible to borrow from a Farm Credit
bank or association that operates under titles I or II of the Act.
(b) Purposes of financing. A Farm Credit Bank, agricultural credit
bank, or direct lender association may finance:
(1) All of the farm-related business activities of an eligible
borrower who derives more than 50 percent of its annual income (as
consistently measured on either a gross sales or net sales basis) from
furnishing farm-related services that are directly related to the
agricultural production of farmers and ranchers; or
(2) Only the farm-related services activities of an eligible
borrower who derives 50 percent or less of its annual income (as
consistently measured on either a gross sales or net sales basis) from
furnishing farm-related services that are directly related to the
agricultural production of farmers and ranchers.
Sec. 613.3030 Rural home financing.
(a) Definitions.
(1) Rural homeowner means an individual who is not a bona fide
farmer, rancher, or producer or harvester of aquatic products.
(2) Rural home means a single-family moderately priced dwelling
located in a rural area that will be the occupant's principal
residence.
(3) Rural area means open country within a State or the
Commonwealth of Puerto Rico, which may include a town or village that
have a population of not more than 2,500 persons.
(4) Moderately priced means the price of any rural home that
either:
(i) Satisfies the criteria in section 8.0 of the Act pertaining to
rural home loans that collateralize securities that are guaranteed by
the Federal Agricultural Mortgage Corporation; or
(ii) Is below the 75th percentile of housing values for the rural
area where it is located, as determined by data from a credible,
independent, and recognized national or regional source, such as a
Federal, State, or local government agency, or an industry source.
(b) Eligibility. Any rural homeowner is eligible to obtain
financing on a rural home. No borrower shall have a loan from the Farm
Credit System on more than one rural home at any one time.
(c) Purposes of financing. Loans may be made to rural homeowners
for the purpose of buying, building, remodeling, improving, repairing
rural homes, and refinancing existing indebtedness thereon.
(d) Portfolio limitations. (1) The aggregate of retail rural home
loans by any Farm Credit Bank or agricultural credit bank shall not
exceed 15 percent of the total of all of its outstanding loans at any
one time.
(2) The aggregate of rural home loans made by each direct lender
association shall not exceed 15 percent of the total of its outstanding
loans at the end of its preceding fiscal year, except with the prior
approval of its funding bank.
(3) The aggregate of rural home loans made by all direct lender
associations that are funded by the same Farm Credit bank shall not
exceed 15 percent of the total outstanding loans of all such
associations at the end of the funding bank's preceding fiscal year.
Subpart B--Financing for Banks Operating Under Title III of the
Farm Credit Act
Sec. 613.3100 Domestic lending.
(a) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Cooperative means any association of farmers, ranchers,
producers or
[[Page 42120]]
harvesters of aquatic products, or any federation of such associations,
or a combination of such associations and farmers, ranchers, or
producers or harvesters of aquatic products that conducts business for
the mutual benefit of its members and has the power to:
(i) Process, prepare for market, handle, or market farm or aquatic
products;
(ii) Purchase, test, grade, process, distribute, or furnish farm or
aquatic supplies; or
(iii) Furnish business and financially related services to its
members.
(2) Farm or aquatic supplies and farm or aquatic business services
are any goods or services normally used by farmers, ranchers, or
producers and harvesters of aquatic products in their business
operations, or to improve the welfare or livelihood of such persons.
(3) Public utility means a cooperative or other entity that is
licensed under Federal, State, or local law to provide electric,
telecommunication, cable television, water, or waste treatment
services.
(4) Rural area means all territory of a State that is not within
the outer boundary of any city or town having a population of more than
20,000 inhabitants based on the latest decennial census of the United
States.
(5) Service cooperative means a cooperative that is involved in
providing business and financially related services (other than public
utility services) to farmers, ranchers, aquatic producers or
harvesters, or their cooperatives.
(b) Cooperatives and other entities that serve agricultural or
aquatic producers.--(1) Eligibility of cooperatives. A bank for
cooperatives or an agricultural credit bank may lend to a cooperative
that satisfies the following requirements:
(i) Unless the bank's board of directors establishes by resolution
a higher voting control threshold for any type of cooperative, the
percentage of voting control of the cooperative held by farmers,
ranchers, producers or harvesters of aquatic products, or cooperatives
shall be 80 percent except:
(A) Sixty (60) percent for a service cooperative;
(B) Sixty (60) percent for local farm supply cooperatives that have
historically served the needs of a community that would not be
adequately served by other suppliers and have experienced a reduction
in the percentage of membership by agricultural or aquatic producers
due to changed circumstances beyond their control; and
(C) Sixty (60) percent for local farm supply cooperatives that
provide or will provide needed services to a community, and are or will
be in competition with a cooperative specified in
Sec. 613.3100(b)(1)(i)(B);
(ii) The cooperative deals in farm or aquatic products, or products
processed therefrom, farm or aquatic supplies, farm or aquatic business
services, or financially related services with or for members in an
amount at least equal in value to the total amount of such business it
transacts with or for non-members, excluding from the total of member
and non-member business, transactions with the United States, or any
agencies or instrumentalities thereof, or services or supplies
furnished by a public utility; and
(iii) The cooperative complies with one of the following two
conditions:
(A) No member of the cooperative shall have more than one vote
because of the amount of stock or membership capital owned therein; or
(B) The cooperative restricts dividends on stock or membership
capital to 10 percent per year or the maximum percentage per year
permitted by applicable State law, whichever is less.
(iv) Any cooperative that has received a loan from a bank for
cooperatives or an agricultural credit bank shall, without regard to
the requirements in paragraph (b)(1)(i) of this section, continue to be
eligible for as long as more than 50 percent (or such higher percentage
as is established by the bank board) of the voting control of the
cooperative is held by farmers, ranchers, producers or harvesters of
aquatic products, or other eligible cooperatives.
(2) Other eligible entities. The following entities are eligible to
borrow from banks for cooperatives and agricultural credit banks:
(i) Any legal entity that holds more than 50 percent of the voting
control of a cooperative that is an eligible borrower under paragraph
(b)(1) of this section and uses the proceeds of the loan to fund the
activities of its cooperative subsidiary on the terms and conditions
specified by the bank;
(ii) Any legal entity in which an eligible cooperative has an
ownership interest, provided that if such interest is less than 50
percent, financing shall not exceed the percentage that the eligible
cooperative owns in such entity multiplied by the value of the total
assets of such entity; or
(iii) Any creditworthy private entity operated on a non-profit
basis that satisfies the requirements for a service cooperative and
complies with the requirements of either paragraphs (b)(1)(i)(A) and
(b)(1)(iii) of this section, or paragraph (b)(1)(iv) of this section,
and any subsidiary of such entity. An entity that is eligible to borrow
under this paragraph shall be organized to benefit agriculture in
furtherance of the welfare of the farmers, ranchers, and aquatic
producers or harvesters who are its members.
(c) Electric and telecommunication utilities.--(1) Eligibility. A
bank for cooperatives or an agricultural credit bank may lend to:
(i) Electric and telephone cooperatives as defined by section
3.8(a)(4)(A) of the Act that satisfy the eligibility criteria in
paragraph (b)(1) of this section;
(ii) Cooperatives and other entities that:
(A) Have received a loan, loan commitment, insured loan, or loan
guarantee from the Rural Utilities Service of the United States
Department of Agriculture to finance rural electric and
telecommunication services;
(B) Have received a loan or a loan commitment from the Rural
Telephone Bank of the United States Department of Agriculture; or
(C) Are eligible under the Rural Electrification Act of 1936, as
amended, for a loan, loan commitment, or loan guarantee from the Rural
Utilities Service or the Rural Telephone Bank.
(iii) The subsidiaries of cooperatives or other entities that are
eligible under paragraph (c)(1)(ii) of this section.
(iv) Any legal entity that holds more than 50 percent of the voting
control of any public utility that is an eligible borrower under
paragraph (c)(1)(ii) of this section, and uses the proceeds of the loan
to fund the activities of the eligible subsidiary on the terms and
conditions specified by the bank.
(v) Any legal entity in which an eligible utility under paragraph
(c)(1)(ii) of this section has an ownership interest, provided that if
such interest is less than 50 percent, financing shall not exceed the
percentage that the eligible utility owns in such entity multiplied by
the value of the total assets of such entity.
(2) Purposes for financing. A bank for cooperatives or agricultural
credit bank may extend credit to entities that are eligible to borrow
under paragraph (c)(1) of this section in order to provide electric or
telecommunication services in a rural area. A subsidiary that is
eligible to borrow under paragraph (c)(1)(iii) of this section may also
obtain financing from a bank for cooperatives or agricultural credit
bank to operate a licensed cable television utility.
(d) Water and waste disposal facilities.--(1) Eligibility. A
cooperative or a public agency, quasi-public agency,
[[Page 42121]]
body, or other public or private entity that, under the authority of
State or local law, establishes and operates water and waste disposal
facilities in a rural area, as that term is defined by paragraph (a)(5)
of this section, is eligible to borrow from a bank for cooperatives or
an agricultural credit bank.
(2) Purposes for financing. A bank for cooperatives or agricultural
credit bank may extend credit to entities that are eligible under
paragraph (d)(1) of this section solely for installing, maintaining,
expanding, improving, or operating water and waste disposal facilities
in rural areas.
(e) Domestic lessors. A bank for cooperatives or agricultural
credit bank may lend to domestic parties to finance the acquisition of
facilities or equipment that will be leased to shareholders of the bank
for use in their operations located inside of the United States.
Sec. 613.3200 International lending.
(a) Definition. For the purpose of this section only, the term
``farm supplies'' refers to inputs that are used in a farming or
ranching operation, but excludes agricultural processing equipment,
machinery used in food manufacturing or other capital goods which are
not used in a farming or ranching operation.
(b) Import transactions. The following parties are eligible to
borrow from a bank for cooperatives or an agricultural credit bank
pursuant to section 3.7(b) of the Act for the purpose of financing the
import of agricultural commodities or products therefrom, aquatic
products, and farm supplies into the United States:
(1) An eligible cooperative as defined by Sec. 613.3100(b);
(2) A counterparty with respect to a specific import transaction
with a voting stockholder of the bank for the substantial benefit of
the shareholder; and
(3) Any foreign or domestic legal entity in which eligible
cooperatives hold an ownership interest.
(c) Export transactions. Pursuant to section 3.7(b)(2) of the Act,
a bank for cooperatives or an agricultural credit bank is authorized to
finance the export (including the cost of freight) of agricultural
commodities or products therefrom, aquatic products, or farm supplies
from the United States to any foreign country. The board of directors
of each bank for cooperatives and agricultural credit bank shall adopt
policies that ensure that exports of agricultural products and
commodities, aquatic products, and farm supplies which originate from
eligible cooperatives are financed on a priority basis. The total
amount of balances outstanding on loans made under this paragraph shall
not, at any time, exceed 50 percent of the capital of any bank for
cooperatives or agricultural credit bank for loans that:
(1) Finance the export of agricultural commodities and products
therefrom, aquatic products, or farm supplies that are not originally
sourced from an eligible cooperative; and
(2) At least 95 percent of the loan amount is not guaranteed by a
department, agency, bureau, board, or commission of the United States
or a corporation that is wholly owned directly or indirectly by the
United States.
(d) International business operations. A bank for cooperatives or
an agricultural credit bank may finance a domestic or foreign entity
which is at least partially owned by eligible cooperatives described in
Sec. 613.3100(b), and facilitates the international business operations
of such cooperatives.
(e) Restrictions. (1) When eligible cooperatives own less than 50
percent of a foreign or domestic legal entity, the amount of financing
that a bank for cooperatives or agricultural credit bank may provide to
the entity for imports, exports, or international business operations
shall not exceed the percentage of ownership that eligible cooperatives
hold in such entity multiplied by the value of the total assets of such
entity; and
(2) A bank for cooperatives or agricultural credit bank shall not
finance the relocation of any plant or facility from the United States
to a foreign country.
Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and
4.18A of the Act
Sec. 613.3300 Participations and other interests in loans to similar
entities.
(a) Definitions.
(1) Participate and participation, for the purpose of this section,
refer to multi-lender transactions, including syndications,
assignments, loan participations, subparticipations, other forms of the
purchase, sale, or transfer of interests in loans, or other extensions
of credit, or other technical and financial assistance.
(2) Similar entity means a party that is ineligible for a loan from
a Farm Credit bank or association, but has operations that are
functionally similar to the activities of eligible borrowers in that a
majority of its income is derived from, or a majority of its assets are
invested in, the conduct of activities that are performed by eligible
borrowers.
(b) Similar entity transactions. A Farm Credit bank or a direct
lender association may participate with a lender that is not a Farm
Credit System institution in loans to a similar entity that is not
eligible to borrow directly under Secs. 613.3000, 613.3010, 613.3020,
613.3100, or 613.3200, for purposes similar to those for which an
eligible borrower could obtain financing from the participating FCS
institution.
(c) Restrictions. Participations by a Farm Credit bank or
association in loans to a similar entity under this section are subject
to the following limitations:
(1) Lending limits.
(i) Farm Credit banks operating under title I of the Act and direct
lender associations. The total amount of all loan participations that
any Farm Credit Bank, agricultural credit bank, or direct lender
association has outstanding under paragraph (b) of this section to a
single credit risk shall not exceed:
(A) Ten (10) percent of its total capital; or
(B) Twenty-five (25) percent of its total capital if a majority of
the shareholders of the respective Farm Credit bank or direct lender
association so approve.
(ii) Farm Credit banks operating under title III of the Act. The
total amount of all loan participations that any bank for cooperative
or agricultural credit bank has outstanding under paragraph (b) of this
section to a single credit risk shall not exceed 10 percent of its
total capital;
(2) Percentage held in the principal amount of the loan. The
participation interest in the same loan held by one or more Farm Credit
bank(s) or association(s) shall not, at any time, equal or exceed 50
percent of the principal amount of the loan; and
(3) Portfolio limitations. The total amount of participations that
any Farm Credit bank or direct lender association has outstanding under
paragraph (b) of this section shall not exceed 15 percent of its total
outstanding assets at the end of its preceding fiscal year.
(d) Approval by other Farm Credit System institutions. (1) No
direct lender association shall participate in a loan to a similar
entity under paragraph (b) of this section without the approval of its
funding bank. A funding bank shall deny such requests only for safety
and soundness reasons affecting the bank.
(2) No Farm Credit Bank or direct lender association shall
participate in a loan to a similar entity that is eligible to borrow
under Sec. 613.3100(b) without the prior approval of the bank for
cooperatives or agricultural credit bank
[[Page 42122]]
that, at the time the loan is made, has the greatest volume of loans
made under title III of the Act in the State where the headquarters
office of the similar entity is located.
(3) No bank for cooperatives or agricultural credit bank shall
participate in a loan to a similar entity that is eligible to borrow
under Secs. 613.3010 or 613.3020 without the prior consent of the Farm
Credit Bank(s) in whose chartered territory the similar entity conducts
operations.
(4) All approvals required under paragraph (d) of this section may
be granted on an annual basis and under such terms and conditions as
the various Farm Credit System institutions may agree.
Subpart E--Nondiscrimination in Lending
Secs. 613.3145, 613.3150, 613.3151, 613.3152, 613.3160, 613.3170,
613.3175 (Subpart E) [Redesignated]
3. Subpart E of part 613, consisting of Secs. 613.3145, 613.3150,
613.3151, 613.3152, 613.3160, 613.3170, and 613.3175 is redesignated as
new part 626, consisting of Secs. 626.6000, 626.6005, 626.6010,
626.6015, 626.6020, 626.6025, and 626.6030 respectively.
PART 614--LOAN POLICIES AND OPERATIONS
4. 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,
4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13,
8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015,
2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096,
2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199,
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101
Stat. 1568, 1639; sec. 207 of Pub. L. 104-105, 110 Stat. 162.
Subpart A--[Amended]
5. Subpart A of part 614 is amended by removing the reference
``613.3020'' each place it appears and adding in its place
``613.3000''; by removing the reference ``613.3045'' each place it
appears and adding in its place ``613.3010''; by removing the reference
``613.3040'' each place it appears and adding in its place
``613.3030''; by removing the reference ``613.3050'' each place it
appears and adding in its place ``613.3020''; by removing the reference
``613.3110'' each place it appears and adding in its place
``613.3100(b)(1)''; and by removing the reference ``613.3110(c)'' each
place it appears and adding in its place ``613.3100(b)(2), (c) and
(d)''.
6. Section 614.4010 is amended by removing the words ``export or''
each place they appear in paragraphs (d)(4) and (d)(5); by removing the
reference ``(d)(3)'' and adding in its place ``(d)(4)'' in paragraph
(d)(5); and by adding new paragraphs (d)(6) and (d)(7) to read as
follows.
Sec. 614.4010 Agricultural credit banks.
* * * * *
(d) * * *
* * * * *
(6) Any party, subject to the requirements in Sec. 613.3200(c) of
this chapter, for the export (including the cost of freight) of
agricultural commodities or products therefrom, aquatic products, or
farm supplies from the United States to any foreign country, in
accordance with Sec. 614.4233 and subpart Q of this part 614; and
(7) Domestic or foreign parties in which eligible cooperatives, as
defined in Sec. 613.3100 of this chapter, hold an ownership interest,
for the purpose of facilitating the international business operations
of such cooperatives pursuant to the requirements of Sec. 613.3200(d)
and (e) of this chapter.
* * * * *
7. Section 614.4020 is amended by removing the words ``export or''
each place they appear in paragraphs (a)(4) and (a)(5); by adding after
the words ``bank's board'', the reference ``, Sec. 614.4233,'' in
paragraph (a)(4); by removing the words ``board policy'' and adding in
their place, the words ``policies of the bank's board, Sec. 614.4233,''
in paragraph (a)(5); and by adding new paragraphs (a)(6) and (a)(7) to
read as follows:
Sec. 614.4020 Banks for cooperatives.
(a) * * *
* * * * *
(6) Any party, subject to the requirements in Sec. 613.3200(c) of
this chapter, for the export (including the cost of freight) of
agricultural commodities or products therefrom, aquatic products, or
farm supplies from the United States to any foreign country, in
accordance with Sec. 614.4233 and subpart Q of this part 614; and
(7) Domestic or foreign parties in which eligible cooperatives, as
defined in Sec. 613.3100 of this chapter, hold an ownership interest,
for the purpose of facilitating the international business operations
of such cooperatives pursuant to the requirements in Sec. 613.3200(d)
and (e) of this chapter.
* * * * *
Subpart E--Loan Terms and Conditions
8. Section 614.4233 is amended by revising the introductory
paragraph to read as follows:
Sec. 614.4233 International loans.
Term loans made by banks for cooperatives and agricultural credit
banks under the authority of section 3.7(b) of the Act and
Sec. 613.3200 of this chapter to foreign or domestic parties who are
not shareholders of the bank shall be subject to following conditions:
* * * * *
Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing
of Other Financing Institutions
Sec. 614.4610 [Amended]
9. Section 614.4610 is amended by removing the words ``an
association in the district'' and adding in their place, the words
``any association funded by the bank'' in the first sentence and
removing the reference ``Sec. 613.3040(d)(2)'' and adding in its place
the reference ``Secs. 613.3010(b)(1) and 613.3030(d)''.
Subpart Q--Banks for Cooperatives Financing International Trade
10. The heading for subpart Q is amended by adding after the words
``Banks for Cooperatives'' the words ``and Agricultural Credit Banks''.
Sec. 614.4700 [Amended]
11. Section 614.4700 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in paragraphs (a), introductory text, (b), and (h).
Sec. 614.4710 [Amended]
12. Section 614.4710 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in the introductory paragraph and paragraph (c); by
adding after the words ``bank for cooperatives''' the words ``or
agricultural credit bank's'' in paragraph (a)(1)(ii); by adding after
the words ``bank for cooperatives'' the words ``or an agricultural
credit bank'' each place they appear in paragraphs (a)(1), (a)(1)(i),
(a)(3), (a)(5) and (b)(1).
Sec. 614.4720 [Amended]
13. Section 614.4720 is amended by adding after the words ``Banks
for cooperatives'' the words ``and
[[Page 42123]]
agricultural credit banks'' in the first sentence of the introductory
paragraph.
Sec. 614.4800 [Amended]
14. Section 614.4800 is amended by adding after the words ``A bank
for cooperatives'' the words ``or an agricultural credit bank'' in the
first sentence.
Sec. 614.4810 [Amended]
15. Section 614.4810 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in paragraphs (a), introductory text, and (b).
Sec. 614.4900 [Amended]
16. Section 614.4900 is amended by adding after the words ``a bank
for cooperatives'' the words ``or an agricultural credit bank'' each
place they appear in paragraphs (a) through (d); and by adding after
the words ``banks for cooperatives'' the words ``and agricultural
credit banks'' in the first sentence of paragraph (i).5
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
17. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076,
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243,
2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-
8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat.
1568, 1608; sec. 105 of Pub. L. 104-105, 110 Stat. 162, 163-64.
Subpart H--Capital Adequacy
Sec. 615.5201 [Amended]
18. Section 615.5201 is amended by adding the words ``Federal land
credit association,'' after the words ``Federal land bank
association,''; and by removing the words ``National Bank for
Cooperatives,'' and adding in their place, the words ``agricultural
credit bank,'' in paragraph (g).
19. Section 615.5205 is revised to read as follows:
Sec. 615.5205 Minimum permanent capital standards.
Each Farm Credit System institution shall at all times maintain
permanent capital at a level of at least 7 percent of its risk-adjusted
asset base.
20. Section 615.5210 is amended by removing paragraphs (f)(2)(i)(D)
and (f)(2)(v)(D); redesignating paragraph (f)(2)(v)(E) as new paragraph
(f)(2)(v)(D); adding a new paragraph (e)(2)(ii)(G)(10); and revising
paragraphs (e)(2)(ii)(G)(7) and (f)(2)(i)(C) to read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
* * * * *
(e) * * *
(2) * * *
(ii) * * *
(G) * * *
(7) Each institution shall deduct from its total capital an amount
equal to any goodwill.
* * * * *
(10) The permanent capital of an institution shall exclude the net
impact of unrealized holding gains or losses on available-for-sale
securities.
(f) * * *
(2) * * *
(i) * * *
(C) Goodwill.
* * * * *
Sec. 615.5216 [Removed and reserved]
21. Section 615.5216 is removed and reserved.
Subpart I--Issuance of Equities
Sec. 615.5220 [Amended]
22. Section 615.5220 is amended by removing paragraph (f),
redesignating existing paragraphs (g), (h), and (i) as paragraphs (f),
(g), and (h), respectively; removing the words ``may be more than,
but'' each place they appear in paragraphs (d) and (e); by adding the
words ``, agricultural credit banks (with respect to loans other than
to cooperatives),'' after the words ``For Farm Credit Banks'' in
paragraph (d); by adding the words ``and agricultural credit banks
(with respect to loans to cooperatives)'' after the words ``For banks
for cooperatives'' in paragraph (e); and by removing the words
``(including interim standards)'' in newly designated paragraph (f).
Sec. 615.5230 [Amended]
23. Section 615.5230 is amended by removing the words ``preferred
stock to be issued to the Farm Credit System Financial Assistance
Corporation and'' in paragraph (b)(1).
24. Section 615.5240 is amended by removing paragraph (b);
redesignating the introductory paragraph and paragraph (a) introductory
text as paragraphs (a) and (b) introductory text, respectively; adding
a new paragraph (c); and revising newly designated paragraph (a) to
read as follows:
Sec. 615.5240 Permanent capital requirements.
(a) The capitalization bylaws shall enable the institution to meet
the minimum permanent capital adequacy standards established under
subparts H and K of this part and the total capital requirements
established by the board of directors of the institution.
* * * * *
(c) An institution's board of directors may delegate to management
the decision whether to retire borrower stock, provided that:
(1) The institution's permanent capital ratio will be in excess of
9 percent after any such retirements;
(2) The institution meets and maintains all applicable minimum
surplus and collateral standards;
(3) Any such retirements are in accordance with the institution's
capital adequacy plan or capital restoration plan; and
(4) The aggregate amount of stock purchases, retirements, and the
net effect of such activities are reported to the board of directors
each quarter.
Sec. 615.5250 [Amended]
25. Section 615.5250 is amended by removing paragraph (c);
redesignating paragraphs (d) and (e) as paragraphs (c) and (d),
respectively; by removing the words ``(including interim standards)''
in paragraphs (a)(4)(ii) and newly designated (c)(3); and by removing
the words ``, including interim standards'' in paragraph (a)(4)(iii).
Subpart J--Retirement of Equities
Sec. 615.5260 [Amended]
26. Section 615.5260 is amended by adding the word ``or'' at the
end of paragraph (a)(2)(i); removing ``; or'' at the end of paragraph
(a)(2)(ii) and inserting a period in its place; and by removing
paragraphs (a)(2)(iii) and (d).
Sec. 615.5270 [Amended]
27. Section 615.5270 is amended by removing the words ``(including
interim standards)'' in paragraph (b).
28. Subpart K is revised to read as follows:
Subpart K--Surplus and Collateral Requirements
Sec.
615.5301 Definitions.
615.5330 Minimum surplus ratios.
615.5335 Bank net collateral ratio.
615.5336 Reporting and compliance.
Subpart K--Surplus and Collateral Requirements
Sec. 615.5301 Definitions.
For the purposes of this subpart, the following definitions shall
apply:
[[Page 42124]]
(a) The terms institution, permanent capital, risk-adjusted asset
base, and total capital shall have the meanings set forth in
Sec. 615.5201.
(b) Core surplus.
(1) Core surplus includes:
(i) Undistributed earnings/unallocated surplus;
(ii) Perpetual common or noncumulative perpetual preferred stock
that is not retired according to an established plan or practice,
provided that, in the event that stock held by a borrower is retired,
other than as required by section 4.14B of the Act or as a part of a
pro rata retirement of all stock of the same class or series that was
issued in the same year as the retired stock, the remaining perpetual
stock shall be excluded from core surplus.
(iii) Nonqualified allocated equities that are not distributed
according to an established plan or practice, provided that, in the
event that a nonqualified patronage allocation is distributed, other
than as required by section 4.14B of the Act or as a part of a pro rata
distribution of nonqualified allocations that were allocated in the
same year as the distributed allocation, the remaining nonqualified
allocations will be excluded from core surplus.
(iv) A newly developed or modified capital instrument or a
particular balance sheet entry or account that the Farm Credit
Administration has determined to be the functional equivalent of a
component of core surplus. The Farm Credit Administration may permit
one or more institutions to include all or a portion of such
instrument, entry, or account as core surplus, permanently, or on a
temporary basis, for purposes of this subpart.
(2) Core surplus shall not include equities held by other System
institutions.
(3) The net impact of unrealized holding gains or losses on
available-for-sale securities shall be excluded from core surplus.
(4) The Farm Credit Administration may, if it finds that a
particular component, balance sheet entry, or account has
characteristics or terms that diminish its contribution to an
institution's ability to absorb losses, require the deduction of all or
a portion of such component, entry, or account from core surplus.
(c) Net collateral means the value of a bank's collateral as
defined by Sec. 615.5050 (except that eligible investments as described
in Sec. 615.5140 are to be valued at their amortized cost), less an
amount equal to that portion of the allocated investments of affiliated
associations that is not counted as permanent capital by the bank.
(d) Net collateral ratio means a bank's net collateral, divided by
the bank's total liabilities.
(e) Net investment in the bank means the total investment by an
association in its affiliated bank, less reciprocal investments and
investments resulting from a loan originating/service agency
relationship, including participations.
(f) Nonqualified allocated equities means allocations of earnings
that are not deducted from the gross taxable income of the allocating
institution at the time of allocation.
(g) Perpetual stock or equity means stock or equity not having a
maturity date, not redeemable at the option of the holder, and having
no other provisions that will require the future redemption of the
issue.
(h) Total surplus means:
(1) Undistributed earnings/unallocated surplus;
(2) Allocated equities, including allocated surplus and stock
which, if subject to revolvement, have a revolvement of not less than 5
years and are eligible to be included in permanent capital pursuant to
Sec. 615.5201(j)(4)(iv); and
(3) Stock that is not purchased or held as a condition of obtaining
a loan, provided that it is either perpetual stock or term stock with
an original maturity of at least 5 years, and provided that the
institution has no established plan or practice of retiring such
perpetual stock or of retiring such term stock prior to its stated
maturity. The amount of term stock that is eligible to be included in
total surplus shall be reduced by 20 percent in each of the last 5
years of the life of the instrument.
The total surplus of an institution shall exclude the net impact of
unrealized holding gains or losses on available-for-sale securities.
Sec. 615.5330 Minimum surplus ratios.
(a) Total surplus. Each institution shall achieve and maintain a
ratio of at least 7 percent of total surplus to the risk-adjusted asset
base.
(b) Core surplus.
(1) Each institution shall achieve and maintain a ratio of core
surplus to the risk-adjusted asset base of at least 3.5 percent.
(2) Each association shall compute its core surplus ratio by
deducting an amount equal to the net investment in its affiliated Farm
Credit bank from both its core surplus and its risk-adjusted asset
base.
(c) An institution shall compute its total surplus and core surplus
ratios as of the end of each month.
Sec. 615.5335 Bank net collateral ratio.
(a) Each bank shall achieve and maintain a net collateral ratio of
at least 103 percent.
(b) A bank shall compute its net collateral ratio as of the end of
each month.
Sec. 615.5336 Reporting and compliance.
(a) Reporting and noncompliance. An institution that falls below
any applicable minimum surplus or collateral standard shall report its
noncompliance to the Farm Credit Administration within 20 calendar days
following the monthend that the institution initially determines that
it is not in compliance with the standard.
(b) Initial institution compliance requirements. Each institution
that fails to satisfy any of its minimum applicable surplus and net
collateral ratios upon the effective date of these regulations shall
submit a capital restoration plan for achieving and maintaining the
standards, demonstrating appropriate annual progress toward meeting the
goal, to the Farm Credit Administration within 60 days of the effective
date of the regulations. If the capital restoration plan is not
approved by the Farm Credit Administration, the Agency shall inform the
institution of the reasons for disapproval, and the association shall
submit a revised capital restoration plan within the time specified by
the Farm Credit Administration.
(c) Approval of compliance plans. In determining whether to approve
a capital restoration plan submitted under this section, the FCA shall
consider the following factors, as applicable:
(1) The conditions or circumstances leading to the institution's
falling below minimum levels (and whether or not they were caused by
actions of the institution or were beyond the institution's control);
(2) The exigency of those circumstances or potential problems;
(3) The overall condition, management strength, and future
prospects of the institution and, if applicable, affiliated System
institutions;
(4) The institution's capital, adverse assets (including nonaccrual
and nonperforming loans), allowance for loss, and other ratios compared
to the ratios of its peers or industry norms;
(5) How far an institution's ratios are below the minimum
requirements;
(6) The estimated rate at which the institution can reasonably be
expected to generate additional earnings;
(7) The effect of the business changes required to increase
capital;
(8) The institution's previous compliance practices, as
appropriate;
[[Page 42125]]
(9) The views of the institution's directors and senior management
regarding the plan; and
(10) Any other facts or circumstances that the FCA deems relevant.
(d) Initial compliance. An institution that fails to meet either or
both of the minimum applicable surplus ratios or net collateral ratio
established in Sec. 615.5330 on the effective date of such section
shall be deemed to be in compliance with such section, provided that
the institution is in compliance with a capital restoration plan that
is approved by the Farm Credit Administration within 180 days of the
effective date of these regulations.
(e) Noncompliance. An institution that has met the minimum
applicable surplus ratios and net collateral ratio established in
Sec. 615.5330 on or after the effective date of this section and
subsequently falls below one or more minimum ratios shall be in
violation of Sec. 615.5330.
29. Subparts L and M are added to read as follows:
Subpart L--Establishment of Minimum Capital Ratios for an Individual
Institution
Sec.
615.5350 General--Applicability.
615.5351 Standards for determination of appropriate individual
institution minimum capital ratios.
615.5352 Procedures.
615.5353 Relation to other actions.
615.5354 Enforcement.
Subpart M--Issuance of a Capital Directive
615.5355 Purpose and scope.
615.5356 Notice of intent to issue a capital directive.
615.5357 Response to notice.
615.5358 Decision.
615.5359 Issuance of a capital directive.
615.5360 Reconsideration based on change in circumstances.
615.5361 Relation to other administrative actions.
Subpart L--Establishment of Minimum Capital Ratios for an
Individual Institution
Sec. 615.5350 General--Applicability.
(a) The rules and procedures specified in this subpart are
applicable to a proceeding to establish required minimum capital ratios
that would otherwise be applicable to an institution under
Secs. 615.5205, 615.5330, and 615.5335. The Farm Credit Administration
is authorized to establish such minimum capital requirements for an
institution as the Farm Credit Administration, in its discretion, deems
to be necessary or appropriate in light of the particular circumstances
of the institution. Proceedings under this subpart also may be
initiated to require an institution having capital ratios greater than
those set forth in Secs. 615.5205, 615.5330, or 615.5335 to continue to
maintain those higher ratios.
(b) The Farm Credit Administration may require higher minimum
capital ratios for an individual institution in view of its
circumstances. For example, higher capital ratios may be appropriate
for:
(1) An institution receiving special supervisory attention;
(2) An institution that has, or is expected to have, losses
resulting in capital inadequacy;
(3) An institution with significant exposure due to operational
risk, interest rate risk, the risks from concentrations of credit,
certain risks arising from other products, services, or related
activities, or management's overall inability to monitor and control
financial risks presented by concentrations of credit and related
services activities;
(4) An institution exposed to a high volume of, or particularly
severe, problem loans;
(5) An institution that is growing rapidly; or
(6) An institution that may be adversely affected by the activities
or condition of System institutions with which it has significant
business relationships or in which it has significant investments.
Sec. 615.5351 Standards for determination of appropriate individual
institution minimum capital ratios.
The appropriate minimum capital ratios for an individual
institution cannot be determined solely through the application of a
rigid mathematical formula or wholly objective criteria. The decision
is necessarily based in part on subjective judgment grounded in Agency
expertise. The factors to be considered in the determination will vary
in each case and may include, for example:
(a) The conditions or circumstances leading to the Farm Credit
Administration's determination that higher minimum capital ratios are
appropriate or necessary for the institution;
(b) The exigency of those circumstances or potential problems;
(c) The overall condition, management strength, and future
prospects of the institution and, if applicable, affiliated
institutions;
(d) The institution's capital, adverse assets (including nonaccrual
and nonperforming loans), allowance for loss, and other ratios compared
to the ratios of its peers or industry norms; and
(e) The views of the institution's directors and senior management.
Sec. 615.5352 Procedures.
(a) Notice. When the Farm Credit Administration determines that
minimum capital ratios greater than those set forth in Secs. 615.5205,
615.5330, or 615.5335 are necessary or appropriate for a particular
institution, the Farm Credit Administration will notify the institution
in writing of the proposed minimum capital ratios and the date by which
they should be reached (if applicable) and will provide an explanation
of why the ratios proposed are considered necessary or appropriate for
the institution.
(b) Response.
(1) The institution may respond to any or all of the items in the
notice. The response should include any matters which the institution
would have the Farm Credit Administration consider in deciding whether
individual minimum capital ratios should be established for the
institution, what those capital ratios should be, and, if applicable,
when they should be achieved. The response must be in writing and
delivered to the designated Farm Credit Administration official within
30 days after the date on which the institution received the notice. In
its discretion, the Farm Credit Administration may extend the time
period for good cause. The Farm Credit Administration may shorten the
time period with the consent of the institution or when, in the opinion
of the Farm Credit Administration, the condition of the institution so
requires, provided that the institution is informed promptly of the new
time period.
(2) Failure to respond within 30 days or such other time period as
may be specified by the Farm Credit Administration shall constitute a
waiver of any objections to the proposed minimum capital ratios or the
deadline for their achievement.
(c) Decision. After the close of the institution's response period,
the Farm Credit Administration will decide, based on a review of the
institution's response and other information concerning the
institution, whether individual minimum capital ratios should be
established for the institution and, if so, the ratios and the date the
requirements will become effective. The institution will be notified of
the decision in writing. The notice will include an explanation of the
decision, except for a decision not to establish individual minimum
capital requirements for the institution.
(d) Submission of plan. The decision may require the institution to
develop and submit to the Farm Credit Administration, within a time
period specified, an acceptable plan to reach
[[Page 42126]]
the minimum capital ratios established for the institution by the date
required.
(e) Reconsideration based on change in circumstances. If, after the
Farm Credit Administration's decision in paragraph (c) of this section,
there is a change in the circumstances affecting the institution's
capital adequacy or its ability to reach the required minimum capital
ratios by the specified date, either the institution or the Farm Credit
Administration may propose a change in the minimum capital ratios for
the institution, the date when the minimums must be achieved, or the
institution's plan (if applicable). The Farm Credit Administration may
decline to consider proposals that are not based on a significant
change in circumstances or are repetitive or frivolous. Pending a
decision on reconsideration, the Farm Credit Administration's original
decision and any plan required under that decision shall continue in
full force and effect.
Sec. 615.5353 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the
required minimum capital ratios for an institution may be established
or revised through a written agreement or cease and desist proceedings
under part C of title V of the Act, or as a condition for approval of
an application.
Sec. 615.5354 Enforcement.
An institution that does not have or maintain the minimum capital
ratios applicable to it, whether required in subparts H and K of this
part, in a decision pursuant to this subpart, in a written agreement or
temporary or final order under part C of title V of the Act, or in a
condition for approval of an application, or an institution that has
failed to submit or comply with an acceptable plan to attain those
ratios, will be subject to such administrative action or sanctions as
the Farm Credit Administration considers appropriate. These sanctions
may include the issuance of a capital directive pursuant to subpart M
of this part or other enforcement action, assessment of civil money
penalties, and/or the denial or condition of applications.
Subpart M--Issuance of a Capital Directive
Sec. 615.5355 Purpose and scope.
(a) This subpart is applicable to proceedings by the Farm Credit
Administration to issue a capital directive under sections 4.3(b) and
4.3A(e) of the Act. A capital directive is an order issued to an
institution that does not have or maintain capital at or greater than
the minimum ratios set forth in Secs. 615.5205, 615.5330, and 615.5335;
or established for the institution under subpart L, by a written
agreement under part C of title V of the Act, or as a condition for
approval of an application. A capital directive may order the
institution to:
(1) Achieve the minimum capital ratios applicable to it by a
specified date;
(2) Adhere to a previously submitted plan to achieve the applicable
capital ratios;
(3) Submit and adhere to a plan acceptable to the Farm Credit
Administration describing the means and time schedule by which the
institution shall achieve the applicable capital ratios;
(4) Take other action, such as reduction of assets or the rate of
growth of assets, restrictions on the payment of dividends or
patronage, or restrictions on the retirement of stock, to achieve the
applicable capital ratios; or
(5) A combination of any of these or similar actions. A capital
directive may also be issued to the board of directors of an
institution, requiring such board to comply with the requirements of
section 4.3A(d) of the Act prohibiting the reduction of permanent
capital.
(b) A capital directive issued under this rule, including a plan
submitted under a capital directive, is enforceable in the same manner
and to the same extent as an effective and outstanding cease and desist
order which has become final as defined in section 5.25 of the Act.
Violation of a capital directive may result in assessment of civil
money penalties in accordance with section 5.32 of the Act.
Sec. 615.5356 Notice of intent to issue a capital directive.
The Farm Credit Administration will notify an institution in
writing of its intention to issue a capital directive. The notice will
state:
(a) The reasons for issuance of the capital directive;
(b) The proposed contents of the capital directive, including the
proposed date for achieving the minimum capital requirement; and
(c) Any other relevant information concerning the decision to issue
a capital directive.
Sec. 615.5357 Response to notice.
(a) An institution may respond to the notice by stating why a
capital directive should not be issued and/or by proposing alternative
contents for the capital directive or seeking other appropriate relief.
The response shall include any information, mitigating circumstances,
documentation, or other relevant evidence that supports its position.
The response may include a plan for achieving the minimum capital
ratios applicable to the institution. The response must be in writing
and delivered to the Farm Credit Administration within 30 days after
the date on which the institution received the notice. In its
discretion, the Farm Credit Administration may extend the time period
for good cause. The Farm Credit Administration may shorten the 30-day
time period:
(1) When, in the opinion of the Farm Credit Administration, the
condition of the institution so requires, provided that the institution
shall be informed promptly of the new time period;
(2) With the consent of the institution; or
(3) When the institution already has advised the Farm Credit
Administration that it cannot or will not achieve its applicable
minimum capital ratios.
(b) Failure to respond within 30 days or such other time period as
may be specified by the Farm Credit Administration shall constitute a
waiver of any objections to the proposed capital directive.
Sec. 615.5358 Decision.
After the closing date of the institution's response period, or
receipt of the institution's response, if earlier, the Farm Credit
Administration may seek additional information or clarification of the
response. Thereafter, the Farm Credit Administration will determine
whether or not to issue a capital directive, and if one is to be
issued, whether it should be as originally proposed or in modified
form.
Sec. 615.5359 Issuance of a capital directive.
(a) A capital directive will be served by delivery to the
institution. It will include or be accompanied by a statement of
reasons for its issuance.
(b) A capital directive is effective immediately upon its receipt
by the institution, or upon such later date as may be specified
therein, and shall remain effective and enforceable until it is stayed,
modified, or terminated by the Farm Credit Administration.
Sec. 615.5360 Reconsideration based on change in circumstances.
Upon a change in circumstances, an institution may request the Farm
Credit Administration to reconsider the terms of its capital directive
or may propose changes in the plan to achieve the institution's
applicable minimum capital ratios. The Farm Credit Administration also
may take such action on its own motion. The Farm
[[Page 42127]]
Credit Administration may decline to consider requests or proposals
that are not based on a significant change in circumstances or are
repetitive or frivolous. Pending a decision on reconsideration, the
capital directive and plan shall continue in full force and effect.
Sec. 615.5361 Relation to other administrative actions.
A capital directive may be issued in addition to, or in lieu of,
any other action authorized by law, including cease and desist
proceedings, civil money penalties, or the conditioning or denial of
applications. The Farm Credit Administration also may, in its
discretion, take any action authorized by law, in lieu of a capital
directive, in response to an institution's failure to achieve or
maintain the applicable minimum capital ratios.
PART 618--GENERAL PROVISIONS
30. 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. 618.8005 [Amended]
31. Section 618.8005 is amended by removing the reference
``Secs. 613.3010, 613.3020(a)(1), (a)(2), (b), and 613.3045'' in
paragraph (a) and adding in its place, the reference
``Secs. 613.3000(a) and (b), 613.3010, and 613.3300'' and by removing
the reference ``Secs. 613.3110 and 613.3120'' and adding in its place,
the reference ``Secs. 613.3100, 613.3200, and 613.3300'' in paragraph
(b).
Subpart J--Internal Controls
Sec. 618.8440 [Amended]
32. Section 618.8440 is amended by removing the reference
``Sec. 615.5200(b)'' and adding in its place, the references
``Secs. 615.5200(b), 615.5330 (c) or (d), and 615.5335(b)'' in
paragraph (b)(6).
PART 619--DEFINITIONS
33. The authority citation for part 619 is revised to read as
follows:
Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6,
7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243,
2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).
Secs. 619.9025, 619.9030, 619.9040, 619.9065, 619.9080, 619.9090,
619.9100, 619.9120, 619.9150, 619.9160, 619.9190, 619.9220, 619.9270,
619.9280, 619.9300, and 619.9310 [Removed]
34. Sections 619.9025, 619.9030, 619.9040, 619.9065, 619.9080,
619.9090, 619.9100, 619.9120, 619.9150, 619.9160, 619.9190, 619.9220,
619.9270, 619.9280, 619.9300, and 619.9310 are removed.
PART 620--DISCLOSURE TO SHAREHOLDERS
35. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart B--Annual Report to Shareholders
36. Section 620.5 is amended by revising paragraphs (d)(1)(ix) and
(g)(4)(ii) to read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(d) * * *
(1) * * *
(ix) The statutory and regulatory restriction regarding retirement
of stock and distribution of earnings pursuant to Sec. 615.5215, and
any requirements to add capital under a plan approved by the Farm
Credit Administration pursuant to Secs. 615.5330, 615.5335, 615.5351,
or 615.5357.
* * * * *
(g) * * *
(4) * * *
(ii) Describe any material trends or changes in the mix and cost of
debt and capital resources. The discussion shall consider changes in
permanent capital, core and total surplus, and net collateral
requirements, debt, and any off-balance-sheet financing arrangements.
* * * * *
PART 626--NONDISCRIMINATION IN LENDING
37. The authority citation for part 626 is added to read as
follows:
Authority: Secs. 1.5, 2.2, 2.12, 3.1, 5.9, 5.17 of the Farm
Credit Act (12 U.S.C. 2013, 2073, 2093, 2122, 2243, 2252); 42 U.S.C.
3601 et seq.; 15 U.S.C. 1691 et seq.; 12 CFR 202, 24 CFR 100, 109,
110.
Sec. 626.6025 [Amended]
38. Newly designated Sec. 626.6025 is amended by removing the
reference ``Sec. 613.3160(b)'' and adding in its place, the reference
``Sec. 626.6020(b)'' in paragraph (b).
* * * * *
Dated: July 31, 1996.
Nan P. Mitchem,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 96-19890 Filed 8-12-96; 8:45 am]
BILLING CODE 6705-01-P
