[Federal Register Volume 60, Number 175 (Monday, September 11, 1995)]
[Proposed Rules]
[Pages 47103-47121]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22313]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 613, 614, 618, 619, and 626
RIN 3052-AB10
Eligibility and Scope of Financing; Loan Policies and Operations;
General Provisions; Definitions; Nondiscrimination in Lending
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA) through the Farm Credit
Administration Board (Board) proposes to amend the current regulations
that govern eligibility and purposes for financing from Farm Credit
System (Farm Credit, FCS, or System) banks and associations. This
proposal would incorporate recent statutory amendments that govern
eligibility and loan purposes from Farm Credit banks that operate under
title III of the Farm Credit Act of 1971, as amended (Act). The
proposed rule would also implement recently enacted sections 3.1(11)(B)
and 4.18A of the Act, which grant Farm Credit banks and associations
authorities to participate with non-System lenders in loans to similar
entities. At the same time, the FCA proposes to eliminate restrictions
in the current regulations that are not required by the Act. The FCA
proposes to substantially reorganize these regulations in order to
enhance their clarity. The FCA also proposes several technical
amendments to other regulations so they conform with this proposal. The
proposed rule would relocate the nondiscrimination in lending
regulations to a new part without change.
DATES: Comments should be received on or before December 11, 1995.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090. Copies of all communications received will be available for
review by interested parties in the Office of Examination, Farm Credit
Administration.
FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Policy Development and Planning Division,
Office of Examination, Farm Credit Administration, McLean, VA 22102-
5090, (703) 883-4498, TDD (703) 883-4444,
or
Richard A. Katz, Senior Attorney, Regulatory Operations Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION:
I. General
The FCA proposes to amend its regulations in part 613 to eliminate
unnecessary regulatory restrictions and implement statutory changes.
Several recent amendments to sections 3.7 and 3.8 of the Act expand
eligibility and purposes of financing for borrowers from BCs and ACBs.
Two new statutory provisions were enacted in 1992 and 1994, which
authorize Farm Credit banks and associations to participate with non-
System lenders in loans to borrowers who are functionally similar but
otherwise ineligible for direct FCS financing when the loans are for
purposes that are within the System's scope of financing (sections
3.1(11)(B) and 4.18A of the Act).
The FCA's approach in crafting new eligibility regulations is
guided by the Board's Policy Statement on Regulatory Philosophy (Policy
Statement).1 Pursuant to this Policy Statement, the FCA is
committed to adopting regulations only as necessary to: (1) Implement
or interpret the law; or (2) promote the safe and sound operations of
System institutions. Consistent with the Policy Statement, the FCA
proposes to remove regulatory provisions that prescribe operational
procedures, to simplify and clarify the regulations wherever possible,
and to delete existing regulatory restrictions that are not imposed by
law or necessary to interpret the law or promote safety and soundness.
The FCA's proposal should permit FCS institutions to more
[[Page 47104]]
effectively meet the credit needs of agricultural and aquatic
producers, farm-related businesses, rural homeowners, cooperatives, and
rural utilities in today's economic environment. Additionally, it
should help stimulate economic development in rural areas by increasing
the availability of affordable credit to eligible borrowers.
\1\See 60 FR 26034 (May 16, 1995).
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The FCA believes that removing non-statutory restrictions in these
regulations will enable the FCS to compete appropriately in
agricultural and rural credit markets and ultimately enhance its safety
and soundness. In this context, the FCA's proposal will enable the FCS
to fulfill its statutory mission (as stated in the preamble to the Act)
to provide: (1) ``A farmer-owned cooperative System of making credit
available to farmers, ranchers, and their cooperatives;'' and (2) ``an
adequate and flexible flow of money into rural areas.''
II. Financing Under Titles I and II of the Act
The FCA proposes new eligibility regulations for Farm Credit banks
and associations that operate under titles I and II of the Act. These
rules are designed to clarify current eligibility criteria and the
scope or purposes for which System financing may be obtained. The FCA's
proposal eliminates provisions in existing subparts A and B of part 613
that prescribe management practices and procedures or unnecessarily
restrict the eligibility of persons authorized to borrow under the Act.
The FCA also proposes to reorganize and clarify these regulations
so they can be better utilized by the FCS, the FCA, and other
interested parties. The existing regulations in subparts A and B would
be replaced by four new regulations in subpart A of part 613, which
would authorize System banks and associations to extend credit to the
following classes of eligible borrowers: (1) Bona fide farmers,
ranchers, and producers or harvesters of aquatic products; (2)
processing or marketing operators; (3) farm-related businesses that
provide services to farmers and ranchers; and (4) rural homeowners. An
explanation of the proposed amendments follows.
A. Bona Fide Farmers, Ranchers, and Aquatic Producers and Harvesters
Sections 1.9(1) and 2.4(a)(1) of the Act state that ``bona fide
farmers, ranchers, and producers or harvesters of aquatic products''
are eligible to borrow from Farm Credit banks and associations that
operate under titles I or II of the Act, respectively. The term ``bona
fide farmer, rancher, or producer or harvester of aquatic products'' is
not defined in either the Act or its legislative history.
The FCA proposes to adopt a single regulation, Sec. 613.3000, that
will determine eligibility for financing for loans made to farmers,
ranchers, and aquatic producers and harvesters. As a result of this
consolidation, the FCA proposes to delete existing Secs. 613.3000,
613.3005, 613.3010, and 613.3020.
Proposed Sec. 613.3000(a)(2) defines a bona fide farmer, rancher,
and aquatic producer 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 definition in
the proposed regulation does not represent a significant departure from
the existing regulations. The FCA proposes to combine the separate
definitions of farmers and ranchers in existing Sec. 613.3010(a) and
aquatic producers and harvesters in Sec. 613.3010(d) into a single
provision, without substantive change. Agricultural land is defined by
proposed Sec. 613.3000(a)(1) as ``land that is devoted to or available
for the production of agricultural or aquatic products.'' This proposed
definition is more streamlined and would replace current Sec. 619.9025.
1. Elimination of Regulatory Restrictions on Eligibility
Although the regulatory definition of ``bona fide farmer'' remains
essentially unchanged, this proposal would reduce or eliminate
restrictions in the current regulations on financing to three types of
farmers: part-time farmers, certain legal entities, and certain foreign
nationals. The proposed regulation, consistent with the Act, eliminates
all distinctions among farmers regarding their eligibility for
agricultural and aquatic financing. The FCA proposes to place limits on
financing that eligible borrowers may obtain for certain purposes. For
the reasons explained below, limitations on financing of non-
agricultural credit needs have been retained.
A. Part-time Farmers
The FCA proposes to eliminate any distinction between full-time and
part-time farmers, ranchers, and aquatic producers and harvesters.
Although the eligibility provisions in titles I and II of the Act do
not distinguish full-time from part-time producers, current
Sec. 613.3005(a) establishes different lending policies and objectives
for full-time and part-time producers who are eligible to borrow. The
existing regulation requires Farm Credit Banks (FCBs), agricultural
credit banks (ACBs), and their affiliated associations to provide: (1)
``Full credit, to the extent of creditworthiness, to full-time bona
fide farmers;'' (2) ``conservative credit'' to part-time farmers for
agricultural enterprises; and (3) ``restricted credit for other credit
requirements as needed to ensure a sound credit package.''
System institutions have noted that Sec. 613.3005 is more
restrictive than the Act. Further, uniform and consistent application
throughout the FCS has been difficult to achieve. For these reasons,
the FCA proposes to repeal Sec. 613.3005 (a) and (c) and replace it
with a new Sec. 613.3000, which will be clear, concise, and easier to
implement.
Proposed Sec. 613.3000 does not differentiate between full-time and
part-time agricultural and aquatic producers. Moreover, the evolution
of agriculture has made part-time producers an increasingly important
sector of the agricultural industry and rural America,2 and
existing regulations restricting the scope of lending to them may not
serve the purposes of the Act, which does not distinguish between full-
time and part-time farmers. The applicant's creditworthiness, not
eligibility criteria, would determine the availability of System loans
to part-time farmers, as it does with full-time farmers. The broad
prescriptions for operational policies and procedures of current
Sec. 613.3005(c), which were designed to keep the focus on agricultural
lending would be replaced with limitations on the amount of other
business credit needs of farmers that could be financed. Although the
FCA is removing the policy and procedure requirements of
Sec. 613.3005(c), the FCA believes that FCS banks and associations
should continue to adopt and implement sound management practices and
policies to guide their operations.
\2\A recent report by the United States Department of
Agriculture, entitled Rural Conditions and Trends, Spring 1995,
reported 88 percent of a farm household's income comes from sources
off the farm, with farm (income) accounting for the rest.
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B. Legal Entities
The FCA's proposed regulation also removes most distinctions
between individuals and legal entities. No restriction on lending to
legal entities appears in the Act, and a review of the legislative
history of the Act reveals that Congress, over an extended period of
time, deleted all statutory restrictions on loans to legal entities by
title I and II institutions or their predecessors. The FCA proposes to
update its regulations to conform with these changes.
[[Page 47105]]
Under an existing regulation, Sec. 613.3020(b), a legal entity is
ineligible for loans from Farm Credit banks and associations unless
more than 50 percent of: (1) Its equity or voting shares are owned by
individuals conducting an agricultural or aquatic operation; (2) the
value of its assets are related to the production of agricultural or
aquatic commodities; or (3) its income is derived from agricultural or
aquatic activities. Furthermore, the current regulation imposes
additional requirements on a legal entity that is owned or controlled
by another legal entity that is an ineligible borrower.
In 1993, the FCA solicited public comment on the burdens that
existing regulations impose on System institutions. See 58 FR 34003,
June 23, 1993. Several commenters responded that existing
Sec. 613.3020(b) limits the System's ability to finance legal entities
despite the removal of such restrictions in the Act. Some of the
comment letters also noted that the current regulation favors
individual borrowers over legal entities.
After considering these comments, the FCA proposes to adopt a
regulatory approach that equalizes the treatment of legal entities and
individual borrowers with respect to financing their agricultural and
aquatic needs. Section 1.1(b) of the Act states that one of the
objectives of the FCS is to ``be responsive to the credit needs of all
types of agricultural producers having a basis for credit.''
Accordingly, the FCA concludes that the eligibility requirements for
System institutions should not influence any borrower's decision about
whether to farm, ranch, or fish in an individual capacity or as a legal
entity.
The FCA proposes to eliminate the requirements in current
Sec. 613.3020(b) that most of the owners, assets, or income of an
eligible legal entity be related to an agricultural or aquatic
enterprise. Rather, any legal entity that engages in agricultural or
aquatic production to generate income or owns agricultural land would
become an eligible System borrower under proposed Sec. 613.3000(a)(2).
The FCA's proposal does not preempt State laws that prohibit or
otherwise restrict legal entities (other than closely held family farm
corporations) from owning agricultural land or conducting a farming,
ranching, or aquatic operation.
Under the proposed regulation, entities that are eligible under
title III of the Act would not qualify as legal entities for purposes
of financing under titles I or II of the Act. The FCA is aware that
some cooperatives now qualify for financing from FCBs and associations,
as well as from BCs and ACBs. In fact, some cooperatives have existing
financial relationships with associations. Although the FCA does not
desire to interfere with existing business relationships, it is
concerned that expanded competition within the FCS could be
detrimental. The FCA invites comments on whether this approach is
appropriate and on other alternatives for addressing this concern.
C. Nationality of the Borrower
Current FCA regulations permit System lenders to provide
agricultural financing to foreign nationals only if they are permanent
residents of the United States. This restriction derives from language
in section 1.1(a) of the Act, which states:
The farmer-owned cooperative Farm Credit System (is) designed to
accomplish the objective of improving the income and well-being of
American farmers and ranchers by furnishing sound, adequate, and
constructive credit and closely related services to them (and) their
cooperatives.
The FCA has viewed this provision as a basis for limiting the ability
of the System to lend to certain foreign nationals. Existing
Sec. 613.3010(c) states that only foreign nationals who are admitted
into the United States for permanent residence pursuant to 8 U.S.C.
1101(a)(20) are eligible for System financing. Legal entities that are
owned by foreign nationals who are permanent residents of the United
States also qualify for System financing under this provision.
The FCA is aware that non-resident foreign nationals and legal
entities owned by such persons have applied to FCS banks and
associations for agricultural or aquatic loans. System institutions and
members of Congress have made the Agency aware of applicants who own
and operate farms or processing and marketing operations in the United
States, but are ineligible for financing because they are not citizens
or permanent residents. FCS banks and associations are currently
required by current Sec. 613.3010(c) to reject automatically the loan
applications of such prospective borrowers solely on the basis of their
nationality and residency status. Many FCS banks and associations state
that the current regulation compels them to deny loans to otherwise
creditworthy farmers, ranchers, and aquatic producers and harvesters
who make significant contributions to American agriculture.
Furthermore, existing Sec. 613.3010 causes System lenders to forfeit to
competitors profitable business opportunities with entities that are
statutorily eligible to borrow from the System. Many FCS
representatives and some members of Congress have questioned the FCA's
decision to prohibit System institutions from financing those
agricultural and aquatic producers who are non-resident foreign
nationals or foreign national legal entities.
These comments have prompted the FCA to consider whether the
existing regulation is unnecessarily restrictive. In considering these
comments, the FCA examined the immigration and nationality laws of the
United States. As a general rule, foreign nationals are allowed to
enter the United States as either immigrants or non-immigrants.
According to 8 U.S.C. 1101(a)(20), persons who are lawfully admitted
for permanent residence in the United States have immigrant status. As
noted earlier, agricultural or aquatic producers who are admitted into
the United States as permanent residents are already eligible to borrow
from System institutions.
Non-immigrants generally are defined as foreign nationals who do
not intend to abandon their residence in their home countries and
settle permanently in the Untied States. Certain categories of non-
immigrants are allowed to conduct businesses and own property in the
United States. For example, non-immigrant foreign nationals may enter
the United States to conduct business as:
(1) Businesspersons under 8 U.S.C. 1101(a)(15)(B);
(2) Merchants or traders under 8 U.S.C. 1101(a)(15)(E); or
(3) Executives, managers, or specialists for a legal entity that
employs them, pursuant to 8 U.S.C. 1101(a)(15)(L).
The proposed regulation would expand eligibility provisions to
encompass all foreign nationals who are authorized by the laws of the
United States to engage in agricultural or aquatic production or to own
agricultural land in the United States. It would also cover domestic
legal entities in which foreign nationals have an ownership interest.
The FCA believes that this interpretation is consistent with section
1.1(a) of the Act and it provides FCS institutions with greater
flexibility to finance bona fide farmers, ranchers, and aquatic
producers and harvesters who actively contribute to the growth,
productivity, and prosperity of domestic agriculture and the rural
economy.
As a result of its consideration of this issue, the FCA proposes to
amend its eligibility regulations to enable Farm Credit banks and
associations to finance certain non-immigrant foreign nationals
[[Page 47106]]
who are bona fide farmers, ranchers, and aquatic producers or
harvesters, as defined by proposed Sec. 613.3000. More specifically,
proposed Sec. 613.3000 (a)(2) and (a)(3)(ii) would expand the
definition of ``individual'' to include foreign nationals who have been
admitted lawfully into the United States pursuant to any provision in 8
U.S.C. 1101(a)(15) that authorizes such individuals to own property or
operate or manage businesses. This would permit such persons to qualify
as a bona fide farmer, rancher, or aquatic producer or harvester if
they are engaged in production or own agricultural land.
The proposed regulation would afford the same treatment to legal
entities owned by citizens and permanent residents of the United
States, or controlled by non-resident foreign nationals, provided that
the entity is chartered domestically. The FCA observes, however, that
certain foreign nationals and foreign national legal entities have
registration and disclosure obligations under the Agricultural Foreign
Investment Act of 1978 (AFIDA), 7 U.S.C. 3508, and its implementing
regulation, 7 CFR Part 781. Because the Secretary of Agriculture is
authorized by section 3 of AFIDA, 7 U.S.C. 3502, to impose civil
penalties on non-resident foreign nationals and foreign national legal
entities who fail to comply with these disclosure provisions, System
institutions that lend to borrowers who are subject to the AFIDA should
ensure that the borrowers have complied with its requirements. The FCA
observes that the proposed regulation does not preempt State laws that
prohibit or otherwise restrict non-resident foreign nationals and
foreign national legal entities from owning agricultural land or
conducting a farming, ranching, or aquatic operation within their
jurisdiction.
The FCA notes that legal entities that are chartered by a foreign
government or headquartered outside the United States are also covered
by the AFIDA. The FCA seeks comment on whether foreign national legal
entities that do not have a domestic subsidiary should be eligible for
financing under the final regulation.
2. Limitations on Financing
The proposed regulations would impose no limitations on the
System's ability to finance the agricultural and aquatic needs of
farmers, ranchers, and aquatic producers. Proposed Sec. 613.3000(c)
would authorize FCS banks and associations to extend credit to all
eligible borrowers for any agricultural or aquatic purpose, including
refinancing pre-existing agricultural or aquatic debt.
Proposed Sec. 613.3000(d) would enable eligible farmers, ranchers,
and aquatic producers or harvesters to obtain System loans for their
other credit needs with certain limitations. Sections 1.11(a) and
2.4(a) of the Act expressly authorize System banks and associations to
finance the other credit needs of agricultural and aquatic producers.
This statutory authority has existed since 1955,\3\ when Congress
originally acknowledged that farmers and ranchers often require credit
for other ``sound and appropriate'' purposes so they can make ends meet
and remain on the farm.\4\ This longstanding Congressional policy is
currently codified in Sec. 613.3005(a).
\3\The former Federal land banks were granted this authority by
the Farm Credit Act of 1955, Pub. L. No. 347, section 304(a), 69
Stat. 655 (Aug. 11, 1955). The Farm Credit Act of 1956 granted this
authority to the PCAs, Pub. L. No. 84-809, section 105(i), 70 Stat.
665 (July 26, 1956).
\4\S. Rep. No. 1201, 84th Cong., 1st. Sess., (July 28, 1955), p.
21; H. Rep. No. 863, 84th Cong., 1st. Sess., (June 20, 1955), p. 20.
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The FCA proposes a regulatory approach that grants FCS banks and
associations greater flexibility to finance the other credit needs of
bona fide farmers, ranchers, and aquatic producers and harvesters, but
simultaneously preserves the mission of System institutions as
agricultural lenders. The proposed regulation removes the existing
requirement that a borrower have an outstanding agricultural or aquatic
loan in order to receive financing for other credit needs. Today, many
agricultural and aquatic producers pursue non-farm business
opportunities as a matter of economic survival. A Farm Credit System
that is responsive to such other credit needs helps agricultural and
aquatic producers to remain on their farms and ranches and in America's
rural communities. Furthermore, System lenders fulfill their obligation
to ``provide for an adequate and flexible flow of money into rural
areas, and * * * to meet current and future rural credit needs'' when
they finance certain non-farm businesses owned by farmers in rural
areas. In this context, the Act expressly contemplates that Farm Credit
banks and associations will contribute to economic development in rural
areas by financing the other business needs of farmers, ranchers, and
aquatic producers and harvesters.
Lending for farmers' other credit needs also enables FCBs, ACBs,
and their affiliated associations to strengthen their viability by
diversifying their loan portfolios. A strong and competitive Farm
Credit System increases the availability of affordable credit in rural
America. Lending for other domestic and business needs allows System
banks and associations to offer a full array of quality credit services
to farmers, ranchers, and aquatic producers and harvesters at
competitive interest rates and to provide an incidental benefit to
rural communities.
Because the primary mission of the FCS is to finance agriculture
and aquaculture, the FCA's proposal would restrict loans for the other
credit needs of System borrowers. In the FCA's opinion, the
availability of credit for non-agricultural purposes should be
proportionally related to the borrower's involvement in farming,
ranching, or aquatic production or harvesting. For the reasons
explained below, proposed Sec. 613.3000(d) would grant borrowers who
engage in agricultural or aquatic production (``farmer-producers'')
greater access to the FCS for their other credit needs than it would
grant to borrowers who are eligible only because they own agricultural
land as an investment (``farmer-investors'') and non-resident foreign
nationals. The FCA's proposal is designed to permit family farm
corporations and other legal entities that are closely held by eligible
farmers, ranchers, and aquatic producers and harvesters to finance
their other credit needs at an FCS bank or association. However, the
proposed regulation would authorize System banks and associations to
finance only the agricultural or aquatic needs of publicly traded
corporations and conglomerates with significant assets unrelated to
agriculture.
Proposed Sec. 613.3000(d)(1) would enable farmer-producers to
obtain System financing for their housing and other domestic needs
without restriction (other than their creditworthiness). Proposed
Sec. 613.3000(d)(1) also allows farmer-producers to obtain limited
System financing for their other business needs in an amount that does
not exceed the market value of their agricultural or aquatic assets.
This regulatory approach would ensure that the amount of financing that
farmer-producers obtain from FCS banks and associations for non-farm
business needs would be proportionate to their investment in their
agricultural or aquatic activities.
For the purposes of proposed Sec. 613.3000(d), agricultural assets
include real estate, a home that is located on a farm or ranch,
equipment, chattel, and livestock. The proposed regulation contemplates
that the market value of agricultural assets would be determined at the
time of loan
[[Page 47107]]
application from the most credible source available to FCS
institutions. Because real estate, equipment, and livestock make up the
bulk of agricultural assets on most loan applications, appraisals and
collateral valuations would be the logical sources to support the
market value of the most material of these assets. Absent available
appraisals and valuations completed for the FCS institution, other
sources could serve as a basis for determining market value such as
county tax assessment values or real estate multiple listings. It is
not the FCA's intent to cause extra cost or regulatory burden on either
the FCS institution or the borrower in order to establish the market
value of agricultural assets for determining the level of financing
available from the System. Rather, a reasonable but credible valuation
performed by FCS institutions that can be supported and tested should
suffice for determining compliance with this subpart.
Proposed Sec. 613.3000(d)(2) would limit financing that farmer-
investors could obtain from the FCS for all of their other credit
needs, including housing and domestic needs, to the market value of
their agricultural assets. Such borrowers are not engaged in
agricultural production and own agricultural land as a passive
investment. As the FCA interprets the Act through its legislative
history, Congress did not intend that these farmer-investors have the
same access to the FCS for non-agricultural credit needs as farmer-
producers. Proposed Sec. 613.3000(d)(2) precludes farmer-investors from
obtaining FCS loans for their other credit needs in amounts that are
disproportionate to their investment in agriculture. The proposed
regulation imposes no restrictions on loans for agricultural or aquatic
purposes that farmer-investors may obtain from System banks and
associations, and therefore, farmer-investors would have increasing
access to the FCS for their other credit needs as their investment in
agriculture increases. Retired farmers, ranchers, and aquatic producers
and harvesters whose land is cultivated by others would be considered
farmer-producers, if they acquired their agricultural land originally
for agricultural production purposes rather than as an investment.
Non-resident foreign nationals are accorded the same treatment
under proposed Sec. 613.3000(d) as farmer-investors. Although such
borrowers are often active agricultural or aquatic producers, their
legal status imposes restrictions on their activities within the United
States. Prudence requires greater restrictions on these borrowers than
on farmer-producers who are citizens or permanent residents of the
United States.
Proposed Sec. 613.3000(d)(3) 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. Although all agricultural corporations would now become
eligible to borrow from Farm Credit banks and associations that operate
under titles I and II of the Act, the FCA intends that most large
agricultural borrowers could obtain System financing only for their
agricultural or aquatic needs. Under proposed Sec. 613.3000(d)(3),
legal entities could obtain System loans for their other credit needs
in an amount that does not exceed the market value of their
agricultural assets only if: (1) The securities of the borrower are not
traded on a public exchange; and (2) more than 50 percent of the assets
of the borrowing legal entity are used in agricultural or aquatic
production. The FCA believes that this approach would effectively
preclude System banks and associations from financing the other credit
needs of large agribusiness corporations and conglomerates.
The FCA requests comments on whether and how the final regulations
ought to distinguish among types of eligible farmers with respect to
financing other credit needs.
B. Financing of Processing or Marketing Operations
Sections 1.11(a) and 2.4(a) of the Act authorize FCBs, ACBs, and
their affiliated associations to finance the processing or marketing
operations of bona fide farmers, ranchers, and aquatic producers or
harvesters. According to the Act, the processing or marketing operation
must be ``directly related'' to the agricultural or aquatic activities
of the borrower. The Act also requires the borrower's agricultural or
aquatic activities to supply some portion of the throughput used in the
processing or marketing operations. The Act limits processing or
marketing loans to borrowers who supply less than 20 percent of the
throughput to 15 percent of the total outstanding loans, during the
preceding fiscal year, of: (1) The FCB or ACB; and (2) all associations
that are affiliated with the same funding bank.
The existing regulation, Sec. 613.3045, imposes certain
restrictions on financing for processing or marketing operations that
are not required by the Act or are no longer needed to ensure the
safety and soundness of the FCS. For example, additional compliance
thresholds presently exist for loans to borrowers who supply less than
50 percent of the throughput. A restriction that has been particularly
problematic relates to processing or marketing operations that have
different owners than the agricultural or aquatic operation providing
the throughput. Section 613.3045(b)(2)(iii) currently requires that the
entire ownership of the processing or marketing operation vest in
eligible borrowers. Many System banks and associations responded to the
Notice of Regulatory Burden by requesting relief from this 100-percent
ownership requirement. According to System commenters, processing or
marketing operations have become ineligible under the existing
regulation solely because of a slight change in ownership. FCS
institutions point out, for example, that a borrower who establishes an
employee ownership program can no longer borrow from the System.
The FCA now proposes to revise and redesignate this regulation, so
it more closely parallels the Act. The revised regulation,
Sec. 613.3010, will simply require that the processing or marketing
operation: (1) Be directly related to the borrower's agricultural or
aquatic activities; and (2) consistently process some throughput
produced by the borrower.
In an effort to reduce regulatory burden on FCS banks and
associations, the FCA proposes to repeal the additional requirements
that existing Sec. 613.3045(b)(2) imposes on borrowers who supply less
than 50 percent of the throughput to a processing or marketing
operation. The FCA believes that this regulatory requirement is no
longer necessary to interpret the Act since a statutory portfolio
limitation has replaced the statutory requirement that the borrower
supply at least 20 percent of the throughput.5 The FCA also
proposes to repeal Sec. 613.3045(e), which unnecessarily specifies
paperwork requirements for FCS institutions.
\5\Pub. L. No. 101-624, section 1832, 104 Stat. 3359 (1990).
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The FCA's proposal would also relax the current requirement that
bona fide farmers, ranchers, and aquatic producers or harvesters own
100 percent of an eligible processing or marketing operation. Proposed
Sec. 613.3010(a)(1) clarifies that an eligible borrower includes a
legal entity in which a controlling interest is owned by individuals or
other legal entities that qualify as bona fide farmers, ranchers, or
aquatic producers or harvesters. The
[[Page 47108]]
controlling interest requirement in proposed Sec. 613.3010(a)(1)
implements sections 1.11(a)(1) and 2.4(a)(1) of the Act, which require
a processing or marketing operation to be directly related to the
agricultural or aquatic operations of the borrower. The FCA seeks
comments on whether the controlling interest requirement appropriately
implements the intent of the Act and provides sufficient guidance to
System lenders.
Proposed Sec. 613.3010(b) implements the portfolio restrictions
that sections 1.11(a)(2) and 2.4(a)(1) of the Act impose on loans to
borrowers who contribute less than 20 percent of the throughput used by
a processing or marketing operation. This provision would limit retail
loans that System banks and associations make to borrowers who supply
less than 20 percent of the throughput to 15 percent of outstanding
loans at the end of the preceding fiscal year for: (1) The funding
bank; and (2) all associations that are funded by the same FCB or ACB.
Proposed Sec. 613.3010(b) also retains the existing requirement in
Sec. 613.3045(d)(2) that each funding bank, in conjunction with its
affiliated associations, ensures that processing or marketing loans to
borrowers who supply less than 20 percent of the throughput are
equitably allocated among the associations.
The FCA believes the proposed regulation would better enable System
institutions to finance entities that contribute substantially to the
agricultural economy and rural communities and that increase the income
of America's farmers, ranchers, and aquatic producers or harvesters.
This proposal would ultimately benefit both producers and consumers by
providing competitive credit for this sector of the agricultural
economy and fostering economic development in rural areas.
C. Loans to Farm-Related Businesses
Sections 1.9(2), 1.11(c)(1), and 2.4(a)(3) of the Act authorize
FCBs, ACBs, and direct lender associations to finance ``persons
furnishing to farmers and ranchers farm-related services directly
related to their on-farm operating needs.'' Presently, Sec. 613.3050(a)
imposes an additional requirement that farm-related businesses furnish
``custom-type services'' that are directly related to on-farm operating
needs of farmers and ranchers. The term ``custom-type services'' is
defined by Sec. 619.9120 as the ``performance of on-farm functions on a
`for-hire' basis which farmers and ranchers typically have done for
themselves.'' Furthermore, to qualify under Sec. 613.3050(b)(2) a farm-
related business must sell only goods and inputs that ``are incident to
the services provided.'' Examples of farm-related services authorized
by this regulation include: (1) Spraying of crops; (2) harvesting; (3)
hauling agricultural commodities to grain elevators, livestock markets,
and other processing centers; (4) custom feed mixing operations; (5)
veterinary services; and (6) drying farm commodities.
The FCA has received numerous comments from the FCS about the
burdensome nature of Secs. 613.3050 and 619.9120. Many System
representatives have stated that the current regulatory requirements
too narrowly restrict the types of agricultural service businesses that
can qualify for FCS loans. Statistics about FCS loans to farm-related
businesses suggest that this may be true. Farm-related business loans
comprise less than 1 percent of all loans in the Farm Credit System,
and many FCS banks and their affiliated associations have no farm-
related business loans in their portfolios. These circumstances may
indicate that current Secs. 613.3050 and 619.9120 frustrate the ability
of System banks and associations to fund statutorily eligible and
creditworthy farm-related service businesses, and unnecessarily deny
many farm-related businesses competitive credit options.
To address this issue, the FCA is proposing a new regulation,
Sec. 613.3020, which would replace Secs. 613.3050(a), 613.3050(b), and
619.9120, with an eligibility standard for farm-related businesses that
is more closely aligned with the plain language of the Act. Under
proposed Sec. 613.3020(a), 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 a Farm Credit
bank or association that operates under titles I or II of the Act.
Regulatory restrictions that are unnecessary to implement or interpret
sections 1.9(2), 1.11(c)(1), and 2.4(a)(3) of the Act would be
eliminated.
In 1979, the FCA acknowledged in the preamble to Sec. 613.3050 that
neither the literal language of the statute nor its legislative history
compel an eligible farm-related business to actually perform services
on the customer's property.6 At that time, however, the FCA did
not delete the ``on-farm'' requirement from the definition of ``custom-
type'' services in Sec. 619.9120. The FCA now proposes to delete the
definition of custom-type services which should dispel confusion
surrounding the ``on-farm'' requirement.
\6\44 FR 69631 (Dec. 4, 1979).
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Furthermore, the Act does not specifically require eligible
borrowers to furnish only ``custom-type'' services to farmers and
ranchers. Although passages in the legislative history to the Farm
Credit Act of 1971 contain examples of various custom services that
farmers and ranchers may perform themselves, the FCA finds no evidence
that sections 1.11(c)(1) or 2.4(a)(3) of the Act actually preclude the
FCS from financing other types of services that are directly related to
agricultural production. In fact, agricultural producers today rely on
technologically advanced services that they cannot provide for
themselves, such as computer mapping of soil and crop conditions,
nutritional analysis for dairy production, and specialized animal
husbandry records and services. These technologically advanced services
enable farmers and ranchers to enhance their income by reducing costs,
increasing productivity, and meeting the growing demand of consumers
for improved food quality and specialty food products. The FCA believes
the ability of the FCS to finance such service providers strengthens
the agricultural economy of the United States.
A farm-related business is currently ineligible to borrow from a
Farm Credit bank or association under Sec. 613.3050(b)(2) unless
substantially all of the goods sold are consumed in the services that
the borrower provides to farmers and ranchers. As the FCA interprets
sections 1.11(c)(1) and 2.4(a)(3) of the Act and their legislative
history, a farm-related service business should not be automatically
ineligible for FCS loans simply because it also sells some goods that
are not incidental to its services. In the FCA's opinion, such a
disqualification defeats the statutory purpose of providing credit to
farm-related service businesses. For this reason, the FCA proposes to
repeal current Sec. 613.3050(b)(2).
The FCA proposes to rely on scope of financing provisions to ensure
that FCS banks and associations finance only farm-related businesses
that are eligible to borrow under sections 1.11(c)(1) and 2.4(a)(3) of
the Act. Proposed Sec. 613.3020(b) would require FCS banks and
associations to determine the extent of financing for an eligible farm-
related business by measuring the applicant's income on either a gross
sales or a net sales basis. More specifically, proposed
Sec. 613.3020(b)(1) would authorize financing of all the business needs
of an eligible farm-related business that derives more than 50 percent
of its
[[Page 47109]]
income, as determined on either a gross sales or net sales basis, from
furnishing agricultural services to farmers and ranchers. A borrower
who derives 50 percent or less of its income from furnishing
agricultural services could obtain System financing under proposed
Sec. 613.3020(b)(2) only for the agricultural services portion of its
business.
The FCA notes that this regulation would permit System banks and
associations to measure each borrower's income consistently on either a
gross sales or a net sales basis, as appropriate. System banks and
associations should experience no difficulty in complying with
Sec. 613.3020(b) because gross and net sales information is normally
provided in financial statements that a farm-related business submits
to support its credit request.
The FCA believes that proposed Sec. 613.3020 implements the
requirements of the Act without imposing unnecessary regulatory burdens
on the FCS or restricting its ability to offer competitive credit to
farm-related businesses. The FCA believes that this proposal would
provide System banks and associations and FCA examiners with clear and
appropriate regulatory guidance, and it would protect the interests of
System competitors by enforcing statutory restrictions.
The FCA proposes to delete Sec. 613.3015, which directs a Farm
Credit bank or association to determine the eligibility of an applicant
who both conducts agricultural or aquatic operations and owns a farm-
related business, using one or any combination of the criteria in the
existing regulations. The existing regulation is not needed to
interpret the Act nor to promote safety and soundness. Clearly,
sections 1.11(a) and 2.4(a) of the Act and proposed Sec. 613.3000
authorize FCS banks and associations to finance the ``other credit
needs'' of bona fide farmers, ranchers, and aquatic producers and
harvesters. For this reason, System banks and associations can finance
farm-related businesses that are owned by eligible agricultural or
aquatic producers under either proposed Secs. 613.3000 or 613.3020. The
FCA observes, however, that a System bank or association could not
finance the ``other credit needs'' of an eligible farm-related business
that is not owned by a bona fide farmer, rancher, or aquatic producer.
D. Non-farm Rural Home Loans
Sections 1.9(3), 1.11(b) and 2.4(b) of the Act authorize FCBs,
ACBs, and their affiliated associations to finance single-family,
moderately priced homes for residents of rural areas where the
population does not exceed 2,500 inhabitants. Sections 1.11(b)(2) and
2.4(b)(2) generally restrict non-farm rural home loans to 15 percent of
the total outstanding loans of each FCB, ACB, or association.
An existing regulation, Sec. 613.3040, implements this statutory
authority. The FCA now proposes to redesignate this regulation as
Sec. 613.3030 and revise it to provide greater flexibility to finance
non-farm rural homes to the extent allowed by the Act. This proposal
differs from the existing rural housing regulation in three ways.
First, it clarifies that rural housing loans do not encompass loans to
farmers and ranchers for their housing needs, because such loans are
properly classified as agricultural loans. Second, the regulation
revises and simplifies the criteria for determining whether a home is
moderately priced and located in a rural area, as the law requires.
Finally, the proposal eliminates regulatory restrictions that are not
needed for safety and soundness. The FCA also addresses specific issues
about non-farm rural home loans that commenters raised during the
Regulatory Burden comment period and in other forums.
1. Definition of Rural Homeowner
The FCA's proposal would clearly differentiate the authority of
System banks and associations to finance homes for agricultural and
aquatic producers from all other rural residents. Proposed
Sec. 613.3030(a)(1) would define an eligible rural homeowner as a
person who is not a bona fide farmer, rancher, or aquatic producer or
harvester within the meaning of proposed Sec. 613.3000(a)(2). The
definition of ``rural home'' in proposed Sec. 613.3030 would no longer
incorporate current Sec. 613.3040(e)(1), which requires either that
the: (1) Property lack the capacity to produce agricultural products on
a sustainable basis; or (2) borrower does not use the property for
agricultural purposes. These provisions were the regulatory mechanism
for ensuring that housing loans to farmers were considered agricultural
loans rather than rural home loans. The proposed regulations addresses
this issue by excluding farmers from the definition of rural homeowner.
The FCA also proposes to repeal existing Sec. 613.3040(e)(2), which
applies the price, locality, and portfolio restrictions in sections
1.11(b) and 2.4 (b)(1), (b)(2), and (b)(3) of the Act to home loans
that System banks and associations make to certain farmers, ranchers,
and aquatic producers and harvesters.
The FCA believes that this new approach will clarify the authority
of System lenders to finance homes for both agricultural and aquatic
producers and other rural residents and eliminate any confusion about
the scope of home lending authority. Under the FCA's proposal, Farm
Credit banks and associations would finance homes for both full-time
and part-time farmers, ranchers, and aquatic producers under proposed
Sec. 613.3000(d), while proposed Sec. 613.3030 would apply to home
loans that System lenders make to all other rural residents.
Because the Act affords certain benefits and applies certain
restrictions to agricultural loans and rural housing loans, it has been
important to classify home loans to farmers correctly. For example, the
homes of agricultural or aquatic producers are not required to be
moderately priced or located in communities where the population does
not exceed 2,500 inhabitants. In fact, neither the Act nor FCA
regulations require agricultural producers to live on the land that
they farm or ranch. As the FCA interprets the Act, home loans to
farmers are not subject to the portfolio limitations applicable to
rural housing loans.
The FCA notes that statutory borrower rights generally apply to all
loans to farmers, ranchers, and aquatic producers, including loans for
the purchase of a residence.\7\ Borrower rights do not, however, apply
to rural home loans.
\7\In some instances, the protections of another Federal law
will supplant the borrower rights provisions of the Act. For loans
covered by the Federal Truth in Lending Act (TILA), 15 U.S.C. 1601,
et seq., FCS lenders must provide the disclosures required by the
TILA in lieu of the effective interest rate disclosures that are
otherwise applicable to loans pursuant to subpart K of part 614. The
TILA applies to all loans for which the principal purpose is
residential housing, regardless of whether the loan is classified as
an agricultural or rural housing loan under FCA regulations.
---------------------------------------------------------------------------
All bona fide agricultural and aquatic producers are required by
section 4.3A(c)(1)(D)(i) of the Act to own voting stock in the FCS bank
or association that extends credit to them, including home loans. In
contrast, non-farm rural residents hold non-voting participation
certificates in FCS banks and associations.
2. Definition of Rural Home
Proposed Sec. 613.3030(a)(2) defines a ``rural home'' as a single-
family moderately priced dwelling located in a rural area that will
serve as the occupant's principal residence. Sections 1.11(b)(2) and
2.4(b)(1) of the Act explicitly limit the non-farm rural home financing
authority of FCS banks and associations to single-family moderately
priced houses. The proposed regulation deletes the requirement in
existing
[[Page 47110]]
regulations that System banks and associations finance only owner-
occupied homes, because this limitation does not appear in the Act. The
proposal retains, however, a requirement that the home be used as a
primary residence. This requirement would implement the Act's stated
intent that the System provide financing for housing for rural
residents. The FCA is concerned that an infrequently occupied vacation
home would not be compatible with Congressional intent. This change
will enable the System to finance moderately priced rural homes that
shall be used as the principal residence of either the borrower or
another rural resident. Thus, a borrower who intends to occupy the home
in the future, perhaps as a retirement residence, would be eligible for
financing so long as the house was leased to a tenant, in the interim,
as the tenant's principal residence.
The FCA proposes to remove the passage in Sec. 613.3040(a)(2) that
describes rural homes as ``conventional housing, modular housing, or
mobile homes which are related to a specific site.'' The FCA believes
that any type of dwelling that is moderately priced and located in a
rural area may be financed, so the passage is not necessary to
implement the Act. Section 613.3030(b) retains a provision that allows
a borrower to obtain financing from the System on only one home at any
one time. This limitation, which derives from the Act's legislative
history, prevents the System from financing rural housing developers.
The existing regulation, Sec. 613.3040(c), allows FCS banks and
associations to make loans to non-farm rural residents solely for the
purpose of buying, building, remodeling, improving, repairing a rural
home, and refinancing existing indebtedness thereon. System
representatives have frequently petitioned the FCA to remove this
restriction so that they can offer equity lines-of-credit loans to
rural homeowners.
The FCA observes that although home equity loans were not generally
available loan products when the rural home financing authority was
granted to the FCS in 1971, neither the Act nor FCA regulations
preclude revolving lines of credit secured by home equity. During the
intervening years, however, the residential mortgage markets have
developed so that home equity lines of credit are now standard loan
products that mortgage lenders routinely offer to their clientele. Home
equity loans would enable the rural home lending authority of the FCS
to reflect current market practices and would allow rural homeowners
who borrow from the FCS to have more flexibility in financing and
utilizing the equity in their homes.
The FCA believes line-of-credit loans are compatible with sections
1.11(b) and 2.4(b) of the Act and the current regulation, which
authorize System institutions to finance the housing needs of non-farm
rural residents. Furthermore, home equity loans would enable FCS banks
and associations to fulfill their mission of providing for an adequate
and flexible flow of credit for housing in rural areas. Homeowners in
rural communities often lack affordable credit options that are widely
available in metropolitan areas.
The FCA also observes that home equity loans are compatible with
the existing authority of production credit associations (PCAs) and
agricultural credit associations (ACAs) under section 2.4(b) of the Act
to take either a first or second lien on a rural home. Under existing
FCA regulations, FCBs, ACBs, Federal land credit associations (FLCAs),
and ACAs can, for certain purposes, make a line-of-credit loan that is
secured by a first lien on an unencumbered rural home that is occupied
by the borrower. Furthermore, an FCS long-term mortgage lender that
already holds the first lien on the property could take a second lien
to secure the home equity line-of-credit loan.
For these reasons, proposed Sec. 613.3030(b) would enable FCS banks
and associations to offer home equity loans to non-farm rural residents
in addition to the types of loans that are already authorized by
existing Sec. 613.3040(c). The FCA also proposes conforming revisions
to Sec. 614.4222. The FCA emphasizes that FCS lenders could only make
home equity line-of-credit financing on rural homes that comply with
the requirements of proposed Sec. 613.3030. The FCA fully expects home
equity loans to be prudently underwritten. The FCA notes that this
proposal would grant FCS institutions reasonable flexibility to make
rural home loans within the 15-percent portfolio limit that is imposed
by statute.
3. Definition of Rural Area
The FCA proposes to revise the regulatory definition of ``rural
area'' to provide a standard that is clear, consistent, and easy to
apply. The proposed definition will also eliminate the need for System
institutions to seek FCA guidance about whether a particular locality
is a ``rural area'' within the meaning of these regulations. Proposed
Sec. 613.3030(a)(3) defines a ``rural area'' as a designated territory
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 United States Bureau of Census is an expert, official, and
neutral source for accurate and accessible information about the
demographics of rural areas. The United States census examines the
population density in each State and then classifies the territories
with 2,500 or fewer inhabitants as ``rural areas.'' The United States
Bureau of the Census does not utilize political boundaries to determine
whether an area is rural. The United States census often identifies
rural pockets (with 2,500 inhabitants or fewer) that are located inside
standard metropolitan statistical areas. The proposed regulation would
enable FCS banks and associations to finance non-farm housing in such
designated rural areas.
Proposed Sec. 613.3030(a)(3) would replace the definition of
``rural area'' in current Sec. 613.3040(a)(3). Census data satisfies
all of the criteria for ``rural areas'' that are specified by existing
Sec. 613.3040(a)(3). This proposal would also delete the current
regulatory requirement that the FCA approve rural areas that include
``towns'' where the population exceeds 2,500 people. Since 1971, the
FCA has acted on only a few requests to approve rural areas including
such towns. Moreover, the FCA believes that the Bureau of the Census
designation of a ``rural area'' may provide significantly more reliable
and flexible data for System institutions because it disregards
political boundaries and is updated to reflect changing conditions.
4. Definition of Moderately Priced
The FCA also proposes to replace the definition of ``moderately
priced'' housing in existing Sec. 613.3040(c)(2) with new
Sec. 613.3030(a)(4). The revised definition would provide System banks
and associations with a clear standard for determining whether a rural
home is ``moderately priced.'' The FCA proposes a two-part definition
for ``moderately priced'' rural homes. The first part is a safe-harbor
provision for rural home loans that qualify under section 8.0(1)(B) of
the Act for programs of the Federal Agricultural Mortgage Corporation
(Farmer Mac). Loans qualify as collateral for Farmer Mac securities if
they are secured by rural homes that are located in communities of
fewer than 2,500 inhabitants and have a purchase price of not more than
$100,000, as adjusted for inflation. Thus, a rural home would be
considered ``moderately priced'' for the purposes of
[[Page 47111]]
proposed Sec. 613.3030(a)(4)(i) if the loan complies with Farmer Mac's
underwriting standards.
The second alternative, proposed Sec. 613.3030(a)(4)(ii), allows
Farm Credit banks and associations to finance rural homes that are
below the 75th percentile of housing values, ranked from the lowest
value to the highest value in the rural area where it is located, as
published by the United States Bureau of the Census in the most recent
edition of the Census of Housing, General Housing Characteristics. This
provision will enable the FCS to finance homes valued in excess of
$100,000 in areas in which such homes are still properly considered as
moderately priced.
The FCS relied on a similar model until the early 1980's. At the
time, the FCA provided administrative guidance to the System by
annually publishing an upper limit for moderately priced housing. The
upper value of moderately priced housing was derived from housing
prices throughout the United States, stratified from the lowest to the
highest sales figures. The FCA's proposal provides a more appropriate
and accurate measure of ``moderately priced'' housing, because it
examines housing prices in the designated rural areas where the
property is located, rather than the entire United States.
In most designated rural areas with a population between 1,000 and
2,499 persons, the 75th percentile for housing prices does not exceed
the Farmer Mac threshold of $100,000, as adjusted for inflation. As a
result, most of the rural housing in the United States would satisfy
either provision of proposed Sec. 613.3030(a)(4). However, when the
75th percentile for home prices in designated rural areas exceeds
$100,000, as adjusted for inflation, System institutions could finance
homes that satisfy the criteria of proposed Sec. 613.3020(a)(4)(ii) and
still comply with Congressional intent that the System finance only
moderately priced homes.
The FCA proposes to delete Sec. 613.3040(c), and instead rely on
Sec. 614.4210(b), which authorizes System mortgage lenders to lend up
to 97 percent of the appraised value of the security property if the
loan is guaranteed by a Federal, State, or other government agency.
This would permit FCS mortgage lenders to finance low-equity rural home
borrowers when the loan is guaranteed by a Federal, State or other
government agency.
5. Portfolio Limitations
Both new Sec. 613.3030(c) and existing Sec. 613.3040(d)(2)
implement sections 1.11(b)(2) and 2.4(b)(2) of the Act, which limit
non-farm rural home loans to 15 percent of the total outstanding loans
of each FCS bank or association. Although the FCA has rewritten these
provisions to enhance their clarity, the substantive requirements of
existing Sec. 613.3040(d)(2) remain the same. Proposed
Sec. 613.3030(c)(1) continues to restrict the rural home portfolio of
each FCB or ACB to 15 percent of its total outstanding loans at any one
time. Under proposed Sec. 613.3020(c)(2), rural home loans by each
direct lender association could not exceed 15 percent of its total
outstanding loans at the end of its preceding fiscal year, except with
the prior approval of its funding bank. Proposed Sec. 613.3030(c)(3)
restricts the aggregate of rural home loans made by all direct lender
associations that are funded by the same Farm Credit bank to 15 percent
of the total outstanding loans of all such associations at the end of
the funding bank's preceding fiscal year.
6. Other Deletions
The FCA proposes to delete the existing program limitations in
Sec. 613.3040(d)(1) and (d)(3). Existing Sec. 613.3040(d)(1) is
obsolete because it prohibits rural home lending in each Farm Credit
district without the approval of the now-defunct district boards.8
Moreover, no provision of the Act requires associations to obtain
approval from their funding bank or the FCA before they can exercise
their statutory authority to make rural home loans.
\8\The district boards were abolished by Pub. L. No. 100-399,
section 409(d), 102 Stat. 989, 1003, (August 17, 1988).
---------------------------------------------------------------------------
Finally, the FCA proposes to delete Sec. 613.3040(d)(3), which
states that ``agricultural loans shall receive priority to the
exclusion of rural home loans'' if loan funds for the System are
curtailed. This provision derives from a commitment that the FCA gave
to Congress in 1971, when System banks and associations were first
granted authority to finance non-farm rural homes.9 The FCA
continues to adhere to this commitment. However, existing
Sec. 613.3040(d)(3) is a policy statement, rather than an enforceable
regulatory provision. If a crisis curtails the ability of the FCS to
meet the credit demands of agricultural and aquatic producers, the FCA
Board would use its statutory authorities to ensure that the credit
needs of agricultural and aquatic producers are given priority.
\9\ S.R. 92-307, 92nd Cong., 1st. Sess., (July 27, 1971), p. 6.
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III. Eligibility and Scope of Financing Under Title III of the Act
The FCA proposes to revise and clarify regulations that govern
eligibility and scope of financing for BCs and ACBs. The proposed
regulations will implement provisions of the Farm Credit Banks and
Associations Safety and Soundness Act of 199210 (1992 Act) and the
Farm Credit System Agricultural Export and Risk Management Act11
(1994 Act) that expand the ability of BCs and ACBs to finance: (1)
Cooperatives; (2) their parents, subsidiaries, and other entities in
which eligible cooperatives hold an ownership interest; and (3) water
and waste disposal facilities. The FCA also proposes to amend these
regulations so that BC and ACB loans to rural electric and
telecommunication utilities are compatible with recent revisions to the
Rural Electrification Act of 1936, 7 U.S.C. 901 et seq.
\10\Pub. L. No. 102-552, 106 Stat. 4102, (Oct. 28, 1992).
\11\Pub. L. No. 100-376, 108 Stat. 3497, (Oct. 19, 1994).
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This proposal retains the format in which the domestic lending
authorities and international lending authorities of these banks are
addressed in two separate regulations. The FCA proposes to redesignate
current Sec. 613.3110, however, as new Sec. 613.3100, and to rearrange
this regulation so it addresses eligibility, and when appropriate,
purposes for financing for each of the following classes of domestic
borrowers: (1) Cooperatives, their parents, subsidiaries, and other
related entities that serve farmers, ranchers, and aquatic producers
and harvesters; (2) electric and telecommunications utilities; (3)
water and waste disposal facilities; and (4) domestic lessors.
Similarly, the FCA proposes to redesignate Sec. 613.3120 as new
Sec. 613.3200, which will clearly delineate eligibility and purposes
for financing for the following categories of international loan
transactions: (1) Imports; (2) exports; and (3) international business
transactions.
Current Sec. 613.3005(b) will be deleted by this proposal because
it prescribes business objectives and management practices. From the
FCA's perspective, Sec. 613.3005(b) is not necessary to implement or
interpret the Act or to promote safety and soundness.
A. Eligibility and Scope of Financing for Domestic Loans
1. Cooperatives and Related Entities That Serve Agricultural and
Aquatic Producers
Proposed Sec. 613.3100 streamlines the provisions in current
Sec. 613.3110 which
[[Page 47112]]
authorize BCs and ACBs to lend to cooperatives and related entities
that serve farmers, ranchers, and aquatic producers and harvesters. The
eligibility provisions for this class of borrowers are scattered
throughout paragraphs (a), (b), (c) and (d) of the current regulation.
The FCA proposes to consolidate these requirements for agricultural and
aquatic cooperatives, their parents, subsidiaries, and other related
entities into Sec. 613.3100(b). Except to the extent that proposed
Sec. 613.3100(b) incorporates recent statutory amendments that expand
the authority of BCs and ACBs to lend to cooperatives and their
affiliates, this reorganization is not intended to alter the substance
of the current regulation.
Proposed Sec. 613.3100(a)(1) defines a cooperative as any
association of farmers, ranchers, producers or harvesters of aquatic
products, or any federation of such associations, which conducts
business for the mutual benefit of its members and has the power to:
(1) Process, prepare for market, handle, or market farm or aquatic
products; (2) purchase, test, grade, process, distribute, or furnish
farm or aquatic supplies; or (3) furnish business or financially
related services to their members.
The FCA proposes to revise the definition of service cooperative in
current Sec. 613.3110(a)(4) so that it more closely reflects the
language of the Act. Under the current regulation, an eligible service
cooperative is ``predominately involved in providing specialized
business services related to the agricultural or aquatic business
operation of farmers, ranchers, or producers and harvesters of aquatic
products, or cooperatives.'' This regulatory definition is more
restrictive than section 3.8(a) of the Act, which only requires such
cooperatives to furnish ``farm or aquatic business services or
services'' to their members. Because the Act does not require eligible
service cooperatives to serve only the agricultural or aquatic business
operations of their members, proposed (and redesignated)
Sec. 613.3100(a)(5) would enable BCs and ACBs to finance service
cooperatives that are predominately involved in providing both business
services and financially related services to farmers, ranchers, aquatic
producers and harvesters, or cooperatives. Cooperatives that satisfy
the criteria in proposed Sec. 613.3100(b)(1) are eligible to borrow
from a BC or ACB.
Proposed Sec. 613.3100(b)(1)(i) implements section 3.8(a)(4) of the
Act, which requires agricultural and aquatic producers to hold a
specified percentage of the voting control of an eligible cooperative.
Generally, both the Act and the regulation require agricultural and
aquatic producers to hold at least 80 percent of the voting control of
cooperatives that are eligible to borrow under title III of the Act.
However, section 3.8(a)(4) of the Act and Sec. 613.3100(b)(1)(i) reduce
the minimum voting control threshold of agricultural and aquatic
producers in service cooperatives and certain farm supply cooperatives
to 60 percent. Both the current and proposed versions of this
regulation allow the board of directors of a BC or ACB to adopt
resolutions that impose a higher voting control threshold on any type
of cooperative. The FCA proposes to delete the remainder of current
Sec. 613.3110(b)(2), which prescribes detailed procedures about how BCs
and ACBs should: (1) Treat all eligible cooperatives equitably; (2)
compel borrowers to make good faith representations about voting
control by agricultural and aquatic producers; and (3) document voting
control of eligible cooperatives in certain circumstances. Such
regulatory prescriptions are deemed unnecessary for the enforcement of
eligibility limitations.
Proposed Sec. 613.3100(b)(1)(ii) retains, with minor stylistic
revisions, the current statutory requirement that each cooperative deal
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 that it transacts with or
for nonmembers. Transactions with the United States, its agencies and
instrumentalities, and public utilities are excluded from the amount of
business that a cooperative conducts with either members or nonmembers.
Redesignated Sec. 613.3100(b)(1)(iii) retains, without substantive
amendment, the requirements in section 3.8(a) of the Act and current
Sec. 613.3110(b)(4) that: (1) No member of an eligible cooperative has
more than one vote because of the amount of stock or membership capital
owned therein; or (2) an eligible 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.
Proposed Sec. 613.3100(b)(2) enables legal entities that are
affiliated with eligible cooperatives to borrow from BCs and ACBs.
Under proposed Sec. 613.3100(b)(2)(i), any legal entity that holds more
than 50 percent of the voting control of any eligible cooperative may
borrow from a BC or ACB as long as it uses the loan proceeds to fund
the activities of its cooperative subsidiary on the terms and
conditions specified by the bank. Any legal entity in which an eligible
cooperative has an ownership interest would be eligible to borrow from
a BC or ACB under proposed Sec. 613.3100(b)(2)(ii). This provision of
the regulation reflects section 3(B) of the 1994 Act, which authorizes
BCs and ACBs to finance, for the first time, legal entities in which
the ownership interest of eligible cooperatives is less than 50
percent. However, the amount of financing that a BC or ACB can provide
to entities in which eligible cooperatives hold less than a 50-percent
ownership interest under section 3.7(b)(2)(A)(ii) of the Act and
proposed Sec. 613.3100(b)(2)(ii) cannot exceed the percentage that
eligible cooperatives own in the entity multiplied by the value of the
entity's total assets. For example, an entity with $100 million in
total assets that is 45-percent owned by eligible cooperatives could
receive financing from a BC or ACB that does not exceed $45 million.
Proposed Sec. 613.3100(b)(2)(iii) derives from section 506 of the
1992 Act, which authorizes BCs and ACBs to finance creditworthy, non-
profit service cooperatives and their subsidiaries, if they benefit
agriculture in furtherance of the welfare of the farmers, ranchers, and
aquatic producers and harvesters who are its members. Many of the
cooperative eligibility criteria in Sec. 613.3100(b)(1) apply to this
new class of borrowers. First, only eligible service cooperatives and
their subsidiaries qualify for loans under proposed
Sec. 613.3100(b)(2)(iii). The regulation requires farmers, ranchers,
and aquatic producers and harvesters to hold at least 60 percent of the
voting control in a service cooperative which is either the borrower,
or the borrower's parent. Second, eligibility under proposed
Sec. 613.3100(b)(2)(iii) is predicated upon compliance with proposed
Sec. 613.3100(b)(1)(iii), which requires cooperatives to either: (1)
Operate on the principle of one person, one vote; or (2) restrict
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. Neither section 3.8(b)(1)(D) of the amended Act, nor
Sec. 613.3100(b)(2)(iii) of the proposed regulations require this
category of borrowers to transact more business with members than non-
members.
2. Electric, Telecommunications, and Cable Television Utilities
The FCA proposes to update and consolidate the regulations that
authorize BCs and ACBs to finance
[[Page 47113]]
public utilities that provide electric, telecommunication, and cable
television services in rural areas. Section 1322 of the Food Security
Act of 198512 significantly expanded the authorities of the BCs
(and subsequently the ACBs) to finance rural utilities. Prior to 1985,
only electric and telephone cooperatives in which agricultural or
aquatic producers held 60 percent of the voting control were eligible
for loans under title III of the Act. After 1985, any rural electric or
telephone utility that qualifies for financing from either the former
Rural Electrification Administration (now the Rural Utilities Services
(RUS)), or the Rural Telephone Bank (RTB) of the United States
Department of Agriculture is eligible to borrow under section
3.8(b)(1)(A) of the Act. Section 3.8(b) of the Act allows the corporate
parents, subsidiaries, and other related entities of such rural
utilities to borrow from BCs and ACBs, as well.
\12\Pub. L. No. 99-198, section 1322, 99 Stat. 1534 (Dec. 23,
1985).
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The statutory eligibility standards for rural electric and
telecommunication utilities are incorporated into Sec. 613.3100(c)(1)
of the proposed regulation, which consolidates all of the rural
utilities eligibility and scope of financing provisions that are now
scattered throughout paragraphs (c)(1), (c)(2), and (c)(3) of existing
Sec. 613.3110.
Utilities cooperatives in which at least 60 percent of the voting
control vests with agricultural or aquatic producers continue to
separately qualify for BC and ACB loans under section 3.8(a)(4)(A) of
the Act. State laws usually require utilities to provide electric or
telephone service to all inhabitants of a specific geographic
territory. As a result of the growth of the non-farm population in
rural areas, virtually no utility cooperative still satisfies the
statutory requirement that farmers, ranchers, and aquatic producers
comprise at least 60 percent of its membership. The FCA understands
that BCs and ACBs no longer receive loan applications from borrowers
who meet the criteria of section 3.8(a)(4)(A) of the Act. Therefore,
the FCA proposes to delete specific references in the regulations to
this class of borrowers. However, the FCA notes that utility
cooperatives in rural areas almost always satisfy the less stringent
eligibility criteria of the RUS or the RTB. As a result, BCs and ACBs
now lend exclusively to borrowers who are eligible for RUS or RTB
loans.
Redesignated Sec. 613.3100(c)(1)(ii) makes minor stylistic edits to
existing Sec. 613.3110(c)(3), which authorizes BCs and ACBs to finance
any legal entity that holds more than 50 percent of the voting control
of any eligible electric or telecommunication utility if the borrower
uses the proceeds of the loan to fund the activities of its subsidiary
on the terms and conditions specified by the bank. The subsidiaries and
other entities in which eligible utility borrowers hold an ownership
interest also qualify for BC and ACB loans under amended section
3.7(b)(2)(A)(ii) of the Act and proposed Sec. 613.3100(c)(1). However,
when eligible rural electric and telecommunication utilities own less
than 50 percent of another entity, section 3.7(b)(2)(A)(ii) of the Act
and proposed Sec. 613.3100(c)(3) limit bank financing to an amount that
does not exceed the ownership percentage multiplied by the total assets
of such entity.
The FCA proposes that Sec. 613.3100(a)(3) and (c) refer to
``telecommunication,'' rather than ``telephone'' services. This
proposed revision reflects the fact that Congress recently amended the
definition of ``telephone service'' in section 203(a) of the Rural
Electrification Act of 1936, 7 U.S.C. 924(a), to encompass new
telecommunication technologies.13 Whereas 7 U.S.C. 924(a)
previously defined ``telephone services'' as communications ``through
the use of electricity between the transmitting and receiving
apparatus,'' the statute now refers to communications ``by wire, fiber,
radio, light, or other visual or electromagnetic means.'' As a result,
cellular, facsimile, cable television, speed data services and other
technologically advanced communication services are increasingly
available in rural areas. Accordingly, proposed Sec. 613.3100(c)(2)
authorizes BCs and ACBs to finance these new telecommunication
technologies and services.
\13\Pub. L. No. 101-624, section 2354, 104 Stat. 4039, (Nov. 28,
1990).
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Proposed Sec. 613.3100(c)(2) would authorize BCs and ACBs to extend
credit to eligible borrowers so they can provide electric or
telecommunication services in rural areas. Although the eligibility of
rural utilities to borrow from a BC or ACB is now based primarily upon
their eligibility for RUS or RTB loans, the purposes for financing for
utilities is not directly governed by the Rural Electrification Act of
1936 as amended. Section 203(a) of the Rural Electrification Act of
1936, as amended, 7 U.S.C. 924(a) expressly prohibits cable television
carriers from obtaining loans from the RUS or RTB. However, section
3.7(b)(2)(A)(ii) of the Act permits BCs and ACBs to finance affiliated
entities that facilitate the business operations of eligible rural
electric or telephone utilities. For this reason, proposed
Sec. 613.3100(c)(2) would authorize BCs and ACBs to finance an eligible
subsidiary of an electric or telecommunication utility that is licensed
to provide cable television services in a designated rural community.
3. Water and Waste Disposal Facilities
In 1990, Congress added section 3.7(f) to the Act,14 granting
BCs and ACBs new authorities to finance water and waste disposal
facilities in rural areas where the population does not exceed 20,000
inhabitants. The 1992 Act expanded the scope of financing so that BCs
and ACBs could also finance the maintenance and operations of such
water and waste disposal facilities.15 The FCA proposes to add a
provision to the regulation that will reflect this new statutory
authority.
\14\Pub. L. No. 101-624, section 2323(a), 104 Stat. 4013, (Nov.
28, 1990).
\15\Pub. L. 102-552, section 505, 106 Stat. 4131, (Oct. 28,
1992).
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Under proposed Sec. 613.3100(d)(1), a cooperative, or a public,
quasi-public agency, 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 would be eligible to borrow
from a BC or ACB. For the purposes of proposed Sec. 613.3100(d), a
rural area is defined by statute as 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. Proposed Sec. 613.3100(d)(2) would authorize BCs and
ACBs to extend credit to these borrowers for the installation,
maintenance, expansion, improvement, or operation of rural water and
waste disposal facilities.
4. Loans to Domestic Lessors
The FCA proposes to redesignate existing Sec. 613.3110(c)(4) as new
Sec. 613.3100(e). Under this provision, a BC or ACB may extend credit
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 within the United States. The lease customers of
eligible borrowers include any cooperative, rural electric or
telecommunication utility, or water or waste disposal facility that is
a shareholder of the BC or ACB. The corporate parents and subsidiaries
of
[[Page 47114]]
cooperatives and rural electric and telecommunication utilities may
also lease from the borrower. The FCA observes that the authority of
BCs and ACBs to make loans to domestic lessors is separate and distinct
from the banks' authority to lease equipment to their shareholders
under section 3.7(a) of the Act.
5. Status of Certain Borrowers
Section 3.8(b)(4) of the Act preserves the eligibility of existing
BC or ACB borrowers despite adverse changes in the law. Existing
Sec. 613.3110(b)(5) ``grandfathers'' parties who were actual BC
borrowers on May 17, 1972. The FCA believes that it is no longer
necessary for this regulation to contain a ``grandfather'' clause
because the statute adequately protects such borrowers. The eligibility
of current BC and ACB borrowers will not be adversely affected by the
removal of this regulatory provision.
B. Eligibility and Scope of Financing for International Loan
Transactions
The FCA proposes new Sec. 613.3200, which implements the expanded
statutory authority of BCs and ACBs to finance the import, export, and
international business transactions of cooperatives and other eligible
borrowers. The FCA proposes substantial revisions to the existing
regulation in order to reflect the provisions in the 1994 Act and
enhance the regulation's clarity. The FCA also proposes 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 authorities of BCs and ACBs.
Proposed Sec. 613.3200(a) would define ``farm supplies'' only for
import and export loan transactions. Under this proposal, ``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. This definition of ``farm
supplies'' is consistent with the legislative history of the 1994 Act
which indicates that Congress did not intend the BCs and ACBs to use
their international lending authorities to finance the import or export
of capital equipment and machinery.16
\16\140 Cong. Rec. S14236 (daily ed. Oct. 5, 1994) (Colloquy
between Senators Leahy and Lugar).
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1. Import Transactions
The 1994 Act did not alter the eligibility and scope of financing
requirements for agricultural, aquatic, and farm supply imports that
are financed by a BC or ACB. Although the FCA's proposal restructures
the existing regulation by consolidating all of the eligibility and
scope of financing requirements for import transactions into
Sec. 613.3200(b), the FCA has not changed the substance of current
Sec. 613.3120. The proposed regulation continues to authorize BCs and
ACBs to finance the import of agricultural commodities or products
therefrom, aquatic products, and farm supplies into the United States
for: (1) An eligible cooperative; (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.
2. Export Transactions
Section 3 of the 1994 Act expanded the authority of the BCs and
ACBs to finance parties who facilitate the export of agricultural and
aquatic products and farm supplies from the United States to foreign
countries. As amended, section 3.7(b)(2)(A) of the Act extends
eligibility for such export loans beyond eligible cooperatives, their
related entities and counterparties, to any domestic or foreign party,
provided that the BC or ACB gives priority, to the extent feasible, to
cooperatively sourced products, commodities, and supplies. The statute
imposes limits on BC and ACB financing of exports that are not both:
(1) Originally sourced from cooperatives; and (2) guaranteed or insured
in an amount that equals or exceeds 95 percent of the loan amount by an
entity of the United States Government.
These new statutory requirements are incorporated into proposed
Sec. 613.3200(c), which provides that the total amount of balances
outstanding on loans that are not originally sourced from cooperatives
and at least 95-percent guaranteed by the Federal government shall not,
at any time, exceed 50 percent of the bank's capital. Furthermore, both
the Act and the regulation require the board of directors of each BC
and ACB to adopt policies and procedures 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.
3. International Business Transactions
Prior to 1994, section 3.7(b) of the Act authorized BCs and ACBs to
finance only the domestic and foreign legal entities that facilitated
the import and export transactions of their cooperative owners. As
amended by section 3 of the 1994 Act, this statutory provision now
authorizes BCs and ACBs to extend credit to any domestic or foreign
legal entity that facilitates the foreign business operations of an
eligible cooperative that holds an ownership interest in it. This new
statutory authority is incorporated into proposed Sec. 613.3200(d). The
FCA observes that this new authority will enable BCs and ACBs to assist
their cooperative customers in developing overseas markets for American
agricultural and aquatic exports, which in turn, will ultimately
increase the income of America's farmers, ranchers, and aquatic
producers.
4. Restrictions
Proposed Sec. 613.3200(e) contains restrictions that the Act
imposes on the international lending authorities of BCs and ACBs. When
eligible cooperatives own less than 50 percent of a foreign or domestic
legal entity, section 3.7(b)(2)(A)(ii) of the Act and proposed
Sec. 613.3200(e)(1) limit the amount of financing that a BC or ACB may
provide to the affiliated entity for any import, export, or
international business transaction, to the percentage of ownership that
such cooperatives hold in such entity multiplied by the value of the
entity's total assets. Furthermore, section 3.7(b)(2)(B) and proposed
Sec. 613.3200(e)(2) prohibit BCs and ACBs from financing the relocation
of any plant or facility from the United States to a foreign country.
IV. Similar Entities
In 1992, Congress granted FCS banks operating under title III of
the Act new authority to participate in loans made by non-System
lenders to ``similar entities.''17 Section 2 of the 1994 Act
clarified this new authority,18 while section 5 of the 1994 Act
granted similar loan participation powers to Farm Credit banks
operating under title I of the Act and direct lender
associations.19 As amended, sections 3.1(11)(B) and 4.18A of the
Act grant System banks and associations broader authorities pertaining
to eligibility and loan
[[Page 47115]]
participations. The FCA proposes Sec. 613.3300 to provide FCS banks and
direct lender associations with guidance about the scope of their new
authorities.
\17\Pub. L. No 102-552, section 502, 106 Stat. 4130 (Oct. 28,
1992).
\18\Pub. L. No. 103-376, section 2, 108 Stat 3497, (Oct. 19,
1994).
\19\Pub. L. No. 103-376, section 5, 108 Stat 3497, (Oct. 19,
1994).
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Both sections 3.1(11)(B)(iv) and 4.18A(a)(1) of the Act define
``participate'' and ``participation'' to mean ``multilender
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.'' The FCA proposes to incorporate this
statutory definition into Sec. 613.3300(a)(1). The FCA emphasizes that
this definition would apply only to loan participations between FCS and
non-System lenders under sections 3.1(11)(B) and 4.18A of the Act and
proposed Sec. 613.3300. For all transactions under sections 1.5(12),
2.2(13), and 3.1(11)(A) of the Act and subpart H of part 614, ``loan
participation'' is defined by Sec. 614.4325(a)(4) as a ``fractional
undivided interest in the principal amount of the loan.''
The proposed regulation would authorize FCS banks and associations
to provide related services to similar entities. The FCA observes that
the plain language of sections 3.1(11)(B)(iv) and 4.18A(a)(1) of the
Act permits FCS banks and associations to provide ``technical and
financial assistance'' to similar entities. Accordingly, the FCA
proposes a conforming amendment to Sec. 618.8005 to reflect this new
statutory authority. The FCA invites comments about whether the final
regulation ought to provide further guidance about this financially
related service authority.
Sections 3.1(11)(B)(ii) and 4.18A(a)(2) identify a ``similar
entity'' as a party that is ineligible for a loan from an FCS bank or
association, but has operations that are ``functionally similar'' to
the activities of eligible borrowers. An entity is functionally similar
to an eligible borrower if it derives a majority of its income from, or
a majority of its assets are invested in, the conduct of the activities
that are functionally similar to the activities that are conducted by
eligible parties. The FCA proposes in Sec. 613.3300(a)(2) a definition
of similar entity that is closely aligned with the statutory
definition.
Proposed Sec. 613.3300(b) reflects sections 3.1(11)(B)(ii) and
4.18A(a)(2) of the Act, which the FCA interprets to mean that the
borrower is ineligible under sections 1.9, 1.11, 2.4, 3.7 and 3.8 of
the Act to borrow directly from a System bank or association, but has a
credit need that an FCS lender could finance for an eligible borrower.
Section 4.18A(b)(4) of the Act expressly precludes Farm Credit banks
operating under title I of the Act and direct lender associations from
participating in rural home loans under this similar entity authority.
For illustration purposes, the parties who qualify as similar
entities under sections 3.1(11)(B) and 4.18A of the Act and the
proposed regulations are presented below. The FCA solicits comments
about whether the final regulation should provide a specific listing of
the parties who qualify as similar entities. Farm Credit banks and
direct lender associations that operate under titles I or II of the Act
would be authorized to participate with non-System lenders in loans to:
(1) Parties who are ineligible to borrow under Sec. 613.3000 but
require financing for any agricultural or aquatic purpose; (2) any
individual, cooperative, and other legal entity that processes or
markets agricultural or aquatic products, but supplies no throughput
from an agricultural or aquatic operation; (3) a processing or
marketing operation in which farmers, ranchers or aquatic producers do
not hold a controlling interest; and (4) parties who are ineligible to
borrow under proposed Sec. 613.3020, but operate farm or aquatic supply
businesses that furnish services, farm or aquatic equipment, and other
goods that are directly related to the agricultural or aquatic
operations of farmers, ranchers, and aquatic producers or harvesters.
The FCA believes that title III lenders could participate in loans
made by non-System lenders to four types of ``similar entities.''
First, BCs and ACBs could participate in loans to any legal entity that
is not part of a cooperative enterprise, but: (1) Processes, prepares
for market, handles, or markets farm or aquatic products; (2)
purchases, tests, grades, processes, distributes, or furnishes farm or
aquatic supplies; or (3) furnishes business and financially related
services primarily to farmers, ranchers, and aquatic producers or
harvesters. Second, BCs and ACBs could participate in loans to electric
utilities that provide some service in rural communities, but for some
reason are ineligible to participate in RUS programs. Third, BCs and
ACBs could participate in loans to independent power producers, so long
as they sell more than 50 percent of the electricity that they generate
to rural electric utilities that are eligible for RUS loans. Finally,
BCs and ACBs could participate in loans that finance the import of
agricultural commodities and products, aquatic products, and farm
supplies for borrowers who are not eligible cooperatives, their
subsidiaries, or their counterparties.
Section 4.18A(b) of the Act allows each FCB, ACB, and direct lender
association to ``participate in any loan of a type otherwise authorized
under title I or II made to a similar entity * * *.'' The FCA
interprets this passage to mean that similar entity loans should still
be compatible with the basic lending powers of each Farm Credit bank or
association. In other words, section 4.18A(b) of the Act would, for
example, authorize FLCAs to participate only in similar entity loans
that are: (1) Secured by a first lien on real estate; and (2) mature
within not fewer than 5 years, nor more than 40 years. Similarly, this
statutory provision would permit PCAs to participate only in operating
loans that mature within the time prescribed in section 1.10(b) of the
Act. Accordingly, Sec. 613.3300(c) reflects the FCA's interpretation of
section 4.18A(b) of the Act. In the FCA's opinion, the above-cited
passage in section 4.18A(b) of the Act is compatible with sections
1.5(12)(C) and 2.2(13) of the Act, which authorize FCS banks and direct
lender associations to participate with non-System lenders only in the
type of loans that such FCS institutions could originate.
Proposed Sec. 613.3300(d) implements the restrictions that sections
3.1(11)(B)(i) and 4.18A(b) of the Act impose on loan participations to
similar entities. Proposed Sec. 613.3300(d)(1) reflects statutory
lending limits for loan participations to similar entities. Under
proposed Sec. 613.3300(d)(1)(i)(A), the total amount of all loan
participations that any FCB, ACB, or direct lender association may have
outstanding under proposed Sec. 613.3300(b)(1) to a single credit risk
could not exceed 10 percent of its total capital. However, proposed
Sec. 613.3300(d)(1)(i)(B) would authorize the shareholders of any FCB,
ACB, or direct lender to approve a higher lending limit, provided it
does not exceed 25 percent of the institution's total capital. This
provision would implement section 4.18A(b)(1) of the Act, which
authorizes the FCA to permit a higher limit that would apply if
shareholders approve. This proposal is consistent with the lending
limits that FCA has established for loans to borrowers under titles I
and II of the Act. Under proposed Sec. 613.3300(d)(1)(ii), the total
amount of all loan participations that any BC or ACB may have
outstanding under proposed Sec. 613.3300(b)(2) to a single credit risk
could not exceed 10 percent of its total capital.
Under proposed Sec. 613.3300(d)(2), the participation interest in
the same loan
[[Page 47116]]
held by one or more Farm Credit bank(s) or association(s) could not, at
any time, equal or exceed 50 percent of the principal amount of the
loan. This regulatory provision would implement sections
3.1(11)(B)(i)(I)(bb) and 4.18A(b)(2) of the Act. Sections 3.1(11)(B)
and 4.18A of the Act also limit the amount of loan participations to
similar entities that each FCS bank or direct lender association may
hold at any time to 15 percent of its total outstanding assets.
Therefore, proposed Sec. 613.3300(d)(3) applies this 15-percent
portfolio limit to FCBs, BCs, ACBs, and direct lender associations.
Proposed Sec. 613.3300(e) would implement requirements of sections
3.1(11)(B) and 4.18A(c)(3) concerning approval by other FCS banks and
associations. Proposed Sec. 613.3300(e)(1) implements a statutory
provision that requires a direct lender association to obtain approval
from its funding bank before it participates with a non-System lender
in a loan to a similar entity. The FCA believes that a funding bank's
decision to grant or deny approval under section 4.18A(c)(3) of the Act
and proposed Sec. 613.3300(e)(1) should rest exclusively on safety and
soundness considerations that the transaction would have on the bank's
financial position. Direct lender associations have not previously
participated with non-System lenders in syndications and other
multilender transactions that provide credit to ineligible borrowers.
The FCA solicits comments from interested parties about how the final
regulation can best accord equitable treatment to both funding banks
and their affiliated associations.
Proposed Sec. 613.3300(e)(2) would require a Farm Credit bank
operating under title I of the Act or a direct lender association to
comply with Sec. 614.4070 before it participates in a similar entity
loan in the chartered territory of another FCS institution. These
provisions are designed to prevent intra-System competition without the
consent of affected institutions. Requiring consent for similar entity
participations would be consistent with the FCA's policy for out-of-
territory participations and loans to eligible borrowers. However, some
System institutions have informed the Agency that obtaining consent is
time-consuming and impedes their ability to engage in participation
transactions. As the Act is silent on this point, the FCA seeks public
comment on whether consent for out-of-territory participations to
similar entities ought to be required.
Proposed Sec. 613.3300(e)(3) would implement section 4.18A(c)(1) of
the Act by requiring a FCB or direct lender association to obtain BC or
ACB approval before it participates in a loan to a similar entity that
is eligible to borrow directly from a Farm Credit bank operating under
title III of the Act. Both the Act and the proposed regulation require
approval from the BC or ACB that, at the time of origination, has the
greatest volume of loans (made under title III of the Act) in the State
where the headquarters of the similar entity is located.
Similarly, proposed Sec. 613.3300(e)(4) implements section
3.1(11)(B)(iii) of the Act by requiring a BC or ACB to obtain FCB
approval before it participates with a non-System lender in a loan to a
similar entity that is eligible to borrow directly from an FCB or a
direct lender association under proposed Secs. 613.3010 or 613.3030.
The BC or ACB is required to obtain approval from the FCB(s) in whose
chartered territory the similar entity conducts operations. As the FCA
interprets section 3.1(11)(B)(iii) of the Act, approval by two FCBs
would only be required when both banks are chartered to fund mortgage
and short- and intermediate-term operating loans in the same chartered
territory. When one FCB discounts production loans in a territory where
another FCB funds solely mortgage loans, the BC or ACB would only be
required to obtain consent from the FCB with the authority to finance
the similar entity.
Pursuant to sections 3.1(11)(B)(iii) and 4.18A(c)(2) of the Act,
proposed Sec. 613.3300(e)(5) grants FCS institutions broad latitude to
negotiate agreements that confer intra-System consents required by the
Act and FCA regulations.
Proposed Sec. 613.3300(f) reflects the FCA's determination that
borrower rights do not apply to participation interests that FCBs,
ACBs, and associations hold in similar entity loans. Sections
4.14A(a)(5) and 4.14A(a)(6)(A) of the Act require Farm Credit banks
(operating under title I of the Act) and associations to accord
borrower rights on loans to eligible borrowers that they make to bona
fide farmers, ranchers, and aquatic producers and harvesters. Borrower
rights would not apply to similar entity loans because the borrower is
ineligible to borrow directly from an FCS bank or association and the
loan is originated by a non-System lender.
The capitalization requirements for similar entity loan
participations is addressed by proposed Sec. 613.3300(g). This
provision of the proposed regulation would require the capitalization
bylaws of each Farm Credit bank and association to address whether, and
to what extent, non-voting stock or participation certificates should
be required for participation interests in similar entity loans.
Proposed Sec. 613.3300(g) is consistent with section 4.3A of the Act
and Sec. 615.5220.
V. Miscellaneous
The FCA proposes to delete existing Sec. 613.3060, which simply
states that direct lender associations and other financing institutions
(OFIs) are eligible to borrow from FCBs and ACBs. Regulations in
subparts C and P of part 614 specifically implement the authority of
FCBs and ACBs to fund and discount loans for direct lender associations
and OFIs under section 1.7 of the Act rendering this section redundant.
The FCA also proposes to delete the following regulations:
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. These regulations define certain
terms that pertain to eligibility and scope of financing. Many of these
definitions are not identical to either the existing or proposed
regulations in part 613. This deletion will reduce duplication and
potential for confusion.
Finally, the FCA proposes to relocate the nondiscrimination in
lending regulations in subpart E of part 613 to a new part 626.
Nondiscrimination is unrelated to eligibility and scope of financing,
and therefore, the FCA believes that this topic should be addressed in
a separate part of the regulations.
List of Subjects
12 CFR Part 613
Agriculture, Banks, Banking, Credit, Rural areas.
12 CFR Part 614
Agriculture, Banks, Banking, Foreign Trade, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistances.
12 CFR Part 619
Agriculture, Banks, Banking, 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, 618, 619,
and
[[Page 47117]]
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 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 land means land that is devoted to or available
for the production of agricultural or aquatic products.
(2) Bona fide farmer, rancher, or producer or harvester of aquatic
products means an individual or legal entity that either:
(i) Produces agricultural products or produces or harvests aquatic
products to generate income; or
(ii) Owns agricultural land.
(3) 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)
or on a visa pursuant to a provision in 8 U.S.C. 1101(a)(15) that
authorizes such individual to own property or operate or manage a
business.
(4) Legal entity means any partnership, corporation, trust, estate,
or other legal entity, excluding legal entities eligible under title
III of the Act, that is established pursuant to the laws of the United
States, any State thereof, the Commonwealth of Puerto Rico, or the
District of Columbia and is legally authorized to conduct a business.
(b) Eligible borrowers. A bona fide farmer, rancher, or producer or
harvester of aquatic products is eligible to borrow under either title
I or II of the Act.
(c) Financing for agricultural or aquatic needs. Any 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 are actively engaged in
agricultural or aquatic production may also obtain financing for:
(i) Housing and domestic needs; and
(ii) Other business needs in an amount that does not exceed the
market value of their agricultural or aquatic assets.
(2) Individual eligible borrowers who either own agricultural land
as an investment, or are non-resident foreign nationals, may obtain
total financing for their housing, domestic and other business needs in
an amount that does not exceed the market value of their agricultural
or aquatic assets.
(3) Legal entities may obtain financing for their other credit
needs in an amount that does not exceed the market value of their
agricultural assets only if:
(i) The securities of the borrower are not traded on a public
exchange; and
(ii) More than 50 percent of the assets of the borrowing legal
entity are used in agricultural or aquatic production.
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) hold a controlling interest; and
(2) The borrower or an owner of a borrowing legal entity
consistently 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 supply,
on a consistent basis, 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'' include 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 businesses.
(a) Eligibility. An individual or legal entity that furnishes
services to farmers and ranchers that are directly related to their
agricultural operations is eligible to borrow under titles I and II of
the Act.
(b) Purposes of financing. An eligible farm-related business may
obtain financing for its business needs, subject to the following
requirements:
(1) An eligible farm-related business that derives more than 50
percent of its income (as consistently measured on either a gross sales
or net sales basis) from furnishing services that are directly related
to the agricultural operations of farmers and ranchers may obtain
financing for all of its business needs.
(2) An eligible farm-related business that derives 50 percent or
less of its income (as consistently measured on either a gross sales or
net sales basis) from furnishing services that are directly related to
the agricultural operations of farmers and ranchers may obtain
financing only for those credit needs that are related to the provision
of farm-related services.
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
[[Page 47118]]
rural area that will be the occupant's principal residence.
(3) Rural area means 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.
(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, ranked from
the lowest value to the highest value in the rural area where it is
located in accordance with the most recent edition of the Census of
Housing, General Housing Characteristics published by the United States
Bureau of the Census. System institutions may obtain copies of this
document from the Superintendent of Documents, U.S. Government Printing
Office, Washington, DC 20402.
(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) 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.
(1) Cooperative means any association of farmers, ranchers,
producers or harvesters of aquatic products, or any federation of such
associations, which 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 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 predominately
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 for cooperatives. A cooperative is
eligible to borrow from a bank for cooperatives or an agricultural
credit bank only if the following requirements are satisfied:
(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
shall provide needed services to a community, and shall compete 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 nonmembers, 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 conforms 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.
(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 it 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 paragraphs (b)(1)(i)(A) and
(b)(1)(iii) 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 and harvesters who are its
members.
(c) Electric, telecommunication, and cable television utilities.--
(1) Eligibility. A bank for cooperatives or an agricultural credit bank
may lend to:
(i) Cooperatives, other entities, or the subsidiaries of such
cooperatives or 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
[[Page 47119]]
Bank of the United States Department of Agriculture; or
(C) Have been certified by the Rural Utilities Service of the
United States Department of Agriculture to be eligible for a loan, loan
commitment, or loan guarantee; or
(ii) 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)(i) 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 for cooperatives or agricultural
credit bank.
(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 that are generally compatible with the Rural
Electrification Act of 1936, as amended, 7 U.S.C. 901 et seq., and
regulations that the Secretary of Agriculture promulgates in 7 CFR
parts 1610, 1710, 1712, 1714, 1735, 1737, 1739, and 1751. A subsidiary
that is eligible to borrow under paragraph (c)(1) of this section may
also obtain financing from a bank for cooperatives or agricultural
credit bank to operate a licensed cable television utility.
(3) Restriction. When an eligible utility, as defined in paragraph
(c)(1)(i) of this section, owns less than 50 percent of any legal
entity, the amount of financing provided by the bank for cooperatives
or agricultural credit bank to the entity shall not exceed the
percentage that the eligible cooperatives own in such entity multiplied
by the value of the total assets of such entity.
(d) Water and waste disposal facilities.--(1) Eligibility. A
cooperative or a public, quasi-public agency, 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) Transactions involving 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 any import, export, or international business
transaction 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 multilender 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) Compatibility with lending authorities under titles I and II of
the Act. Each direct lender association may participate in loans to
similar entities under paragraph (b) of this section only to the extent
that such loans are compatible with the association's applicable long-
term real estate lending
[[Page 47120]]
authority under sections 1.7(a) and 1.10(a) of the Act or its short-
and intermediate-term lending authorities under sections 1.10(b) and
2.4 of the Act.
(d) 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.
(e) 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 operating under title I of the Act or a
direct lender association shall participate in a loan under paragraph
(b) of this section to a similar entity that is located outside of its
chartered territory unless it complies with the requirements of
Sec. 614.4070 of this chapter.
(3) 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 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.
(4) 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.
(5) All approvals required under paragraph (e) 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.
(f) Borrower rights. The borrower rights requirements in title IV
of the Act and Sec. 614.4336 and subparts K, L and N of part 614 of
this chapter do not apply to participations in loans to similar
entities under paragraph (b) of this section.
(g) Borrower stock requirements. Pursuant to section 4.3A of the
Act and Sec. 615.5220 of this chapter, the capitalization bylaws of
each Farm Credit bank and association shall determine whether, and to
what extent, non-voting stock or participation certificates shall be
required for participations in loans to similar entities.
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.
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) * * *
* * * * *
[[Page 47121]]
(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 614.4222 is revised to read as follows:
Sec. 614.4222 Rural home loans.
A long-term real estate loan, including a revolving line of credit,
on a rural home shall be secured by a first lien on the property,
pursuant to Sec. 614.4210, except that it may be secured by a second
lien if the institution also holds the first lien on the property. A
short- or intermediate-term loan on a rural home, including a revolving
line of credit, must be secured by a lien on the property unless the
financing is provided exclusively for repairs, remodelling, or other
improvements to the rural home, in which case the credit may be secured
by other property or unsecured if warranted by the creditworthiness of
the borrower.
9. 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]
10. Section 614.4610 is amended by removing the words ``a
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(c)(2)''.
Subpart Q--Banks for Cooperatives Financing International Trade
11. 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]
12. 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), (b), and (h).
Sec. 614.4710 [Amended]
13. Section 614.4710 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place it appears 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]
14. Section 614.4720 is amended by adding after the words ``Banks
for cooperatives'' the words ``and agricultural credit banks'' in the
first sentence of the introductory paragraph.
Sec. 614.4800 [Amended]
15. 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]
16. 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) and (b).
Sec. 614.4900 [Amended]
17. 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).
PART 618--GENERAL PROVISIONS
18. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Subpart A--Related Services
Sec. 618.8005 [Amended]
19. 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).
PART 619--DEFINITIONS
20. 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]
21. 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 626--NONDISCRIMINATION IN LENDING
22. 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]
23. 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: September 5, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-22313 Filed 9-8-95; 8:45 am]
BILLING CODE 6705-01-P
