[Federal Register: August 11, 2003 (Volume 68, Number 154)]
[Proposed Rules]
[Page 47502-47513]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11au03-23]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 614 and 615
RIN 3052-AB96
Loan Policies and Operations; Funding and Fiscal Affairs, Loan
Policies and Operations, and Funding Operations; OFI Lending
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA, agency, us, or we)
proposes to amend its regulations governing other financing
institutions (OFIs) and investments in Farmers' notes so it would be
easier for Farm Credit System (FCS, Farm Credit, or System)
institutions and non-System lenders to work together in providing
affordable credit to agriculture and rural America. In addition, the
proposed rule would remove provisions in the existing OFI and Farmers'
notes regulations that: Impede the flow of credit; are not required by
law; or do not enhance safe and sound operations. The FCA also proposes
related amendments to its capital regulations.
DATES: You may send us comments by October 10, 2003.
ADDRESSES: Send us your comments by electronic mail to reg-
comm@fca.gov, through the Pending Regulations section of our Web site
at www.fca.gov, or through the government-wide Web site,
www.regulations.gov. You may also submit your comments in writing to S.
Robert Coleman, Director, Regulation and Policy Division, Office of
Policy and Analysis, Farm Credit Administration, 1501 Farm Credit
Drive, McLean, VA 22102-5090, or by facsimile transmission to (703)
734-5785. You may review copies of all comments we receive in the
Office of Policy and Analysis, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
Dennis Carpenter, Senior Policy Analyst, Office of Policy and Analysis,
Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia
22102-5090, (703) 883-4498, TTY (703) 883-4434,
or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090, (703) 883-4020, TTY (703) 883-4020.
SUPPLEMENTARY INFORMATION:
[[Page 47503]]
I. Background
This proposed rule is intended to make affordable credit more
available to agriculture and rural America by increasing cooperation
between System and non-System lenders. This rulemaking began on April
20, 2000, with an advance notice of proposed rulemaking (ANPRM) that
asked the public questions about ways to improve the funding and
discount relationship between Farm Credit banks and OFIs. See 65 FR
21151. FCA staff subsequently conducted telephone and field interviews
with interested parties. On August 3, 2001, we held a public meeting in
Des Moines, Iowa, where interested parties offered suggestions on how
we could facilitate greater cooperation between System and non-System
lenders in providing credit to agriculture and rural America. The
public meeting addressed both the OFI program and other arrangements
where the FCS and non-System lenders could help each other in extending
credit to farmers, ranchers, and other eligible borrowers in rural
America.
Many of the comments and suggestions that we received from the
ANPRM, interviews, and at the public meeting are incorporated in this
proposed rule, which would revise both our OFI and Farmers' notes
regulations. This preamble also explains other actions that we are
taking to facilitate greater cooperation between System and non-System
lenders that will ultimately benefit agriculture and other eligible
rural residents. OFIs and Farmers' notes are two separate and distinct
programs that arise under different provisions of the Farm Credit Act
of 1971, as amended (Act). In the first program, Farm Credit Banks
(FCBs) and the agricultural credit bank (ACB) (collectively Farm Credit
banks) fund and discount short- and intermediate-term loans that OFIs
make to eligible farmers, ranchers, aquatic producers and harvesters,
farm-related businesses, and non-farm rural homeowners. The Farmers'
notes program currently authorizes certain FCS associations to invest
in notes, contracts, and other obligations that eligible farmers and
ranchers enter into with suppliers. Changes to the OFI and Farmers'
notes regulations require conforming amendments to our capital
regulations.
This rule complements other efforts by the FCA to increase the flow
of credit to agriculture and rural America by promoting greater
cooperation between FCS and non-System lenders. System banks and
associations have many different powers that enable them to act as a
funding source for a wide array of credit products that non-System
lenders offer their customers. For example, Farm Credit banks fund and
discount short- and intermediate-term loans that OFIs make to eligible
borrowers. Separately, Farm Credit banks and associations can provide
non-System lenders with long-term funding, in addition to short- and
intermediate-term funding, by buying participations up to 100 percent
of the principal amount of the loan. Syndications are another method
that FCS institutions use to help non-System institutions extend
credit, particularly to larger borrowers. As part of its effort to
promote partnering arrangements between FCS and non-System lenders, the
FCA is currently exploring methods for the System's use of syndications
originated by non-System lenders. Today, the FCA is proposing
substantial revisions to its Farmers' notes regulations, which if
adopted, will expand this program to more non-System lenders, and allow
all FCS associations to invest, for the first time, in both long- and
short-term loans between these other lenders and eligible farmers and
ranchers.
These different authorities give the FCS many powers to meet the
varied funding needs of a wide variety of non-System lenders that
finance agriculture. These authorities allow non-System lenders to
access any one or a combination of FCS funding programs, depending on
individual needs. The System fulfills its mission to finance
agriculture and other specified credit needs in rural America by
serving as a steady source of funding and liquidity for other lenders.
This should result in lower credit costs and more credit options for
farmers, ranchers, aquatic producers and harvesters, and other eligible
rural residents.
II. Other Financing Institutions
A. History of OFIs
Farm Credit banks have discounted production agricultural loans for
OFIs since 1923.\1\ Since 1930, Farm Credit banks also have made
secured loans and advances directly to OFIs.\2\ Thus, OFIs could borrow
from, and discount production agricultural loans with, Farm Credit
banks before Congress created production credit associations (PCAs) as
an alternative source of financing the operating needs of farmers and
ranchers.\3\ Since 1980, the Act has authorized Farm Credit banks to
fund and discount for OFIs any loan that PCAs could make. As a result,
OFI loans to eligible processing and marketing, farm-related
businesses, and non-farm rural homeowners may also be funded or
discounted by a Farm Credit bank.
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\1\ See The Agricultural Credits Act of 1923, Pub. L. 503, 42
Stat. 1454 (March 4, 1923).
\2\ See Federal Farm Loan Act Amendments, Pub. L. 439, 46 Stat.
816 (June 26, 1930).
\3\ See Farm Credit Act of 1933, Pub. L. 75-73D, title II, 48
Stat. 257, 259 (June 16, 1933).
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The legislative history of the various Farm Credit Acts reveals
that the primary purpose of the OFI program is to address the scarcity
of operating credit for farmers and ranchers.\4\ Over the years,
Congress has responded to the changing credit needs of farmers,
ranchers, and other rural residents by expanding the lending authority
of the FCS, and giving Farm Credit banks more authority to fund
OFIs.\5\ These statutory changes have ensured that the FCS could
continue as a source of affordable and reliable credit to agriculture
and rural America on both a wholesale and retail level.
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\4\ See H. R. Rep. No. 1712, 67th Cong., 1st. Sess. (February
25, 1923), p. 17; H.R. Rep. No. 96-1287, 96th Cong., 2nd Sess.
(September 4, 1980), p.21.
\5\ From 1923 until 1988, OFIs funded and discounted short- and
intermediate-term loans with the former Federal Intermediate Credit
Banks. Section 410 of the Agricultural Credit Act of 1987 (1987 Act)
created the FCBs through the mandatory merger of the Federal Land
Bank and the Federal Intermediate Credit Bank in each Farm Credit
district. See Pub. L. 100-233, section 410, 101 Stat. 1568, 1637
(January 6, 1988). Section 7.0 of the Act authorizes FCBs to merge
with banks for cooperatives to form an ACB. According to section 7.2
of the Act, an ACB has all of the powers and obligations of its
constituent banks.
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OFIs, historically, have established funding or discount
relationships with Farm Credit banks when the cost of FCS funds is
significantly lower than other funding sources. The OFI program reached
its peak in the 1970s and early 1980, when market interest rates were
at historically high levels. In 1982, approximately 300 OFIs borrowed
approximately $914 million from various Farm Credit banks. By December
31, 2002, Farm Credit banks lent only $291 million to 31 OFIs.
Much of the decline in the OFI program can be attributed to the
farm crisis of the mid and late 1980s. Declining land values and
commodity prices meant that many farmers were unable to repay their
loans, which caused the FCS to experience significant financial stress
between 1984 and 1989. During this time, many OFIs terminated their
funding and discount relationships with Farm Credit banks for a variety
of reasons. One reason for the decline of the OFI program was that Farm
Credit banks were in a weakened financial position and, therefore,
could no longer offer OFIs competitive rates. Additionally, the merger
or consolidation among many commercial bank OFIs improved their
liquidity and
[[Page 47504]]
resulted in lower-cost funding for their agricultural loans.
The FCS has regained its financial strength over the past decade.
As a result, FCBs and the ACB are once again in a strong financial
position to fulfill their statutory mission of increasing the
availability of affordable and dependable credit for agriculture and
other rural credit needs by assisting both FCS associations and non-
System lenders, including OFIs. The FCA has consistently promoted
various efforts to improve cooperation among System and non-System
lenders so agriculture and rural America will always have adequate
credit. In this context, we propose regulatory amendments that will
provide OFIs with greater access to the funding and discount services
of Farm Credit banks within the confines of the Act.
B. The Act and OFIs
Currently, section 1.7(b)(1) of the Act authorizes Farm Credit
banks to offer funding, discounting, and other similar financial
services to OFIs so they can make short- and intermediate-term loans to
eligible agricultural and aquatic producers, farm-related business, and
rural homeowners. Section 1.7(b)(1)(B) of the Act allows national
banks, State banks, trust companies, agricultural credit corporations,
incorporated livestock loan companies, certain agricultural credit
cooperatives, and corporations that lend to aquatic producers and
harvesters to become OFIs. Section 1.7(b)(4) requires the FCA to enact
regulations that assure that loans, discounts, and other similar
financial assistance from Farm Credit banks are available on a
reasonable basis to any OFI that:
1. Is significantly involved in lending for agricultural or aquatic
purposes;
2. Demonstrates a continuing need for supplementary sources of
funds to meet the credit requirements of its agricultural or aquatic
borrowers;
3. Has limited access to national or regional capital markets; and
4. Does not use its relationship with its Farm Credit bank to
extend credit to persons and for purposes that are not authorized by
title II of the Act.
C. FCA's Rulemaking Efforts
This proposed rule is designed to help restore the vitality of the
OFI program by making it easier for OFIs to obtain funding from Farm
Credit banks. Between 1996 and 1998, the FCA conducted a rulemaking
that overhauled the OFI regulations by removing numerous regulatory
requirements that were not required by law, or did not promote safety
and soundness.\6\ The express purpose of our earlier rulemaking was to
``substantially expand access to System funding so OFIs can provide
more short- and intermediate-term credit to parties who are eligible to
borrow under sections 2.4(a) and (b) of the Act.'' \7\
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\6\ See 61 FR 24907 (May 17, 1996); 62 FR 38223 (July 17, 1997);
63 FR 36541 (July 7, 1998).
\7\ See 63 FR 36541 (July 7, 1998).
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After the earlier rulemaking concluded, Farm Credit banks and OFIs
brought to our attention other problems that impeded OFI access to
System funding. In response to these concerns, the FCA started this
rulemaking in April 2000. The ANPRM sought input on the following
issues:
1. The appropriate risk weighting of Farm Credit bank loans to
OFIs;
2. Removing regulatory restrictions on funding OFIs located in the
chartered territory of another Farm Credit bank;
3. Public disclosure of the identities of OFIs; and
4. Other ways to improve the ability of Farm Credit banks to fund
OFIs.
The FCA received 37 comment letters in response to the ANPRM. Of
this total, comments were received from six Farm Credit banks and
associations, 18 commercial banks, and four non-bank entities. Nine (9)
banking trade associations also submitted comments on behalf of their
members. Most commenters favored: (1) Lowering the risk weighting on
most System bank loans to OFIs; (2) removing territorial restrictions
on FCS bank loans to OFIs; and (3) disclosing the identity of OFIs. The
commenters also offered us helpful suggestions for improving the
funding and discounting relationship between OFIs and their System
funding banks. We will discuss these comments in greater detail below
when we explain how the proposed rule addresses specific issues.
The responses to the ANPRM indicated that we needed more public
input, not only on OFIs, but also on other approaches that would enable
the FCS to provide funding to non-System lenders that finance
agriculture and other specified needs in rural America. The FCA gained
additional information and advice about these issues in the summer of
2001, when staff conducted telephone and field interviews with all Farm
Credit banks, an FCS association, and three OFIs in Wisconsin, and
Oklahoma. These field interviews were supplemented by telephone
interviews with other lenders. In all interviews, the staff asked the
questions that we originally raised in the ANPRM and sought additional
information about the hurdles that existing and potential OFIs faced in
their relationships with FCS funding banks.
The FCA Board also decided to solicit additional guidance from
interested parties by convening a public meeting in Des Moines, Iowa,
on August 3, 2001. Fifteen (15) representatives from Farm Credit banks
and associations, trade associations, commercial banks, OFIs,
investment bankers, and farm groups presented testimony at or as
follow-up to the public meeting. In addition to discussing the OFI
program, commenters at the public meeting also asked the FCA to explore
other arrangements where non-System lenders that do not qualify as OFIs
could obtain credit services from both Farm Credit banks and
associations. The comments that we received from the ANPRM, field and
telephone interviews, and the public meeting, helped us develop the
rule that we propose today.
D. Regulatory Issues
As we explained earlier, the purpose of this rule is to make it
easier for OFIs to obtain funding from Farm Credit banks for their
short- and intermediate-term loans to agricultural and aquatic
producers, farm-related business, and rural homeowners. Improving OFI
access to the funding and discount services of Farm Credit banks could
make affordable credit more available to farmers, ranchers, and other
eligible borrowers. Farm Credit banks fulfill their missions as a
Government-sponsored enterprise by enhancing the liquidity of OFIs,
thereby lowering the cost of funding agriculture.
Commenters identified several regulatory issues pertaining to the
OFI program. The FCA proposes to address some of the issues by amending
the OFI regulations. In other cases, the FCA will explain how the
commenters' concerns are addressed by the existing regulations, which
means that a regulatory amendment is unnecessary.
1. Assured Access
Section 1.7(b)(4)(B)(i) of the Act requires FCA regulations to
assure that the funding and discount services of Farm Credit banks are
available on a reasonable basis to any OFI that is significantly
involved in lending for agricultural and aquatic purposes. Currently,
Sec. 614.4540(b)(1) \8\ states that Farm Credit banks must ``fund,
discount, or provide other similar financial assistance to any
creditworthy OFI that * * * maintains at least 15 percent of its loan
volume at a seasonal peak in loans and leases to farmers,
[[Page 47505]]
ranchers, aquatic producers and harvesters.'' Section 1.7(b) of the Act
and Sec. 614.4540 of the regulations allow OFIs that do not meet this
15-percent threshold to fund and discount their short- and
intermediate-term loans at Farm Credit banks, but they are not assured
access if credit becomes scarce.
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\8\ See 46 FR 51886 (October 22, 1981).
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Several commercial bank and System commenters believe that this 15-
percent threshold is too onerous, and they asked the FCA to reduce or
eliminate it. These commenters erroneously claim that the requirement
that agricultural loans always comprise 15 percent of an OFI's loan
portfolio discourages potential OFIs and deters existing OFIs from
depending on Farm Credit banks as their primary source of agricultural
funding. The FCA seeks to dispel the misconception that Sec.
614.4540(b)(1) requires OFIs to always maintain at least 15 percent of
their loan portfolio in farm loans in order to maintain assured access.
Instead, this regulation requires such OFIs to maintain at least 15
percent of their volume at a seasonal peak in farm loans and leases.
At this time, the FCA does not propose to change the 15-percent
threshold as the factor that determines whether an OFI is significantly
involved in agricultural lending, and thus assured access to funding
from a System bank. In reaching this decision, the FCA examined how two
of the other Federal bank regulatory agencies determine if a bank
engages in substantial agricultural lending. The FCA's research
revealed that the Federal Deposit Insurance Corporation (FDIC)
classifies banks as agricultural banks if at least 25 percent of their
loans are to farmers or ranchers. The Board of Governors of the Federal
Reserve System (Federal Reserve Board) classifies a bank as
agricultural if its ratio of farm loans to total loans exceeds the
unweighted average of the average of all banks on a given date. Based
on this formula, the Federal Reserve Board most recently classified
banks as agricultural banks if farm loans comprise at least 14.97
percent of their loan portfolios. Thus, the standard that the FCA uses
to determine if a non-System lender is substantially involved in
agricultural lending is significantly more permissive than the FDIC's
benchmark and comparable to the measure used by the Federal Reserve
Board.
The current regulatory threshold also seems to strike a fair
balance between the needs of small rural lenders and larger
institutions. Agricultural loans usually comprise a larger percentage
of the loan assets of small rural lenders. However, larger institutions
may extend more overall credit, in dollar terms, to farmers, although
agricultural loans are a much smaller percentage of their loan
portfolios. Additionally, Sec. 614.4540(b)(1) continues to forbid Farm
Credit banks from including the loan volume of an OFI's parent,
affiliates, or subsidiaries in determining compliance with this 15-
percent threshold. In practice, most lenders establish a separate OFI
affiliate to access System bank funding and, therefore, the 15-percent
threshold should not be onerous to OFIs. As noted earlier, failure to
meet the 15-percent threshold does not prohibit FCS bank funding to
creditworthy OFIs unless credit is scarce.
Because the FCA wants to make the OFI program more attractive to
eligible agricultural lenders, we invite your comments on alternatives
that reasonably demonstrate that an OFI is significantly involved in
agricultural lending, as section 1.7(b)(4)(B)(i) of the Act requires.
2. Place of Discount
Non-System lenders and many Farm Credit banks have long considered
place of discount restrictions as a major reason why the OFI program
has not been widely used by commercial banks and other agricultural
lenders. Historically, OFIs borrowed from the Farm Credit bank that
serves the territory where such OFIs maintain their headquarters or
makes the most of their loans. As a result, OFIs have maintained a
funding or discount relationship with a System bank that is owned and
controlled by their competitors.
In 1998, the FCA sought to remedy this problem by adopting Sec.
614.4550, which established new place-of-discount rules for OFIs. Under
this regulation, every OFI must apply first to the Farm Credit bank
that serves the territory where the OFI operates. If the bank denies
funding, or otherwise fails to approve a completed application within
60 days, the OFI may apply to any other FCB or the ACB. Additionally,
the regulation allows a Farm Credit bank to consent to another System
bank funding or discounting loans for an OFI.
We received 28 comments about place of discount in response to the
ANRPM, and another five comments about this issue during the interviews
and public meeting. Specifically, we received comments on this issue
from 12 commercial banks and seven commercial bank trade associations.
Additionally, six Farm Credit banks and one FCS association commented
on this issue. All commercial bank and bank trade association
commenters, five Farm Credit banks, and the one FCS association favored
repealing regulatory restrictions on place of discount so OFIs could
choose their System funding bank. One Farm Credit bank opposed
repealing Sec. 614.4550, so FCS associations would not be placed at a
competitive disadvantage.
In response to these comments, the FCA proposes allowing OFIs to
apply for funding and discount services from any FCS bank. However, the
proposed rule will require a Farm Credit bank to notify another System
bank in writing within five (5) business days of receiving an
application from an OFI that maintains its headquarters or has more
than 50 percent of its loan volume in the territory of the other Farm
Credit bank. This notice will give the bank in whose territory the OFI
is located ample opportunity to contact the applicants and offer them
funding and discount services. Under the proposed rule, no OFI may
borrow from two or more Farm Credit banks at the same time. Farm Credit
banks extend wholesale credit to OFIs, and they hold the OFIs' retail
loans and other collateral as security. Allowing two or more Farm
Credit banks to simultaneously fund the same OFI could pose safety and
soundness risks to the funding banks if the OFI experienced financial
stress and disputes arose over collateral pledged.
Our new regulatory approach would resolve the difficulties that
often arise when OFIs must borrow from a Farm Credit bank that is owned
and controlled by their competitors. When Farm Credit banks compete for
OFI credit, the OFI can lower its funding costs, which it can then pass
on to its agricultural borrowers. Additionally, this approach frees
Farm Credit banks from potential association pressure not to lend to
their competitors. If a Farm Credit bank is concerned about another
System bank funding OFIs in its territory, written notice gives it
ample opportunity to seek the relationship with the OFI.
3. Borrower Rights
Section 4.14A(a)(6)(B) of the Act expressly requires OFIs to adhere
to borrower rights, ``but only with respect to loans discounted or
pledged under section 1.7(b)(1).'' The borrower rights that apply to
loans that OFIs discount or pledge with a Farm Credit bank are: (1)
Effective Interest Rate (EIR) disclosures; (2) notice of adverse credit
decision; (3) the right to appeal adverse credit decisions to the
lender's credit review committee; (4) receiving copies of certain
documents; and (5) the right to restructure distressed loans. Existing
Sec. 614.4560(d) implements section 4.14A(a)(6)(B) of the Act by
requiring OFIs to comply with borrower rights on
[[Page 47506]]
those loans that Farm Credit banks fund or discount.
During this rulemaking, the FCA received numerous comments from
existing and potential OFIs and a Farm Credit bank that borrower rights
are a significant disincentive to the success of this program. Borrower
rights are a statutory requirement for OFIs; therefore, the FCA cannot
repeal Sec. 614.4560(d).
Recently, a Farm Credit bank and some of its affiliated OFIs asked
the FCA to reconsider its interpretation of section 4.14A(a)(6)(B) of
the Act. The FCB and its OFIs interpret section 4.14A(a)(6)(B) to mean
that borrower rights apply to OFI loans only during the time they are
actually pledged as collateral to the funding bank. Under this
interpretation, OFI loans would be exempt from most borrower rights
requirements because many of these rights apply before or after the
time an OFI's loans are actually pledged to the FCB or ACB. Examples of
borrower rights that usually apply before an OFI actually pledges loans
to a Farm Credit bank are: (1) Most EIR disclosures; (2) written notice
that the borrower's credit application has been denied; and (3) appeals
of adverse credit decisions to the lender's credit review committee. An
example of a right that applies when a loan is no longer pledged to a
System bank is the right of borrowers under section 4.14A of the Act to
restructure distressed loans. Borrowers usually seek to restructure a
distressed loan after the Farm Credit bank instructs the OFI to remove
it from collateral. Under the suggested interpretation, section 4.13A
of the Act would be the only borrower rights provision of the Act that
would always apply to OFI borrowers. This provision enables System and
OFI borrowers to obtain copies of: (1) All loan documents they sign or
deliver; (2) loan appraisals on their assets that the lender uses in
making credit decisions; and (3) the lender's articles of incorporation
and bylaws.
The FCB and its affiliated OFIs advocate an interpretation of
section 4.14A(a)(6)(B) of the Act that emphasizes the timing of certain
events over how an OFI loan is funded. However, our analysis leads us
to conclude that Congress intended section 4.14A(a)(6)(B) of the Act to
apply whenever an OFI uses a Farm Credit bank rather than another
source (such as deposits or other lines of credit) to fund the
borrower's loan. Originally, the provisions of the Act that govern EIR
disclosures, written notice of credit denials, and appeal of adverse
credit decisions only applied to Farm Credit banks and associations
that operate under title I or II of the Act. The 1987 Act amended these
statutory provisions so these rights and protections would also apply
to OFI borrowers.\9\ The 1987 Act also added section 4.14A to the Act
so that farmers, ranchers, and aquatic producers and harvesters \10\
who borrowed from either the FCS or an OFI would have the right to
restructure distressed loans.\11\ These statutory amendments clearly
demonstrate that Congress intended to grant OFI borrowers whose loans
were funded by a Farm Credit bank all of the rights and protections
described above, regardless of when certain events occurred.
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\9\ Pub. L. 100-233, Sections 103, 104, 105, and 106, 101 Stat.
1568, 1579-81 (January 6, 1988).
\10\ Borrower rights do not apply to loans that are subject to
the Truth-in-Lending Act, 15 U.S.C. 1601 et seq. The Truth-in-
Lending Act applies to consumer credit. Non-farm rural home loans
and consumer loans to farmers are subject to the Truth-in-Lending
Act, not the borrower rights provisions of the Act. See Act,
Sec. Sec. 4.13 and 4.14A(a)(5). Also, borrower rights do not apply
to loans that the ACB makes under title III of the Act. See Act
Sec. Sec. 4.14A(a)(6)(A).
\11\ Pub. L. 100-233, Sections 102, 101 Stat 1568, 1574 (January
6, 1988).
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The FCB and its OFIs believe that Congress's use of the word
``pledged'' in section 4.14A(a)(6)(B) indicates that borrower rights
apply only during the period of time when an OFI loan serves as
collateral for the Farm Credit bank loan. However, they are reading the
word ``pledged'' out of context with the rest of the statute. Section
4.14A(a)(6) refers to ``loans discounted or pledged under section
1.7(b)(1)'' of the Act. However, section 1.7(b)(1) of the Act describes
the services that Farm Credit banks are authorized to provide certain
FCS associations and OFIs, not the timing of when such associations and
OFIs pledge collateral to the bank. Therefore, the term ``pledged'' in
section 4.14A(a)(6)(B) covers those loans that a Farm Credit bank funds
under its authority in section 1.7(b)(1), not the time when such loans
are pledged.
For these reasons, OFIs must comply with borrower rights on all
loans that they fund or discount through a Farm Credit bank. Borrower
rights, however, do not apply to loans that an OFI funds through other
sources. Thus, OFIs that always use the funding or discounting services
of a Farm Credit bank to make all of its short- and intermediate-term
agricultural and aquatic loans must comply with all borrower rights
requirements.
Some flexibility may exist, however, for those OFIs that actually
use several sources of funding, including Farm Credit banks, to make
loans to farmers, ranchers, and aquatic producers and harvesters. In
some cases, an OFI genuinely may not know how it will fund a particular
borrower's loans until after closing. In such cases, an OFI may decide
not to give the borrower an EIR disclosure, written notification about
the denial of credit, or the right to appeal the credit denial to a
credit review committee because the OFI plans to use deposits or
another line of credit to fund the borrower's loan. If the OFI
subsequently decides to draw on its credit line with its Farm Credit
bank to fund this loan, borrower rights would apply to all future
actions on this loan. For example, a borrower who did not receive an
EIR disclosure at closing would be entitled to an EIR disclosure at a
later date if the OFI funds or discounts the loan with the Farm Credit
bank and then adjusts the borrower's interest rate. The OFI must also
give the borrower written notice and the right to appeal adverse credit
actions to a credit review committee once it funds or discounts a
seasoned loan with a Farm Credit bank. OFIs must also honor the rights
of borrowers to restructure distressed loans even if the Farm Credit
bank removed such loans from collateral after their credit quality
declined. Once a Farm Credit bank funds or discounts a loan, borrower
rights attach to it for the duration of the loan. This is the same
approach that the FCA follows for loans that FCS institutions sell to
non-System lenders.\12\
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\12\ 12 CFR 614.4336.
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The FCA proposes a technical correction to Sec. 614.4560(d).
Currently, this provision erroneously states that section 4.36 of the
Act applies to all loans that an OFI funds or discounts through an FCB
or ACB. In fact, the plain language in section 4.36 of the Act states
that the right of first refusal applies only to the borrowers of FCS
institutions that operate under title I or II of the Act. As a result,
OFIs are subject to some, but not all, of the regulations in subpart N
of part 614. Accordingly, the FCA proposes to omit the reference to
section 4.36 from Sec. 614.4560(d) and to further amend this
regulatory provision so it refers to Sec. Sec. 614.4516, 614.4517,
614.4518, and 614.4519, which are the only regulations in subpart N of
part 614 that apply to OFIs.\13\
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\13\ The FCA recently proposed to move all borrower rights
regulations to part 617. See 68 FR 5587, February 4, 2003. If the
FCA adopts this change the final OFI rule will revise the cross-
references to borrower rights regulations in Sec. 614.4560(d).
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4. Equitable Treatment
In 1998, the FCA adopted Sec. 614.4590, which requires Farm Credit
banks to treat OFIs and FCS associations
[[Page 47507]]
equitably. More specifically, Sec. 614.4590(a) states that Farm Credit
banks must apply comparable and objective loan underwriting standards
and pricing requirements to both OFIs and FCS associations. Under Sec.
614.4590(b), the total charges that a System bank assesses its OFIs
must be comparable to the total charges it imposes on its affiliated
associations. This regulation also states that any variation between
the overall funding costs that OFIs and FCS associations are charged by
the same funding bank must result from differences in credit risk and
administrative costs to the FCB or ACB.
Many responses to the ANPRM and several speakers at the public
meeting expressed the view that Farm Credit banks do not treat OFIs
equitably with FCS associations, which own and control each System
bank. According to these commenters, the perception of unfair treatment
discourages potential OFIs from establishing a funding and discount
relationship with an FCB or ACB. Many commenters informed us that
existing OFIs often feel that Farm Credit banks favor the associations.
Many commercial bank commenters suggested that our regulations
should mandate equal, rather than equitable, treatment of OFIs and FCS
associations. These commenters believe that the disparity of treatment
is especially evident in the price of funding that Farm Credit banks
charge their OFIs and FCS associations. Several commenters want us to
require Farm Credit banks to disclose to OFIs exactly how they price
their loans to both OFIs and FCS associations. Several commercial bank
trade associations asked the FCA to require Farm Credit banks to
identify the specific components that make up their cost of funds to
OFIs and the amount of these components in terms of basis points.
Commercial banks and their trade associations also requested that the
FCA enact regulations that expressly prohibit Farm Credit banks from
charging OFIs fees that are not charged to FCS associations. Some
commenters asked the FCA to require Farm Credit banks to pay dividends
or patronage to OFIs.
The FCA sought to address many of these concerns in the rulemaking
that ended in 1998 by adopting Sec. 614.4590, which requires Farm
Credit banks to treat OFIs and FCS associations equitably. The FCA
notes that the OFI program has not significantly expanded since 1998,
but many of the same complaints about disparate treatment by Farm
Credit banks of OFIs and FCS associations have surfaced once again. The
FCA has decided to address these concerns by proposing amendments to
Sec. 614.4590 that would strengthen regulatory requirements concerning
equitable treatment.
Fundamental differences between OFIs and direct lender associations
mean that regulations can only require Farm Credit banks to treat OFIs
and FCS direct lender associations equitably, but not equally. The
following are some of the fundamental differences between these two
types of financial institutions that preclude identical treatment:
[sbull] OFIs have access to several funding sources whereas direct
lender associations do not.
[sbull] FCS associations have invested significant amounts of
capital in the funding bank, while most OFIs have not.
[sbull] A direct lender association pledges all of its loans to the
Farm Credit bank, whereas OFIs do not.
[sbull] FCS associations are members of a cooperative credit system
that shares gains and losses, whereas OFIs have limited exposure to
such losses.
[sbull] Administrative costs for funding a direct lender
association and an OFI differ because OFIs are not required to maintain
a long-term commitment with a System funding bank.
These fundamental differences mean that OFIs expose Farm Credit
banks to different credit risks and administrative costs than direct
lender associations. As a result, some disparity in cost of funds that
an FCB or ACB charges FCS associations and OFIs may be justified. For
this reason, Sec. 614.4590 requires that Farm Credit banks treat OFIs
comparably, but not identically, to FCS associations in pricing loans.
In fact, Sec. 614.4590(b) states that the total charges that an FCB or
ACB assesses an OFI through capitalization requirements, interest
rates, and fees shall be comparable to the charges that the same Farm
Credit bank imposes on its direct lender associations. This regulation
also specifies that any variation in the overall funding costs that the
same FCS funding bank charges OFIs and direct lender associations must
be attributed to differences in credit risk and administrative costs to
the bank.
The current regulation, however, does not require Farm Credit banks
to explain and justify variations in the cost of funds to existing OFIs
and OFI applicants. As a result, it is difficult to ascertain whether
Farm Credit banks are pricing credit comparably for OFIs and FCS
associations, as Sec. 614.4590(b) requires. Commercial bank commenters
have repeatedly asked the FCA to resolve this problem by requiring Farm
Credit banks to disclose to OFIs how they price funding for both OFIs
and associations. In 1998, we reasoned that disclosing such pricing
information was unnecessary because the regulation did not compel Farm
Credit banks to charge identical rates to OFIs and System
associations.\14\ The comments that we received during this rulemaking
have persuaded us to propose a change on this issue. Disclosing pricing
information will make the OFI program more transparent and address
concerns by existing and potential OFIs that they are not treated
fairly. The FCA hopes that this change will attract more agricultural
lenders to this program and, therefore, make affordable credit more
available for farmers, ranchers, and other eligible rural residents.
---------------------------------------------------------------------------
\14\ See 63 FR 35541 (July 7, 1998).
---------------------------------------------------------------------------
The FCA plans to achieve this objective by proposing to add two new
provisions to Sec. 614.4590. Proposed Sec. 614.4590(c) would require
each FCB or ACB to provide any OFI or OFI applicant, upon request, a
copy of its policies, procedures, loan underwriting standards, and
pricing guidelines for OFIs. This provision would also specify that the
pricing guidelines must identify the specific components that make up
the cost of funds for OFIs and the amount of these components in basis
points. We believe this requirement is consistent with the information
that is available to the associations, and is analogous to EIR
disclosures that associations provide to retail borrowers.
Proposed Sec. 614.4590(d) would require each FCB or ACB to explain
in writing the reasons for any variation in the overall funding costs
it charges OFIs and FCS associations if such information is requested
by an OFI or OFI applicant. This provision would require a Farm Credit
bank to compare the costs that it charges OFIs and FCS associations as
groups or, if possible, variations between groups of OFIs and FCS
associations that are of a similar size. However, proposed Sec.
614.4590(d) would expressly prohibit System funding banks from
disclosing financial or confidential information about individual FCS
associations. Such information is confidential and proprietary
information affecting the bank and its other customers and, therefore,
it cannot be disclosed to OFIs.
The FCA also proposes a conforming amendment to Sec. 614.4540(c)
that would require each FCB or ACB to establish objective policies,
procedures, pricing guidelines, and loan underwriting standards for
determining the creditworthiness of each OFI applicant. Currently,
Sec. 614.4540(c) does not mention procedures or pricing guidelines.
[[Page 47508]]
The proposed rule does not require Farm Credit banks to pay
dividends or patronage to their OFIs. It is not appropriate in this
instance for FCA regulations to impose business practices on FCS
institutions in the absence of a compelling safety and soundness
reason.
The proposed amendments to Sec. 614.4590 should ensure that Farm
Credit banks treat their OFIs and associations equitably. If
information that a Farm Credit bank discloses about how it prices
funding for OFIs and FCS associations continues to raise concerns about
equitable treatment, an OFI or OFI applicant could pursue this matter
with the FCA Ombudsman.
5. Ombudsman
Many commercial banks and their trade associations asked us to
appoint an Ombudsman to assist OFI applicants and existing OFIs in
establishing and maintaining good relations with System funding banks.
On February 25, 2003, the FCA Board established the Office of the
Ombudsman. According to the public announcement, ``The Office of the
Ombudsman will be an effective, neutral and confidential resource and
liaison for the public.'' Addressing the concerns of OFIs will be one
of many duties of the Office of the Ombudsman. More information about
how the Ombudsman will assist existing and potential OFIs will be
forthcoming.
6. Disclosure of OFI Identities
In the ANPRM, we asked you whether we should amend our regulations
so Farm Credit banks could disclose the identities of the OFIs that
they fund. Our current regulations on releasing information prohibit
FCS institutions from releasing information about their borrowers and
stockholders to the public.\15\ However, these prohibitions apply only
to retail borrowers, such as farmers, ranchers, aquatic producers and
harvesters, and rural homeowners. We have never interpreted these
regulations as prohibiting the release of names of FCS associations
that borrow from Farm Credit banks. In fact, information about the
identities of FCS associations is widely available because it is
contained in financial statements that Farm Credit banks release to the
public.
---------------------------------------------------------------------------
\15\ 12 CFR part 618, subpart G.
---------------------------------------------------------------------------
The ANPRM explained why we believe that the reasons for protecting
the identity of retail borrowers do not apply to financial institutions
that fund and discount loans with a Farm Credit bank. Retail borrowers
often are individual consumers, and keeping their identities
confidential shields them from unwanted marketing solicitations or
publicity involving their personal financial business. In contrast,
OFIs could benefit from the disclosure of their identity because it
could make prospective retail borrowers aware of other credit options.
We received 33 comments about the disclosure of OFI identities.
Twenty-five (25) comments on this issue came from commercial banks or
their trade associations; two comments were received from a non-bank
entity and an OFI, while six comments came from Farm Credit banks and
associations. Reaction was mixed, and neither commercial banks nor
System institutions took unified positions on this issue. Most
commenters believe that there is no valid justification to prohibit or
otherwise restrict Farm Credit banks from disclosing the names of their
OFIs. These commenters assert that disseminating this information
promotes the OFI program and informs farmers, ranchers, and rural
homeowners of their other credit options. These commenters also believe
that the FCA regulations should treat FCS associations and OFIs the
same when it comes to disclosing their identities to the public.
However, other commenters opposed the disclosure of identifying
information about OFIs to the public. These commenters believe that
requiring such disclosures are an unwarranted intrusion by the FCA into
private business transactions. Other commenters expressed the view that
OFIs should advertise for customers if they want to expand market
penetration, rather than relying on Farm Credit banks to inform
potential borrowers of their other credit options. Some commenters
suggested a compromise that would allow Farm Credit banks to disclose
only the identities of OFIs that consent.
The FCA proposes a new rule, Sec. 614.4595, which would allow Farm
Credit banks to disclose to the public the names, addresses, telephone
numbers, and Internet Web site addresses of those OFIs that consent in
writing. The proposed regulation also requires each Farm Credit bank to
adopt policies and procedures for: (1) Obtaining and maintaining the
consent of its OFIs; and (2) disclosing this information to the public.
Similarly, the financial statements of Farm Credit banks should
disclose the identity of an OFI only with its consent. The FCA believes
that this regulatory approach empowers each OFI to make the decision
whether disclosure of its name, address, telephone number, and Web site
address to the public is in its best interest.
7. Associations Acting as Farm Credit Bank Agents
Both System and non-System commenters suggested that FCS
associations could serve as an effective conduit for funding OFIs.
These commenters pointed out that associations often have established
relationships with local OFIs and other commercial lenders. In many
cases, FCS associations and existing and potential OFIs already have
entered into joint financing arrangements for common borrowers.
The Act allows only Farm Credit banks that operate under title I of
the Act, not FCS associations, to establish funding and discount
relationships with OFIs. However, section 1.5(18) of the Act allows a
Farm Credit bank to delegate to associations such functions as the bank
deems appropriate. Similarly, section 2.2(19) of the Act allows a
direct lender association to perform functions delegated to it by its
funding bank. We believe that this authority allows FCS associations to
act as point-of-contact or servicing agents for the Farm Credit bank in
its lending relationship with its OFIs.
While associations could not directly fund OFIs, they could help
make this program more successful by acting as intermediaries or
servicing agents on loans from the Farm Credit banks to OFIs. Such
arrangements could help promote new, and support existing, local
relationships between the associations and potential and existing OFIs.
Origination and servicing fees earned by the associations as agents for
the banks can also serve to increase the associations' earnings
potential. Such arrangements could also serve to reduce the servicing
costs for smaller OFIs. A precedent for this approach is that FCS
associations acted as servicing agents on loans that the former
regional banks for cooperatives made to small, local, farmer
cooperatives. In this capacity, FCS associations provided efficient and
effective loan administration for the banks on loans they could have
made themselves.
Agreements between the parties can establish these arrangements
and, therefore, no new regulation is necessary. The FCA Board supports
associations serving as agents for the Farm Credit banks in
establishing and maintaining funding relationships between Farm Credit
banks and existing or new OFIs.
[[Page 47509]]
8. ``Similar Financial Assistance'' for OFIs
Section 1.7(b)(1) of the Act expressly authorizes Farm Credit banks
to ``extend other similar financial assistance'' to both OFIs and FCS
associations that extend short- and intermediate-term credit to their
customers. Several commenters asked us to clarify exactly what
constitutes ``similar financial assistance.'' Similar financial
assistance includes lease financing, the issuance of guarantees, surety
bonds, and the issuance of standby letters of credit. These all are
services that Farm Credit banks routinely provide to their direct
lender associations and; therefore, they are also acceptable forms of
financial assistance that Farm Credit banks may offer their OFIs. Our
explanation is consistent with guidance that we previously offered Farm
Credit banks on this issue. At this time, no regulatory amendment is
necessary to clarify the meaning of ``similar financial assistance'' in
section 1.7(b)(1) of the Act.
9. Establishment of OFI Lending Limits
In 1998, former Sec. 614.4565 was repealed, which imposed a
lending limit on the amount of credit that any OFI could extend to a
single credit risk with FCS funds. At the time, we acknowledged that
certain OFIs would remain subject to lending limits that their primary
regulator imposes under applicable Federal or state law. The preamble
to the final rule stated that we expect each Farm Credit bank to
prudently manage risk exposures to concentrations in OFI loan
portfolios through underwriting standards and the general financing
agreements (GFAs) executed with the OFIs.\16\
After the FCA repealed former Sec. 614.4565, some Farm Credit
banks considered imposing a lending limit on both FCS associations and
OFIs that is lower than the lending limit that: (1) Section 614.4353
establishes for System direct lender associations; and (2) Federal or
state laws place on depository institutions. During this rulemaking,
two commenters asked us to enact a new regulation that would forbid
Farm Credit banks from imposing a lending limit on OFIs that is lower
than the limit established by applicable Federal or state law. The FCA
declines this request because it is inconsistent with safety and
soundness. Each Farm Credit bank may establish, by underwriting
standards and GFAs, limits on its exposure to concentrations in the
loan portfolios of both FCS associations and OFIs that are more
stringent than lending limits imposed by statute or regulation, as long
as it does not favor FCS associations over OFIs.
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\16\ See 63 FR 36541, 36545 (July 7, 1998).
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10. Eligible Collateral Pledged To Support an OFI's Discounting
Arrangements With a Farm Credit Bank
Currently, Sec. 614.4570 requires a secured lending relationship
between each Farm Credit bank and every OFI. Under Sec.
614.4570(b)(2), each FCB or ACB must perfect its security interest in
any and all obligations and the proceeds thereunder that the OFI
pledges as collateral, in accordance with applicable state law.
Additionally, Sec. 614.4570(c) allows each FCB and ACB to require its
OFIs to pledge supplemental collateral to support the lending
relationship.
These commenters asked the FCA to amend Sec. 614.4570(b) so OFIs
could pledge long-term agricultural mortgage loans as primary
collateral to their FCS funding bank. According to the commenters, this
approach would provide OFIs with an additional source of funding for
agricultural mortgages.
The FCA denies this request because it is incompatible with section
1.7(b) of the Act, which requires OFIs to use funds from a Farm Credit
bank only for the purpose of extending short- and intermediate-term
credit to eligible borrowers for authorized purposes under section
2.4(a) and (b) of the Act. OFIs may, however, pledge agricultural
mortgages to Farm Credit banks as supplemental, but not primary,
collateral under Sec. 614.4570(c).
Section 614.4570(c) requires each FCB and the ACB to develop
policies and loan underwriting standards that establish uniform and
objective requirements for determining the need and amount of
supplemental collateral or other credit enhancements that each OFI must
pledge to its System funding bank as a condition for obtaining credit.
The amount, type, and quality of supplemental collateral or other
credit enhancements specified by such policies and procedures must be
proportional to the level of risk that the OFI poses to the System
funding bank. Provisions in the GFA or the security agreement govern
collateral pledged by each OFI to its System funding bank.
11. Improving the Relationship Between Farm Credit Banks and OFIs
Several commenters offered various suggestions for improving the
relationship between Farm Credit banks and prospective and existing
OFIs. These suggestions are confidence-building measures that will
attract more OFIs to rely on Farm Credit banks as a source of funding
and liquidity. These ideas could improve relations between existing
OFIs and their funding banks and encourage prospective OFIs to
establish funding and discount relationships with Farm Credit banks.
New regulations or policies promulgated by the FCA are not required
to implement these ideas for improving the OFI program. Instead, these
suggestions request Farm Credit banks to take the initiative and reach
out to existing and prospective OFIs. The FCA uses this opportunity to
convey the commenters' ideas to Farm Credit banks and provide them with
guidance about measures that could make this program more appealing to
OFIs. The FCA encourages Farm Credit banks to develop internal programs
and initiatives that:
a. Establish outreach programs for contacting prospective OFIs and
providing them with information about the bank's services;
b. Routinely publish updated information about its products and
services for OFIs, and its underwriting standards, funding terms and
conditions, and pricing guidelines for OFI loans;
c. Allow OFI representatives to observe meetings of the bank's
board of directors;
d. Promote better communication through roundtable discussions,
focus groups, and public discussions that bring OFIs, associations, and
other interested parties together to discuss issues of mutual interest;
e. Work with OFIs to identify and remove administrative barriers
that hinder OFI access;
f. Allow FCS associations to act as intermediaries and servicing
agents on extensions of credit from the funding bank to OFIs, as
discussed earlier; and
g. Identify best practices for OFIs.
The FCA is strongly committed to the success of the OFI program.
OFIs are an important component of the mission of Farm Credit banks to
finance agriculture. By adopting the internal programs and initiatives
described above, Farm Credit banks can attract more OFIs to rely on the
FCS as a source for funding and liquidity which, in turn, will provide
eligible farmers, ranchers, aquatic producers and harvesters, farm-
related businesses, and rural homeowners with more plentiful and
affordable credit, as Congress intended. The FCA may provide additional
guidance to Farm Credit banks about improving the OFI program through
bookletters, informational memoranda, and the Office of the Ombudsman.
[[Page 47510]]
E. Statutory Issues
Many FCS and non-System commenters identified other factors that
they view as impediments to the success of the OFI program. Several
commenters believe that OFIs should be able to fund or discount long-
term mortgage loans on agricultural land and rural homes with Farm
Credit banks. Other commenters observed that OFIs cannot hold voting
stock in their System funding banks and; therefore, they are not
represented on the banks' boards of directors. One commenter opposed
the prohibition on Farm Credit banks extending additional credit to
OFIs when the aggregate of their liabilities exceeds ten times their
paid-in and unimpaired capital and surplus. Several commenters
expressed the view that the OFI program should be modeled after the
Federal Home Loan Bank System. These restrictions on the OFI program
are imposed by the Act, not FCA regulations.
III. Investments in Farmers' Notes
Our public meeting notice asked interested parties for input on
both OFIs and ``other types of partnering relationships between System
and non-System lending institutions that would increase the
availability of funds to agriculture and rural America.'' See 66 FR
35428 (July 5, 2001). At the public meeting, many commenters encouraged
us to promote other arrangements, in addition to the OFI program, that
make it easier for Farm Credit banks and associations to provide
funding and liquidity to non-System financial institutions and
merchants that extend credit to agriculture. Many commenters expressed
their desire for more flexible and informal arrangements between FCS
and non-System institutions.
The FCA is exploring a variety of different options that could
improve cooperation between FCS and non-System lenders that, in turn,
would increase the flow of credit to agriculture and rural America. For
example, we are currently reviewing the regulatory treatment of loan
syndications. Future rulemakings may suggest other regulatory
approaches for enhancing partnering arrangements between FCS and non-
System lenders.
Our efforts in this rulemaking focus on the Farmers' notes program.
The FCA originally approved this program in 1966. The purpose of the
Farmers' notes program is to provide liquidity to private dealers and
cooperatives that sell farm machinery, supplies, equipment, home
appliances, and other items of a capital nature to eligible farmers and
ranchers. The Farmers' notes regulation, Sec. 615.5172, allows PCAs
and agricultural credit associations to purchase, as investments,
notes, conditional sale contracts, and obligations that evidence the
sale of the items, described above to farmers and ranchers.
The authority to purchase Farmers' notes derives from section
2.2(10) of the Act, which permits certain associations to invest their
funds as may be approved by their funding bank under FCA regulations.
Because Farmers' notes are investments, the regulation places a
portfolio cap of 15 percent and a concentration limit of 50 percent of
capital and surplus on association investments in Farmers' notes.
Additionally, Sec. 615.5172(d) requires participating dealers and
cooperatives to endorse Farmers' notes that they sell to these
associations with full recourse. The full recourse requirement is
designed as a credit enhancement, which is consistent with the
treatment of Farmers' notes as investments. Finally, the existing
regulation requires associations to contact those notemakers who meet
their credit underwriting standards, and encourage them to become FCS
borrowers.
The Farmers' notes regulation has become outmoded. The FCA proposes
substantial revisions to Sec. 615.5172 that should reinvigorate this
program. The proposed revisions should enable this program to evolve as
agricultural credit markets continually change, so that FCS
associations can help non-System lenders meet the credit needs of
farmers. However, the purpose of this program remains the same, namely
that FCS associations will continue to provide funding and liquidity to
other agricultural creditors.
The FCA proposes four major changes to the Farmers' notes
regulation so that this program will be more responsive to the needs of
other creditors and their customers. First, all entities that routinely
extend agricultural or aquatic credit in the normal course of their
business may participate in this program. In the past, this program was
restricted to private dealers and cooperatives. Now, merchants and all
types of creditors will be able to sell Farmers' notes to FCS
associations. Second, the FCA proposes to expand this program to long-
term loans. Third, all FCS direct lenders may now invest in Farmers'
notes, whereas this program was previously limited to FCS associations
that had only short- and intermediate-term lending authorities. Fourth,
FCS associations will be allowed to invest in notes from aquatic
producers and harvesters and farm-related businesses. All these
proposed changes are reflected in proposed Sec. 615.5172(a) and (b).
Other provisions of the proposed rule ensure that FCS direct lender
associations continue to treat Farmers' notes as investments. Several
provisions of the proposed rule contain various requirements that are
designed to enhance the credit quality of Farmers' notes. For example,
proposed Sec. 615.5172(b) reaffirms that FCS associations may invest
in Farmers' notes that are secured by specified collateral that the
underlying debtor pledges to creditors. The FCA also proposes to retain
the 15-percent portfolio cap and the 50-percent concentration limit in
Sec. 615.5172(c). All proposed revisions to Sec. 615.5172(c) would
either conform this provision to amendments in Sec. 615.5172(a) and
(b) or are stylistic changes that enhance the clarity of this
regulation. Current Sec. 615.5172(d) requires the seller to endorse
all Farmers' notes with full recourse. The FCA proposes to update this
requirement by allowing other types of credit enhancements, such as
guarantees, insurance, reserves of cash or marketable securities,
subordinated interests, or a combination of such credit enhancements
that would adequately cover the principal amount of the association's
investment in Farmers' notes.
The purpose of the portfolio cap, the concentration limit, and the
credit enhancements in proposed Sec. 615.5172(d) is to ensure that
Farmers' notes are treated as investments. FCS associations are credit
cooperatives, and the portfolio cap and concentration limit ensure that
most assets in association portfolios are loans to members. The full
recourse requirement and the other credit enhancements in Sec.
615.5172(d) lessens the credit risk that FCS associations assume from
Farmers' notes.
The FCA proposes to delete the provision in Sec. 615.5172 that
currently requires associations to contact the farmers or ranchers who
are indebted on these Farmers' notes, and encourage them to become FCS
borrowers. This requirement may be an impediment to the success of the
Farmers' notes program. Other creditors may be reluctant to sell
Farmers' notes to FCS associations as long as the regulation requires
such associations to lure away their customers.
The proposed revisions to the Farmers' notes regulation would give
the System a greater role in providing funding and liquidity to those
who extend credit to agriculture during the normal course of business.
The Farmers' notes program complements the OFI
[[Page 47511]]
program. Farm Credit banks provide funding and liquidity to OFIs,
whereas FCS direct lender associations provide these services through
the Farmers' notes program. In both programs, the FCS acts as a source
of funding and liquidity to agricultural creditors who need these
services so they can meet the credit needs of their customers. As a
result, the System fulfills its mission to finance agriculture and
related activities in rural America, as Congress intended. From the
FCA's perspective, agriculture benefits when System and non-System
lenders cooperate to make affordable credit more available for farmers,
ranchers, aquatic producers and harvesters, farm-related businesses,
and rural homeowners.
IV. Capital Risk Weighting
We have previously interpreted our regulations as requiring funding
banks to risk weight loans to OFIs at 100 percent. In contrast,
existing Sec. 615.5210(f)(2)(ii)(I) allows Farm Credit banks to risk
weight loans to System associations at 20 percent. This means Farm
Credit banks currently hold more capital (at a minimum) for loans to
OFIs than loans to System associations, which in many cases have
similar structures and financial conditions as OFIs.
The ANPRM acknowledged that many OFIs, particularly commercial
banks or their affiliates might pose no greater risk to their FCS
funding bank than System associations. However, unregulated non-bank
OFIs could expose their System funding bank to greater risk than FCS
associations and regulated OFIs. The preamble to the ANPRM explained,
in detail, the risk-reducing features of FCS associations that
justified a 20-percent risk weighting.\17\
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\17\ See 65 FR 21151 (April 20, 2000).
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Furthermore, as the preamble to the ANPRM observed, the risk-
weighting categories in the FCA's capital regulations are patterned
after the risk-weighting categories in the 1988 Basel Accord, which the
other Federal bank regulatory agencies adopted and applied to all
depository institutions. As a result, many, but not all, OFIs have the
same risk-reducing features as FCS associations. The ANPRM asked
several questions about whether and how we should amend our capital
regulations to address the risk weighting of OFI loans by Farm Credit
banks.
We received 38 comments on this issue during the ANPRM comment
period and as part of the public meeting testimony from 28 commercial
banks, two non-bank entities and OFIs, five Farm Credit banks, and two
associations. The overwhelming majority of the commenters supported the
concept of differentiating the risk weighting of OFI loans based on the
structure and risk-mitigating characteristics of the OFIs. Under this
approach, OFIs that are Federal- or state-regulated depository
institutions or their affiliates would be risk-weighted at 20 percent,
while unregulated non-bank OFIs might be risk weighted at a higher
percentage. One unregulated OFI opposed any change to the risk
weighting of OFI loans by Farm Credit banks. Three commenters,
including two FCBs, suggested that Farm Credit banks apply the same
risk weight to all OFI and FCS association loans.
The FCA proposes amendments to Sec. 615.5210 that would permit
Farm Credit banks to risk weight their loans to OFIs that are Federal-
or state-regulated depository institutions, or their affiliates, at 20
percent. Under this proposal, Farm Credit banks would continue to risk
weight loans to OFIs that are unregulated, or exhibit a higher risk
profile at either 50 or 100 percent, depending on certain factors,
which are explained below. Although we received no comments about how
to risk weight Farmers' notes, the proposed rule would establish
similar risk weights for these investments.
The proposed rule would establish a 20-percent risk weighting for
OFIs or Farmers' notes sold by entities that are either: (1) An
equivalent to an OECD \18\ bank (Federal- or state-regulated depository
institution); (2) subsidiaries of OECD equivalent banks or bank holding
companies and carry full guarantees from such parent entities; or (3)
an institution that carries one of the three highest ratings from a
nationally recognized statistical rating organization (NRSRO).\19\
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\18\ OECD means the group of countries that are full members of
the Organization for Economic Cooperation and Development,
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund's
General Arrangement to Borrow, excluding any country that has
rescheduled its external sovereign debt within the previous 5 years.
For purposes of United States banking operations, all Federally
regulated depository institutions are considered the equivalent of
OECD banks.
\19\ Nationally recognized statistical rating organization means
an entity recognized by the Division of Market Regulation of the
Securities and Exchange Commission (or any successor Division)
(Commission) as a nationally recognized statistical rating
organization for various purposes, including the Commission's
uniform net capital requirements for brokers and dealers.
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Additional criteria for a 20-percent risk weighting is that the
obligation must have full recourse or another form of credit
enhancement. Under Sec. 614.4570(a), OFIs must pledge full recourse on
all loans they fund or discount with a Farm Credit bank. Proposed Sec.
615.5172(d) requires full recourse or another form of credit
enhancement for Farmers' notes as described in the proposed rule.
Proposed Sec. 615.5210 would establish a 50-percent risk weighting
for OFIs or Farmers' notes sold by entities that: (1) Are not OECD
banks but otherwise meet similar capital and operational standards; and
(2) carry an investment grade or higher NRSRO rating. Again, full
recourse or another appropriate credit enhancement is a condition for
the 50-percent risk weighting. The proposed rule establishes a 100-
percent risk weighting for all OFIs and Farmers' notes that do not
qualify for the 20-percent or 50-percent risk weight categories.
Applying lower risk weightings for OFIs that are considered less
risky would allow the FCBs to hold less capital to support such loans.
This approach is consistent with the direction from the proposed Basel
Accord revisions, which are currently under consideration. Lowering the
capital requirements for OFI loans will lower the operating costs of
the OFI program to Farm Credit banks, which in turn should lower the
cost of funds to OFIs and ultimately reduce interest rates charged to
OFI borrowers. These outcomes would advance the System's public mission
to provide affordable credit on a consistent basis to agriculture and
rural America. Greater flexibility for the risk weighting of OFI loans
should provide the Farm Credit banks additional incentives to expand
their lending to both existing and new OFIs.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule
will not have a significant economic impact on a substantial number of
small entities. Each of the banks in the System, considered together
with its affiliated associations, has assets and annual income in
excess of the amounts that would qualify them as small entities.
Therefore, System institutions are not ``small entities'' as defined in
the Regulatory Flexibility Act.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
[[Page 47512]]
12 CFR Part 615
Accounting, Agriculture, Banks, banking, Government securities,
Investments, Rural areas.
For the reasons stated in the preamble, parts 614 and 615, chapter
VI, title 12 of the Code of Federal Regulations are proposed to be
amended as follows:
PART 614--LOAN POLICIES AND OPERATIONS
1. The authority citation for part 614 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19,
4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6,
7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011,
2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091,
2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149,
2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5);
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing
of Other Financing Institutions
2. Revise Sec. 614.4540(c) to read as follows: Sec. 614.4540
Other financing institution access to Farm Credit Banks and
agricultural credit banks for funding, discount, and other similar
financial assistance.
* * * * *
(c) Underwriting standards. Each Farm Credit Bank and agricultural
credit bank shall establish objective policies, procedures, pricing
guidelines, and loan underwriting standards for determining the
creditworthiness of each OFI applicant. A copy of such policies and
guidelines shall be made available, upon request to each OFI and OFI
applicant.
* * * * *
3. Revise Sec. 614.4550 to read as follows:
Sec. 614.4550 Place of discount.
A Farm Credit Bank or agricultural credit bank may provide funding,
discounting, or other similar financial assistance to any OFI
applicant. However, a Farm Credit Bank or agricultural credit bank
cannot fund, discount, or extend other similar financial assistance to
an OFI that maintains its headquarters, or has more than 50 percent of
its outstanding loan volume to eligible borrowers who conduct
agricultural or aquatic operations in the chartered territory of
another Farm Credit bank unless it notifies such bank in writing within
five (5) business days of receiving the OFI's application for
financing. Two or more Farm Credit banks cannot simultaneously fund the
same OFI.
4. Revise Sec. 614.4560(d) to read as follows:
Sec. 614.4560 Requirements for OFI funding relationships.
* * * * *
(d) The borrower rights requirements in part C of title IV of the
Act, and the regulations in subparts K, L, and Sec. Sec. 614.4516,
614.4517, 614.4518, and 614.4519 of subpart N of part 614 shall apply
to all loans that an OFI funds or discounts through a Farm Credit Bank
or agricultural credit bank, unless such loans are subject to the
Truth-in-Lending Act, 15 U.S.C. 1601 et seq.
* * * * *
5. Amend Sec. 614.4590 by adding new paragraphs (c) and (d) to
read as follows:
Sec. 614.4590 Equitable treatment of OFIs and Farm Credit System
associations.
* * * * *
(c) Upon request, each Farm Credit Bank or agricultural credit bank
must provide each OFI and OFI applicant a copy of its policies,
procedures, loan underwriting standards, and pricing guidelines for
OFIs. The pricing guidelines must identify the specific components that
make up the cost of funds for OFIs and the amount of these components
in basis points.
(d) Upon request of any OFI or OFI applicant, each Farm Credit Bank
or agricultural credit bank must explain in writing the reasons for any
variation in the overall funding costs it charges to OFIs and direct
lender associations. The written explanation must compare the cost of
funds that the Farm Credit Bank or agricultural credit bank charges the
aggregate of its OFIs and affiliated direct lender associations. When
possible, the written explanation shall compare the costs of funding
that the bank charges several OFIs and FCS associations that are
similar in size. However, the Farm Credit Bank or agricultural credit
bank must not disclose financial or confidential information about any
individual FCS association.
6. Amend part 614, subpart P by adding a new Sec. 614.4595 to read
as follows:
Sec. 614.4595 Public disclosure about OFIs.
A Farm Credit Bank or agricultural credit bank may disclose to
members of the public the name, address, telephone number, and Internet
Web site address of any affiliated OFI only if such OFI, through a duly
authorized officer, consents in writing. Each Farm Credit Bank and
agricultural credit bank must adopt policies and procedures for
obtaining and maintaining the consent of its OFIs and for disclosing
this information to the public.
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
7. The authority citation for part 615 continues to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
Subpart F--Property, Transfers of Capital, and Other Investments
8. Revise Sec. 615.5172 to read as follows:
Sec. 615.5172 Investments by associations in Farmers' notes.
(a) In accordance with policies prescribed by the board of
directors of the Farm Credit Bank or agricultural credit bank that
funds it and each direct lender association, each direct lender
association may invest in notes, sales contracts, and other similar
obligations (hereafter Farmers' notes) that eligible farmers, ranchers,
producers and harvesters of aquatic products, and farm-related
businesses give to entities that routinely extend credit in the normal
course of their business.
(b) Farmers' notes must be secured by:
(1) Collateral of a capital nature that eligible farmers, ranchers,
producers and harvesters of aquatic products use in their agricultural
or aquatic operations or for their household needs;
(2) Collateral of a capital nature that eligible farm-related
businesses use in providing farm-related services to eligible farmers
and ranchers.
(c) The total amount that an association may invest in Farmers'
notes, at any one time, must not exceed 15 percent of the balance of
its loans outstanding at the close of the association's preceding
fiscal year. In addition, the total amount that an association may
carry as investments in Farmers' notes originated by any one selling
entity must not exceed 50
[[Page 47513]]
percent of the association's capital and surplus.
(d) All Farmers' notes in which an association invests shall have
at least one or a combination of the following credit enhancements:
(1) The selling entity must endorse these Farmers' notes with full
recourse;
(2) A guarantee by a creditworthy third party covers the full
principal amount of the Farmers' note;
(3) Acceptable insurance covers the principal amount of each
Farmers' note;
(4) The selling entity or a third party maintains a reserve of cash
or marketable securities in an amount that equals or exceeds 10 percent
of the principal amount of each Farmers' note;
(5) The selling entity or a third party holds a subordinated
interest that equals or exceeds 10 percent of the principal amount of
each Farmers' note; or
(6) The entire principal amount of the Farmers' notes is covered by
a combination of credit enhancements listed in this section.
Subpart H--Capital Adequacy
9. Amend Sec. 615.5210 by adding new paragraphs (f)(2)(ii)(M) and
(N); (f)(2)(iii)(C); and (f)(2)(iv)(E) and (F) to read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
* * * * *
(f) * * *
(2) * * *
(ii) * * *
(M) Claims on other financing institutions provided that:
(1) The other financing institution qualifies as an OECD bank or it
is owned and controlled by an OECD bank that guarantees the claim, or
(2) The other financing institution has a rating in one of the
highest three investment-grade rating categories from a NRSRO or the
claim is guaranteed by a parent company with such a rating, and
(3) The other financing institution has endorsed all obligations it
pledges to its funding Farm Credit bank with full recourse.
(N) Investments in Farmers' notes that:
(1) Provide the Farm Credit System direct lender association full
recourse against a seller or has other acceptable credit enhancements
specified in Sec. 615.5172(d), and
(2) Are guaranteed by an OECD bank or other institution that
qualifies for a 20-percent risk weight under this section, or
(3) Are sold by entities that:
(i) Are rated in one of the highest three investment-grade rating
categories from a NRSRO or the investment is guaranteed by a parent
company with such a rating. If the entity has more than one NRSRO
rating the lowest rating shall apply.
(ii) Maintain capital to total assets of at least 9 percent.
(iii) * * *
(C) Claims on other financing institutions that:
(1) Are not covered by the provisions of paragraph (f)(2)(ii)(M) of
this section, but otherwise meet similar capital, risk identification
and control, and operational standards, or
(2) Carry an investment-grade or higher NRSRO rating, and
(3) The other financing institution has endorsed all obligations to
its Farm Credit funding bank with full recourse.
(D) Investments in Farmers' notes that:
(1) Provide the Farm Credit System direct lender association full
recourse against a seller or has other acceptable credit enhancements
specified in Sec. 615.5172(d), and
(2) The seller is not covered by the provisions of paragraph N (20-
percent risk weight), but otherwise meets similar capital, risk
identification and control, and operational standards, or
(3) The credit provider carries an investment-grade or higher NRSRO
rating.
(iv) * * *
(E) Claims on other financing institutions that do not otherwise
qualify for a lower risk weight category under this section.
(F) Investments in Farmers' notes that do not otherwise qualify for
a lower risk weight under this section.
* * * * *
Dated: August 6, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-20360 Filed 8-8-03; 8:45 am]
BILLING CODE 6705-01-P