[Federal Register: May 7, 2004 (Volume 69, Number 89)]
[Notices]
[Page 25578-25580]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07my04-56]
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FARM CREDIT ADMINISTRATION
Farm Management and Agricultural Trust
AGENCY: Farm Credit Administration.
ACTION: Notice.
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SUMMARY: The Farm Credit Administration (FCA or we) publishes this
notice to inform the public of its decision to deny a request by a Farm
Credit System (System or FCS) institution for approval to offer farm
management and agricultural trust services as authorized related
services.
[[Page 25579]]
The proposed services were published for public comment on August 19,
2003.
EFFECTIVE DATE: April 22, 2004.
FOR FURTHER INFORMATION CONTACT:
Lori Markowitz, Policy Analyst, Office of Policy and Analysis, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TTY (703)
883-4434;
or
Joy Strickland, Senior Counsel, Regulatory Enforcement Division, Office
of the General Counsel, Farm Credit Administration, McLean, VA 22102-
5090, (703) 883-4020, TTY (703) 883-2020.
SUPPLEMENTARY INFORMATION:
I. Objective
Consistent with law and safety and soundness principles, the
objective of this notice is to inform the public of the FCA's decision
on a request from an FCS institution to offer farm management and
agricultural trust services as authorized related services.
II. Background
FCA published a notice and request for public comment on the
institution's related services request in the Federal Register on
August 19, 2003, and provided a 60-day comment period. (See 68 FR
49773) On October 23, 2003, FCA reopened the comment period until
December 22, 2003. (See 68 FR 60689) In this notice, we are providing a
summary of the comments we received and informing the public of FCA's
decision on the related services request.
Related service, as defined in 12 CFR 618.8000(b), means ``any
service or type of activity provided by a System bank or association
that is appropriate to the recipient's on-farm, aquatic, or cooperative
operations, including control of related financial matters.'' Any new
service not previously authorized and placed on the Related Services
List in 12 CFR part 618 requires a prior determination that the service
is legally authorized. The FCA also must evaluate whether the service
presents excessive risk to the requesting institution or the System as
a whole, including whether the service could result in significant
conflicts of interest or expose the institution or the System as a
whole to significant liability.
In its evaluation of a proposed service, the FCA must focus on its
application System-wide rather than on institution-specific factors. If
we authorize a new related service, any System bank or association may
develop a program and subsequently offer the same related service(s) to
eligible recipients, subject to any special conditions or limitations
imposed by the FCA. We may, at the time of approval, impose such
special conditions or limitations on any approved service to ensure
safety and soundness or compliance with law or regulation. These
programs would be subject to review during the examination process.
III. Proposed Related Services
The following services were proposed as services that an individual
institution would offer to its customers:
Farm Management Services--Professionals familiar with the
market would provide management of agricultural properties for real
estate owners in the service area. Farm management includes defining
ownership goals, identifying problems, analyzing alternatives, and
making recommendations for achieving business goals. Farm managers
would present the customer with a full spectrum of lease or custom
farming alternatives and help the owner decide how to ultimately get
the best return on assets. Key factors of the service would include
developing a comprehensive farm operating plan, securing operators and
negotiating leases, providing property reporting, including annual
budgets and projections, analyzing government programs, formulating and
implementing capital improvements and repairs, and handling commodity
sales.
Agricultural Trust Services--The institution would assist
customers in creating a trust and managing the assets of the trust. As
the trustee, the institution would handle the responsibilities involved
in settling the estate, including recordkeeping, asset management,
asset disposition, tax filings, and income distributions.
IV. Comments
Because of the complex nature of these proposed services, the FCA
solicited public comment, in accordance with 12 CFR 618.8010(b)(3). We
believe that evaluation of the proposal has been aided by the public
comments we received. FCA received 390 comments, four of which asked
for an extension of the original comment period or clarification of
FCA's process. Commenters included FCS institutions, the Farm Credit
Council, the American Bankers Association, the Independent Community
Bankers Association, state banking associations, the National
Association of Realtors, realtors, property managers, appraisers, and
members of the public.
We received 19 comments in support of the proposal. Supporters
commented that farm management and agricultural trust services would
allow FCS institutions to become more comprehensive providers of
financial services. Also, the proposed services would greatly benefit
and parallel FCA's Young, Beginning and Small (YBS) farmer initiative
by allowing YBS farmers to have highly regarded expert advice about
specialized services available. Commenters stated that these services
could provide retiring farmers with the alternatives and valuable
business tools that would allow the transfer of assets from one
generation to another, thus allowing for the continuation of the family
farm business. The services could also benefit absentee and non-active
farmland owners who do not want to actively farm the land, but want to
continue land ownership and need assistance in farm management.
Supporters also commented that the proposed services would meet the
growing market demand in areas where the private sector providers are
underserving the public or not offering such services at all.
Supporters also commented that a System institution offering the
proposed services should demonstrate that appropriate risk management
practices are in place and that safeguards are specifically identified
in the agreement with the customer. Commenters asserted that risks
could be adequately addressed by written programs establishing detailed
operating procedures, staff qualifications, training, licensing, and
insurance requirements, contractual provisions with clients, and
``firewalls'' between other institution operations. An organizational
structure that provides for a separation of duties from the credit
function would minimize potential conflicts associated with borrowers
with distressed loans. Commenters further noted that an institution's
board and management could implement internal controls through the
development of policies and procedures, which would be monitored
through internal and FCA regulatory examinations.
FCA received 367 comments in opposition to this proposal, many of
which were identical in content. Commenters stated that the proposal
would create an unfair competitive advantage because the proposed farm
management and trust services are widely available to farmers
throughout the country from existing service providers, and an FCS
institution would be able to charge less for these services because of
its Government-sponsored enterprise status. Many commented that farm
management is a low margin business with high start-up costs due to the
training and expertise requirements.
[[Page 25580]]
Several commenters asserted that the proposed services are
contradictory to Congressional intent and legislative history.
Commenters in opposition also believe that FCS institutions cannot
legally offer trust services because state law governs who can be
deemed a corporate trustee, and most laws only include banks, savings
and loan institutions, and trust companies. Further, the commenters
noted that farm management, like any property management, is a
commercial activity that most nationally chartered banks and savings
and loan institutions are prohibited from offering.
The majority of comments in opposition to this proposal noted that
there are significant conflicts of interest, particularly when the
institution serves as farm manager, lender, and trustee of the same
property. Financing farm operators and absentee landowners, while
having a fiduciary position of negotiating leases and selecting farm
operators, has built-in conflicts of interest. It would be difficult to
negotiate lease terms as a farm manager if the farm operator were also
a borrower. Commenters suggested that conflicts would also develop if
potential farm management clients needed to borrow money. In addition,
commenters stated that institutions offering farm management and trust
services could expect to be involved in frequent litigation. As a
result, some commenters felt that the services pose too great a
financial risk to the System.
V. FCA's Action on the Proposal
After thoroughly considering the proposal and the comments
received, the FCA concluded that farm management and agricultural trust
services could come within the definition of related services as
authorized in 12 CFR 618.8000 and the Farm Credit Act of 1971, as
amended. The services are related to on-farm operations, which FCA has
defined to include control of related financial matters. The proposed
services are also similar to several other services that have been
approved by the FCA, provided by FCS institutions for a number of
years, and ratified through a notice and comment rulemaking process.
Those services include appraisal services, estate planning services,
farm recordkeeping services, and farm business consulting services.
Although the proposed services come within the statutory and
regulatory parameters of a related service, farm management and
agricultural trust services as proposed introduce significant risks and
potential conflicts of interest for System institutions. An institution
participating in farm management and agricultural trust services could
face legal liability to its customers for certain management decisions,
as well as third-party liability, including environmental liability.
The financial risks associated with liability could significantly
affect an institution's capital and financial condition. In addition,
these services would likely involve substantial start-up and
maintenance costs. If many institutions began offering these services,
the risks and conflicts involved could adversely impact the System's
viability.
Performing farm management and agricultural trust services for
customers who are also borrowers of the offering institution poses
potentially significant conflicts of interest. The conflicts would be
magnified if a borrower's loan became distressed. Foreclosing on a
loan, including providing distressed loan restructuring rights, would
be difficult if the institution foreclosing on the loan were also
managing the farm. Significant potential for conflicts would also exist
in management and trust situations where owners and lessees were also
borrowers of the institution. The potential conflicts of interests
would increase the financial risk of offering these services because
they are likely to give rise to frequent litigation, including creating
defenses to foreclosures of managed properties and properties in trust.
FCA believes that the conflicts of interest that this proposal presents
are too great and cannot be satisfactorily resolved.
FCA recognizes that farm management and agricultural trust services
can be beneficial to farmers and ranchers, particularly YBS farmers and
ranchers. In some areas, these services may be provided through
existing entities, while other areas may be underserved by existing
entities. Notwithstanding the potential need for and benefits of these
services, FCA believes that the conflicts and financial risks when one
institution serves as both lender and manager/trustee outweigh the
benefits that could be derived. FCA also notes that many of the
benefits of these services, particularly the benefits to YBS farmers
and ranchers, could be gained by System institutions more fully
utilizing farm business consulting, which is an authorized related
service on the Related Services List in 12 CFR part 618. Through farm
business consulting, FCS institutions can provide critical advice to
young and beginning farmers and advice on alternatives available to
retiring farmers. Because FCS institutions that offer farm business
consulting are not authorized to make management decisions for a
customer, conflicts of interest and liability concerns are alleviated.
For the foregoing reasons, the FCA Board has decided that farm
management and agricultural trust services, as proposed, should not be
authorized as related services.
Dated: May 3, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-10408 Filed 5-6-04; 8:45 am]
BILLING CODE 6705-01-P