[Federal Register: May 26, 2004 (Volume 69, Number 102)]
[Rules and Regulations]
[Page 29852-29863]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26my04-2]
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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: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, agency, or we) adopts a
final rule that amends regulations governing other financing
institutions (OFIs). The purpose of the final rule is to make it easier
for OFIs to obtain funding for short- and intermediate-term loans to
farmers, ranchers, aquatic producers, farm-related businesses, and
rural homeowners through Farm Credit System (FCS, Farm Credit, or
System) banks. The FCA believes that these
[[Page 29853]]
changes will make credit to agriculture and other eligible borrowers in
rural America more affordable. The final rule removes unnecessary
provisions in the existing OFI regulations that: Impede the flow of
credit; or do not enhance safe and sound operations. The FCA also
adopts conforming amendments to its capital regulations.
DATES: Effective Date: This regulation will be effective 30 days after
publication in the Federal Register during which time either or both
Houses of Congress are in session. We will publish a notice of the
effective date in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, Office of Policy and
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TTY (703) 883-4434; or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-2020.
SUPPLEMENTARY INFORMATION:
I. Background
This rulemaking began on April 20, 2000, with an advance notice of
proposed rulemaking (ANPRM) that asked all interested parties specific
questions about the funding and discount relationship between Farm
Credit banks and OFIs.\1\ 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.
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\1\ See 65 FR 21151 (April 20, 2000).
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Many of the comments and suggestions that we received from the
ANPRM, interviews, and at the public meeting were incorporated into the
proposed rule to revise both our OFI and the investment in farmers'
notes (Farmers' Notes) regulations.\2\ Basically, the proposed OFI rule
would allow OFIs to establish a funding and discount relationship with
any one Farm Credit Bank (FCB) or agricultural credit bank (ACB)
(collectively Farm Credit banks). The proposed rule also would
strengthen the equitable treatment provisions in the existing
regulations by requiring a Farm Credit bank, at the request of an OFI
or OFI applicant; to: (1) Disclose how it prices funds for OFIs; and
(2) justify any discrepancy in the cost of funding between OFIs and
associations. Another feature of the proposed rule is that it would
allow Farm Credit banks to disclose the identity of OFIs with their
consent. The preamble to the proposed OFI rule clarified the FCA's
position on borrower rights, and it offered suggestions for improving
relationships between OFIs and the System, and the role of the FCA
Ombudsman. The FCA also proposed changes to the Farmers' Notes
regulation and conforming amendments to its capital regulations
regarding risk weighting for OFIs and Farmers' Notes.
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\2\ See 68 FR 47502 (August 11, 2003).
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The FCA received 111 comment letters on the proposed rule. A total
of 8 comment letters came from the System; 1 from the Farm Credit
Council (FCC), 5 from Farm Credit banks, and 2 from associations. Other
commenters were an agricultural credit cooperative OFI, a Community
Development Financial Institution (CDFI), the Credit Union National
Association (CUNA), which is a trade association for credit unions, and
two individuals. Finally, 98 letters came from commercial bankers,
including the Independent Community Bankers of America (ICBA) and its
state-affiliated associations.
The vast majority of the commenters generally supported the
proposed OFI rule, but both System and non-System commenters offered
suggestions and raised concerns about particular issues. Commercial
banks and their affiliated trade associations opposed the proposed
Farmers' Notes rule. These commenters asked the FCA to hold a public
meeting, seek additional public comment, and solicit congressional
input before adopting a final Farmers' Notes rule. Several FCS and non-
System commenters asked the FCA to revise or clarify certain provisions
in the proposed capital risk-weighting regulations that applied to
OFIs.
We are enacting a final rule on OFIs, which includes conforming
amendments to the capital regulations concerning the risk weighting of
System bank loans to OFIs. We are not adopting a final Farmers' Notes
rule at this time because we are continuing to consider the best
regulatory approach to this program.
II. Final OFI Rule
As 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.
The FCA now addresses concerns and suggestions that the commenters
raised about various issues of the proposed OFI rule.
A. Assured Access (Sec. 615.4540(b)(1))
Section 1.7(b)(4)(B)(i) of the Farm Credit Act of 1971, as amended
(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) 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, 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.
During earlier phases of this rulemaking, some commercial banks and
System lenders expressed the opinion that the 15-percent threshold was
too onerous, and they asked the FCA to reduce or eliminate it. Some of
these commenters mistakenly believed that Sec. 614.4540(b)(1)
automatically excluded non-System lenders from the OFI program if
agricultural or aquatic loans did not compromise at least 15 percent of
their loan portfolios. Although the current regulation assures access
to creditworthy OFIs that maintain at least 15 percent of their loan
volume at a seasonal peak in agricultural loans, some commenters
erroneously thought that it only provided assured access to those OFIs
that always maintain at least 15 percent of their loan portfolio in
farm loans. The preamble to the proposed rule dispelled both of these
misconceptions.\3\
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\3\ See 68 FR 47502, 47505 (August 11, 2003).
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The FCA did not propose to change the 15-percent threshold as the
factor that determines whether an OFI is
[[Page 29854]]
assured access to funding from a Farm Credit bank. The preamble to the
proposed rule explained that the standard that the FCA uses to
determine whether a non-System lender is substantially involved in
agricultural lending is more permissive than the 25-percent benchmark
that the Federal Deposit Insurance Corporation established for
nonmember banks that it insures, and is comparable to the measure used
by the Board of Governors of the Federal Reserve System.\4\ The FCA
invited comments on alternatives that reasonably demonstrate that an
OFI is significantly involved in agricultural lending because the
agency is open to ideas that would make this program more attractive to
OFIs.
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\4\ Ibid.
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The FCA received two comment letters about assured access. Both
letters came from FCS institutions that support the 15-percent
threshold as the appropriate standard for determining whether an OFI is
significantly involved in agricultural lending.
The final rule retains the 15-percent threshold in existing Sec.
614.4540(b)(1). The 15-percent threshold strikes 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.
B. Place of Discount (Sec. 614.4550)
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 the OFIs maintain their headquarters or
makes 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 current
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 Farm
Credit bank denies funding, or otherwise fails to approve a completed
application within 60 days, the OFI may apply to any other Farm Credit
bank. Additionally, the regulation allows a Farm Credit bank to consent
to another System bank funding or discounting loans for an OFI.
The ANPRM, interviews, and public meeting revealed widespread
dissatisfaction with the place of discount rule in Sec. 614.4550.
Except for one Farm Credit bank, all System and non-System commenters
favored repealing all restrictions on place of discount so OFIs could
choose their System funding bank. The one Farm Credit bank that opposed
repealing Sec. 615.4550 was concerned that FCS associations would be
placed at a competitive disadvantage.
In response to these comments, the FCA proposed to revise Sec.
615.4550 so OFIs could fund or discount loans with any FCS bank. The
FCA reasoned that this approach would free Farm Credit banks from
potential pressure by associations not to lend to their competitors.
Another factor that supports the proposed rule is that when Farm Credit
banks compete for OFI credit, the OFI may be able to obtain a more
favorable funding cost, which it can then pass on to farmers and
ranchers.\5\
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\5\ Ibid.
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The proposed rule would require a Farm Credit bank to notify
another System bank in writing within 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. The purpose of this notice requirement is to give the bank
in whose territory the OFI is located ample opportunity to contact the
applicant and offer it funding and discount services. The proposed rule
would not allow any OFI to borrow from two or more Farm Credit banks at
the same time. The preamble to the proposed rule justified this ban on
safety and soundness grounds.
The FCA received 100 comments about place of discount. Of this
total, 92 came from commercial banks or their trade associations, 6
from System banks and associations, and 1 each from CUNA and the
agricultural credit cooperative OFI. All commercial bank commenters and
CUNA supported the FCA's position on place of discount. None of these
commenters sought any revision to proposed Sec. 614.4550. System
commenters agreed that an OFI should be allowed to fund or discount
short-or intermediate-term loans with the Farm Credit bank of its
choice.
However, System commenters opposed the 5-day notice requirement in
the proposed rule. These commenters claim that the notice requirement
grants too much flexibility to OFIs while imposing unnecessary burdens
on System banks. One commenter thought that the OFI should bear the
burden of notifying the local Farm Credit bank that it is taking its
business elsewhere. Two System commenters stated that the mere receipt
of a credit application from an OFI located outside its chartered
territory does not mean that the Farm Credit bank will approve funding.
Since the FCS bank is unlikely to make a credit decision within 5 days,
these commenters stated that it should be under no obligation to notify
the Farm Credit bank that serves the territory where the OFI is
located.
System commenters and the agricultural credit cooperative OFI
opposed the ban on two or more Farm Credit banks simultaneously funding
the same OFI. Many of these commenters stated that our safety and
soundness rationale was unpersuasive. These commenters note that many
OFIs already have multiple sources of funding, and that multilender
financing of commercial borrowers is commonplace today in credit
markets. All of these commenters suggest that intercreditor agreements
among different Farm Credit banks will adequately resolve the FCA's
safety and soundness concerns about disputes over collateral if the OFI
fails.
The FCA adopts final Sec. 614.4550, which enables creditworthy
OFIs to seek and establish a funding and discount relationship with the
Farm Credit bank of their choice. Allowing OFIs to choose their System
funding bank frees them from the problems associated with obtaining
credit from banks that are owned and controlled by their competitors.
This approach may lower the funding costs and improve the liquidity of
OFIs which could, in turn, reduce the cost of credit to farmers,
ranchers, and other eligible rural residents.
In response to System commenters, the FCA does not view the 5-day
notice requirement as a burden on Farm Credit banks. This notice
requirement ensures that Farm Credit banks communicate with each other
in providing funding and liquidity to OFIs. Additionally, this
regulatory requirement enables each Farm Credit bank to consider
offering funding and discount services to OFIs in its chartered
territory. The 5-day notice requirement has no relationship to the
credit approval process at a Farm Credit bank that receives an
application from an OFI outside its territory. Written notice is
required within 5 days, regardless of whether the Farm Credit bank has
considered or acted upon an application received from such OFIs.
[[Page 29855]]
Simply providing written notice to another Farm Credit bank within 5
days is neither costly nor difficult to any System bank that receives
applications from OFIs outside its chartered territory.
The FCA retains the ban on two or more Farm Credit banks
simultaneously funding the same OFI. Although System arguments against
this ban have some merit, policy concerns justify the FCA's decision to
retain it. In retail credit markets, financing by multiple lenders of
the same borrower and intercreditor agreements are commonplace.
However, discount banks established by Congress to fulfill a public
policy mission generally do not engage in such practices. For example,
two Federal Reserve Banks or two Federal Home Loan Banks do not
simultaneously fund the same member bank. Generally, each FCS
association receives all of its funding from one Farm Credit bank. In
addition, an association cannot seek credit from another System bank
unless its funding bank consents. Therefore, the ban on two or more
Farm Credit banks simultaneously funding the same OFI is consistent
with the FCA's policy of requiring FCS banks to treat their OFIs and
System associations equitably.
The agricultural credit cooperative OFI expressed concern about how
the ban on two FCS banks simultaneously funding the same OFI would
affect its business. The commenter stated that its parent is an
agricultural cooperative that borrows from the ACB under title III of
the Act, while it is an OFI that borrows from a Farm Credit bank and
sells participations in loans to FCS associations. The FCA clarifies
that nothing in the proposed or final regulation prevents: (1) OFIs
from participating in loans with System associations; or (2) any parent
or affiliate which is an agricultural cooperative from borrowing from
the ACB under title III of the Act.
C. Borrower Rights (Sec. 614.4560(d))
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. An
existing regulation, Sec. 614.4560(d), implements section
4.14A(a)(6)(B) of the Act by requiring OFIs to comply with borrower
rights on those loans that Farm Credit banks fund or discount.
During all phases of this rulemaking, System and commercial bank
commenters have repeatedly advised the FCA that borrower rights are an
impediment to the success of the OFI program. However, many commenters
acknowledged that the Act requires OFIs to comply with borrower rights
requirements. The FCA cannot repeal Sec. 614.4560(d) because it
implements statutory borrower rights requirements.
The FCA proposed a technical correction to Sec. 614.4560(d) that
would remove the reference to section 4.36 of the Act from the
regulation because the plain language of the statute grants the right
of first refusal only to borrowers of FCS institutions that operate
under titles I or II of the Act, not OFIs. One System commenter agreed
with the technical correction to Sec. 614.4560(d), while all other
commenters expressed no opinion about this matter. The final rule
removes the reference to section 4.36 of the Act from Sec. 614.4560(d)
so that the regulation conforms to the statute.
The FCA recently moved all borrower rights regulations to part
617.\6\ For this reason, the FCA revises all of the cross-references in
final Sec. 614.4560(d) to the borrower rights regulations to reflect
this change.
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\6\ See 69 FR 10901 (March 9, 2004).
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Currently, Sec. 614.4560(d) states that borrower rights apply to
``all loans that an OFI funds or discounts through a Farm Credit Bank
or agricultural credit bank * * *'' (Emphasis added). Earlier, a Farm
Credit bank pointed out that section 4.14A(a)(6)(B) of the Act requires
an OFI to comply with borrower rights, ``but only with respect to loans
discounted or pledged under section 1.7(b)(1).'' As a result, this
System bank asserted that the language in Sec. 614.4560(d) exceeds the
scope of section 4.14A(a)(6) of the Act. Specifically, the Farm Credit
bank interpreted section 4.14A(a)(6) of the Act to mean that borrower
rights apply to OFI loans only during the time that they are actually
pledged to the funding bank as collateral. Under this interpretation,
most borrower rights would not apply to OFI loans because many of these
rights apply before or after the time that these loans are actually
pledged to the System funding bank. Examples of borrower rights that
would not apply to OFI loans under this interpretation are: (1) Most
EIR disclosures; (2) the right to appeal certain adverse credit
decisions to an OFI's credit review committee; and (3) the right to
restructure a distressed loan that the OFI has removed from collateral
at its System funding bank. Under the bank's suggested interpretation
of the statute, 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 proposed rule retained the provision in Sec. 614.4560(d),
which states that borrower rights apply to all loans that an OFI funds
or discounts through a Farm Credit bank. The preamble to the proposed
rule thoroughly examined and analyzed the text, structure, and
legislative history of the borrower rights provisions of the Act, and
it explained in detail why borrower rights apply to all loans that OFIs
fund through a Farm Credit bank. The discussion in the preamble to the
proposed rule revealed that Congress intended to grant OFI borrowers
whose loans are funded by a Farm Credit bank all of these rights and
protections, even at times when their loans are not actually pledged as
collateral to the System funding bank.
Except for one association, which expressed no opinion on this
matter, all other System commenters opposed the FCA's interpretation of
the borrower rights provision of the Act. These commenters stated that
this approach conflicts with the FCA's stated goal of making the OFI
program more attractive to potential and existing OFIs. Some commenters
stated that the FCA's position was impractical because neither the
agency nor the funding bank can enforce compliance with borrower rights
after an OFI has removed a distressed loan from collateral.
None of these commenters offered new information or provided any
legal analysis that would cause the FCA to change its interpretation of
section 4.14A(a)(6) of the Act. Accordingly, the FCA reaffirms its
interpretation of section 4.14A(a)(6) that it presented in the preamble
to the proposed rule. Under section 4.14A(a)(6) of the Act, borrower
rights apply to all loans that an OFI funds or discounts through a Farm
Credit bank. The borrower continues to be entitled to borrower rights
after the OFI removes the loan from collateral. Only a statutory
amendment could resolve the concerns raised by the commenters.
The ICBA and its member banks stated that depository institutions
should not have to comply with borrower rights because they must
[[Page 29856]]
comply with the Community Reinvestment Act (CRA). These commenters
asked the FCA to treat compliance with the CRA as a substitute to
compliance with borrower rights requirements.
The FCA responds that the Act explicitly requires OFIs to comply
with borrower rights on all loans that they fund or discount through a
Farm Credit bank, regardless of whether they are also subject to the
CRA. The purposes, objectives, and compliance mechanism of the CRA are
separate, distinct, and independent from the borrower rights
requirements of the Act. The CRA does not provide farmers, ranchers,
and aquatic producers and harvesters the rights and protections on
agricultural loans that the Act confers on them. Neither the Act nor
the CRA authorizes depository institutions to substitute CRA
requirements for compliance with borrower rights. For this reason, the
FCA has no authority to grant this request.
One Farm Credit bank asked the FCA to clarify that borrower rights
do not apply to loans that an OFI pledges as supplemental collateral.
Under Sec. 614.4570(c), Farm Credit banks may require an OFI to pledge
supplemental collateral or provide other credit enhancements that
support the lending relationship. Farm Credit banks take supplemental
collateral from their OFIs out of an abundance of caution. However,
Farm Credit banks do not fund or discount supplemental collateral
pledged by their OFIs. For this reason, borrower rights would not apply
to agricultural loans that OFIs pledge to their System funding bank as
supplemental collateral.
D. Equitable Treatment (Sec. 614.4590)
An FCA regulation, Sec. 614.4590, requires Farm Credit banks to
treat OFIs and FCS associations equitably. More specifically, Sec.
614.4590(a) requires that Farm Credit banks 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. Section 614.4590(b)
additionally requires 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 respondents to the ANPRM and speakers at the public meeting
told the FCA that Farm Credit banks continue to favor FCS associations
over OFIs. According to these commenters, this perception of unfair
treatment deters many agricultural lenders from becoming OFIs, while
existing OFIs feel that FCS associations always receive preferential
treatment from System funding banks.
Commercial bank commenters suggested that our regulations could
rectify this problem by mandating equal, rather than equitable,
treatment of OFIs and FCS associations. Because these commenters stated
that this disparity of treatment was especially evident in the price of
funding that Farm Credit banks charge their associations and OFIs, they
asked the FCA to amend Sec. 614.4590 so it requires Farm Credit banks
to disclose to OFIs exactly how they price their loans to both OFIs and
FCS associations. These commenters also stated that the FCA should
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. Another suggestion was that Sec. 614.4590
should be revised so it expressly prohibits Farm Credit banks from
charging OFIs fees that are not charged to FCS associations. Some
commercial banks commented that the regulation should require Farm
Credit banks to pay dividends or patronage to OFIs.
In response to these comments, the FCA proposed adding 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 require 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. 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.
The FCA declined requests to amend Sec. 614.4590 so it would
require equal, instead of equitable, treatment of FCS associations and
OFIs. The preamble to the proposed rule listed five fundamental
differences that distinguish FCS associations from OFIs. The FCA
reasoned that these fundamental differences preclude Sec. 614.4590
from mandating equal treatment for associations and OFIs. The preamble
to the proposed rule also explained that 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. The proposed rule did not require Farm
Credit banks to pay dividends or patronage to their OFIs because the
FCA found it inappropriate to impose, by regulation, business practices
on FCS institutions in the absence of a compelling safety and soundness
reason.\7\
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\7\ See 68 FR 47502, 47505 (August 11, 2003).
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In response to the proposed rule, the FCA received comment letters
on equitable treatment from the FCC, a Farm Credit bank, an
agricultural credit cooperative OFI, the ICBA and several of its
commercial bank members. The two System commenters believe that the new
disclosure requirements in proposed Sec. 614.4590 impose costs and
burdens on FCS banks that outweigh the benefits to OFIs. The Farm
Credit bank stated that the revisions to Sec. 614.4590 ``are heavily
slanted in favor of the OFIs.'' Both System commenters expressed
concern that Sec. 614.4590 would require Farm Credit banks to disclose
``proprietary pricing procedures'' and information to OFIs, which could
now establish a funding or discount relationship with any System bank
under Sec. 614.4550. Although commercial bank commenters support the
new disclosure requirements in Sec. 614.4590, they continue to state
that this regulation should require equal, rather than equitable,
treatment of associations and OFIs.
The commercial bank commenters urged the FCA to enact a final rule
that requires the equal funding costs for FCS associations and OFIs
because in their view, System institutions ``have easy access to all
the credit they need'' while OFIs must rely on several funding sources,
each which is limited. Commercial banks and the agricultural credit
cooperative OFI asked the FCA to require FCS banks to: (1) Earmark the
capital contribution of each OFI, and (2) pay patronage and dividends
to OFIs whenever FCS associations receive such payments.
After considering these comments, the FCA has decided to enact
proposed Sec. 614.4590 as a final rule without
[[Page 29857]]
revision. The final rule appropriately balances the interests of Farm
Credit banks, OFIs, and System associations.
In response to System concerns, the FCA believes that OFI program
will become more transparent because final Sec. 614.4590(c) and (d)
now require Farm Credit banks to disclose pricing information to their
OFIs. Transparency enables both OFIs and FCA examiners to objectively
determine whether a Farm Credit bank is treating its associations and
OFIs equitably. Allowing OFIs to choose their System funding bank while
simultaneously requiring Farm Credit banks to disclose pricing
information to OFIs achieves the FCA's objective of making this program
more attractive to existing and potential OFIs. Disclosing pricing
information helps OFIs make informed decisions in selecting their
System funding bank. As a result, the OFI can pass these pricing
advantages along to farmers, ranchers, and other eligible borrowers.
Funding and discounting loans for OFIs is part of the public policy
mission of System banks, which are cooperative institutions that are
jointly and severally liable for FCS debt. Accordingly, the FCA is not
persuaded by the commenters' arguments that the regulation gives OFIs
access to ``proprietary'' pricing information at several different Farm
Credit banks.
Commercial bank commenters offered no new information or analysis
that would persuade the FCA to amend this regulation so it requires
equal, rather than equitable, treatment of OFIs and FCS associations.
In fact, the most recent comments from commercial banks reinforce the
notion that OFIs are fundamentally different than FCS associations.
Thus, OFIs pose different credit risks to System banks than
associations which, in turn, could justify the differential in the cost
of funding charged to the two groups of lenders.
The FCA declines the request that the final rule require FCS banks
to: (1) Allocate the capital contribution of each OFI; and (2) pay
patronage and dividends to OFIs when FCS associations receive similar
payments. System banks distribute patronage and dividends to their
shareholders in accordance with their bylaws. FCA regulations do not
prescribe business practices at System institutions in the absence of
compelling safety and soundness reasons. However, each System bank must
factor in capital contributions as well as patronage and dividend
payments when it prices credit for an OFI. The new regulatory
disclosure requirements make it easier for the OFIs and other
interested parties to determine whether Farm Credit banks are pricing
OFI credit equitably.
E. Ombudsman
Many commercial banks and their trade associations asked us in
their response to the ANPRM and during the public meeting 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. The
public announcement, which informed the public of the creation of this
office stated, ``The Office of the Ombudsman will be an effective,
neutral and confidential resource and liaison for the public.'' One of
many duties of the Ombudsman is to address the concerns of OFIs and
facilitate better relationships between them and the FCS. The FCA
repeated this information in the preamble to the proposed rule.\8\
---------------------------------------------------------------------------
\8\ Ibid.
---------------------------------------------------------------------------
The FCC and a System bank stated in their comment letters that the
sole task of the Ombudsman is to serve as an advocate for OFIs. Since
System banks pay for the Office of the Ombudsman through assessments
that the FCA levies on them, these commenters suggest that it would be
appropriate for these banks to pass the cost along to their OFIs. One
commenter stated that the FCA has no express statutory authority to
establish the Ombudsman position.
The FCA repeats what it said in the public announcement and the
preamble to the proposed regulation. The FCA emphasizes that the Office
of the Ombudsman is an effective, neutral and confidential resource and
liaison for the public. Addressing the concerns of OFIs is only one of
the Ombudsman's duties.
Several provisions of title V of the Act grant the FCA power to
establish the Office of the Ombudsman. Section 5.9 of the Act enables
our Board to ``provide for the performance of all the powers and duties
vested in the Farm Credit Administration.'' Section 5.11(b) of the Act
empowers the Chairman of the FCA to ``appoint such personnel as may be
necessary to carry out the functions of the Farm Credit
Administration.'' This section of the Act also states, ``The
appointment by the Chairman of the heads of major administrative
divisions under the Board shall be subject to the approval of the
Board.'' The FCA Board voted to establish this office in order to
address concerns by members of the public about how the agency or the
System is carrying out their responsibilities under the Act.
The FCA would oppose any attempt by System banks to encumber their
OFIs with the entire cost of the Office of the Ombudsman. Such attempts
would violate the requirement in Sec. 614.4590 that Farm Credit banks
treat their associations and OFIs equitably.
F. Disclosure of OFI Identities (Sec. 614.4595)
The ANPRM asked the public whether FCA regulations should allow
Farm Credit banks to disclose the identities of the OFIs that they
fund. Current FCA regulations prohibit FCS institutions from releasing
information about their retail borrowers and stockholders to the
public.\9\ However, the FCA never interpreted these regulations as
prohibiting the release of names of FCS associations that borrow from
Farm Credit banks.\10\ The preambles to both the ANPRM and the proposed
rule explained why the FCA believes 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.\11\ As both
preambles explained, retail borrowers often are individual consumers,
and keeping their identities confidential shields them from unwanted
marketing solicitations or publicity involving their personal financial
business whereas OFIs could benefit from the disclosure of their
identity because it could make prospective retail borrowers aware of
other credit options.
---------------------------------------------------------------------------
\9\ 12 CFR part 618, subpart G.
\10\ 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.
\11\ See 65 21151, 21154 (April 20, 2000); 68 FR 47502, 47508
(August 11, 2003).
---------------------------------------------------------------------------
In response to ANPRM comments and testimony in the public meeting,
the FCA proposed a new regulation, 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 would require 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. Financial statements of Farm Credit banks
should not disclose the identity of an OFI unless it consents. The FCA
believes that this regulatory approach empowers each OFI to make the
decision whether disclosure of its name, address, telephone number, and
Internet Web site address to the public is in its best interest.
[[Page 29858]]
The FCA received comments about this issue from the FCC, two Farm
Credit banks, the ICBA, and CUNA. The FCC and a System bank see no need
for this regulation because they believe that the regulations in
subpart G of part 618, which govern the release of information about
System borrowers and shareholders, already permits Farm Credit banks to
disclose the identity of an OFI that consents. If the FCA adopts a
final disclosure regulation for OFIs, two System banks suggest preamble
clarifications and minor edits to the text of Sec. 614.4595. The CUNA
supports proposed Sec. 614.4595 because it believes that disclosure of
a credit union's identity will help inform farmers, ranchers, and other
eligible borrowers about their other credit options and the benefits of
credit union membership. The ICBA suggests the FCA switch from an
``opt-in'' to an ``opt-out'' approach in the final rule. Under an
``opt-out'' approach, each Farm Credit bank would automatically
disclose an OFI's identity to the public unless the OFI instructed it,
in writing, not to do so. The ICBA contends that an ``opt-out''
approach is consistent with the trend in the law governing disclosure
of customer information by financial institutions.
The FCA adopts Sec. 614.4595 as a final rule after slightly
changing the text of the regulation in response to a comment from a
System bank. The FCA disagrees with the two System commenters that this
regulation is unnecessary because the regulations in subpart G of part
618 already govern releases of information about System borrowers and
shareholders. As the preambles to the ANPRM and proposed rule explain,
the regulations in subpart G of part 618 apply only to releasing
information about retail borrowers. For this reason, a new regulation
is needed to clarify the authority of System banks to disclose
information about OFIs.
The FCA declines the ICBA's request to revise Sec. 615.5495 so
that the final regulation requires System banks to disclose an OFI's
identity unless the OFI ``opts-out.'' The FCA believes that the ``opt-
in'' approach in the proposed rule is easier for System banks to
administer than the ``opt-out'' approach favored by the commenter.
Requiring an OFI to affirmatively consent, in writing, to the
disclosure of its identity avoids the misunderstandings and
miscommunications that are more likely to occur if disclosure happens
automatically unless or until the OFI takes action to stop it. Also,
the FCA's ``opt-in'' approach gives OFIs more control and flexibility
over the decision to allow System funding banks to publicly disclose
their identity than the ICBA's ``opt-out'' approach. Under the approach
in Sec. 615.4595, the OFI decides whether to allow its System funding
bank to disclose its identity to the public, and then it communicates
its decision to the bank, which honors its decision. In contrast,
disclosure occurs under the ``opt-out'' approach unless the OFI takes
action to stop it by a certain deadline.
Under final Sec. 614.4595, 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 requesting, obtaining, and maintaining the
consent of its OFIs and for disclosing this information to the public.
The FCA inserted the word ``requesting'' into the final regulation
Sec. 614.4595 in response to a comment from a Farm Credit bank. The
commenter suggested that the FCA change the word ``obtaining'' in the
proposed regulation to ``requesting.'' According to the commenter, a
System bank should not be accountable for ``obtaining'' consent from an
OFI. The commenter believes that ``requesting'' the OFI's consent is
the most the System funding bank can do. After considering this
comment, the FCA amended the regulation so it requires System banks to
adopt policies and procedures for ``requesting, obtaining, and
maintaining'' the consent of its OFIs. This revision enhances the
clarity and accuracy of the final regulation. A Farm Credit bank must
request and obtain the OFI's written consent before it can publicly
disclose the OFI's identity.
One Farm Credit bank asked the FCA for assurances that Sec.
614.4595 does not restrict the System bank's right to file financing
statements or other routine public filings that protect its security
interest under applicable law. The FCA affirms that the final rule does
not hinder the right or ability of any System bank to perfect its
security lien in collateral pledged by its OFIs. This approach is
similar to other Federal laws that protect the privacy of consumers who
buy goods and services on credit. Although these laws restrict the
release of confidential information by the creditor, they do not
prevent the creditor from filing public documents that enable it to
collect the debt in event of default.
G. Associations Acting as Farm Credit Bank Agents
Both System and non-System commenters suggested in their responses
to the ANPRM and during testimony at the public meeting 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 FCA stated in the preamble to the proposed rule that 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, the preamble to the proposed rule pointed out that
section 1.5(18) of the Act allows a Farm Credit bank to delegate to
associations such functions as the bank deems appropriate while section
2.2(19) allows a direct lender association to perform functions
delegated to it by its funding bank. Thus, sections 1.5(18) and 2.2(19)
of the Act enable FCS associations to act as point-of-contact or
servicing agents for the Farm Credit bank in its lending relationship
with its OFIs.\12\
---------------------------------------------------------------------------
\12\ See 68 FR 47502, 47508 (August 11, 2003).
---------------------------------------------------------------------------
Allowing FCS associations to act as intermediaries between Farm
Credit banks and OFIs may make this program more successful and reduce
tensions between the System and OFIs. In particular, designating
associations as intermediaries and servicing agents for Farm Credit
banks on their OFI loans may help diminish the competitive rivalries
that have historically troubled the relationship between OFIs and
associations. Farmers and ranchers benefit when FCS associations and
OFIs work together. Agreements between the parties can establish these
arrangements and, therefore, no new regulation is necessary.
The FCA received 2 comment letters about this issue from a Farm
Credit bank and association. The Farm Credit bank commenter concurred
that existing statutory authorities are sufficient to support
associations acting as agents of Farm Credit banks in their
relationship with OFIs and, therefore, no regulation is necessary. The
association fully supported allowing associations to act as
intermediaries for the Farm Credit banks in establishing and servicing
OFI relationships.
[[Page 29859]]
The FCA reaffirms that FCS associations have no authority under the
Act to lend directly to OFIs, but they can act as intermediaries or
servicing agents on loans from a Farm Credit bank to OFIs.
H. OFI Lending Limits
In 1998, the FCA repealed former Sec. 614.4565, 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 its general financing
agreement (GFA) with each OFI.\13\
---------------------------------------------------------------------------
\13\ See 63 FR 36541, 36545 (July 7, 1998).
---------------------------------------------------------------------------
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) Sec. 614.4353
establishes for System direct lender associations; and (2) Federal or
state laws place on depository institutions. During earlier phases of
this rulemaking, two non-System 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 declined this request because it is
inconsistent with safety and soundness. The preamble to the proposed
rule stated that each Farm Credit bank may establish, by underwriting
standards and the GFA, 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.\14\
---------------------------------------------------------------------------
\14\ See 68 FR 47502, 47508 (August 11, 2003).
---------------------------------------------------------------------------
The FCA received comments on this issue from a Farm Credit bank,
the ICBA, and 95 commercial banks. The Farm Credit bank supported the
FCA's position. The ICBA agreed with the FCA that lending limits
imposed by FCS banks on OFIs should be on the same basis as for FCS
associations. The ICBA asserted that System banks should not impose
``unduly restrictive'' lending limits on OFIs, and they should be
commensurate with limits set by the OFI's parent or primary regulator.
Several commercial banks continued to urge the FCA to enact a
regulation that prevents Farm Credit banks from imposing a lending
limit that is more stringent than the limit established by Federal or
state law.
The FCA reaffirms its earlier position that each Farm Credit bank
may establish, by underwriting standards and GFAs, limits on its
exposure to concentrations in the loan portfolios of FCS associations
and OFIs that are more stringent than lending limits imposed by statute
or regulation. However, System banks would not be treating OFIs
equitably if they establish lending limits that favor FCS associations
over OFIs. Additionally, any decision by a Farm Credit bank to
establish a lending limit that is more stringent than the limit imposed
on an OFI by applicable Federal or state law, or its corporate parent
must have a safety and soundness justification. Commercial bank
commenters have provided no new information or analysis that would
persuade the FCA to prohibit Farm Credit banks, by regulation, from
imposing a lending limit on OFIs that is more stringent than the limit
established by law or the corporate parents of such OFIs. The FCA
declines this request.
I. Eligible Collateral Pledged To Support an OFI's Discounting
Arrangements With a Farm Credit Bank (Sec. 614.4570)
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.
A comment letter from a System bank acknowledged that the Act
prohibits Farm Credit banks from: (1) Advancing funds for long-term
real estate mortgages to OFIs; and (2) accepting mortgages as primary
collateral from OFIs. The commenter opined that the statutory ban on
System banks funding and discounting agricultural mortgages for OFIs is
a major impediment to expansion of this program. The commenter then
asked the FCA to develop regulatory interpretations that would enable
System banks to overcome this obstacle.
As acknowledged by the commenter, the Act does not authorize long-
term funding for OFIs. FCA regulations, policies, or interpretations
must comply with the Act. Therefore, an amendment to the Act is
necessary to authorize Farm Credit banks to fund or discount
agricultural mortgage loans that OFIs make to their customers.
J. Improving the Relationship Between Farm Credit Banks and OFIs
In response to the ANPRM and during the public meeting, several
System and non-System commenters offered various suggestions for
improving the relationship between Farm Credit banks and prospective
and existing OFIs. The commenters' suggestions are confidence-building
measures that could attract more OFIs to establish funding and discount
relationships with Farm Credit banks. These suggestions could help
improve relations between existing OFIs and their funding banks and
encourage prospective OFIs to establish funding and discount
relationships with Farm Credit banks.
The FCA conveyed these ideas to Farm Credit banks by publishing the
suggestions in the preamble to the proposed rule. These suggestions
would require Farm Credit banks to take the initiative and reach out to
existing and prospective OFIs. More specifically, the FCA encouraged
Farm Credit banks to consider developing internal programs and
initiatives that:
1. Establish outreach programs for contacting prospective OFIs and
providing them with information about the banks' services;
2. Routinely publish updated information about their products and
services for OFIs, and their underwriting standards, funding terms and
conditions, and pricing guidelines for OFI loans;
3. Allow OFI representatives to observe meetings of the banks'
board of directors;
4. 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;
5. Work with OFIs to identify and remove administrative barriers
that hinder OFI access;
6. Allow FCS associations to act as intermediaries and servicing
agents on extensions of credit from the funding bank to OFIs, as
discussed earlier; and
7. Identify best practices for OFIs.
The FCA published these suggestions in the preamble to the proposed
rule because we are strongly committed to the success of the OFI
program. The FCA reasoned that by adopting the internal programs and
initiatives described above, Farm Credit banks can attract more OFIs
which, in turn, will provide eligible farmers, ranchers, aquatic
producers and harvesters, farm-related businesses, and rural
[[Page 29860]]
homeowners with more plentiful and affordable credit, as Congress
intended. Another passage in the preamble to the proposed rule advised
the public that 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. The preamble
to the proposed rule informed the public that new regulations may not
be required to implement these suggestions for improving the OFI
program.\15\
---------------------------------------------------------------------------
\15\ Ibid.
---------------------------------------------------------------------------
The FCA received several comments about this guidance from both FCS
and non-System commenters. Letters from commercial banks strongly
supported the recommendations and urged the FCA to encourage Farm
Credit banks to undertake all of these initiatives so: (1) Their
relationships with OFIs would improve; and (2) this program would
become more attractive to non-System agricultural lenders. In contrast,
System commenters stated that the FCA was interfering in the internal
business affairs of System banks without any safety or soundness
justification. These commenters found it unusual for the preamble to
encourage certain practices at System banks while acknowledging that
new regulations are unnecessary.
Four System commenters objected to the suggestion that Farm Credit
banks invite OFI observers to their board meetings. According to these
commenters, matters discussed at bank board meetings are confidential
and only board members and officers attend such meetings. One System
commenter objected to the suggestion that Farm Credit banks identify
best management practices for OFIs. From this commenter's perspective,
OFIs are independent financial institutions that are responsible for
their own operation, and Farm Credit banks should not attempt to impose
their own views about best management practices on their OFIs. This
commenter expressed concern that System banks could be exposed to
lender liability claims if they prescribed best management practices to
their OFIs.
As stated earlier, the FCA is committed to the success of the OFI
program. Providing funding and liquidity to OFIs is an essential and
integral part of the public policy mission of System banks to ensure
that farmers and ranchers always have access to sound, adequate, and
constructive credit. The FCA offered these seven suggestions in the
hope that they would encourage System banks to: (1) Reach out to
potential OFI applicants and existing OFIs; and (2) take the initiative
in building confidence between OFIs and the System. All of these
suggestions concentrated on ideas for improving communications between
the System and non-System agricultural lenders that are, or may become
OFIs.
From time to time, the FCA and other regulators offer guidance to
institutions that they regulate. The suggestions are not mandatory, but
are guidelines, which pertain to business practices instead of safety
and soundness or compliance with laws and regulations. System banks may
consider other approaches that foster strong and healthy relationships
with OFIs in addition to, or instead of, the ideas that the FCA has
suggested. If System banks invite OFI observers to their board
meetings, they should consider appropriate measures that protect the
confidentiality of information. The FCA emphasizes the importance of
System banks reaching out to OFIs.
K. CDFIs
A CDFI urged the FCA to amend the OFI regulations so they
facilitate System bank lending to CDFIs that primarily serve young,
beginning, small, and low resource farmers and ranchers. The commenter
made no specific regulatory recommendations to the FCA with regard to
CDFIs being designated as OFIs. The commenter did suggest a regulatory
change to treat CDFIs as the equivalent of Organization for Economic
Cooperation and Development (OECD) banks \16\ for risk-weighting
purposes. We address this comment later under section III. Capital Risk
Weighting of this preamble.
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\16\ 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.
---------------------------------------------------------------------------
CDFIs are private sector financial intermediaries that offer
financial services to economically distressed communities. These
institutions provide economically distressed communities with credit,
capital, and financial services that often are unavailable from other
financial institutions. The Community Development Financial
Institutions Fund (CDFI Fund), which is a wholly owned Government
corporation within the United States Department of the Treasury
(Treasury), certifies and oversees CDFIs.
CDFIs attract capital for their operations from both private and
public sources of funding. The CDFI Fund provides financial and
technical assistance in the form of grants, loans, equity investments,
and deposits to competitively selected CDFIs. The private sector also
provides equity investments and credit to CDFIs. Some CDFIs are
depository institutions and, therefore, they obtain some funds for
their operations from deposits as well as credit lines with other
lenders. CDFIs work in partnership with other financial institutions to
channel credit and investment into economically distressed communities.
There are six basic types of CDFIs. Specific language in section
1.7(b)(1)(B) of the Act determines whether an entity is eligible to
borrow from a Farm Credit bank as an OFI and would authorize certain
types of CDFIs as OFIs. Under section 1.7(b)(1)(B) of the Act and Sec.
614.4540 of FCA regulations, two types of CDFIs, community development
banks and community development credit unions, could become OFIs that
fund, discount, or obtain other similar financial assistance from a
Farm Credit bank in order to extend short- and intermediate-term credit
to eligible borrowers for authorized purposes pursuant to sections
1.10(b) and 2.4(a) and (b) of the Act. Since the mission of CDFIs is to
serve economically distressed segments of the population, those CDFIs
that become OFIs may use funding, discount services, and other
financial assistance from a Farm Credit bank to serve young, beginning,
small, and low resource farmers and ranchers. In addition, the FCA
encourages Farm Credit banks to work with eligible CDFIs that make
loans or extend other similar financial assistance to agriculture and
are interested in establishing an OFI relationship. Because of
eligibility restrictions in the Act for OFI funding, no other
amendments to the regulations are allowable.
Section 4.19(a) of the Act mandates that Farm Credit banks and
associations have programs for furnishing sound and constructive credit
and related services to young, beginning, and small (YBS) farmers and
ranchers. According to the statute, the YBS program of each FCS direct
lender association must comply with policies prescribed by the board of
their funding banks. Section 4.19(a) of the Act also states, ``Such
programs shall assure that such credit and services are available in
coordination with other units of the Farm Credit System serving the
territory and with other governmental and private sources of credit.''
(Emphasis added.)
A CDFI that seeks funding, discount services, and other financial
assistance
[[Page 29861]]
from a Farm Credit bank should consult with the bank about how they can
work together to provide credit to YBS and low resource farmers and
ranchers. When feasible, the Farm Credit bank should encourage CDFIs
and local FCS associations to coordinate their efforts to serve YBS and
low resource farmers and ranchers.
III. Capital Risk Weighting
A. Background
As discussed in the preamble to the proposed rule, we have
interpreted our capital adequacy regulations as requiring Farm Credit
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 preamble to
the ANPRM explained, in detail, the risk-reducing features of FCS
associations that justified a 20-percent risk weighting.\17\
---------------------------------------------------------------------------
\17\ See 65 FR 21151 (April 20, 2000).
---------------------------------------------------------------------------
The FCA acknowledged in the preambles to the ANPRM and the proposed
rule 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 the FCS
bank to greater risk than FCS associations and regulated OFIs.
The risk-weighting categories in FCA's capital regulations are
patterned after the risk-weighting categories in the 1988 Basel Accord,
which apply to all depository institutions regulated by the other
Federal bank regulatory agencies. As a result, many, but not all, OFIs
have the same risk-reducing features as FCS associations.
The FCA proposed 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.
The proposed rule would establish a 20-percent risk weighting for
OFIs that are either: (1) An equivalent to an OECD 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).\18\ OFIs are required by regulations to
pledge full recourse on all loans they fund or discount with a Farm
Credit bank.
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\18\ ``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.
---------------------------------------------------------------------------
Proposed Sec. 615.5210 would establish a 50-percent risk weighting
for OFIs that: (1) Are not OECD banks but otherwise meet similar
capital and operational standards; and (2) carry an investment grade or
higher NRSRO rating. The FCA proposed to retain a 100-percent risk
weighting for all loans to OFIs that do not qualify for the 20-percent
or 50-percent risk-weight categories.
B. Comments Received
We received 98 comments on capital risk weighting in response to
our proposed rule. The comments came from 3 Farm Credit banks, a CDFI,
an OFI that is affiliated with a group of farmer cooperatives, the
CUNA, the ICBA, and 91 commercial banks. The majority of the commenters
supported differentiating the risk weighting of loans to OFIs based on
the structure and risk-mitigating characteristics of the OFIs.
The 3 Farm Credit banks generally supported the proposed capital
risk-weighting rule for OFIs. However, these commenters sought
clarification of two issues, and they requested two technical changes
to the regulation. The CUNA supported the rule as proposed, while the
ICBA and 47 bankers supported equal risk weighting for FCS associations
and OFIs that are depository institutions or their affiliates. Forty-
four (44) commercial bank commenters supported equal risk-weighting
treatment for all OFIs and the FCS associations. The CDFI stated that
the final rule should require Farm Credit banks to risk weight all
CDFIs at 20 percent. The CDFI also stated that all CDFIs should be
treated as equivalent to OECD banks because of the CDFIs ``good
standing'' status with Treasury. The agricultural credit cooperative
OFI expressed concern that the new regulation will increase the cost of
funds to OFIs that are risk weighted at 100 percent.
A Farm Credit bank asked the FCA to clarify whether the three
highest NRSRO investment ratings (for institutions that are risk
weighted at 20 percent) include subset designations (e.g., AAA+, AA+,
or A+). The FCA responds that the regulation refers to the generic
rating categories, not plus or minus signs that show relative standing
within each rating category. Under this regulation, for example, a
rating of ``AA-'' would be within the second highest investment-grade
ratings by an NRSRO.
Two Farm Credit banks asked the FCA whether the full recourse
requirement for OFIs extended to their parents. According to these
commenters, requiring both the parent and the OFI subsidiary to pledge
full recourse on the OFI's loan (so the funding bank could risk weight
it at 20 percent) could become a significant impediment to the growth
of the OFI program. One of these commenters expressed concern that
requiring the parent to pledge full recourse to the System funding bank
clashes with its capital reasons for establishing an OFI subsidiary.
The FCA replies that the rule requires full recourse from the OFI.
Generally, the full recourse requirement would not extend to an OFI's
parent, but the System funding bank could require it to provide such a
guarantee as a condition for approving the OFI for credit.
A Farm Credit bank suggested that the final rule allow OFIs that
are not OECD banks or their affiliates to qualify for a 20-percent risk
weighting if they receive an investment grade or higher rating from a
NRSRO. Under the proposed rule, such OFIs do not qualify for a 20-
percent risk weighting unless a NRSRO rates them in one of the three
highest investment rating categories. However, OFIs that are not OECD
banks or their affiliates could qualify for a 50-percent risk weighting
under the proposed rule if they receive an investment-grade rating by a
NRSRO and they meet the other requirements of this regulation.
The FCA rejects the commenter's recommendation because it
eliminates the distinction in the regulation between OFIs that are risk
weighted at 20 percent and those that are risk weighted at 50 percent.
NRSRO ratings provide Farm Credit banks with a credible, objective, and
independent standard for determining risk exposure from an OFI. Each
risk-weighting category in our regulation is based on the System's
potential exposures to risk, as well as risk mitigation factors. A
lower investment rating from a NRSRO means that an OFI (that is not an
OECD bank or its affiliate) exposes its System
[[Page 29862]]
funding bank to greater risks which, in turn, justifies a 50-percent,
not a 20-percent, risk weighting. The FCA's approach is consistent with
the approach taken by the other federal bank regulatory agencies and
pending revisions to the Basel Accord. For this reason, the final rule
will require each Farm Credit bank to risk weight OFIs that are not
OECD banks or their affiliates at 20 percent only if they achieve and
maintain one of the three highest investment-grade ratings from a
NRSRO.
A Farm Credit bank asked the FCA to amend a provision in the
proposed rule so that an OFI can qualify for a 50-percent risk
weighting if its loan is guaranteed by a parent that receives an
investment grade or higher rating from a NRSRO. The rule already allows
an OFI to qualify for a 20-percent risk weighting if its parent: (1)
Guarantees the loan; and (2) has one of the three highest NRSRO
investment-grade ratings. The commenter sought this change so that the
final rule applies consistent standards for risk weighting OFIs at
either 20 or 50 percent. The FCA agrees with the commenter and,
accordingly, the final rule includes this change.
As discussed earlier, the agricultural credit cooperative OFI
expressed concern that this regulation will increase the cost of funds
to OFIs that are risk weighted at 100 percent. The FCA believes that
this concern has no merit. All OFIs are currently risk weighted at 100
percent. Lowering the risk weighting of some OFIs based on lower risk
profiles should not result in increased costs to other OFIs. Although
the regulation differentiates between OFIs on the basis of risk to the
funding bank, the FCA does not expect that FCS banks should raise the
cost of funding that they charge to OFIs that do not fall within the
20- or 50-percent risk-weighting categories.
In response to the ICBA and other commercial bank commenters, the
FCA confirms that the final rule treats FCS associations and OECD banks
the same for risk-weighting purposes. As discussed earlier, the CDFI
inquired about the risk weighting of CDFIs that become OFIs. The FCA
replies that CDFIs as a group are not considered the equivalent of OECD
banks despite their ``good standing'' status with Treasury. The
certification criteria imposed on CDFIs by Treasury are mission-based
rather than safety- and soundness-based and, therefore, do not address
risk identification and control criteria as required of the OECD banks
by the federal bank regulatory agencies. Accordingly, it would be
inconsistent with the agency's safety- and soundness-based regulations
to automatically equate CDFIs as equivalent to the risk weighting for
OECD banks. However, CDFIs that are community banks and credit unions
would probably qualify as OECD banks and, therefore, a Farm Credit bank
could risk weight discounted CDFI loans at 20 percent.
Forty-four (44) commercial bank commenters took the position that
the risk weighting for all OFIs and FCS associations should be the
same. As explained earlier, not all OFIs pose the same risks to their
funding banks. Some OFIs are not OECD banks or their affiliates. In
other cases, nonbank OFIs do not meet the capital, risk identification
and control, and operational standards that apply to OECD banks, or
they do not carry an investment-grade rating from a NRSRO. For these
reasons, not all OFIs should be risk weighted at 20 percent.
C. Final Rule
The final rule establishes a 20-percent risk weighting for OFIs
that are either: (1) An equivalent to an OECD 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 investment-grade ratings from a NRSRO.
Under final Sec. 615.5210, a 50-percent risk weighting applies to
OFIs that: (1) Are not OECD banks but otherwise meet similar capital,
risk identification and control, and operational standards; and (2)
carry an investment-grade or higher NRSRO rating, or the claim is
guaranteed by a parent company with such a rating.
The final rule establishes a 100-percent risk weighting for all OFI
loans that do not qualify for the 20-percent or 50-percent risk-weight
categories. OFIs that are well-capitalized and well-managed expose the
System to less risk. Therefore, FCS institutions need less capital to
support loans to these OFIs. This approach is consistent with the
direction from the pending Basel Accord revisions, which are currently
under consideration.
Lowering the capital requirements for most OFI loans will lower the
operating costs of the OFI program to Farm Credit banks. This, in turn,
should lower the cost of funds to well-capitalized and well-managed
OFIs. Lower funding costs should enable these OFIs to reduce interest
rates charged to their borrowers. These results would advance the
System's public policy 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.
IV. 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 final 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.
12 CFR Part 615
Accounting, Agriculture, Banks, Banking, Government securities,
Investments, Rural areas.
0
For the reasons stated in the preamble, parts 614 and 615, chapter VI,
title 12 of the Code of Federal Regulations are amended as follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
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,
4.13B, 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, 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
0
2. Revise Sec. 614.4540(c) to read as follows:
[[Page 29863]]
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,
procedures, guidelines, and standards shall be made available, upon
request to each OFI and OFI applicant.
* * * * *
0
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.
0
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 part 617 of this chapter 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.
* * * * *
0
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, that has or is seeking to
establish a funding relationship with the Farm Credit Bank or
agricultural credit bank, 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 expressed in
basis points.
(d) Upon request of any OFI or OFI applicant, that has or is
seeking to establish a funding relationship with the Farm Credit Bank
or agricultural credit bank, the bank must explain in writing the
reasons for any variation in the overall funding costs it charges to
OFIs and affiliated direct lender associations. The written explanation
must compare the cost of funds that the Farm Credit Bank or
agricultural credit bank charges the OFIs and affiliated direct lender
associations. When possible, the written explanation shall compare the
costs of funding that the bank charges several OFIs and Farm Credit
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 Farm Credit association.
Subpart P--[Amended]
0
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
requesting, 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
0
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 H--Capital Adequacy
0
8. Amend Sec. 615.5210 by adding new paragraphs (f)(2)(ii)(M);
(f)(2)(iii)(C); and (f)(2)(iv)(E) 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.
(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 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.
(iv) * * *
(E) Claims on other financing institutions that do not otherwise
qualify for a lower risk-weight category under this section.
* * * * *
Dated: May 20, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-11849 Filed 5-25-04; 8:45 am]
BILLING CODE 6705-01-P