[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Rules and Regulations]
[Pages 42853-42855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16318]
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FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AB87
Loan Policies and Operations; Participations
AGENCY: Farm Credit Administration.
ACTION: Final rule; response to comment.
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SUMMARY: The Farm Credit Administration (FCA or agency) responds to a
comment letter on a final rule that repealed regulations that required
a Farm Credit System (FCS or System) bank or association to provide
notice or obtain consent before purchasing participations in loans that
a non-System lender originates in the chartered territory of another
FCS institution. This response, which is pursuant to an order of the
United States District Court for the District of Columbia dated April
8, 2004, supplements the preamble to the final rule that was published
at 65 FR 24101 on April 25, 2000.
DATES: Effective Date: These regulations became effective on May 25,
2000. See 65 FR 33743.
FOR FURTHER INFORMATION CONTACT: Alan Markowitz, 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 the General Counsel, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.
SUPPLEMENTARY INFORMATION:
I. Background
On November 9, 1998, the FCA proposed repeal of several regulations
in parts 611, 614, and 618 that required System lenders operating under
title I or II of the Farm Credit Act of 1971, as amended (Act) to
provide notice or obtain consent before they could lend, participate in
loans, or offer related services to borrowers in the chartered
territory of other FCS lending institutions. See 63 FR 60219. The
extended comment period closed on May 10, 1999.
The FCA received more than 270 comment letters from System
institutions, commercial banks, trade associations, FCS and non-System
customers, state agricultural commissioners, a statewide council of
agricultural organizations, a United States senator, and individuals.
Commercial bank commenters opposed the proposed rule, while the other
commenters were evenly divided between those supporting and opposing
the proposal.
The Farm Credit Bank of Texas (FCBT) and its six affiliated Federal
land credit associations (FLCAs) \1\ in Alabama, Louisiana, and
Mississippi, and its two affiliated production credit associations
(PCAs) in New Mexico sent the FCA a joint comment letter dated May 3,
1999, opposing the proposed rule. The joint comment letter stated that:
(1) The FCA lacked statutory authority to enact the proposed rule; (2)
the proposed rule would conflict with statutory amendments enacted in
1992; (3) geographic boundaries are an integral part of the System's
statutory scheme; (4) out-of-territory credit and related services
would hurt the System and its customers, especially small farmers; and
(5) the proposed rule would not advance any congressionally mandated
purpose.
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\1\ At the time that the FCA received this comment letter, the
FCBT had not yet transferred direct lending authority to one of
these FLCAs pursuant to section 7.6 of the Act.
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The FCA did not repeal those regulations that require notice or
consent when a System lender operating under title I or II of the Act
makes direct loans or offers related services outside its chartered
territory. However, the FCA adopted a final rule on April 25, 2000,
that repealed the notice and consent requirements only for out-of-
territory loan participations. See 65 FR 24101. As a result, notice and
consent requirements no longer apply when a System lender purchases
participations in loans that non-System lenders originate in the
chartered territory of other FCS institutions.\2\
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\2\ The final rule does not affect intra-System loan
participations because the originating FCS lender consents when it
sells participations in its loans to other FCS institutions.
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The preamble to the final rule explained that repealing the notice
and consent requirements for loan participations could help: (1)
Increase the flow and availability of agricultural credit; (2) improve
the liquidity of non-System lenders; and (3) diversify geographic and
industry concentrations in the loan portfolios of Farm Credit banks and
associations. The preamble also pointed out that the chartered
territory of an FCS lender does not change when it buys participations
in loans that non-System lenders originate
[[Page 42854]]
in the territory of other System lenders. Another passage in the
preamble explained that the final rule does not authorize any FCS
lender to make loans directly to farmers and ranchers in the chartered
territory of other System lenders. The following paragraph in the
preamble to the final rule discussed the comments that the FCA received
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from the public:
We received over 270 comment letters on the proposed rule. No
commenter cited any statutory provision that restricts the authority
of System banks and associations to participate in loans outside of
their chartered territory. Only one comment letter mentioned the
statutory authorities of System institutions to participate in
loans.
After the final rule became effective on May 25, 2000, the FCBT and
the FLCAs that submitted the joint comment letter (plaintiffs) filed
suit against the FCA in the United States District Court for the
District of Columbia, seeking a declaration that the final rule was
invalid.\3\ The plaintiffs claimed the final rule violated the Act and
a 1992 amendment thereto, and that the FCA failed to comply with the
procedural requirements of the Administrative Procedure Act (APA) when
it enacted the final rule.
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\3\ Two FLCAs that signed the joint comment letter merged before
litigation.
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The plaintiffs raised two procedural arguments. First, they claimed
that the FCA failed to respond to their comments in the preamble to the
final rule. Their second claim was that the public did not have
adequate notice that the FCA would only repeal the out-of-territory
notice and consent requirements for loan participations and, therefore,
the FCA should have sought additional comment before it enacted the
final rule.
On August 21, 2001, the District Court granted the FCA's motion for
summary judgment. The District Court ruled that: (1) The FCA adequately
responded to the plaintiffs' comments; (2) the final rule was a logical
outgrowth of the proposed rule; (3) the final rule complied with the
applicable provisions of the Act; and (4) the plaintiffs waived their
argument that the final loan participation rule violated the 1992
amendments because they did not raise this argument in their comment
letter. La Fed. Land Bank Ass'n, FLCA v. Farm Credit Admin., 189 F.
Supp. 2d 47, (D.D.C. 2001).
The plaintiffs appealed. On July 29, 2003, the Court of Appeals
ruled that the final rule did not violate the Act and the 1992
amendments thereto. La Fed. Land Bank Ass'n, FLCA v. Farm Credit
Admin., 336 F.3d 1075 (D.C. Cir., 2003). In addition, it denied the
plaintiffs' petition to vacate the final rule, stating, ``we think the
probability that the [FCA] will be able to justify retaining the
[final] rule is sufficiently high that vacatur of the rule is not
appropriate.'' See 336 F.3d 1075, 1085. The Court of Appeals also
affirmed the District Court's finding that the FCA did not need to seek
additional public comment before it repealed the notice and consent
requirements for out-of-territory participations because the final rule
was a logical outgrowth of the proposed rule. However, the Court of
Appeals found that: (1) The plaintiffs' comment letter opposed repeal
of the notice and consent requirements for both out-of-territory
lending and participations; and (2) the FCA was required to address the
plaintiffs' comments before enacting the final rule. The Court of
Appeals reversed the judgment of the District Court with instructions
to remand the matter to the FCA for a response to the plaintiffs'
comments.
II. Response to the Plaintiffs
In accordance with the court's ruling, the FCA publishes this
notice, which responds to the plaintiffs' joint comment letter. Our
response addresses out-of-territory loan participations, which were the
subject of both the final rule and the court decisions.
A. Legal Issues
The plaintiffs alleged that: (1) The FCA lacked authority to
rescind regulatory restrictions on out-of-territory activities by
System lenders; and (2) the proposed rule would violate several
provisions of the Act and section 401 of the Farm Credit Banks and
Associations Safety and Soundness Act of 1992\4\ (1992 amendments). The
Court of Appeals decided both of these issues, holding that the FCA had
authority under the Act and the 1992 amendments to repeal the pre-
existing regulatory notice and consent requirements for out-of-
territory loan participations. Accordingly, this response does not
recap the plaintiffs' legal arguments, the agency's response, and the
Court of Appeals' rulings. The FCA refers interested parties to the
Court of Appeals' opinion if they seek a detailed discussion of the
legal issues.
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\4\ Pub. L. 102-552, 106 Stat. 4102 (Oct. 28, 1992).
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B. Policy Issues
In addition to its findings on the above legal issues, the Court of
Appeals found that the FCA's ``only error was its failure to explain
what seems to be a policy difference with the plaintiffs.'' Id.
Accordingly, the FCA now responds to the plaintiffs' policy comments.
The plaintiffs' comment letter objected to the repeal of notice or
consent requirements for out-of-territory activities on policy grounds.
The plaintiffs claimed that repeal of regulatory restrictions on out-
of-territory activities would have a detrimental impact on both the
System and its borrowers. The plaintiffs raised three arguments. Their
first argument is that geographic restrictions preserve the cooperative
principles, local control, and financial interdependence of the FCS.
The second argument is that ending restrictions on out-of-territory
activities will introduce intra-System competition that will harm small
farmers, ``who are the very people the System is designed to serve.''
The plaintiffs'' final argument is that the proposed rule would not
advance any congressionally mandated purpose.
1. Cooperative Principles, Local Control, and Financial Interdependence
The plaintiffs claimed that geographic boundaries reinforce the
structure of System institutions, which are credit cooperatives that
are owned and controlled by the local farmers who borrow from them.
Accordingly, the plaintiffs believe that revoking regulatory
restrictions on out-of-territory activities overturns the rights of
farmer-owners to make decisions that affect their institution. Another
argument that the plaintiffs raised is that allowing FCS institutions
to make or participate in loans in the chartered territory of other
System lenders without restriction is incompatible with an intra-System
financial support structure that depends on joint and several liability
and loss-sharing agreements.
The FCA responds that the final rule does not authorize any FCS
institution to lend directly to borrowers outside its chartered
territory without consent. As a result, the final rule does not change
the System's cooperative principles, local control, or financial
interdependence. Cooperative principles, borrower stock, voting rights,
and borrower rights continue to apply to loans that System institutions
make. However, the final rule applies only to participations in loans
made by non-System lenders. The borrowers are customers of non-System
commercial lenders, not the FCS; therefore, they do not enter into a
contractual relationship with any FCS lender. FCS institutions may buy
participations in these loans from commercial lenders, but their
contractual relationship is with the lead lender, not the borrower.
Accordingly, borrower stock, cooperative membership requirements, and
borrower rights do not apply. For these
[[Page 42855]]
reasons, repeal of the notice and consent requirements for loan
participations do not adversely affect cooperative principles and local
control of System institutions.
Similarly, the final rule does not threaten the financial
interdependence of System institutions. The final rule does not change
the Farm Credit banks' statutory joint and several liability, or their
lending relationships with their affiliated associations. In addition,
the final rule does not bring FCS institutions into competition with
each other for direct loans because it applies only to participations
in loans that non-System lenders originate. Furthermore, System lenders
participated in loans with non-System lenders long before the FCA
repealed regulatory notice and consent requirements for out-of-
territory participations. Loan participations with non-System lenders
have never undermined the System's financial interdependence.
2. Service to Small Farmers
The plaintiffs claimed that removal of restrictions on out-of-
territory activities would be detrimental to the ``very people the
System is designed to serve,'' especially small farmers and ranchers.
More specifically, the plaintiffs alleged that the FCA's proposal would
enable the bigger FCS associations to ``cherry pick'' loans to large
and profitable farm operations outside their chartered territory,
leaving loans to small and struggling farmers to the local association.
First of all, the final rule addresses participations, not direct
loans. More importantly, the final rule is not detrimental to small
farmers. Nothing in the final rule weakens the System's statutory
authority and commitment to serve small farmers. The Act expressly
authorizes FCS banks and associations to participate in loans with each
other and non-System lenders. Although lenders participate in credits
to larger borrowers, loan participations for larger borrowers generate
income and portfolio diversification which, in turn, facilitate System
lending to small farmers.
3. Benefiting Agriculture
Finally, the plaintiffs' comment letter claimed that rescinding
restrictions on out-of-territory activities does not advance any
congressionally mandated purpose. The FCA replies that loan
participations achieve a congressionally mandated purpose because
several provisions of the Act expressly authorize them. Buying out-of-
territory loan participations from non-System lenders improves ``the
income and well-being of American farmers and ranchers by furnishing
sound, adequate, and constructive credit * * * to them,'' which is an
objective that Congress established for the System in section 1.1(a) of
the Act.
Eliminating territorial restrictions on loan participations
promotes cooperation between System and non-System lenders, which
ultimately benefits farmers and ranchers. Sound loan participation
programs can increase the availability of agricultural credit for
farmers and ranchers. System banks and associations can improve the
liquidity of non-System lenders by purchasing participations in loans
to farmers and ranchers which, in turn, enable non-System lenders to
make more agricultural loans. The final rule also enables System
lenders to diversify geographic and industry concentrations in loan
portfolios by purchasing participations in sound loans made anywhere in
the United States. Cooperation between System and non-System lenders
benefits America's farmers, ranchers, and rural communities by ensuring
a steady flow of agricultural credit in both good and bad economic
times. For these reasons, the final rule furthers the goals that
Congress set forth in the Act because it advances the System's mission
of financing agriculture and rural America.
Dated: July 13, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-16318 Filed 7-16-04; 8:45 am]
BILLING CODE 6705-01-P