[Federal Register: November 16, 2004 (Volume 69, Number 220)]
[Proposed Rules]
[Page 67074-67075]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr16no04-20]
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FARM CREDIT ADMINISTRATION
12 CFR Part 617
RIN 3052-AC24
Borrower Rights
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA) proposes to allow a
borrower to waive borrower rights when receiving a loan from a
qualified lender as part of a loan syndication with non-System lenders
that are otherwise not required by section 4.14A(a)(6) of the Farm
Credit Act of 1971, as amended (Act) to provide borrower rights. This
proposal would provide qualified lenders needed flexibility to meet the
credit needs of borrowers seeking financing from a qualified lender as
part of certain syndicated lending arrangements.
DATES: Written comments should be received on or before December 16,
2004.
ADDRESSES: Send us your comments by electronic mail to reg-comm@fca.gov
or through the Pending Regulations section of our Web site, http://www.fca.gov or through the government-wide http://www.regulations.gov
portal. You may also send written comments to S. Robert Coleman,
Director, Regulation and Policy Division, Office of Policy and
Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean,
Virginia 22102-5090, or by facsimile transmission to (703) 734-5784.
You may review copies of all comments we receive at our office in
McLean, Virginia.
FOR FURTHER INFORMATION CONTACT: Mark L. Johansen, Senior Policy
Analyst, Office of Policy Analysis, Farm Credit Administration, McLean,
VA 22102-5090, (703) 883-4498, TTY (703) 883-4434; or Howard Rubin,
Senior Attorney, Office of General Counsel, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-2020.
SUPPLEMENTARY INFORMATION:
I. Background
On January 17, 2003, FCA published a notice requesting comment on
the regulatory treatment of loan syndications (68 FR 2540). After
considering the comments, the FCA Board reaffirmed its long-standing
interpretation that loan syndications come within a Farm Credit System
(System) institution's direct lending authorities and, therefore, loan
syndications to eligible borrowers are subject to the borrower rights
requirements of the Act, and corresponding regulations. (69 FR 8407,
Feb. 24, 2004)
In their comments on the notice, the Farm Credit Council (FCC) and
other System institutions stated that borrower rights are an impediment
to System involvement in loan syndication transactions. Loan
syndications are multi-lender transactions, generally involving a lead
lender and at least one other participating lender, where each lender
has a direct contractual relationship with the borrower. Typically, the
loan servicing and loan collection procedures are the same for each
lender, and these activities are undertaken according to standard
agreements among the lenders in the transaction. System institutions
commented that it is difficult to enter into these transactions when
they have unique disclosure requirements and have to provide distressed
loan restructuring rights and the right of first refusal on
repurchasing foreclosed property. The commenters stated that commercial
lenders see fulfillment of these rights as a delay to loan servicing
and collection and they would rather enter into loan syndication
transactions with lenders that are not required to offer such rights.
The commenters also stated that borrowers in syndications are
generally sophisticated in financial transactions and represented by
counsel. Thus, the commenters contend that these borrowers are in an
equal bargaining position with qualified lenders and should be free to
choose to waive their borrower rights.
Subsequently, we received two petitions under 5 U.S.C. 553(e)
asking us to amend Sec. 617.7010(b) to allow borrowers to waive
borrower rights in loan syndication transactions. These petitions cited
reasons for granting a waiver similar to the previous commenters.
II. Section-by-Section Analysis
1. Waiver of Borrower Rights in Loan Syndications
After reviewing System syndication transactions, we have determined
that the borrower in these transactions generally possess a very high
level of business sophistication. These borrowers are more likely than
others to be able to provide a knowing and intelligent waiver of their
rights. Therefore, we propose to amend Sec. 617.7010 to allow a
borrower to waive borrower rights when receiving a loan from a
qualified lender that is part of a loan syndication package with non-
System lenders that are otherwise not required by the Act to provide
borrower rights.\1\ To ensure that the borrower understands the
borrower rights being waived and is freely and intelligently waiving
those rights, we require that the borrower be advised by legal counsel
at the time of the waiver.
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\1\ Section 617.7000 defines ``qualified lender'' as: (1) A
System institution, except a bank for cooperatives, that makes loans
as defined in part 617; and (2) each bank, institution, corporation,
company, credit union, and association described in section
1.7(b)(1)(B) of the Act (commonly referred to as an other financing
institution), but only with respect to loans discounted or pledged
under section 1.7(b)(1). The proposed waiver is intended to apply
only to those situations where System institutions enter into loan
syndications with non-System lenders that are otherwise not required
by the Act (section 4.14A(a)(6)) to provide borrower rights.
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We also invite comments on whether we should consider other
criteria to further differentiate what borrower and what type of loan
syndication transactions should be eligible for a waiver of borrower
rights.
The purpose of the waiver is to eliminate instances where borrower
rights are an impediment to a borrower receiving credit from a
qualified lender through a loan syndication with non-System lenders
that are otherwise not required by the Act to provide borrower rights.
As previously noted, borrower rights are not compatible with many loan
syndication transactions because the servicing and collection practices
must be the same for all lenders.
The waiver provision in this proposed regulation is intended to be
used only in addressing the problems qualified lenders have encountered
in entering into loan syndications due to the requirement to provide
the borrower with borrower rights. Section 617.7010(c) provides that
this waiver provision is not to be used as a means of circumventing the
borrower rights requirements by creating a syndication relationship
whose primary purpose is to avoid borrower rights. A syndicated lending
package is typically sought when the total credit would exceed the
lending institution's lending limit or the risk associated with the
total credit would exceed the risk tolerance of the individual lending
institution. Our examination process will be mindful of this issue and
will take appropriate action to address any abuses of this proposed
waiver.
III. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule
will not have a significant economic impact on a substantial
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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 in 12 CFR Part 617
Banks, banking, Criminal referrals, Criminal transactions,
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.
For the reasons stated in the preamble, part 617, chapter VI, title
12 of the Code of Federal Regulations is proposed to be amended as
follows:
PART 617--BORROWER RIGHTS
1. The authority citation for part 617 continues to read as
follows:
Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D,
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200,
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252).
Subpart A--General
2. Amend Sec. 617.7010(a) by:
a. Removing the reference, ``paragraph (b)'' and adding in its
place, the reference ``paragraphs (b) and (c)'' in paragraph (a);
b. Redesignating and revising existing paragraph (c) as new
paragraph (d);
c. Adding a new paragraph (c) as follows:
Sec. 617.7010 May borrower rights be waived?
* * * * *
(c) A borrower may waive all borrower rights provided for in part
617 of these regulations in connection with a loan syndication
transaction with non-System lenders that are otherwise not required by
section 4.14A(a)(6) of the Act to provide borrower rights. For purposes
of this paragraph, a ``loan syndication'' is a multi-lender transaction
in which each member of the lending syndicate has a direct contractual
relationship with the borrower, but does not include a transaction
created for the primary purpose of avoiding borrower rights.
(d) All waivers must be voluntary and in writing. The document
evidencing the waiver must clearly explain the rights the borrower is
being asked to waive and provide an explanation of such rights.
Additionally, a borrower in a loan syndication must certify in writing
that the borrower was advised by legal counsel prior to executing a
waiver.
Dated: November 10, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-25397 Filed 11-15-04; 8:45 am]
BILLING CODE 6705-01-P