[Federal Register: September 26, 2007 (Volume 72, Number 186)]
[Rules and Regulations]
[Page 54527-54529]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr26se07-3]
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FARM CREDIT ADMINISTRATION
12 CFR Part 627
RIN 3052-AC16
Title IV Conservators, Receivers, and Voluntary Liquidations;
Priority of Claims--Joint and Several Liability
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, Agency, we), issues this
final rule amending the priority of claims regulations to provide
priority of claims rights to Farm Credit System (System, FCS, Farm
Credit) banks if they make payments under a reallocation agreement to
holders of consolidated and System-wide obligations on behalf of a
defaulting System bank. The final rule also clarifies that payments to
a class of claims will be on a pro rata basis.
DATES: Effective Date: This regulation will be effective 30 days after
publication in the Federal Register during which 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:
Christopher D. Wilson, Policy Analyst, Office of Regulatory Policy,
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4414, TTY
(703) 883-4434, or
Rebecca S. Orlich, Senior Counsel, Office of General Counsel, Farm
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703)
883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
Our objectives in this final rule are to:
Provide System banks that make payments under a
reallocation agreement to holders of consolidated and System-wide
obligations of a defaulting bank the same priority of claims rights
they would have for payments made under statutory joint and several
calls by the FCA; and
Clarify that claims in the same class will receive
payments on a pro rata basis if there are insufficient assets in a
receivership to pay the entire class in full.
II. Background
A. Joint and Several Liability Under the Act
System associations obtain funding by means of direct loans from
their affiliated Farm Credit banks. The banks in turn obtain their
funding primarily by
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issuing System-wide obligations to investors through the Federal Farm
Credit Banks Funding Corporation (Funding Corporation).\1\ The banks'
authority to issue System-wide obligations is provided in section
4.2(d) of the Farm Credit Act of 1971, as amended (Act).\2\ Currently,
all of the System's joint funding is through System-wide
obligations.\3\
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\1\ The Funding Corporation is the fiscal agent of the System
established under section 4.9 of the Farm Credit Act of 1971, as
amended (12 U.S.C. 2160).
\2\ 12 U.S.C. 2153(d).
\3\ 12 U.S.C. 2153(c).
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Investors in consolidated and System-wide obligations have three
levels of repayment sources. The first level is a bank's own primary
liability under section 4.4(a)(2)(A) of the Act \4\ for its portion of
any consolidated or System-wide obligation. The second level is
payments made by the Farm Credit System Insurance Corporation (FCSIC)
under section 4.4(d) of the Act if a bank is unable to pay its portion
of liability on consolidated or System-wide obligations. The third
level is joint and several calls made by FCA on nondefaulting banks
under section 4.4(a)(2) of the Act in proportion to each bank's
proportionate share of the aggregate available collateral \5\ held by
all nondefaulting banks, or in proportion to each bank's remaining
assets if the aggregate available collateral does not fully satisfy the
insured obligations of the defaulting bank. The Act provides
subrogation rights to both the banks and the FCSIC for payments of
insured obligations made on behalf of a defaulting bank under sections
4.4(a)(2)(E) \6\ and 5.61(c)(1),\7\ respectively.
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\4\ 12 U.S.C. 2155(a)(2)(A).
\5\ A bank's ``available collateral'' is defined in section
4.4(a)(2)(C) as ``the amount (determined at the close of the last
calendar quarter ending before such call) by which a bank's
collateral * * * exceeds the collateral required to support the
bank's outstanding notes, bonds, debentures, and other similar
obligations.''
\6\ Section 4.4(a)(2)(E) provides: ``Any System bank that,
pursuant to a call by the [FCA], makes a payment of principal or
interest to the holder of any consolidated or System-wide
obligations issued on behalf of another System bank shall be
subrogated to the rights of the holder against such other bank to
the extent of such payment.''
\7\ Section 5.61(c) provides: ``On the payment to an owner of an
insured obligation issued on behalf of an insured System bank in
receivership, the [FCSIC] shall be subrogated to all rights of the
owner against the bank to the extent of the payment. * * *
Subrogation * * * shall include the right on the part of the [FCSIC]
to receive the same dividends from the proceeds of the assets of the
bank as would have been payable to the owner on a claim for the
insured obligation.''
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B. Proposed Rule
We proposed an amendment to the priority of claims rule in response
to a petition by System banks to provide the same subrogation rights to
banks for making joint and several payments on insured obligations
under a reallocation agreement that the banks would receive if they
made payments under section 4.4(a)(2) of the Act. In recent years, the
banks have discussed the benefits and feasibility of using a
methodology for paying joint and several calls based on the proportion
of total System-wide debt on which each nondefaulting bank is primarily
liable. The banks have explored the possibility of entering into a
reallocation agreement among themselves to pay a defaulting bank's
maturing insured obligations as the Farm Credit Insurance Fund is
nearing exhaustion but before statutory joint and several calls are
triggered. The banks have informed us that, while they have generally
agreed on the outlines of an agreement for payment based on individual
banks' outstanding System-wide debt, a key to an agreement is that
payments made would be entitled to the same payment rights as if the
banks had made the payments under a statutory joint and several call.
Such an agreement would be subject to Agency approval.
The proposed revision to the priority of claims rule as well as the
amendment to clarify the related payment of claims regulation on pro
rata payments were published in the Federal Register on March 12,
2007.\8\ The proposals had a 60-day comment period that ended on May
11, 2007. The proposals are described in Part III below.
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\8\ See 72 FR 10939. See the preamble of this proposal for more
in-depth discussion of the banks' joint and several liability under
the Act.
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C. Comments on Proposed Rule
We received three comments: One from the Farm Credit Council (FCC)
on behalf of all System institutions, and two others from System banks.
All of the commenters fully supported the revision to the priority of
claims rule as proposed and did not suggest any changes. Furthermore,
the FCC letter stated that it offered no objections to our proposal to
clarify that payments to a class of claims would be on a pro rata basis
if there are insufficient funds to pay the class in full.
One commenter also asked us to consider a rulemaking to add
subordinated debt to the list of claims priority categories in part
627. At present, the liquidation priority of subordinated debt is not
expressly addressed in our regulations. We agree that it is appropriate
to specify the liquidation priority of claims of subordinated
debtholders and are issuing a direct final rule on that subject
concurrent with this final rule.
III. Description of Final Rule
Section 627.2750--Priority of Claims--Banks
Section 627.2750 sets forth the priority of claims for banks in
liquidation. Existing paragraph (h) provides for payment of claims of
holders of consolidated and System-wide obligations and of other System
banks arising from their payments made under statutory joint and
several calls. In the proposed rule, we proposed to revise this
paragraph to include all claims of other System banks arising from
their payments of consolidated and System-wide obligations under a
reallocation agreement that is in writing and approved by the Agency.
We adopt this provision as final.
Section 627.2755--Payment of Claims
Existing Sec. 627.2755 contains several priority of claims
provisions that apply to some or all types of System institutions that
may be placed in receivership by the FCA under part 627 of our
regulations.\9\ In the proposed rule, we proposed to amend paragraph
(a) by removing language limiting the pro rata distribution requirement
to association receiverships. This will clarify that, in all System
institution receiverships, if there are insufficient funds to pay a
class of claims in full, payments to such class must be on a pro rata
basis. We adopt this provision as final.
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\9\ We note that part 627 of FCA's regulations does not apply to
the Federal Agricultural Mortgage Corporation, also known as Farmer
Mac. Regulations applicable to Farmer Mac are in parts 650-655 of
FCA's regulations.
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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 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 in 12 CFR Part 627
Agriculture, Banks, Banking, Claims, Rural areas.
0
For the reasons stated in the preamble, we are amending part 627 of
chapter VI,
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title 12 of the Code of Federal Regulations to read as follows:
PART 627--TITLE IV CONSERVATORS, RECEIVERS, AND VOLUNTARY
LIQUIDATIONS
0
1. The authority citation for part 627 continues to read as follows:
Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the
Farm Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7,
2277a-10).
Subpart B--Receivers and Receiverships
0
2. Revise Sec. 627.2750(h) to read as follows:
Sec. 627.2750 Priority of claims--banks.
* * * * *
(h) All claims of holders of consolidated and System-wide bonds and
all claims of the other Farm Credit banks arising from their payments
on consolidated and System-wide bonds pursuant to 12 U.S.C. 2155 or
pursuant to an agreement among the banks to reallocate the payments,
provided the agreement is in writing and approved by the Farm Credit
Administration.
* * * * *
Sec. 627.2755 [Amended]
0
3. Amend Sec. 627.2755(a) by removing the words ``described in Sec.
627.2745'' in the last sentence.
Dated: September 20, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E7-18968 Filed 9-25-07; 8:45 am]
BILLING CODE 6705-01-P