[Federal Register: September 30, 2008 (Volume 73, Number 190)]
[Proposed Rules]
[Page 56754-56756]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se08-15]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 56754]]
DEPARTMENT OF AGRICULTURE
Farm Service Agency
7 CFR Parts 761 and 762
RIN 0560-AH66
Maximum Interest Rates on Guaranteed Farm Loans
AGENCY: Farm Service Agency, USDA.
ACTION: Proposed rule.
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SUMMARY: The Farm Service Agency (FSA) is proposing to amend its
guaranteed farm loan program regulations governing interest rates to
increase clarity and to be more consistent with other government loan
guarantee programs. FSA is proposing to tie the maximum interest rate
that may be charged on FSA guaranteed farm loans to nationally
published indices such as the Wall Street Journal Prime (also known as
New York Prime), or the 10-year Treasury note rate unless the lender
uses a formal written risk-based pricing model for loans, in which case
the rate will be the rate charged to moderate risk borrowers. This
proposed rule specifically asks for comments on the index to be used
and the maximum allowable spread between the base rate and the rate to
be charged to FSA guaranteed borrowers.
DATES: We will consider comments that we receive by December 1, 2008.
ADDRESSES: We invite you to submit comments on this proposed rule. In
your comment, include the volume, date, and page number of this issue
of the Federal Register. You may submit comments by any of the
following methods:
E-Mail: Trent.Rogers@wdc.usda.gov.
Fax: (202) 720-6797.
Mail: Director, Loan Making Division, Farm Service Agency,
U.S. Department of Agriculture, 1400 Independence Avenue, SW., Stop
0522, Washington, DC 20250-0522.
Hand Delivery or Courier: Deliver comments to Farm Service
Agency, Loan Making Division, 1280 Maryland Ave., SW., Suite 240,
Washington, DC 20024.
Federal eRulemaking Portal: Go to http://
www.regulations.gov. Follow the online instructions for submitting
comments.
Comments may be inspected in the Office of the Director, Loan
Making Division, Farm Services Agency, USDA, Suite 240, 1280 Maryland
Ave., SW., Washington, DC 20024, between 8 a.m. and 4:30 p.m., except
holidays.
FOR FURTHER INFORMATION CONTACT: Trent Rogers, Senior Loan Officer,
Loan Making Division, Farm Service Agency; telephone: (202) 720-3889;
facsimile: (202) 720-6797; e-mail: Trent.Rogers@wdc.usda.gov. Persons
with disabilities or who require alternative means for communications
should contact the USDA Target Center at (202) 720-2600 (voice and
TDD).
SUPPLEMENTARY INFORMATION:
Background
FSA guaranteed loans are a means of providing credit to farmers
whose financial risk exceeds a level acceptable to commercial lenders.
The guarantee reduces the lender's risk of default and loss, and thus
the lender's credit cost. FSA believes that part of the intent of the
program is for the borrower to receive the benefit of the reduction in
the lender's credit cost in the form of a lower interest rate.
The existing regulation, 7 CFR 762.124(a)(3), limits the interest
rate that a lender may charge guaranteed loan customers to a rate that
does not exceed the rate charged to its ``average agricultural loan
customers'' as defined in Sec. 761.2. Currently, 7 CFR 762.124(a)(2)
states that variable rates, if used, may change according to the normal
practices of the lender for its average agricultural loan customer, but
the frequency of change must be specific in the loan instrument. Some
lenders have indicated that the term ``average agricultural loan
customer'' is overly vague and have encouraged the agency to review its
current interest rate policy. FSA proposes to clarify this section of
the regulations to simplify compliance for stakeholders by setting a
maximum rate based on certain widely published indices, while
permitting the continued use of risk-based pricing models for lenders
that prefer that approach.
The agriculture credit industry continues to undergo rapid
transformation in response to the impact of technology and
globalization of financial markets. FSA's current interest rate
policies that are tied to the rate of an average customer are no longer
consistent with industry pricing practices that generally consider the
anticipated risks, costs, market competition, and terms of the loan or
with the practices of other government agencies that administer similar
programs. For example, the Small Business Administration has imposed
rate ceilings which are linked to the ``prime'' rate or other index,
depending on loan size, terms, and rate structure.
FSA believes that the FSA guarantee compensates the lender for much
of the lender's risk of loss and that the interest rate charged by the
lender to the producer should reflect that reduced risk. The changes
proposed are consistent with that policy. In this rule FSA is proposing
to eliminate the term ``average agricultural loan customer'' from 7 CFR
762.124(a)(2) and (3). FSA proposes new interest rate limits based on
widely recognized indices, which will provide simple, clear limits
rather than an ``average'' customer. For lenders who use a formal
written risk-based pricing model for loans, the option to use the rate
charged to moderate risk borrowers will still be included in the
regulation.
FSA has selected the indices that it believes most accurately
represent current rates. FSA has conducted an analysis of its guarantee
portfolio and the rates lenders have charged their agricultural loan
customers since 1999 in order to identify a correlation between these
rates and a published index. That analysis indicated that the 10-year
Treasury note rate was the index that most closely tracked farm real
estate loans and Wall Street Journal prime was the index that most
closely tracked short and intermediate term loans. The rate for 10 year
Treasury notes is the yield on 10 year Treasury notes issued by the
U.S. Department of the Treasury through the Bureau of Public Debt. The
Wall Street Journal prime is the rate that at least 23 of the 30
largest U.S. banks charge for corporate loans, as published in the
print edition of the Wall Street Journal. It is sometimes called the
New York Prime rate.
The average rate charged on guaranteed Farm Ownership (FO) loans
[[Page 56755]]
since 1999 was 291 basis points (2.91 percent) over the 10-year
Treasury rate. FSA proposes to limit the interest rate charged on
guaranteed FO loans to no more than 350 basis points (3.5 percent) over
the 10-year Treasury rate. Of the FO loans made since 1999, most would
have met this interest rate limit, had it been in effect.
The average rate charged on guaranteed Operating Loans (OL) during
the same time period was New York Prime plus 195 basis points (1.95
percent). FSA proposes to limit the guaranteed OL interest rate to no
more than 250 basis points (2.5 percent) over the New York Prime rate.
Had the proposed interest rate limit been in effect, most of the
guaranteed OLs made since 1999 would have met this limit. These limits
will apply to both fixed and variable rate guaranteed loans and lines
of credit.
FSA realizes that financial markets can be very volatile and that
lenders use various methodologies to manage their funding sources. This
proposal does not require that the lender tie its guaranteed loan
interest rates to these indices, nor does it require that the rate
remain below these maximums throughout the term of the loan. It only
sets the maximum rate that may be charged to the customer at the time
of loan origination. In addition, to ensure that the benefit of the
guarantee is passed on to borrowers in financial distress, these
interest rate limits will apply to guaranteed loans at such time that
they are restructured, too. FSA is specifically requesting comments on
the suitability of using these indices or recommendations for another
index, such as a London Inter Bank Offered Rate (known as LIBOR), or
the Farmer Mac II cost of funds index or alternative methodologies for
setting maximum interest rates.
FSA also realizes that some lenders have well developed risk based
pricing models and are able to document how the interest rate on a
guaranteed loan reflects the reduced risk of loss due to the guarantee.
FSA is proposing to continue to permit such lenders to price guaranteed
loans at a rate not exceeding the rate charged to their typical,
moderate risk agricultural loan customer. The rate charged this
customer would be limited to no more than the highest interest rate for
the tier of the lender's risk rating matrix that reflects moderate
risk. This would typically be the lender's middle tier, or for those
lenders with an even number of tiers, a rate no higher than an average
of the lender's two middle tiers. If such tier had a range of interest
rates, the maximum rate permitted would be the highest rate for that
tier. Specific comments are requested to further define this moderate
risk agricultural loan rate. The lender will be required to provide the
Agency with their pricing model.
Again, FSA is inviting comments that will address the indices to be
used, as well as the maximum yield spreads. FSA is attempting to adhere
to current lending standards, propose changes that will provide clear
and straightforward guidance for lenders to improve lender compliance,
allow guaranteed loan borrowers to receive the benefit resulting from
the reduced risk of loss with a guarantee, and to promote active
competition among lenders. FSA proposes to reserve the right to change
the maximum rates on a temporary basis by Federal Register notice to
ensure liquidity in the farm loan market, as determined in consultation
with the Department of the Treasury, in response to conditions that
result in large interest rate changes or term structure changes.
Examples of these conditions include increased loan losses in the
sector or significant changes in the yield curve.
Executive Order 12866
This rule has been designated as not significant under Executive
Order 12866 and has not been reviewed by the Office of Management and
Budget.
Regulatory Flexibility Act
In accordance with the Regulatory Flexibility Act, 5 U.S.C. 601,
FSA certifies that there would not be a significant economic impact on
a substantial number of small entities. This rule is not expected to
change the ability of applicants, borrowers, or lenders to receive FSA
guaranteed loans, and would not increase the costs of compliance with
the program. Further, all applicants or borrowers affected by this
change are small, but no lenders are considered small entities. Changes
will be applied to all affected entities equally, however, without
regard to their size.
Unfunded Mandates Reform Act of 1995
Title II of the Unfunded Mandates Reform Act of 1995 (UMRA)
establishes requirements for Federal agencies to assess the effects of
their regulatory actions on State, local, and tribal governments and
the private sector. This rule contains no Federal mandates (under the
regulatory provisions of title II of the UMRA) for State, local, and
tribal governments or the private sector. Therefore, this rule is not
subject to the requirements of sections 202 and 205 of the UMRA.
Executive Order 12612
It has been determined under section 6(a) of Executive Order 12612,
Federalism, that this rule does not have sufficient federalism
implications to warrant the preparation of a Federalism Assessment. The
provisions contained in this rule will not have a substantial direct
effect on States or their political subdivisions or on the distribution
of power and responsibilities among the various levels of government.
Executive Order 12372
These regulations are not subject to the provisions of Executive
Order 12372, which require intergovernmental consultation with State
and local officials. See the notice related to 7 CFR part 3015, subpart
V, published at 48 FR 29115, June 24, 1983.
Executive Order 12988
This rule has been reviewed under Executive Order 12988, on Civil
Justice Reform. The provisions of this rule are not retroactive. The
provisions of this rule preempt State and local laws to the extent such
State and local laws are inconsistent. Generally, all administrative
appeal provisions, including those published at 7 CFR part 11, must be
exhausted before any action for judicial review may be brought in
connection with the matters that are the subject of this rule.
Environmental Evaluation
The environmental impacts of this rule have been considered in a
manner consistent with the provisions of the National Environmental
Policy Act (NEPA), 42 U.S.C. 4321-4347, the regulations of the Council
on Environmental Quality, 40 CFR parts 1500-1508, and the FSA
regulations for compliance with NEPA (7 CFR 799 and 7 CFR part 1940,
subpart G). FSA concluded that this rule will not have a significant
impact on the quality of the human environment either individually or
cumulatively and therefore is categorically excluded and not subject to
environmental assessments or environmental impact statements in
accordance with 7 CFR 1940.310(e)(3).
Paperwork Reduction Act of 1995
The information collections to which this rule applies have been
reviewed by OMB under the Paperwork Reduction Act of 1995 (44 U.S.C.
chapter 35), approved, and assigned OMB control number 0560-0155. This
rule involves no change to the currently approved collection of
information.
[[Page 56756]]
E-Government Act Compliance
FSA is committed to complying with the E-Government Act, to promote
the use of the Internet and other information technologies to provide
increased opportunities for citizen access to Government information
and services, and for other purposes.
List of Subjects
7 CFR Part 761
Accounting, Loan programs--agriculture, Rural areas.
7 CFR Part 762
Agriculture, Credit, Loan programs--agriculture, Grant programs--
agriculture, Reporting and recordkeeping requirements.
For the reasons set out in the preamble, 7 CFR parts 761 and 762
are proposed to be amended as follows:
PART 761--GENERAL PROGRAM ADMINISTRATION
1. The authority citation for part 761 continues to read as
follows:
Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.
Sec. 761.2 [Amended]
2. In Sec. 761.2(b), remove the definition of ``average
agricultural loan customer.''
PART 762--GUARANTEED FARM LOANS
3. The authority citation for part 762 continues to read as
follows:
Authority: 5 U.S.C. 301, 7 U.S.C. 1989.
4. Amend Sec. 762.124 by revising paragraphs (a)(2) and (a)(3) to
read as follows:
Sec. 762.124 Interest rate, terms, charges, and fees.
(a) * * *
(2) If a variable rate is used, it must be tied to an index or rate
specifically agreed to between the lender and borrower in the loan
instruments and the rate adjustments must be in accordance with normal
practices of the lender for unguaranteed loans. Upon request, the
lender must provide the Agency with copies of written rate adjustment
practices.
(3) At loan closing and at the time of loan restructuring, the
interest rate on the guaranteed portion and the unguaranteed portion of
a fixed or variable rate loan may not exceed the following, as
applicable:
(i) For lenders utilizing a pricing model based on loan risk, the
highest interest rate for tier of the lender's risk rating matrix that
reflects moderate risk. The lender must provide the Agency with this
pricing model.
(ii) For lenders without a risk based pricing model, the 10-year
Treasury rate plus 350 basis points for FO and the New York Prime (as
published in the Wall Street Journal) plus 250 basis points for OL. In
the event of extraordinary conditions resulting in large interest rate
changes or term structure changes, the Agency may temporarily set a
different maximum rate under this paragraph as determined in
consultation with the Department of the Treasury; and
* * * * *
5. Amend Sec. 762.150 by revising paragraph (g) to read as
follows:
Sec. 762.150 Interest Assistance Program.
* * * * *
(g) Rate of Interest. The lender interest rate will be set
according to Sec. 762.124(a).
* * * * *
Signed at Washington, DC, on September 24, 2008.
Glen L. Keppy,
Acting Administrator, Farm Service Agency.
[FR Doc. E8-22871 Filed 9-29-08; 8:45 am]
BILLING CODE 3410-05-P