[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Proposed Rules]
[Pages 50936-50941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20367]
========================================================================
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.
========================================================================
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 /
Proposed Rules
[[Page 50936]]
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AC60
Loan Policies and Operations; Lending and Leasing Limits and Risk
Management
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, Agency, we, our), by the
Farm Credit Administration Board, is publishing for comment proposed
amendments to our regulations relating to lending and leasing limits.
We propose lowering the current limit on extensions of credit to a
single borrower for each Farm Credit System (System) institution
operating under title I or II of the Farm Credit Act of 1971, as
amended (Act). The proposed rule would not affect the lending and
leasing limits of title III lenders under Sec. 614.4355. However, we
are proposing that all titles I, II and III System institutions adopt
written policies to effectively identify, limit, measure and monitor
their exposures to loan and lease concentration risks. This proposed
rule, if adopted, would increase the safe and sound operation of System
institutions by strengthening their risk management practices and
abilities to withstand volatile and negative changes in increasingly
complex and integrated agricultural markets.
DATES: You may send comments on or before October 18, 2010.
ADDRESSES: We offer a variety of methods for you to submit your
comments. For accuracy and efficiency reasons, commenters are
encouraged to submit comments by e-mail or through FCA's Web site. As
facsimiles (fax) are difficult for us to process and achieve compliance
with section 508 of the Rehabilitation Act, we are no longer accepting
comments submitted by fax. Regardless of the method you use, please do
not submit your comment multiple times via different methods. You may
submit comments by any of the following methods:
E-mail: Send us an e-mail at [email protected].
FCA Web site: http://www.fca.gov. Select ``Public
Commenters,'' then ``Public Comments,'' and follow the directions for
``Submitting a Comment.''
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Mail: Gary K. Van Meter, Deputy Director, Office of
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090.
You may review copies of all comments we receive at our office in
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you
are in the Web site, select ``Public Commenters,'' then ``Public
Comments,'' and follow the directions for ``Reading Submitted Public
Comments.'' We will show your comments as submitted, but for technical
reasons we may omit items such as logos and special characters.
Identifying information you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove e-mail addresses to help reduce Internet spam.
FOR FURTHER INFORMATION CONTACT: Paul K. Gibbs, Senior Accountant,
Office of Regulatory Policy, Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-
4434; or Wendy R. Laguarda, Assistant General Counsel, Office of
General Counsel, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule are to:
Strengthen the safety and soundness of System
institutions;
Ensure the establishment of consistent, uniform and
prudent concentration risk management policies by System institutions;
Ensure that all System lenders have robust methods to
identify, measure, limit and monitor exposures to loan and lease
concentration risks, including counterparty risks; and
Strengthen the ability of System lenders to withstand
volatile and negative changes in increasingly complex and integrated
agricultural markets.
The proposed regulation would not change the following provisions
of the current lending limits rule: Definitions under Sec. 614.4350;
computation of lending and leasing limit base under Sec. 614.4351;
lending and leasing limits for Banks for Cooperatives (BCs) under Sec.
614.4355; BCs look-through notes under Sec. 614.4357; the base
calculation for computing the lending and leasing limit under Sec.
614.4358; the attribution rules under Sec. 614.4359; lending and
leasing limit violations under Sec. 614.4360; or the transition period
prescribed in Sec. 614.4361.\1\
---------------------------------------------------------------------------
\1\ The proposed changes will not change existing regulations
covering underwriting standards or lending procedures under Sec.
614.4150.
---------------------------------------------------------------------------
We have elected not to address the lending limits for title III
lenders at this time because of the complexity of the issues involved
in lending to cooperatives under title III of the Act. Should the
Agency decide to address the BCs lending limits at some future time, we
will do so in a separate rulemaking.
All System institutions, including title III institutions, would be
given 6 months from the effective date of new Sec. 614.4362 to
establish and implement written policies on limiting exposures to on-
and off-balance sheet loan and lease concentration risks as prescribed
therein.
II. Background
The Act \2\ does not contain general lending and leasing limits for
titles I and II System institutions outside of specific limits for
processing and marketing and rural housing loans. However, both the
Agency and the System recognize that lending limits are a sound banking
practice and an effective risk management tool that enhance the safety
and soundness of individual System institutions and the System as a
whole. The Agency's current lending limit regulations,\3\ promulgated
in 1993 with an effective date in 1994, were issued due to the System's
structural changes resulting from the Agricultural Credit Act of 1987
(1987 Act).\4\ This regulation created a uniform lending limit for all
System banks and associations, with the exception of BCs,
[[Page 50937]]
and for all types of loans and leases. The 25-percent lending limit
represented a balance between the Agency's safety and soundness
concerns and the System's concerns of being able to service the credit
needs of creditworthy, eligible borrowers.\5\
---------------------------------------------------------------------------
\2\ Public Law 92-181, 85 Stat. 583 (Dec. 10, 1971).
\3\ See 58 FR 40311, July 28, 1993.
\4\ Public Law 100-233, 101 Stat. 1568 (Jan. 6, 1988).
\5\ See 58 FR 40311, 40318, July 28, 1993.
---------------------------------------------------------------------------
The current regulations do not impose lending limits based on
specified risks, such as undue industry concentrations, counterparty
risk, ineffective credit administration, participation and syndication
activity, inadequate management and accounting practices, or other
shortcomings that might have been present in a System institution's
financial position or business practices. When the Agency issued the
final regulations in 1993, we stated ``limiting the amount that can be
lent to any one borrower or a group of related borrowers is an
effective way to control concentrations of risk in a lending
institution and limit the amount of risk to an institution's capital
arising from losses incurred by large `single credits.' '' \6\ Other
than concentration of risk to a single borrower, the Agency left it up
to each individual System lender to address industry, counterparty and
other concentrations of risk.
---------------------------------------------------------------------------
\6\ Id. at 40311.
---------------------------------------------------------------------------
III. Proposed Limit on Loans and Leases to One Borrower/Lessee
A. In General
The Agency is proposing to lower the lending and leasing limit on
loans and leases (loans) to one borrower or lessee (borrower) for all
System institutions operating under title I or II of the Act from the
current limit of 25 percent to no more than 15 percent of an
institution's lending and leasing limit base. Specifically, FCA
proposes to lower the lending and leasing limit in Sec. Sec. 614.4352,
614.4353 and 614.4356 to 15 percent. We are interested in receiving
comments on the implications of this proposed limit for the smallest-
sized associations in the System. As noted above, the calculation for
the lending and leasing limit base in Sec. 614.4351 would remain
unchanged, as would the lending and leasing limit base in Sec.
614.4355 for title III lenders. The proposed 15-percent limit would
apply on the date a loan or lease is made and at all times thereafter,
with certain exemptions for loans that violate the lending limit as set
forth in Sec. 614.4360.\7\
---------------------------------------------------------------------------
\7\ Section 614.4360 and its stated exemptions from the
requirements of Sec. 615.5090 remain unchanged, as noted earlier.
---------------------------------------------------------------------------
The Agency believes the proposed 15-percent limit is appropriate
and necessary for the safe and sound operation of the System, given the
changes in the System's structure, growth, authorities and practices
since the current regulations became final in 1994. While the proposed
15-percent limit is more in line with the practices of a majority of
System lenders, which have established, by policy, internal lending
limits well below the current regulatory limit, some System lenders
rely on the current 25-percent regulatory limit. Given the extensive
System practice of establishing internal hold limits well below the
regulatory maximum and the significant concentration risk a 25-percent
limit represents, FCA concludes that all System lenders should be
required to implement internal lending limits at or below the proposed
15-percent limit based on their institutions' specific circumstances,
resources, financial condition, business activities and capability.
B. Substantial Changes in System Structure Since the 25-Percent Limit
Was Adopted
Since 1994, System banks have shifted their focus from supervising
their district associations to operating as funding banks that
predominately extend direct loans to, and manage funding for, their
district associations. In turn, all associations have become direct
lenders, no longer acting as agents for the district banks or relying
on district bank policies for their day-to-day operations. During this
same time period, the associations have gone through significant
restructurings and consolidations. Today, there are fewer than 90
associations in the System and all but a few of them are structured as
agricultural credit associations with Federal land credit and
production credit association subsidiaries. The proposed 15-percent
lower lending limit is more appropriate to these larger consolidated
direct lender associations, operating primarily as stand-alone lending
institutions with greater lending capacity than ever before.
C. Substantial Growth in System Lending Capacity Since the 25-Percent
Limit Was Adopted
Coupled with these operational and structural changes, there has
been substantial growth in the capital bases of System institutions
since 1994, giving them much greater capacity to meet the needs of
large borrowers. For example, the median System institutions based on
permanent capital totaled $13.7 million at year-end 1994, compared to
$98.5 million at year-end 2009. This change represents a 621-percent
increase in capital and has increased the 25-percent lending limit
amount in the median System institution from $3.4 million to $24.6
million. Additionally, when you compare the 25-percent lending limit
amount for the median System institution in 1994 to a 15-percent
lending limit amount for a median System institution in 2009, there is
effectively a 333-percent increase in the amount of the lending limit
due to the increase in the median size of System institutions.
Furthermore, when you compare the 25-percent lending limit amount for
the smallest and largest System institutions in 1994 to a 15-percent
lending limit amount for the smallest and largest System institutions
in 2009, there is effectively an increase in the maximum amount of a
loan that could be made to a single borrower from $105,000 to $822,000
(a 685-percent increase) for the smallest System institution and from
$188 million to $566 million (a 202-percent increase) for the largest
System institution.
Accordingly, because of the substantial growth in the System's
lending capacity, the current 25-percent lending limit is no longer
prudent or necessary to meet the needs of the System's borrowers. While
the borrowing needs of the System's largest borrowers have also
increased, the tools available to the System today (such as
participations, syndications and guarantees) have made it possible to
meet those needs with lower, more prudent lending and leasing limits.
Such tools can also work to mitigate lending risks by enabling System
lenders to share credit risk with each other as well as with other non-
System lenders and governmental entities.
D. Majority of System Institution Lending Limit Practices
The Agency has found that a majority of System lenders have
implemented internal lending limits at levels not only lower than the
current 25-percent regulatory limit but, in many cases, lower than the
proposed 15-percent limit. Therefore, the proposed 15-percent limit
would be in line with a majority of the current lending practices in
the System and, we believe, would not significantly disrupt System
institution operations.
The Agency also believes that even with the proposed lower limit of
15 percent, the growth in System capital since 1994 leaves sufficient
lending and leasing capacity in the System to adequately serve the
credit needs of creditworthy, eligible borrowers.
[[Page 50938]]
E. Enhanced System Authorities Since the 25-Percent Limit Was First
Adopted
Since 1994, System institutions have used the authorities granted
under the Act and implemented through FCA regulations to increase their
loan portfolios and meet the mission of providing sound, adequate and
constructive credit to American agriculture. During this time period,
loans to processing and marketing operations have increased to meet the
changing nature and needs of farming over the last decade and a half.
Likewise, the System's ability to participate and syndicate loans both
within and outside of the System has also grown since 1994. System
institutions now routinely serve large borrowers by buying and selling
participation and syndication interests to other System institutions
and other lenders.
The System's lending authorities ensure adequate credit for the
next generation of farmers and are necessary for the future of a strong
and stable agricultural industry. The System's lending authorities also
allow farmers and ranchers to diversify their incomes and financial
portfolios. However, the varied loans made for multiple agricultural
purposes are not without a degree of risk, particularly when
concentrations are not identified, measured, and managed. Similarly,
while the System's increased participation and syndication channels
reduce the risk of credit to large borrowers and enable System
institutions to continue serving such large customers notwithstanding
the proposed 15-percent lower lending limit, they also are not without
some risk. Such lending channels increase counterparty risks, or those
risks created by the potential default of the multiple parties doing
business with the System.
Therefore, System institutions must carefully manage and control
the counterparty risk posed by purchasing or selling loan exposures
through participations or syndications to other System and non-System
lenders. With appropriate use and risk controls over syndications and
participations, the Agency believes that the proposed 15-percent lower
lending limit would reduce the potential risks of all large loans
without jeopardizing the System's ability to provide the varied and
multiple forms of credit that are necessary in today's agricultural
environment.
F. Lending Limits of Other Federally Chartered Lending Institutions
We recognize that a single industry lender like the System is not
comparable in many respects to other Federally chartered lending
institutions with more diverse lending authorities. Consequently,
different factors are considered when arriving at a lending limit for
the System. Notwithstanding these differences, we note that the 15-
percent proposed lower lending limit for the System is comparable to
the lending limits of other Federally chartered lending
institutions.\8\ We do not believe, therefore, that the proposed lower
limit would put System institutions at a competitive disadvantage in
the agricultural lending marketplace.
---------------------------------------------------------------------------
\8\ See, e.g., 12 CFR 32.3 (Office of the Comptroller of the
Currency); 12 CFR 560.93 (Office of Thrift Supervision); and 12 CFR
701.21 and 12 CFR 723.8 (National Credit Union Administration).
---------------------------------------------------------------------------
G. Repeal of Sec. 614.4354
The proposed rule would repeal Sec. 614.4354 pertaining to Federal
land bank associations (FLBAs) since such associations have all been
converted to direct lending institutions. We note, however, that the
repeal of Sec. 614.4354 does not affect, modify, or change in any
manner FCA's authority to charter an FLBA without direct lending
authority in the future. If we were to issue such a charter at some
future point, this provision of the regulation would be repromulgated
to establish a lending limit for such an association.
H. Transition Period for Lower Lending Limit
As previously noted, the proposed regulations would not change the
existing transition rules in Sec. 614.4361. However, we want to make
clear that this section should be read as providing that certain
nonconforming loans (including commitments) made or attributed to a
borrower prior to the effective date of existing subpart J, or the
amendments proposed herein, will not be considered a violation of the
lending and leasing limits during the existing contract terms of such
loans, provided such loans complied with the regulatory lending limit
when made.
IV. Policy on Limiting Exposures to Loan and Lease Concentration Risks
A. In General
In addition to proposing a lower limit on loans to one borrower,
FCA is proposing that each System lender's board of directors adopt and
ensure implementation of a written policy that would effectively
identify, measure, limit and monitor exposures to loan and lease
concentration risks. This policy should include both on- and off-
balance sheet loan and lease exposures (participation and syndication
activity).
The country's recent economic crisis revealed the increasing
complexity and volatility of the financial world over the past few
decades. The increase in types and complexity of financial
instruments--including mortgage-backed securities, collateralized debt
obligations and credit default swaps--along with the rise in imprudent
home mortgage lending practices helped to create the current
instability and uncertainty in the financial lending markets that
System institutions, along with all other lenders, are experiencing
today.
Like the growing complexity in the financial markets, agricultural
markets and industries have also become more complex, integrated,
inter-related and potentially turbulent over the years. The System has
not been immune to these financial or agricultural instabilities. For
instance, the recent financial woes in the biofuels industry (namely
ethanol) that the System funded left many System institutions with
large troubled loans with related potential loss exposures. Similarly,
the recent financial troubles of the largest poultry industry producer
in the United States had a domino and damaging effect on contract
poultry growers throughout the industry, which demonstrated the impact
of concentration risk and ultimately created credit stress in several
System institutions. For these reasons, we believe enhanced focus on
all loan and lease concentration risks is essential.
B. Safety and Soundness
While many System lenders have adopted policies to manage their
exposures to loan concentration risks, a number of institutions do not
have any formal or written policies in place. Furthermore, some of
those System institutions with established internal concentration
limits operate without board policies that adequately address all
aspects of identifying, measuring, limiting and monitoring those
concentration risks that could adversely impact the institution's
financial performance. FCA believes that the proposed policy
requirements would ensure a comprehensive approach to mitigating loan
and lease concentration risks and would represent a best practice in
loan portfolio management. Such policies would help ensure the
continuance of a safe and sound System by potentially reducing
exposures to concentration risks.
[[Page 50939]]
The proposed policy requirement is intended to address
vulnerabilities in System loan portfolios resulting from both on- and
off-balance sheet loan concentration risks, in particular those
concentration risks that are not addressed by the attribution
provisions of Sec. 614.4359.
The Agency recognizes that there is not one ideal uniform approach
to a loan concentration risk mitigation policy. Accordingly, this
proposal outlines only the minimally required elements of such a
policy. We have placed substantial responsibility on the board of
directors to establish more detailed policies and procedures
appropriate to the nature and scope of their institutions' credit
activities, territory and risk-bearing capacity. For example, under the
category of ``other concentration risks,'' System banks may find it
necessary to develop policies that focus on district-wide loan
concentrations and on the participation and syndication loans in their
portfolios.
C. Policy Elements
In addition to the specific loan and lease concentration risk
exposures discussed below under ``Quantitative Methods'' in Part D, we
are proposing to require that the policy include the following elements
to ensure that it is properly developed, implemented and monitored:
1. A clearly defined purpose and objective statement that sets
forth the objectives of the policy and specific means of achieving such
objectives. The Agency believes that such a statement would engage
System boards of directors in forming a philosophy and direction for
the management of their institutions' loan portfolio in the area of
concentration risk mitigation.
2. Clearly defined terms that are used consistently throughout the
policy.
3. Internal control requirements that:
a. Define those authorities delegated to management. Such
requirements should set forth organizational structure and reporting
lines that clearly delineate responsibility and accountability for all
management functions pertaining to mitigating exposures to both on- and
off-balance sheet loan and lease concentration risks, including risk
identification, measurement, limitation and oversight. In addition, the
policy should establish, when feasible, a separation of duties between
personnel executing transactions and those responsible for approval,
evaluation and oversight of credit activities. This separation of
duties promotes integrity and accuracy in lending practices that
reduces the risk of loss. Finally, the policy should cross-reference
the conflict of interest regulations in part 612 of this chapter to
ensure that employees directly involved in lending and leasing are
aware of their responsibilities to disclose actual or apparent
conflicts with their official duties.
b. Define those authorities retained for board action. Each
institution's board of directors has a fiduciary duty to ensure that
its institution's lending and leasing activities are prudently managed
and in compliance with all applicable laws and regulations.
Additionally, the board must ensure that the institution has adequate
and qualified personnel to manage the risks associated with its lending
and leasing activities. To this end, the Agency encourages each System
board of directors to review its loan and lease portfolio concentration
risk mitigation policy every year and make any adjustments that are
necessary and proper in light of the institution's financial position
and the lending environment.
c. Address exceptions to the policy. Such procedures should set
forth the basis for detecting deviations from, and making exceptions
to, the policy requirements. In addition, the policy should describe
the duties and responsibilities of management with regard to
recommending and reporting on policy deviations or exceptions to the
institution's board of directors, including what corrective actions
must be taken to restore compliance with the policy. In no event may
the lending and leasing limit exceed the applicable regulatory limits
for title I, II, or III institutions.
d. Describe reporting requirements. Such requirements should
describe the content and frequency of the reports and the office or
individual(s) responsible for preparing them for an institution's board
of directors. The reports should focus on providing information that
interprets the data and focuses the board on what is crucial to
understand and consider.
D. Quantitative Methods
The Agency is proposing that each policy contain a quantitative
method(s) to measure and limit identified exposures to on- and off-
balance sheet loan and lease concentrations emanating from:
(i) A single borrower;
(ii) Borrowers in a single sector in the agricultural industry;
(iii) A single counterparty; or
(iv) Unique factors because of the institution's territory, nature
and scope of its activities and risk-bearing capacity. Unique
concentration exposures might include, but not limited to, borrowers
that are reliant on the same processor, marketer, manager, integrator
or supplier (or any combination thereof).
Quantitative methods could include hold limits (for example, as a
percentage of risk funds, capital, earnings/net income or other
appropriate measurements or methods) that reasonably measure and limit
concentration risk exposures. We emphasize that the proposed 15-percent
regulatory limit on loans to one borrower establishes a ceiling limit.
We encourage System institutions to choose more conservative limits on
loans to one borrower as a majority of them have done under the current
regulatory limit. When arriving at quantitative methods, System
institutions should strongly take into account the stability and
strength of their capital positions and set their hold limits or other
risk management measures accordingly.
The following are examples of concentration risk exposures that
might be unique to a lender's territory:
An institution has a preponderance of borrowers in its
territory that are dependent on off-farm income from the same area
manufacturing plant where the potential downsizing or closing of the
plant could have a negative effect on loan repayment abilities.
An institution has a preponderance of independent
borrowers selling production to a very limited market (such as farmers
selling eggs, sugar beets, cranberries) where a squeeze in the market
could have a negative effect on loan repayment abilities.
An institution has a preponderance of borrowers structured
as limited liability companies or partnerships in which the same
individuals or group of individuals own interests--not enough to
trigger the attribution provisions under this subpart--but enough to
create instability among the group of borrowers should the common
investors experience financial difficulties.
An institution has a preponderance of borrowers in a newly
emerging market, such as biofuels, which also is an industry outside of
the institution's area of expertise and in which volatile and
unforeseen trends in the industry can have a negative effect on loan
repayment abilities.
In all the foregoing examples, System institutions should prudently
identify, measure, limit and monitor loan concentrations to these
groups of borrowers.
In determining concentration risk limits, the policy should take
into
[[Page 50940]]
consideration other risk factors that could reasonably identify
foreseeable loan and lease losses. Such risk factors could include
borrower risk ratings, the institution's relationship with the
borrower, the borrower's knowledge and experience, loan structure, type
and location of collateral (including loss given default ratings),
loans to emerging industries or industries outside of an institution's
area of expertise, out-of-territory loans, counterparties, or
weaknesses in due diligence practices. This list is exemplary only and
not meant to be exhaustive. The risk factors to be considered by an
institution would depend on the unique circumstances of the
institution's credit operations.
System institutions should give special consideration to
counterparty risks. For example, when entering into a participation,
the institution should consider how well it knows and trusts the
originator to make full and fair disclosures and to competently service
the loan. Conversely, when a System institution originates a
participation, it must ensure that there are no material
misrepresentations in its disclosures and that it has the ability to
properly service the loan. System institution originators should also
consider the risk of holding the entire loan should the loan become
distressed and the counterparties prevail against the System
institution in a lawsuit requiring the System institution to take back
the participation. System institutions should consider the risks of
concentrating too much of their participation and syndication loans
with the same third party. Finally, System institutions should ensure
that their policies prudently identify, measure, limit and monitor
counterparty exposures with respect to their participation and
syndication activity.
We emphasize that robust due diligence practices are especially
important when institutions are making loans outside of their
territories or core areas of expertise, or with counterparties.
E. Six-Month Timeframe To Issue a Policy
The proposed regulations would require all System lenders
(including a title III lender) to establish written loan and lease
concentration risk mitigation policies within 6 months from the
effective date of these revised regulations. FCA believes that 6 months
is a sufficient amount of time for System boards to design and adopt
the policy requirements prescribed in new Sec. 614.4362.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the Farm Credit 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, Farm Credit System institutions are not ``small entities''
as defined in the Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, Banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, part 614 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 614--LOAN POLICIES AND OPERATIONS
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 J--Lending and Leasing Limits
Sec. 614.4352 [Amended]
2. Section 614.4352 is amended by:
a. Removing the comma after the word ``borrower'' and removing the
number ``25'' and adding in its place, the number ``15'' in paragraph
(a);
b. Removing the comma after the word ``Act'' and removing ``exceeds
25'' and adding in its place ``exceed 15'' in paragraph (b)(1); and
c. Removing the comma after the word ``Act'' and removing
``exceeds'' and adding in its place ``exceed'' in paragraph (b)(2).
Sec. 614.4353 [Amended]
3. Section 614.4353 is amended by:
a. Adding the words ``direct lender'' after the word ``No'';
b. Removing the comma after the word ``borrower''; and
c. Removing ``exceeds 25'' and adding in its place ``exceed 15''.
Sec. 614.4354 [Removed]
4. Section 614.4354 is removed.
Sec. 614.4356 [Amended]
5. Section 614.4356 is amended by removing the number ``25'' and
adding in its place, the number ``15''.
6. Section 614.4361 is amended by adding a new paragraph (c) to
read as follows:
Sec. 614.4361 Transition.
* * * * *
(c) The loan and lease concentration risk mitigation policy
required by Sec. 614.4362 must be adopted and implemented within 6
months from the effective date of such section.
7. A new Sec. 614.4362 is added to subpart J to read as follows:
Sec. 614.4362 Loan and lease concentration risk mitigation policy.
The board of directors of each System direct lender institution
must adopt and ensure implementation of a written policy to effectively
measure, limit and monitor exposures to concentration risks resulting
from the institution's lending and leasing activities.
(a) Policy elements.
(1) The policy must include:
(i) A purpose and objective;
(ii) Clearly defined and consistently used terms;
(iii) Quantitative methods to measure and limit identified
exposures to loan and lease concentration risks (as set forth in
paragraph (b) of this section); and
(iv) Internal controls that delineate authorities delegated to
management, authorities retained by the board, and a process for
addressing exceptions and reporting requirements.
(b) Quantitative methods.
(1) At a minimum, the quantitative methods included in the policy
must quantifiably measure and limit identified concentration risk
exposures emanating from:
(i) A single borrower;
(ii) A single industry sector;
(iii) A single counterparty; or
(iv) Other lending activities unique to the institution because of
its territory, the nature and scope of its activities and its risk-
bearing capacity.
(2) In determining concentration limits, the policy must consider
other risk factors that could reasonably identify foreseeable loan and
lease losses. Such risk factors could include
[[Page 50941]]
borrower risk ratings, the institution's relationship with the
borrower, the borrower's knowledge and experience, loan structure and
purpose, type or location of collateral (including loss given default
ratings), loans to emerging industries or industries outside of an
institution's area of expertise, out-of-territory loans,
counterparties, or weaknesses in due diligence practices.
Dated: August 12, 2010.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 2010-20367 Filed 8-17-10; 8:45 am]
BILLING CODE 6705-01-P