[Federal Register Volume 59, Number 209 (Monday, October 31, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26839]


[[Page Unknown]]

[Federal Register: October 31, 1994]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB43

 

Organization; General Provisions; Disclosure to Shareholders; 
Technical Assistance and Financially Related Services; Member Insurance

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit 
Administration Board (Board), proposes to amend the regulations 
governing Technical Assistance and Financially Related Services and 
Member Insurance. Subpart A of the proposed regulation defines what 
constitutes technical assistance, financial assistance and financially 
related services and what types of activities the Farm Credit System 
(System) institutions are authorized to provide. The proposed 
regulation allows greater flexibility in this area, while maintaining 
the FCA's ability to regulate safety and soundness risks. The FCA's 
existing prior approval requirement is eliminated and replaced with a 
post-review process for all services, except for those that have never 
been authorized by the FCA. The FCA also proposes to amend the Member 
Insurance regulation to clarify existing rules and reduce regulatory 
burdens wherever possible.

DATES: Comments should be received on or before December 30, 1994.

ADDRESSES: Comments may be mailed or delivered (in triplicate) to 
Patricia W. DiMuzio, Associate Director, Regulation Development, Office 
of Examination, Farm Credit Administration, McLean, Virginia 22102-
5090. Copies of all communications received will be available for 
examination by interested parties in the Office of Examination, Farm 
Credit Administration, McLean, Virginia.

FOR FURTHER INFORMATION CONTACT:

Linda C. Sherman, Policy Analyst, Regulation Development, Office of 
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 
883-4498, TDD (703) 883-4444, or
Joy E. Strickland, Senior Attorney, Regulatory Operations Division, 
Office of General Counsel, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background and Statutory Authorities

    Under title I, section 1.12; title II, sections 2.5 and 2.12 (15); 
and title III, section 3.7 of the Farm Credit Act of 1971, as amended 
(the Act), the FCA is responsible for promulgating regulations 
governing the offering and administering of technical assistance, 
financial assistance, and financially related services by banks and 
associations (hereinafter referred to as ``related services'').
    System institutions have offered credit life insurance and a 
variety of other credit-related services over the past 40 years. 
Pursuant to regulations adopted in 1984, the FCA is responsible for the 
review and approval of bank financial services policies and must also 
approve each new related service program on a case-by-case basis before 
it is offered by a bank or its affiliated associations. The FCA took no 
further Systemwide action until 1993, when the Board adopted a policy 
statement (58 FR 36410, July 2, 1993) and subsequently issued a 
bookletter (366-OE, September 3, 1993) authorizing the providing of 
related services outside an institution's chartered territory, under 
certain circumstances.
    On December 2, 1993, FCA Board Chairman Billy Ross Brown completed 
a study entitled ``The Farm Credit System's Authorized Services'' and 
directed staff to use it as a basis for revising the existing 
regulations. The proposed regulation also incorporates the intent of 
the FCA Board's Policy Statement on Regulatory Philosophy published in 
the Federal Register on February 17, 1994 (59 FR 32189).

II. Regulatory Burden Comments and Petitions for Rulemaking

    On June 23, 1993, the FCA Board published a ``Statement of 
Regulatory Burden'' (58 FR 34003) that requested comments regarding how 
the FCA could lessen the regulatory burden on System institutions. In 
response, the agency received three comment letters on related 
services, including one on Member Insurance. These comments are 
addressed in this proposed regulation and are referred to as 
``Regulatory Burden Comments.''
    Also in 1993, the Farm Credit Banks' Presidents Planning Committee 
(PPC) authorized an initiative to review the FCA regulations and make 
recommendations concerning those that the System believes are not 
directly related to safety and soundness or unduly restrict the full 
exercise of authorities granted by the Act. This initiative produced a 
System work group on related services (PPC work group) which included 
representatives from associations and banks in the AgriBank, Baltimore, 
Columbia, Springfield, and Western Farm Credit Districts. In July 1993, 
FCA met with the PPC work group to hear its concerns and objectives.
    The PPC work group completed its study on November 2, 1993, and 
provided the results to the FCA Board for its consideration in this 
proposed rule. The study recommended:
    (1) Elimination of existing prior approval requirements;
    (2) revision of coordination requirements to provide for increased 
flexibility in providing intra- and inter-district services;
    (3) revision of the requirement for bank annual review of service 
programs;
    (4) increased flexibility in how banks and associations administer 
related service programs; and
    (5) various technical and clarifying changes in subparts A and B.
    On April 4, 1994, the FCA received a ``Petition for Rulemaking to 
Revise 12 CFR part 618--subpart A, Concerning Financially Related 
Services'' (hereinafter referred to as ``FRS petition''), submitted by 
a Washington, D.C., law firm on behalf of one agricultural credit 
association (ACA), three Federal land credit associations (FLCAs) and 
five production credit associations (PCAs) in California and Michigan. 
The petitioners supported the PPC work group's recommendations, but 
suggested that, in light of the FCA Board's February 17, 1994 Policy 
Statement on Regulatory Philosophy (59 FR 32189), the FCA should 
consider a broader rulemaking proceeding and more fundamental changes 
in the regulation than may have originally been contemplated.
    The petitioners focused on areas where expanded authorities could 
be considered and requested that the FCA:
    (1) Define related services (although no definition was suggested);
    (2) authorize the offering of other services for a fee;
    (3) provide for a non-exclusive list of approved related services;
    (4) eliminate the prior approval requirement;
    (5) eliminate the annual bank review of related service programs; 
and
    (6) encourage innovative means for offering related services that 
meet borrower needs.
    On May 4, 1994, the FCA received a petition from an ACA in Michigan 
(hereinafter referred to as ``Insurance petition'') asking the FCA to 
reconsider the requirement in the Member Insurance regulations (subpart 
B) that insurance only be sold to members who have a debtor/creditor 
relationship.
    In addition to the above petitions and System input, over the past 
18 months the FCA has received prior approval requests and technical/
interpretive questions that have raised issues regarding what types of 
services are authorized, what types of institutions can offer services, 
and who the recipients of these services can be. Issues included 
questions about incidental authorities, sale of insurance out-of-
territory, and sale of fee appraisals other than directly to members or 
borrowers.

III. Proposed Regulatory Approach

    System institutions desire greater flexibility to use their 
statutory authority for providing related services in order to serve 
the evolving needs of farmers and ranchers and to meet competitive 
pressures. Although the FCA understands the System's desire to expand 
current related service activities, the agency's primary concerns 
continue to focus on safety and soundness issues and whether the System 
remains within the limits of current statutory authorities.
    Underlying these proposed regulations, is FCA's conclusion that, 
under most circumstances, it would be appropriate to replace the 
current prior approval requirement with specific criteria for 
determining what services can be offered and under what circumstances. 
However, the FCA, in its role as a safety and soundness regulator, 
wishes to reserve the right to review new services in order to ensure 
that they would not present excessive risk to the System. Because it is 
difficult to foresee what types of new services will be proposed, it is 
impracticable to prescribe specific regulations for new services that 
have yet to be offered by the System. The FCA, therefore, proposes to 
remove as much of the regulatory burden as possible, while maintaining 
its ability to apply the statute, achieve regulatory objectives, and 
preserve flexibility. The FCA has also reduced the role the funding 
bank is required, by regulation, to play in overseeing such programs. 
This allows the institution offering a service to take the primary 
responsibility for the related services it provides.
    The proposed regulation in part 618 defines terms and establishes 
specific authorizing criteria so that each institution can evaluate the 
services it would like to offer its customers. Thus, the proposed 
regulation clarifies the FCA's primary safety and soundness concerns 
and distinguishes between the types of services that can be offered and 
the programs for delivering these services.
    Subpart A has been rewritten and reorganized because of the 
wholesale nature of the regulatory changes proposed by the FCA. In 
proposed Sec. 618.8000, the FCA sets forth a definition of ``related 
service'' which includes insurance and encompasses activities 
previously referred to as technical assistance, financial assistance, 
or financially related services. The proposed regulation also details 
regulatory eligibility requirements for recipients of such services.
    In proposed Sec. 618.8010 (``Related Services Authorization 
Process''), the FCA replaces the prior approval in the existing 
regulation in part, by communicating to all institutions those services 
it has approved, which may then be offered without further regulatory 
approval. The proposed regulation also describes the process for the 
FCA's review of new services.
    Proposed Sec. 618.8015 (``Policy Guidelines'') requires each 
institution offering related services to adopt a policy addressing 
related services. Proposed Sec. 618.8020 (``Feasibility Requirements'') 
contains criteria for the feasibility analysis that must be performed 
in conjunction with developing a new service program.
    Proposed Sec. 618.8025 (``Feasibility Reviews'') addresses the 
statutory requirement for the board of directors of each funding bank 
to determine that association-related service programs are feasible. 
The proposed regulation requires the association to perform a 
feasibility analysis and requires the bank's board of directors to 
verify that this analysis has been done, and limits the scope and 
frequency of reviews that the bank must perform.
    The final section in subpart A, Sec. 618.8030 (``Out-of-Territory 
Related Services''), establishes a regulatory basis for providing out-
of-territory related services. The FCA's policy statement and 
bookletter on offering services outside an institution's chartered 
territory would be superseded by these provisions.
    The proposed Member Insurance regulation in subpart B remains 
largely unchanged with two exceptions: (1) The requirement for a 
debtor/creditor relationship would no longer be necessary for sales of 
certain types of insurance; and (2) employee compensation for insurance 
sales would be allowed within certain limits.

IV. Section-by-Section Analysis

A. Subpart A--Related Services

1. Section 618.8000--Definitions
    Section 618.8000 of the proposed regulation would define the term 
``program'' to mean the method or procedure by which an institution 
provides a related service. The purpose of the definition is to 
distinguish between the concept or type of activity that will be 
provided, such as farm business consulting, and the manner in which an 
institution will provide the particular service. The distinction 
between the type of related service and the institution's program for 
providing the service will be addressed further in the discussion of 
proposed Sec. 618.8010. ``Related services'' would be defined to mean 
any activity provided by a System bank or association that pertains to 
the recipient's on-farm, aquatic or cooperative operation, including 
control of related financial matters. The definition is intended to be 
broadly construed in order to encompass services, other than the making 
of loans, that an institution may want to offer to persons or entities 
eligible to borrow. It should be noted that the proposed definition 
does not rely upon whether the institution charges fees or makes a 
profit from offering a service in making a determination as to whether 
it is considered a ``related service.'' The FCA recognizes that 
institutions may offer related services at cost or at a slight loss in 
order to increase customer satisfaction or attract new customers. Such 
decisions are considered business decisions that will be reviewed in 
the examination context. The proposed definition of related services is 
not intended to include advertising or purely promotional activities.
    Although other terms, such as ``technical assistance,'' ``financial 
and technical assistance,'' and ``financially related services,'' are 
referenced in the Act, the distinction among these types of services 
has become negligible. In fact, the legislative history for the 
enactment of the Farm Credit Act of 1971\1\ does not distinguish among 
these terms. Therefore, in order to reduce any confusion, the proposed 
definition would include all services referred to above.
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    \1\Pub. L. 92-181, Dec. 10, 1971.
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    The PPC work group commented that the on-farm requirement should 
not be interpreted to limit authorized related services to only those 
services that relate to the physical operations of the farm. The FCA 
agrees that Congress did not intend the on-farm requirement to be 
interpreted in such a restrictive manner and, historically, the FCA has 
not done so in approving related service programs. The FCA interprets 
the on-farm requirement to mean that related services must pertain to 
the farming or aquatic operations of the recipients or be useful in 
managing the financial matters of such operations. In fact, many of the 
services specifically mentioned by Congress when it enacted the related 
services authority in 1971 are related to farming and aquatic 
operations and controlling the risks associated with such operations 
rather than being a direct part of the physical operation. Those 
services specifically mentioned in the statute or legislative history 
include insurance, estate planning, and tax services.
    Finally, the proposed regulation would also define ``System banks 
and associations'' to include Farm Credit Banks (FCBs), Agricultural 
Credit Banks (ACBs), banks for cooperatives (BCs), production credit 
associations (PCAs), agricultural credit associations (ACAs), Federal 
land bank associations (FLBAs), and Federal land credit associations 
(FLCAs). The Federal Agricultural Mortgage Corporation and the Farm 
Credit Banks Funding Corporation would not be included because these 
and other similar Farm Credit institutions are not authorized to 
provide related services. Although service corporations are not 
included within the term ``System banks and associations,'' these 
entities would continue to be authorized to offer related services, 
except insurance, based on section 4.25 of the Act.\2\
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    \2\Section 4.25 of the Act states that service corporations may 
perform all the functions and services of the banks, with the 
exception of extending credit and providing insurance.
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2. Section 618.8005--Eligibility
    Based on the provisions of sections 1.12, 2.5, 2.12(15) and 3.7 of 
the Act, proposed Sec. 618.8005 requires that related services\3\ be 
offered by an institution to persons or entities eligible to borrow 
from the System. The proposed regulation would determine eligible 
recipients for related services by reference to persons eligible to 
borrow as defined in the lending regulations at part 613 of this 
chapter. Proposed Sec. 618.8005(a) would authorize FCBs and 
associations to offer related services to the persons eligible to 
borrow as defined in Secs. 613.3010; 613.3020(a)(1), (a)(2), and (b); 
and 613.3045. For BCs, proposed Sec. 618.8005(b) would authorize 
related services to be provided to eligible borrowers as defined in 
Secs. 613.3110 and 613.3120. Proposed Sec. 618.8005(c) would authorize 
ACBs to offer related services appropriate to on-farm and aquatic 
operations to persons eligible to borrow as specified in paragraph (a) 
of this section and to offer related services appropriate to 
cooperative operations to entities eligible to borrow as specified in 
paragraph (b) of this section.
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    \3\Although insurance is included within the definition of 
related services, more specific eligibility requirements are 
provided in revised Sec. 618.8040; those requirements govern 
eligibility for receipt of insurance.
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    The FCA is currently developing proposed amendments to the lending 
eligibility regulations. Once any lending eligibility amendments become 
final, Sec. 618.8005 would be modified as necessary to conform to 
lending eligibility.
    The FCA believes that marketers and processors that meet the 
eligibility requirements of Sec. 613.3045 would also be included within 
the recipients that Congress considered eligible to receive related 
services. For any processing and marketing unit to be eligible to 
borrow, there must be a portion of the operation's throughput that is 
produced on-farm by the entity or its owners. The FCA believes that 
related services provided to marketing and processing units would be 
appropriate to the on-farm or aquatic operations of the unit or its 
owners. Therefore, these entities would be included within the eligible 
recipients specified in proposed Sec. 618.8005(a). Because rural home 
residents and farm-related businesses do not have farming or aquatic 
operations, services provided to them would not meet the statutory 
``on-farm'' requirement and, therefore, they would continue to be 
excluded from the eligible recipients specified in proposed 
Sec. 618.8005.
    The proposed regulation would approach the eligibility provisions 
for related services offered by ACBs in the same manner as eligibility 
is treated for FCBs and BCs. An ACB would be authorized under proposed 
Sec. 618.8005(c) to provide related services to persons eligible to 
borrow from FCBs. Such related services would have to be appropriate to 
the on-farm and aquatic operations of the recipients. Further, an ACB 
could provide related services to its cooperative customers, as long as 
the service is appropriate to their cooperative operations. Therefore, 
although an FCB and BC will be combined into an ACB, the services that 
can be provided to each type of borrower under titles I, II, and III of 
the Act would not change under the proposed regulation.
    Recent requests from System institutions have led the FCA to 
consider whether there are situations in which persons eligible to 
borrow may be denied the ability to receive the benefit of related 
services merely because an intermediary or other person or entity 
involved would not meet the eligibility requirements of the Act. The 
FCA believes that all farmers, ranchers, and other eligible persons and 
entities should be able to receive the full benefit of the related 
services authorized in the Act. Similar requests have been received 
asking the FCA to consider allowing the System to provide fee 
appraisals for agricultural real estate to entities such as the Farmers 
Home Administration (FmHA), commercial banks, and other lenders in 
connection with loan applications from persons eligible to borrow, and 
loan servicing actions (including bankruptcies and foreclosures) 
involving agricultural assets. The FCA also received a letter from the 
FmHA requesting that System institutions be authorized to provide the 
appraisals.
    The FmHA and certain System institutions have stated that there is 
a shortage of qualified agricultural appraisers in certain areas of the 
country, especially following the Financial Institutions Reform, 
Recovery and Enforcement Act.\4\ System personnel, who have developed 
an expertise in agricultural appraisals, could help meet this need. The 
availability of qualified appraisers would benefit farmers and ranchers 
in that their property would be fairly valued in situations such as 
loan applications and loan servicing. Under current regulations, System 
institutions have not been able to provide the appraisals when they are 
provided directly to the FmHA or a commercial bank, entities not 
eligible to borrow from a System institution. Also, the FmHA procedures 
provide that the FmHA will contract for appraisals rather than having 
each borrower obtain an appraisal.
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    \4\Pub. L. 101-73, Aug. 9, 1989.
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    Therefore, proposed Sec. 618.8005(d) would provide that related 
services may be offered to recipients that do not otherwise meet the 
eligibility requirements, as long as such service is offered in 
connection with loan applications, loan servicing, and other 
transactions between these recipients and persons or entities eligible 
to borrow under the criteria in proposed Sec. 618.8005(a), (b), or (c) 
discussed above.
    The service in question would have to be a part of or pertain to 
the transaction. For example, if a System institution offered a soil 
testing service, a natural food store wishing to purchase produce from 
a farmer could utilize the System institution's service to test the 
soil for pesticides. Although the eligible farmer directly benefits 
from the service and could arrange for the testing from the 
institution, the food store may wish to contract for the service 
directly in order to ensure independence of the testing. The System 
institution could not, however, offer tax planning services to the 
natural food store because tax planning does not pertain to the store's 
transaction with the farmer and does not directly benefit the eligible 
farmer. In addition, the authority to provide related services in 
Sec. 618.8005(d) would not depend on which party arranges for or pays 
for the related services. Finally, for BCs and ACBs, proposed 
Sec. 618.8005(d) would not change the requirements of Sec. 613.3120 of 
this chapter that a voting stockholder must substantially benefit from 
services provided in connection with foreign export or import 
transactions.
    One of the Regulatory Burden comments stated that System 
institutions should have the authority to provide related services to 
non-eligible entities as long as such services did not comprise the 
majority of the institution's program. The FCA does not believe that 
statutory or regulatory eligibility requirements depend on the 
percentage of an institution's services that are provided to the person 
or entity whose eligibility is in question, and did not include this 
suggestion in the proposed regulation.
    Finally, the FCA does not agree with the view advanced by the Farm 
Credit Council (FCC) and FRS petitioners that appraisals and other 
services could be provided to non-eligible entities pursuant to the 
institutions' incidental authorities under sections 1.5(21), 2.2(20), 
2.12(20), and 3.2(16) of the Act. System institutions were created for 
the express purpose of providing lending and related services. It is a 
general principle of corporate law that incidental powers are those 
powers that are directly and immediately appropriate to the execution 
of powers expressly granted and cannot be used to waive a specific 
limitation on an express power.\5\ Therefore, any use of incidental 
authorities for activities derived from either lending or related 
services express powers would still be subject to the limitations on 
those express powers.
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    \5\Fletcher Cyc. Corp. Sec. 2485 (rev. perm. ed. 1989).
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3. Section 618.8010--Related Services Authorization Process
    As part of its commitment to reducing the regulatory burden, the 
FCA proposes to eliminate the existing regulatory requirement that each 
System bank or association obtain the FCA's prior approval before 
providing a related service program. In addition, System institutions 
requested a change in the approval process to lessen the burden and 
speed up the process. A number of suggestions were made regarding the 
process; many of these have been incorporated into the proposed 
regulation.
    The proposed regulation sharply reduces the FCA's up-front role in 
two ways. First, the FCA would only evaluate proposals for new related 
services up front, that is, only services that have not previously been 
approved by the FCA. Second, only the service itself, not an 
institution's program, would initially be evaluated. This means that 
the FCA's evaluation of new services could occur before the proposing 
institution prepares a complete feasibility analysis or its funding 
bank completes its review. In fact, while the FCA would expect well-
documented service proposals, an institution would not need to devote 
valuable resources to developing its operational program before 
submitting a new related service for the FCA's evaluation. Following 
the FCA's authorization of the service, any authorized institution 
could develop and offer a program based on regulatory criteria in 
proposed Secs. 618.8020 and 618.8025 without obtaining prior approval 
from the FCA. The institution's program would then be subject to review 
in the course of the examination process.
    The first step in the proposed new process would be the compilation 
of related services that have been determined to meet the definition 
and other criteria specified in this regulation (the Related Service 
List or simply ``the list''). As provided in proposed 
Sec. 618.8010(c)(2), the list would briefly describe each related 
service, capturing key distinguishing aspects of the activity, as well 
as a designation of the types of institutions authorized to offer the 
specific services. Institutional restrictions would mainly be due to 
statutory limitations related to eligible recipients. Finally, any 
special conditions placed on offering a given service would be 
identified on the list. It is anticipated that these conditions would 
be the exception rather than the rule and would apply mainly to complex 
services, with readily identifiable safety and soundness risks.
    Appendix A contains a sample list consisting of all previously 
approved related services known to have at least one active program 
among System banks and associations and those services specifically 
mentioned in the statute. The sample list is included as an attachment 
to this Federal Register document for informational purposes only and 
will not become part of the final regulation.
    Although every attempt has been made to identify existing services, 
the FCA recognizes that its historical records may not be complete. 
Therefore, System banks and associations currently offering services 
that meet the related service definition, but are not part of the 
sample list, should submit such services during the comment period if 
they wish to continue providing them after the revised regulation 
becomes effective. Institutions should provide the title of the service 
and a brief description, including any previous action taken by the FCA 
on the related service. If there is no existing documentation, then the 
institution should provide sufficient information for the FCA to 
consider the service based on the provisions in proposed 
Sec. 618.8010(b). These services may be included on the initial list to 
be published concurrently with the final regulation. If some services 
require further study, they will be considered for inclusion on the 
list after the regulation is finalized.
    Once a service is determined to meet the regulatory criteria and is 
placed on the list, proposed Sec. 618.8010(b) would provide that System 
banks and associations could develop programs and subsequently offer 
the related service, subject to any special conditions and 
institutional restrictions identified on the list. This proposal would 
eliminate the requirement in existing Sec. 618.8000(c) that the FCA 
approve each institution's related services program. The FCA believes 
that an institution's program for offering the service and its capacity 
to offer that service can be reviewed during the examination process. 
Proposed Sec. 618.8010(c)(4) would require that when a listed service 
is first offered by an institution, the institution must notify the 
FCA's Office of Examination field office responsible for examining that 
institution.
    An institution that wishes to offer a related service not 
previously evaluated by the FCA would need to submit a written proposal 
pursuant to proposed Sec. 618.8010(b). Neither a formal bank review nor 
a detailed operational program (per existing regulations) would be 
required prior to requesting that the FCA review the service. In the 
event of complex or controversial proposals, proposed 
Sec. 618.8010(b)(3) acknowledges that the FCA, at its discretion, may 
publish the proposed service in the Federal Register for public 
comment.
    No later than 60 days after receipt of a complete proposal, 
including any additional information the FCA may require, System 
institutions would be notified of the FCA's action pursuant to 
Sec. 618.8010(b)(4). Although the FCA would normally act promptly on a 
proposed service, for good cause and prior to the expiration of the 60 
days, the review period could be extended for up to a total of 120 
days. The FCA would formally notify all System institutions of its 
action by bookletter or other appropriate forms of communication.
    Proposed new related services would be evaluated by the FCA based 
on the provisions of proposed Sec. 618.8010(b). The FCA would consider 
two key aspects in evaluating a related service. The first aspect is 
whether the service is authorized; that is, whether it meets the 
definition of a related service in proposed Sec. 618.8000(b). For 
example, a service provided by a title I or title II lending 
institution would have to be appropriate to on-farm operations and 
would have to be targeted to the defined eligible recipients. When 
evaluating that service, the FCA would also consider whether the 
service would be appropriate to cooperative operations and, if so, 
include BCs and ACBs as authorized institutions.
    The second key aspect the FCA would consider is whether significant 
risk factors are inherent in the service and whether they can be 
managed or eliminated. This evaluation would involve assessing the 
degree of risks in the areas of financial liability, operational 
matters, and conflicts of interest.
    Financial liability includes any liability that could arise as a 
result of offering the service. For example, such liability could arise 
if institution personnel make management decisions on a customer's 
behalf. The primary concern is whether such liability has the potential 
to materially impact an institution's financial condition.
    Operational risk is the risk involved in implementing a service. 
This risk could occur if an institution fails to properly prepare for 
or administer a service. Examples of how this could arise are: (1) If 
significant staff training is required in order to competently offer 
the service, but is not contemplated or planned; or (2) if there are 
substantial up-front costs in setting up a new service that may not be 
recouped.
    Finally, conflict of interest would include any conflict that might 
arise between the interests of the institution and those of the 
recipient as a result of offering the service. An example would be the 
conflict that could arise when, as part of the farm business consulting 
service, an institution employee suggests a management strategy that 
requires the recipient to borrow more money.
    If risks were identified in any of these areas but some 
modification could eliminate, minimize, or control them, the service 
could be added to the list with special conditions or institutional 
restrictions. In addition, in order to better evaluate risk areas, a 
service could be placed on the list subject to the condition that it 
only be offered on a pilot basis by one or more institutions. If such 
risks could not be minimized to a degree that would make the service 
appropriate for System institutions to provide, approval to provide the 
service would be denied. In considering the risks associated with a 
proposed new service, the FCA would evaluate the risks as they pertain 
to any System institution or the System as a whole. Program weaknesses 
would be addressed through the examination or enforcement functions of 
the FCA.
    In considering the agency's role in reviewing proposed related 
services, the FCA considered a range of options, including the current 
prior approval approach and the proposal by the PPC work group. Under 
the PPC's proposal, institutions would notify the FCA of their intent 
to offer an existing or new related service program. If the FCA did not 
object within specified time periods, the institution could offer the 
service. Although this suggestion would reduce the current regulatory 
burden, the FCA believes that because it would require every 
institution to submit a program proposal to the FCA, it would still be 
more burdensome than necessary. The FCA proposes instead to evaluate 
each new service only once. If an institution concludes that the 
service meets the criteria for authorization, it could then offer such 
service once a feasibility analysis was prepared in accordance with the 
regulatory requirements. The FCA believes this proposed process will 
reduce time needed for staff review and the regulatory burden placed on 
System institutions, while appropriately minimizing the risks of 
offering unauthorized or unsafe and unsound services.
4. Section 618.8015--Policy Guidelines
    Existing Sec. 618.8000(b) authorizes district and bank boards to 
establish policies pertaining to related service programs. This section 
also includes general policy guidelines and requires that the FCA 
approve the policies. The FCA proposes to amend existing 
Sec. 618.8000(b) primarily by eliminating the requirements that a 
district bank establish a single related services policy for the 
district and that the FCA approve these policies.
    Section 618.8015 of the proposed regulation would require that each 
System institution offering related services formulate policies 
pertaining to the development, implementation, marketing, and offering 
of related services. This change would reduce the supervisory burden of 
the funding bank and appropriately place the responsibility on the 
offering institutions. This change would not, however, absolve the 
funding bank from providing the necessary guidance on districtwide 
issues, such as its approach for verifying the feasibility analyses of 
associations' related service programs.
    Proposed Sec. 618.8015 would also eliminate the requirement that 
the FCA approve district and bank policies. This proposed change is 
consistent with the FCA's intent to remove unnecessary prior approval 
functions and rely instead on the examination function to evaluate 
compliance, performance, and safety and soundness.
    The FCA proposes to modify the existing guidance for the content of 
the related services policy. The proposed regulation would require the 
policy to include clearly stated purposes, objectives, and operating 
parameters. In addition, the proposed regulation would require 
institutions to link each related service program it offers to its 
business plan and long-term strategic goals. Proposed Sec. 618.8015(b) 
and (c) retain the requirements in existing Sec. 618.8000(b)(1) and (2) 
that all related services be offered on an optional basis and that all 
fees associated with a service be identified and disclosed to the 
recipient.
    The FCA proposes to eliminate as unnecessary the specific 
requirements in existing Sec. 618.8000(b)(4) that banks and 
associations maintain detailed records because other regulatory 
provisions exist that require maintaining such records in order to 
comply with the institutions' internal control policies.
    The FCA also proposes to eliminate the requirement in existing 
Sec. 618.8000(b)(4) that the bank annually review each service offered 
in the district. This change was also supported by the PPC work group 
and in the FRS petition. As discussed above, the FCA has concluded that 
the emphasis on accountability is at the institution level, and 
regularly reviewing an activity and reporting the results to the board 
should be a standard part of managing an institution.
5. Section 618.8020--Feasibility Requirements
    Sections 1.12, 2.5, 2.12, and 3.7 of the Act authorize FCBs, ACBs, 
PCAs, ACAs, FLBAs, FLCAs and BCs, respectively, to offer related 
services. Each section specifies that there be a determination of 
feasibility before a related service is offered. The FCA believes that 
the ultimate accountability and responsibility in offering related 
services rests with the institution offering the service. Therefore, 
although the funding bank has a statutory role to determine that 
related services are feasible, each offering institution should 
document the feasibility of providing a related service.
    Neither the statute nor the existing regulation defines 
feasibility. Under the existing approval process for related service 
programs, a definition is not critical because the feasibility 
determination is centralized at the bank level and reviewed by the FCA 
in the prior approval process. However, the proposed rule moves to a 
post-review environment, which creates a need to specify the 
feasibility criteria.
    Section 618.8020 of the proposed regulation would enumerate minimum 
feasibility requirements. The FCA proposes that the feasibility 
analysis include support that a proposed related service is an FCA-
authorized service. (If a proposed service is not authorized, the 
institution can request that it be authorized via the process outlined 
in Sec. 618.8010(b).) The feasibility analysis would also include an 
overall cost/benefit analysis based on the evaluation of the market, 
pricing, competition, expected financial returns, operational risks, 
financial liability, and conflicts of interest. This would also include 
an analysis to show that the service is compatible with the offering 
institution's business plan and strategic goals. These requirements 
should not be interpreted as all-encompassing, and in many instances 
there will be other issues that will also need to be addressed.
6. Section 618.8025--Feasibility Reviews
    Section 2.5 of the Act authorizes a PCA to offer related services 
as determined feasible by the board of directors of the FCB. Section 
2.12(15) of the Act authorizes an FLBA to offer related services that 
it determines, with FCB approval, are feasible. Therefore, the FCB has 
a statutory role in the determination of whether a related service 
program is feasible for an association to offer. Historically, the FCB 
has conducted reviews of each related service, at least annually, at 
both the bank and association level. Additionally, existing 
Sec. 618.8000(a)(5) requires that the bank board annually determine the 
financial feasibility of its related service programs.
    As stated in the preceding discussion of proposed Sec. 618.8020, 
the FCA believes the determination of feasibility of a proposed program 
should ultimately be the responsibility of the offering institution. 
Nonetheless, the funding bank does have a statutory responsibility. 
Therefore, the FCA proposes in Sec. 618.8025 to require the funding 
bank to verify that the association performed the feasibility analysis 
pursuant to Sec. 618.8020. It would permit the funding bank to prevent 
the offering of the related service only if it determines that the 
feasibility analysis is inadequate or that the analysis fails to 
indicate that the program can be feasibly provided by the association. 
Any conclusion by the bank that the feasibility analysis is incomplete 
or fails to demonstrate the program's feasibility must be fully 
supported and communicated to the association in writing within 60 days 
of its submission to the bank.
    The FCA concludes that this approach creates the least amount of 
burden, maintains the funding bank's statutory role, supports the 
bank's ability to supervise its credit, and permits greater association 
autonomy. The FRS petitioners suggested making the bank's determination 
of feasibility automatic, in the absence of extraordinary 
circumstances, for those proposed services that the FCA has authorized. 
The FCA does not agree that either the bank's or association's 
determination of feasibility should be automatic. The FCA's 
determination of whether a particular service should be authorized is 
fundamentally different from the determination of whether an individual 
service program is feasible for a given association. Moreover, the FCA 
does not accept the premise that the funding bank could fulfill its 
statutory role by making an automatic assumption of feasibility for 
those services that the FCA has already authorized.
7. Section 618.8030--Out-of-territory Related Services
    Proposed Sec. 618.8030 would allow a System bank or association to 
offer a related service outside of its chartered lending territory. It 
would replace guidance provided in FCA Bookletter 366-OE, which 
implemented the FCA Board policy statement concerning the offering of 
out-of-territory related services (58 FR 36410, July 2, 1993). 
Presently, an institution is required to obtain the concurrence of all 
System banks or associations serving the territory before it can offer 
its related services. The other chief conditions are: (1) A common 
program requirement within a district (associated with existing related 
service regulations); and (2) a requirement that the service provided 
within the institution's territory remain as the primary component of 
its services.
    The proposed regulation eliminates the common program feature in 
Sec. 618.8000(b)(3) because the FCA recognizes that this feature 
reflects an out-of-date system structure. In addition, the PPC work 
group and FRS petition both requested that the FCA drop the common 
program requirement in favor of greater flexibility.
    The requirement that related services provided within an 
institution's own territory remain the institution's primary service 
component is not part of the proposed regulation. The FCA concludes 
that as long as an institution is able to adequately serve the needs of 
eligible borrowers in its chartered territory, there should not be a 
limit on how much business it conducts out of its territory. The FCA 
agrees with a comment made by the PPC work group that services can have 
a positive effect on an institution's credit program by providing 
diversity and an additional income stream.
    Under the proposed regulation, the requirement for consent before 
offering related services out-of-territory would be modified. In 
proposed Sec. 618.8030(a), an institution would be required to obtain 
the concurrence of at least one institution chartered to service that 
outside territory. The FCA believes it is important to preserve the 
rights of all System institutions within their chartered territories. 
The fact that some territories overlap is irrelevant to the right of an 
institution to determine what services it wishes to provide in its own 
territory. Thus, the FCA believes that if a bank or association wishes 
to make a related service available to its customers, it can arrange 
with any other System institution to provide the service in its 
chartered territory without any other institution's consent. This 
outcome is no different from the current situation in which an 
institution can offer a service itself or it can contract with a non-
System entity to offer the service; in either case, the institution is 
not required to obtain the consent of any other institution.
    The proposed regulation also requires that for services provided 
out of its territory, the providing institution must meet all of the 
requirements of subparts A and B of part 618, including adopting a 
related services policy and determining feasibility. It should be noted 
that if the providing institution is expanding an existing program, a 
new feasibility analysis and bank verification would be needed. An 
institution that gives consent to another bank or association to 
provide a related service in its chartered territory need must meet the 
requirements of proposed Sec. 618.8030, but need not comply with the 
other requirements of subparts A and B, unless the program consented to 
imposes on the consenting institution a financial obligation, in which 
case the consenting institution must comply with Secs. 618.8015, 
618.8020, and 618.8025.
    Another aspect to the out-of-territory issue is whether an 
institution that initially concurs in another institution providing 
related service programs in its territory can later withdraw its 
approval. One example could be a situation in which an institution has 
approved a service in its territory because that service is not 
currently offered, but later that institution wishes to begin 
exclusively offering the same service. The FCA believes that by 
entering into a written agreement with specific terms, conditions, and 
timeframes, the consenting institution can best protect its interests. 
One example could be that the institutions enter into a formal 
contractual arrangement that provides for termination by either party 
with proper notice.

B. Subpart B--Member Insurance

1. Section 618.8040--Authorized Insurance Services, Debtor/Creditor 
Relationship
    The PPC work group and the Insurance petition raised questions 
concerning the authority in section 4.29 of the Act for banks 
(excluding banks for cooperatives) and associations to provide to 
members and borrowers credit or term life and credit disability 
insurance appropriate to protect the loan commitment. When it enacted 
section 4.29 of the Act, Congress stated that for System institutions 
to ``sell credit or term life, there must be a debtor-creditor 
relationship and the amount of insurance should be appropriate to 
protect but not exceed the total loan commitment to the member-
borrower.''\6\ Therefore, current regulations require that a debtor-
creditor relationship exist for the sale of credit or term life and 
credit disability insurance. Although the Insurance petition requested 
that this requirement be removed from the regulations, the FCA 
concludes that this is a statutory requirement, not only a regulatory 
requirement.
---------------------------------------------------------------------------

    \6\See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 43 (1980).
---------------------------------------------------------------------------

    Questions have also arisen as to whether the debtor-creditor 
relationship must exist with the institution offering credit or term 
life or credit disability insurance. For example, in situations in 
which related services may be offered out-of-territory, a borrower may 
have a debtor-creditor relationship with the bank or association in the 
territory, but an out-of-territory association may be offering the 
insurance. The FCA interprets section 4.29 of the Act and its 
legislative history to mean that there must be a borrowing relationship 
with a System institution, but not necessarily with the institution 
offering the service. Therefore, as long as the recipient of credit or 
term life or credit disability insurance has a debtor-creditor 
relationship with a bank or association of the System, the insurance 
can be offered by any institution authorized to provide insurance to 
that recipient. Accordingly, in proposed Sec. 618.8040(b)(1), the FCA 
would add a statement that the debtor-creditor relationship does not 
necessarily have to be with the offering institution.
    Another question related to the debtor-creditor requirement was 
raised by the PPC work group. The issue involves situations in which a 
borrower relies upon a spouse's income for repayment of the loan and 
wishes to purchase credit or term life and disability insurance on the 
spouse, but the spouse is not a co-maker of the loan. The FCA considers 
it to be unlikely that a spouse who significantly contributes to the 
loan's repayment would not have signed the note. Nevertheless, because 
spouses may have contractual liability for the debt by operation of 
state law, the proposed regulation would permit the sale of credit 
insurance on a borrower's spouse. As with all other situations, the 
amount of insurance offered could not exceed the total amount of the 
loan commitment to the borrower.
    The FCA's review of the legislative history on the enactment of 
section 4.29 of the Act indicates that a debtor-creditor relationship 
is not necessary for System institutions to provide other insurance 
necessary to protect the member's farm or aquatic unit, such as hail 
and multiple-peril crop insurance.\7\ Accordingly, this restriction has 
been deleted in the proposed regulation. Purchasers of other insurance 
would, however, have to be either members or borrowers. Proposed 
Sec. 618.8040(b)(2) would define members (for subpart B only) to 
include a stockholder or participation certificate holder who acquired 
stock or participation certificates to obtain a loan, for investment 
purposes, or to qualify for other services of the association or bank. 
Therefore, the reference in existing Sec. 618.8030(b)(1) to eligibility 
for landlords of tenants and tenants of landlords having a debtor-
creditor relationship would be removed as unnecessary. Such tenants or 
landlords would be eligible to receive hail or multiple-peril crop 
insurance upon becoming members of a bank or association. Similar to 
the debtor-creditor requirement in proposed Sec. 618.8040(b)(1), the 
purchaser of other types of insurance does not have be to a borrower or 
member of the offering bank or association, but can be a borrower or 
member of any System bank or association.
---------------------------------------------------------------------------

    \7\See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 44 (1980).
---------------------------------------------------------------------------

2. Section 618.8040(b)(5)--Incentive Compensation for Sale of Insurance
    Section 618.8040(b)(5) is proposed to be amended to clarify how 
incentive compensation for sale of insurance may be provided to 
employees. The existing regulation states that ``Bank or association 
personnel shall not benefit, directly or indirectly, from insurance 
sales by receipt of commissions, gifts, or incentive awards.'' The 
proposed regulations would allow incentive compensation for sale of 
insurance with some limitations.
    The prohibition of compensation for insurance sales was included in 
the existing regulation to prevent conflicts of interest between System 
employees and borrowers and to implement the requirement in section 
4.29 of the Act that borrowers not be coerced into buying insurance 
from System institutions. The FCA believes that unrestricted 
compensation of loan officers or other employees, based on volume of 
insurance sales can lead to abusive, high-pressure sales practices. In 
addition, other Federal financial regulators agree and continue to 
place limitations on employee compensation derived from insurance 
sales. At the same time, however, the FCA recognizes that if sale of 
insurance is a part of an employee's regular job, incentive 
compensation should be allowed to some extent. Additionally, the FCA is 
aware that some institutions have instituted bonus pools that are 
shared by employees who may not be involved in selling insurance. The 
proposed regulation accommodates those arrangements as well.
    The issue of employee compensation for insurance sales was raised 
in 1992 when it became known that some institutions had employee 
compensation programs that allowed direct compensation for insurance 
sales. On May 20, 1992, the FCA issued Bookletter 327-OE, which 
recognized that some System employees were compensated for insurance 
sales in one of two ways: (1) Incentive bonuses were directly tied to 
the insurance sales generated by each employee; or (2) incentive 
bonuses were tied in some way to the net income of the institution, 
part of which was derived from sales of insurance. The bookletter 
stated that compensation that is tied directly to insurance sales is 
not in compliance with current regulations. However, the FCA did not 
intend to apply that determination to the second type of plan where 
compensation is tied to the net income of an institution. Since that 
bookletter was issued, the FCA has received a number of inquiries from 
System institutions requesting clarification on whether specific 
compensation plans would be considered acceptable. In addition, the PPC 
work group requested that the FCA consider the issue of compensation 
for sale of insurance as part of its project to amend Sec. 618.8000.
    Proposed Sec. 618.8040(b)(6) allows for incentive compensation for 
sale of insurance in line with what is currently allowed in the 
commercial banking industry. In any single year, the amount of 
incentive compensation attributable to insurance sales cannot exceed 5 
percent of the recipient's annual base salary. This limitation applies 
to individual incentive plans, as well as bonus pools or any other type 
of plan. If an employee participates in both an individual plan and 
some form of bonus pool, the amount of incentive compensation 
attributable to sale of insurance received from each plan must be 
aggregated for purposes of determining whether it meets the 5-percent 
limitation.
    It should be noted that insurance is the only related service for 
which there is any restriction on employee incentive compensation. At 
this time, the FCA has concluded that there is no need for similar 
limitations on other related services because those services are not as 
directly linked to the loan-making process. Furthermore, customers may 
be able to more readily evaluate the benefit of other related services.
3. Section 618.8040--Other Regulatory Changes
    The requirement in Sec. 618.8040(b)(10) that the bank review 
annually the individual association member insurance services would be 
eliminated. This provision was originally included to be consistent 
with other related service requirements in subpart A, which are now 
also to be removed. The proposed rule removes the annual review 
requirement from both subparts A and B. As previously discussed, the 
FCA believes the review function is most appropriately handled at the 
level of the institution offering the program. The FCA expects that 
each institution offering insurance will review its program 
periodically to determine that it is operating in a safe and sound 
manner and that it remains consistent with the institution's business 
plan and long-term strategic goals.
    In order to reflect the creation of Agricultural Credit Banks, the 
FCA clarifies that under proposed Sec. 618.8040(a) ACBs may provide 
insurance to the persons eligible to borrow as identified in titles I 
and II of the Act and corresponding regulations. This would not be a 
change from the existing regulations.
    Technical changes were also made to parts 611 and 620 in order to 
conform with the proposed regulatory changes in part 618, subparts A 
and B.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, Banking, Rural areas.

12 CFR Part 618

    Agriculture, Archives and records, Banks, Banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

12 CFR Part 620

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, parts 611, 618, and 620 of 
chapter VI, title 12 of the Code of Federal Regulations is proposed to 
be amended to read as follows:

PART 611--ORGANIZATION

    1. The authority citation for part 611 continues to read as 
follows:

    Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 
5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act; 12 U.S.C. 
2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2243, 2244, 2252, 
2279a-2279f-1, 2279aa-5(e); secs. 411 and 412 of Pub. L. 100-233, 
101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102 
Stat. 989, 1003 and 1004.

Subpart G--Mergers, Consolidations, and Charter Amendments of 
Associations


Sec. 611.1125  [Amended]

    2. Section 611.1125 is amended by removing the word ``financially'' 
in paragraph (b)(2).

PART 618--GENERAL PROVISIONS

    3. The authority citation for part 618 is revised to read as 
follows:

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 
2200, 2211, 2218, 2243, 2244, 2252).


Sec. 618.8030  [Redesignated as Sec. 618.8040]

    4. In subpart B, Sec. 618.8030 is redesignated as new 
Sec. 618.8040.
    5. Subpart A is revised to read as follows:

Subpart A--Related Services

Sec.
618.8000  Definitions.
618.8005  Eligibility.
618.8010  Related services authorization process.
618.8015  Policy guidelines.
618.8020  Feasibility requirements.
618.8025  Feasibility reviews.
618.8030  Out-of-territory related services.

Subpart A--Related Services


Sec. 618.8000  Definitions.

    For the purposes of this subpart, the following definitions shall 
apply:
    (a) Program means the method or procedures used to deliver a 
related service. This distinguishes the particulars of how a related 
service will be provided from the type of activity or concept.
    (b) Related service means any service or activity provided by a 
System bank or association that pertains to the recipient's on-farm, 
aquatic, or cooperative operations, including control of related 
financial matters. The term ``related service'' includes, but is not 
limited to, technical assistance, financial assistance, financially 
related services and insurance, but does not include lending or leasing 
activities.
    (c) System banks and associations means Farm Credit Banks, 
agricultural credit banks, banks for cooperatives, agricultural credit 
associations, production credit associations, Federal land bank 
associations and Federal land credit associations.


Sec. 618.8005  Eligibility.

    (a) Farm Credit Banks and associations may offer related services 
to persons eligible to borrow as defined in Secs. 613.3010, 
613.3020(a)(1), (a)(2), (b), and 613.3045 of this chapter.
    (b) Banks for cooperatives may offer related services to entities 
eligible to borrow as defined in Secs. 613.3110 and 613.3120 of this 
chapter.
    (c) Agricultural credit banks may offer related services 
appropriate to on-farm and aquatic operations to the persons eligible 
to borrow specified in paragraph (a) of this section and may offer 
related services appropriate to cooperative operations of entities 
eligible to borrow as specified in paragraph (b) of this section.
    (d) System banks and associations may provide related services to 
recipients that do not otherwise meet the requirements of paragraphs 
(a), (b), and (c) of this section in connection with loan applications, 
loan servicing, and other transactions between these recipients and 
persons eligible to borrow as defined in paragraphs (a), (b), or (c) of 
this section, as long as the service provided is a part of or pertains 
to the transaction between the parties. Such services include, but are 
not limited to, fee appraisals of agricultural assets performed for the 
Farmers Home Administration, commercial banks and other lenders.


Sec. 618.8010  Related services authorization process.

    (a) Authorities. (1) The Farm Credit Administration (FCA) shall 
authorize related services that meet the criteria specified in this 
regulation. System banks and associations may only offer related 
services that are authorized by the FCA.
    (b) New service proposals. (1) A System bank or association that 
wishes to offer a related service that the FCA has not previously 
authorized must submit to the FCA, in writing, a proposal that includes 
a description of the service, how it meets the regulatory definition of 
``related services'' in Sec. 618.8000(b), and the risk analysis cited 
in Sec. 618.8020(b)(3). The FCA will evaluate the proposed service 
based on the information submitted, and may also consider whether there 
are extenuating circumstances or other compelling reasons that justify 
the proposed service or support a determination that the service is not 
authorized. This evaluation will focus primarily on Systemwide issues 
rather than on institution or program-specific factors.
    (2) When authorizing a proposed related service, at its discretion, 
the FCA may impose special conditions or limitations on any program to 
offer a related service.
    (3) At its discretion the FCA may, during its evaluation of a 
proposed related service, publish the proposed related service in the 
Federal Register for public comment.
    (4) Within 60 days of the FCA receiving a completed proposal, 
including any additional information the FCA may require, the FCA will 
act on the request. The FCA shall approve the request, deny the 
request, or notify the requesting institution that the service shall be 
published for public comment in the Federal Register. For good cause 
and prior to the expiration of the 60 days, the FCA may extend this 
period for an additional 60 days.
    (5) The FCA shall notify all System banks and associations by 
bookletter or other means each time it determines whether a proposed 
related service is or is not authorized.
    (c) Previously authorized services. (1) For related services that 
have been authorized by the FCA, any System bank or association may 
develop a program and subsequently offer the related service to 
eligible recipients, subject to any special conditions or institutional 
limits placed by the FCA. These programs will be subject to review and 
evaluation during the examination process.
    (2) The FCA shall make available to all Farm Credit institutions a 
list of such related services (``related services list'' or ``list'') 
and will update it in accordance with paragraph (b)(5) of this section. 
The list will contain the following:
    (i) A description of each related service;
    (ii) Identification of any special conditions on how the related 
service may be offered; and
    (iii) The types of institutions authorized to offer each type of 
related service.
    (3) Within 30 days of implementing a related service program 
already on the list, the System bank or association must notify the FCA 
Office of Examination field office responsible for examining that 
institution.


Sec. 618.8015  Policy guidelines.

    (a) The board of directors of each institution providing related 
services shall adopt a policy addressing related services. The policy 
should include clearly stated purposes, objectives, and operating 
parameters for offering related services and a requirement that each 
service offered be consistent with the institution's business plan and 
long-term strategic goals. Such policy should also be subject to review 
under the institution's internal control policy.
    (b) All related services must be offered to recipients on an 
optional basis. If the institution requires a related service as a 
condition to borrow, it must inform the recipient that the related 
service can be obtained from the institution or from any other person 
or entity offering the same or similar related services.
    (c) All fees for related services shall be separately identified 
from loan interest charges and disclosed to the recipient of the 
service.


Sec. 618.8020  Feasibility requirements.

    For every related service program an institution provides, it must 
document program feasibility. The feasibility analysis shall include 
the following:
    (a) Support for the determination that the related service is 
authorized; and
    (b) An overall cost-benefit analysis of offering the program that 
demonstrates its feasibility, taking into consideration the following 
items:
    (1) An analysis of how the program relates to or promotes the 
institution's business plan and strategic goals;
    (2) An analysis of the expected financial returns of the program 
which, at a minimum, must include an evaluation of market, pricing, 
competition issues, and whether the program would be expected to make a 
profit or if its purpose is to be combined with a broader objective 
aimed at contributing to the overall financial health of the 
institution or the individual borrower; and
    (3) An analysis of the risk in the program, including:
    (i) An evaluation of the operational costs and risks involved in 
offering the program, such as management and personnel requirements, 
training requirements, and capital outlays;
    (ii) An evaluation of the financial liability that may be incurred 
as a result of offering the program and any insurance or other measures 
that are necessary to minimize these risks; and
    (iii) An evaluation of the conflicts of interest, whether real or 
perceived, that may arise as a result of offering the program and any 
steps that are necessary to reduce these conflicts.


Sec. 618.8025  Feasibility reviews.

    Prior to an association offering a related service program for the 
first time, the board of directors of the funding bank must verify that 
the association has performed a feasibility analysis pursuant to 
Sec. 618.8020. The bank's review is limited to a determination that the 
feasibility analysis is complete and that the analysis establishes that 
it is feasible for the association to provide the program. Any 
conclusion by the bank that the feasibility analysis is incomplete or 
fails to demonstrate the program's feasibility must be fully supported 
and communicated to the association in writing within 60 days of its 
submission to the bank.


Sec. 618.8030  Out-of-territory related services.

    System banks and associations may offer related services outside 
their chartered territories subject to the following condition. Any 
System bank or association desiring to offer related services outside 
its chartered territory must obtain the consent of at least one 
institution chartered to serve the territory in which the related 
service is to be provided. Such consent shall be in the form of a 
written agreement with specific terms and conditions, including 
timeframes.
    (a) The providing institution must fulfill all requirements of 
subparts A and B of this part 618.
    (b) An institution that consents to another bank or association 
providing a related service in its chartered territory must meet the 
requirements of this section, but need not comply with the other 
requirements of subparts A and B of this part 618, unless the program 
consented to imposes a financial obligation on the consenting 
institution. In such cases, the consenting institution must comply with 
Secs. 618.8015, 618.8020 and 618.8025.
    6. Newly designated Sec. 618.8040 is amended by revising paragraph 
(b)(1); by removing paragraph (b)(10); by redesignating existing 
paragraphs (b)(2) through (b)(9) as paragraphs (b)(3) through (b)(10); 
by adding a new paragraph (b)(2); by removing the reference 
``Sec. 618.8030(b)(3)(i)'' and adding in its place, the reference 
``Sec. 618.8040(b)(4)(i)'' in newly designated paragraph (b)(3); and by 
revising newly designated (b)(6) to read as follows:

Subpart B--Member Insurance


Sec. 618.8040  Authorized insurance services.

* * * * *
    (b) Bank and association board policies governing the provision of 
member insurance programs shall be established within the following 
general guidelines:
    (1) A System bank or association may provide credit or term-life or 
credit-disability insurance only to persons who have a loan or lease 
with a System bank or association. The loan or lease does not 
necessarily have to be with the institution providing the insurance. 
Term-life insurance coverage may continue after the loan has been 
repaid or the lease terminated, provided the member can reasonably be 
expected to borrow again within 2 years, and provided the continuation 
of insurance is not contrary to state law.
    (2) A debtor-creditor relationship is not required for the sale of 
other insurance specified in paragraph (a) of this section, as long as 
purchasers are members or borrowers of a System bank or association. 
For the purposes of this section, ``member'' means a stockholder or 
participation certificate holder who acquired stock or participation 
certificates to obtain a loan, for investment purposes, or to qualify 
for other services of the association or bank.
* * * * *
    (6) Bank or association personnel shall not benefit from insurance 
sales by receipt of commissions or gifts from underwriting insurance 
companies. However, an employee may participate in an institution's 
incentive plan under which incentive compensation is provided for the 
sale of insurance. In any single year, such compensation shall not 
exceed an amount equivalent to more than 5 percent of the recipient's 
annual base salary.
* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

    1. The authority citation for part 620 continues to read as 
follows:

    Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 
Stat. 1568, 1656.

Subpart B--Annual Report to Shareholders


Sec. 620.5  [Amended]

    2. Section 620.5 is amended by removing the word ``financial'' and 
adding in its place, the word ``related'' each place it appears in 
paragraph (a)(3).

    Dated: October 26, 1994.
Floyd Fithian,
Acting Secretary, Farm Credit Administration Board.

                          Appendix A to the Preamble--Sample Related Services List\1\                           
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Authorized institutions                                                                                         
                          Type of service                    Description                    Special Conditions  
----------------------------------------------------------------------------------------------------------------
ACB (Title I and II),    Estate Planning     Providing information and assistance         ......................
 FCB, ACA, PCA, FLBA,     Service.            concerning development of estate plans.                           
 FLCA.                                        Does not include providing legal counsel                          
                                              or advice or executing the estate planning                        
                                              documents.                                                        
ACB, FCB, BC, ACA, PCA,  Fee Appraisal       Providing real and personal property         ......................
 FLBA, FLCA.              Service.            appraisals and evaluations. (Note:                                
                                              appraisals done in conjunction with making                        
                                              or servicing System loans are not                                 
                                              considered related services for the                               
                                              purpose of this regulation.)                                      
ACB, FCB, BC, ACA, PCA,  Recordkeeping       Providing recordkeeping systems tailored to  ......................
 FLBA, FLCA.              Service             recipients' needs.                                                
                          (including                                                                            
                          AgrifaxR).                                                                            
ACB, FCB, BC, ACA, PCA,  Tax Planning and    Preparing tax returns and assisting          ......................
 FLBA, FLCA.              Preparation.        recipients in understanding tax                                   
                                              implications of alternative management                            
                                              decisions and strategies.                                         
ACB (Title 1 and II),    Farm Business       Assisting with business planning for on-     Institutions must have
 FCB, BC, ACA, PCA,       Consulting.         farm or aquatic operations. Includes such    procedures in place  
 FLBA, FLCA.                                  activities as assisting individuals in       to ensure conflicts  
                                              defining business goals, identifying         of interest do not   
                                              management problems, and formulating or      occur between the    
                                              analyzing alternative strategies for         credit and business  
                                              achieving goals. Institution personnel may   consulting function. 
                                              not be involved in making management                              
                                              decisions.                                                        
ACB (Title III), BC....  Cooperative         Providing consulting services to             Institutions must have
                          Business            cooperatives or other eligible recipients    procedures in place  
                          Consulting.         to assist management and directors in        to ensure conflicts  
                                              making business decisions. May include       of interest do not   
                                              educational seminars, development of         occur between the    
                                              computer services, business analysis,        credit and business  
                                              feasibility studies, and activity            consulting functions 
                                              coordination (e.g., coordination of                               
                                              activities on mergers or formation of                             
                                              joint ventures). Institution personnel may                        
                                              not be involved in making management                              
                                              decisions.                                                        
ACB (Title III), BC....  Foreign Currency    Providing foreign currency exchange          Subject to the        
                          Exchange.           services necessary to individual             criteria under 12 CFR
                                              transactions that may be financed under      614.4900.            
                                              Title III, section 3.7(b) of the Farm                             
                                              Credit Act of 1971, as amended.                                   
ACB (Title III), BC....  Financial Risk      Providing risk management products that      (1) Interest rate     
                          Management for      enable customers to hedge interest rate      swaps should be      
                          Customers.          risk inherent in their balance sheets.       included with the    
                                              Limited to the following derivative          borrower's total debt
                                              products:                                    when calculating     
                                             Interest rate swaps, caps, collars    lending limits under 
                                              and floors;                                  12 CFR part 614,     
                                             Forward rate agreements; and          subpart J. For swaps 
                                             Exchange-traded and over-the-         where the bank keeps 
                                              counter interest rate options on eligible    an offsetting        
                                              interest rate futures contracts              position, it must    
                                                                                           include the credit   
                                             (Products may be offered as part of loan      risk of the swaps    
                                              packages or as stand-alone hedging tools.)   with the borrower's  
                                                                                           total debt when      
                                                                                           calculating lending  
                                                                                           limits. Credit limits
                                                                                           for each counterparty
                                                                                           should be determined 
                                                                                           by reviewing the     
                                                                                           potential magnitude  
                                                                                           of adverse payment   
                                                                                           increases over the   
                                                                                           life of the swap.    
                                                                                          (2) Related services  
                                                                                           programs are subject 
                                                                                           to annual audits by a
                                                                                           CPA.                 
ACB (Title I and II),    Credit Life         Coverage that pays off an outstanding loan   ......................
 FCB, ACA, PCA, FLBA,     Insurance or        or mortgage in the event of the policy                            
 FLCA.                    Mortgage Life       holder's death.                                                   
                          Insurance.                                                                            
ACB (Title I and II),    Group Term Life     One-year group life insurance coverage that  ......................
 FCB, ACA, PCA, FLBA,     Insurance.          is renewable at the end of each year.                             
 FLCA.                                                                                                          
ACB (Title I and II),    Credit Disability   Insurance that provides for loan or          ......................
 FCB, ACA, PCA, FLBA,     and Accident        mortgage payments, or some degree of                              
 FLCA.                    Insurance or        income protection if the insured is                               
                          Mortgage            disabled.                                                         
                          Disability                                                                            
                          Insurance.                                                                            
ACB (Title I and II),    Hospital Income     Insurance that provides a specified amount   ......................
 FCB, ACA, PCA, FLBA,     Insurance.          of income while the insured is                                    
 FLCA.                                        hospitalized. A form of credit disability                         
                                              insurance, and subject to the debtor-                             
                                              creditor requirement.                                             
ACB (Title I and II),    Multiple-peril      Insurance covering hazards incident to the   ......................
 FCB, ACA, PCA, FLBA,     Crop Insurance      growing and storage of crops.                                     
 FLCA.                    (including                                                                            
                          insurance                                                                             
                          provided by the                                                                       
                          Federal Crop                                                                          
                          Insurance                                                                             
                          Corporation).                                                                         
ACB (Title I and II),    Crop Hail           Insurance providing protection against       ......................
 FCB, ACA, PCA, FLBA,     Insurance.          damage or loss of crops due to hail or                            
 FLCA.                                        certain other named perils.                                       
ACB (Title I and II),    Hay (or Other       Insurance that covers loss of hay or other   ......................
 FCB, ACA, PCA, FLBA,     Crop) Fire          crops due to fire.                                                
 FLCA.                    Insurance.                                                                            
ACB (Title I and II),    Title Insurance...  Insurance against loss or damage resulting   ......................
 FCB, ACA, PCA, FLBA,                         from defects or failure of title or from                          
 FLCA.                                        the enforcement of liens existing against                         
                                              title at the time of the insurance.                               
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\1\The sample list is included as an attachment to this Federal Register document for informational purposes    
  only. The attachment will not become part of the final regulation.                                            

[FR Doc. 94-26839 Filed 10-28-94; 8:45 am]
BILLING CODE 6705-01-P