[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]
=======================================================================
-----------------------------------------------------------------------
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.
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\Pub. L. 92-181, Dec. 10, 1971.
---------------------------------------------------------------------------
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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\4\Pub. L. 101-73, Aug. 9, 1989.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\5\Fletcher Cyc. Corp. Sec. 2485 (rev. perm. ed. 1989).
---------------------------------------------------------------------------
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\
----------------------------------------------------------------------------------------------------------------
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.
----------------------------------------------------------------------------------------------------------------
\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