[Federal Register Volume 60, Number 6 (Tuesday, January 10, 1995)]
[Proposed Rules]
[Pages 2552-2555]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-489]



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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, and 618

RIN 3052-AB53


Loan Policies and Operations; Funding and Fiscal Affairs, Loan 
Policies and Operations, and Funding Operations; General Provisions

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), by order of the FCA 
Board (Board), proposes to repeal several regulations as part of an 
ongoing effort to reduce unnecessary regulatory burden on Farm Credit 
System (FCS or System) institutions. Comments that the FCA solicited 
through a notice of intent regarding regulatory burden identified most 
of the regulations that the FCA now proposes to delete. The FCA concurs 
with the commenters that these particular regulations should be 
repealed because they are outdated or impose a burden that is greater 
than the benefit derived.

DATES: Written comments must be received on or before February 9, 1995.

ADDRESSES: Comments may be mailed or delivered (in triplicate) to 
Patricia W. DiMuzio, Associate Director, Regulation Development, Office 
of Examination, 1501 Farm Credit Drive, McLean, VA 22102-5090. Copies 
of all communications received will be available for examination by 
interested parties in the Office of Examination, Farm Credit 
Administration.

FOR FURTHER INFORMATION CONTACT:

W. Eric Howard, Policy Analyst, Regulation Development, Office of 
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 
883-4498, TDD (703) 883-4444,

      or

Richard A. Katz, 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

    On June 10, 1993, the FCA Board approved a Statement on Regulatory 
Burden seeking public comment on the appropriateness of requirements 
the FCA regulations impose on the FCS. More specifically, the FCA asked 
the public to identify regulations that either duplicate other 
governmental requirements, are not effective, or impose a burden that 
is greater than the benefit derived. The notice of intent was published 
in the Federal Register (58 FR 34003) on June 23, 1993. Although the 
90-day comment period expired on September 21, 1993, the FCA considered 
comments that were received subsequent to that date.
    The FCA received a total of 28 responses. The FCA received nine 
comment letters from individual Farm Credit associations and three 
letters from groups of associations in particular Farm Credit 
districts. Seven Farm Credit banks sent 12 comment letters to the FCA. 
The Farm Credit Council (FCC) sent a comment letter on behalf of its 
membership. Additionally, three separate work groups of the Farm Credit 
System Presidents Planning Committee each sent the FCA a position paper 
containing recommendations to relieve regulatory burdens pertaining to 
capital, eligibility, and financially related services.
    Many of the comments involve regulatory projects that the FCA Board 
previously identified in the Unified Agenda of Federal Regulations 
published in the Federal Register on October 25, 1993 (58 FR 57276). 
The FCA work groups organized to develop revised regulations on these 
issues will consider the comments as they evaluate various policy 
options during the course of their regulatory projects. The analysis 
and appropriate response to comments regarding topics under review by 
these existing work groups will be included as part of any regulatory 
action published in the Federal Register.
    The remaining comments contained a number of recommendations for 
eliminating or modifying specific regulations that are perceived as 
imposing unnecessary regulatory burdens on the FCS. The FCA's review 
and analysis of these comments was guided, in part, by the FCA Board's 
Policy Statement on Regulatory Philosophy (Policy Statement).1

    \1\59 FR 32189, June 22, 1994.
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    The Policy Statement conveys that ``[t]he FCA will work to 
eliminate outdated regulations and ensure that its regulations 
implement the purposes of the law without unnecessary burden or cost.'' 
According to the Policy Statement, the FCA shall only adopt regulations 
that: (1) Implement or interpret the law; or (2) are necessary to 
promote the safe and sound operations of System institutions. The 
Policy Statement also commits the FCA to replacing outmoded regulations 
with new regulations that implement the purposes of the law without 
imposing unnecessary costs or burdens on FCS institutions. Another 
provision in the Policy Statement declares that the FCA will strive to 
ensure that each regulation has a well-defined objective addressing 
specific problems or risks. In this context, the FCA will seek to 
establish a regulatory environment that grants FCS institutions the 
business flexibility to offer a full range of high-quality, low-cost 
credit services to borrowers. The Policy Statement also states that the 
FCA, to the extent feasible, will seek to eliminate regulations that 
prescribe specific operational or managerial practices to System 
institutions. If appropriate, the FCA will consider the regulatory 
approaches of other Federal financial institution regulators. Finally, 
another provision in the Policy Statement pledges that when the need 
arises, the FCA will draft new regulations so that they are clear, easy 
to understand, and designed to minimize the potential for ambiguity, 
uncertainty, and resultant litigation.
    The FCA analyzed the commenters' recommendations, and determined 
that many of the suggestions warranted the immediate repeal of certain 
FCA regulations. Other suggestions will require additional research and 
analysis before the FCA determines whether, and to what extent, changes 
in the existing regulations should be proposed. Once a determination is 
made, the public will be notified of the FCA Board's decisions 
regarding the remaining issues in an appropriate manner.
    The FCA is proposing to repeal the following regulatory provisions: 
Secs. 615.5104; 615.5105(c); 615.5170(b) through (e); 615.5190; 
615.5498; 615.5500; 615.5520; 615.5530; and 618.8220. In addition, the 
FCA is proposing to repeal the FCA prior approval requirements in 
Secs. 614.4470(b)(1) and (b)(3). An explanation of the FCA's reasons 
for proposing the repeal of these regulations follows. The FCA invites 
public comment on all aspects of the proposed rule.

II. Analysis of Changes and Comments by Section

A. Loans Subject to Bank Approval

    A Farm Credit Bank (FCB) and a bank for cooperatives (BC) suggested 
that the FCA eliminate all agency prior approvals of FCS institution 
policies, procedures, and transactions that are not required by the 
Act. The commenters stated that these prior approval requirements are 
inconsistent [[Page 2553]] with the FCA's status as an arm's-length 
regulator, and deny System institutions the opportunity to use their 
business judgment. The commenters specifically indicated that the 
agency should give priority to the removal of the prior approval 
requirements for general financing agreements (GFAs), financially 
related services (FRS), and certain insider loan transactions.
    Since the enactment of the Agricultural Credit Act of 1987 (1987 
Act),2 the FCA has eliminated from the regulations many of the 
prior approval requirements that are not mandated by the Act. The FCA 
is in the process of reviewing all the remaining non-statutory prior 
approvals in order to determine whether they should be retained. The 
FCA has already established regulatory projects to determine whether 
the agency prior approvals of GFAs and FRS are still feasible. Another 
work group is currently reviewing whether the FCA should continue to 
pre-approve the retirement of protected stock outside the ordinary 
course of business.

    \2\Pub. L. No. 100-233, 101 Stat. 1568, (January 6, 1988).
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    At this time, the FCA is proposing to eliminate from both 
Secs. 614.4470(b)(1) and (b)(3) the requirement that the agency pre-
approve certain insider loan transactions at System associations. 
Section 614.4470(a) requires funding banks to pre-approve loans that 
their affiliated associations make to: (1) Their own directors or 
employees; (2) directors or employees of a jointly managed association; 
or (3) bank employees. Furthermore, Sec. 614.4470(b) requires FCA 
approval of loans to any borrower whenever certain institution-
affiliated parties will: (1) Receive proceeds of a loan in excess of an 
amount established by the funding bank; or (2) endorse, guarantee, or 
comake a loan that is in excess of the amount established by the 
funding bank.
    The FCA agrees with the commenters that the prior approval 
requirements in Secs. 614.4470 (b)(1) and (b)(3) are no longer 
appropriate since the FCA has become an arm's-length regulator. An 
existing regulation, 12 CFR 620.5, requires that System institutions 
disclose in their annual reports to shareholders insider loan 
transactions. In addition, the FCA has sufficient examination and 
enforcement powers to ensure that loans to institution-affiliated 
parties do not undermine the solvency of any FCS bank or association. 
If the agency prior approval requirements in Sec. 614.4470(b) are 
repealed, the FCA intends to rely upon its examination authority to 
determine whether: (1) Bank policy adequately deters insider abuses at 
institutions in its district; and (2) associations are complying with 
bank policy.

B. Debt Policy and Consolidated Systemwide Notes

    Two Farm Credit banks requested that the FCA repeal Secs. 615.5104 
and 615.5105(c) because they are no longer necessary. Section 615.5104 
requires each bank to adopt a policy for the management of its debt. 
Section 615.5105(c) requires each bank to identify in its debt 
management policy the maximum amount of discount notes that can be 
outstanding at any one time.
    The FCA recently revised Sec. 615.5135 to require each FCS bank to 
adopt an asset/liability management policy. See 58 FR 63034, November 
30, 1993. This new regulation requires the policies of System banks to 
address the management of both assets and liabilities in a more 
comprehensive manner than Secs. 615.5104 and 615.5105(c) currently 
require. Since the FCA agrees with the commenters that Secs. 615.5104 
and 615.5105(c) are now obsolete, the agency proposes to delete these 
two regulations. The new investment regulations in subpart E of part 
615 enhance the ability of Farm Credit banks to control liquidity and 
solvency risks in their portfolios.

C. Real and Personal Property

    An FCB and a BC commented that Secs. 615.5170 (c) and (d) are 
outdated and should be removed from the FCA regulations. These 
commenters also asserted that the regulation improperly involves banks 
in the real and personal property acquisitions of their affiliated 
associations. After carefully evaluating the commenters' suggestions, 
the FCA proposes to repeal Secs. 615.5170 (b) through (e).
    The FCA has concluded that Secs. 615.5170 (b) through (d) prescribe 
detailed operational standards, rather than performance criteria, for 
ensuring the safe and sound operation of System banks and associations. 
Furthermore, these provisions neither implement nor interpret 
provisions in the Act that govern the acquisition of real or personal 
property by FCS banks and associations. The FCA believes that these 
regulatory provisions impose burdens on System institutions that 
produce no corresponding benefits. The FCA also observes that 
paragraphs (b), (c), and (d) of Sec. 615.5170 are obsolete because they 
impose responsibilities on the ``district boards'' that were abolished 
by section 409(d) of the Agricultural Credit Technical Corrections Act 
of 1988.3

    \3\Pub. L. No. 100-399, Section 409(d), 102 Stat. 989, 1003, 
(August 17, 1988).
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    The FCA also believes that Sec. 615.5170 (d) and (e) are no longer 
necessary because the safety and soundness concerns posed by 
information system processing technology are now adequately addressed 
in FCA Information Systems Bulletins. Additionally, Information Systems 
Bulletin 92-1 addresses information system risks in mergers and 
acquisitions.
    The FCA proposes, however, to retain Sec. 615.5170(a) because this 
provision implements the applicable sections of the Act. Sections 
1.5(5) and 3.1(5) of the Act authorize each bank, subject to regulation 
by the FCA, to acquire, hold, dispose, and otherwise exercise all the 
usual incidents of ownership of real and personal property necessary or 
convenient to its business. Sections 2.2(5) and 2.12(5) of the Act 
provide associations with similar authorities subject to the 
supervision by the district bank and regulation by the FCA. Section 
615.5170(a) implements these sections of the Act by specifically 
stating that the ownership of real estate for office quarters of any 
bank or association ``shall be limited to facilities reasonable and 
necessary to meet the foreseeable requirements of the institution.'' 
Furthermore, Sec. 615.5170(a) expressly prohibits any FCS institution 
from acquiring real property ``if it involves, or appears to involve, a 
bank or association in the real estate or other unrelated business.'' 
For safety and soundness reasons, Sec. 615.5170(a) also prohibits banks 
and associations from directly investing in real estate because such 
extraneous business activities may increase the exposure of System 
institutions to loss.

D. Deposits of Funds

    The FCA proposes to repeal Sec. 615.5190. The FCA did not receive 
any comments concerning Sec. 615.5190(a), but it proposes to repeal 
this provision. The FCA has determined that Sec. 615.5190(a) is 
unnecessary because sections 1.5(14), 2.2(10), 2.12(18) and 3.1(12) of 
the Act provide the requisite authority for FCS institutions to deposit 
current funds in commercial banks that are either members of the 
Federal Reserve System, or are insured by the Federal Deposit Insurance 
Corporation (FDIC).
    Two Farm Credit banks recommended that the FCA repeal 
Sec. 615.5190(b) because there is no statutory basis for requiring the 
National Bank for Cooperatives (CoBank) to make foreign 
[[Page 2554]] deposits for the other BCs. The commenters also assert 
that Sec. 615.5190(b) unnecessarily restricts other BCs from becoming 
active in the international arena.
    Section 615.5190(b) was originally adopted in 1981 (46 FR 51881, 
October 22, 1981), when there were 12 BCs and the Central Bank for 
Cooperatives (CBC). After section 304 of the Farm Credit Act Amendments 
of 19804 granted international lending authorities to the BCs, the 
FCA decided that the CBC should conduct all international banking 
transactions on behalf of the district BCs. At the time, only the CBC 
had the expertise to reduce the safety and soundness risks that derive 
from currency exchange transactions. After the CBC and 10 district BCs 
merged to form the CoBank, the FCA amended Sec. 615.5190(b) to require 
CoBank to assume the CBC's function. See 56 FR 2671, January 24, 1991.

    \4\Pub. L. No. 96-592, Section 304, 94 Stat. 3437, 3444, 
(December 24, 1980).
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    After careful reflection on this issue, the FCA has determined that 
the safety and soundness risks inherent in currency exchange 
transactions should not be controlled by a regulation which flatly 
prohibits a BC or an agricultural credit bank (ACB), other than CoBank, 
from independently exercising its international banking authorities 
under section 3.7(a) of the Act. The existing regulation unduly 
restricts the business flexibility of BCs and ACBs, other than CoBank, 
to offer a full range of high-quality, low-cost international financial 
and credit services to their customers.
    If Sec. 615.5190(b) is repealed, the FCA will rely upon its 
examination and enforcement powers to ensure that all BCs and ACBs 
conduct their currency exchange transactions in a safe and sound 
manner. The FCA emphasizes that each BC and ACB is responsible for 
employing personnel who have the competency and expertise to conduct 
its international banking operations. In the alternative, a BC or an 
ACB may contract with commercial banks, other FCS banks operating under 
title III of the Act, or other qualified institutions for the 
management of its currency exchange transactions.
    Another provision in Sec. 615.5190(b) prohibits FCS banks from 
holding certificates of deposit that are denominated in foreign 
currencies as investments under Sec. 615.5140. This provision predates 
the revisions to Sec. 615.5140, which now requires System banks to 
acquire investments that are denominated only in United States dollars. 
The duplicative nature of Sec. 615.5190 supports FCA's decision to 
repeal this regulation.

E. Farm Credit Securities as Illustrations

    The FCA is proposing to repeal Sec. 615.5498, which regulates the 
illustration of Farm Credit securities that are used for educational or 
illustrative purposes. The FCA proposes to delete Sec. 615.5498 
although it received no comments about this regulation. The purpose of 
this regulation is to deter counterfeiting of definitive FCS 
securities. Since virtually all FCS securities are now issued in book-
entry form, Sec. 615.5498 is obsolete. The Federal Farm Credit Banks 
Funding Corporation and individual System banks can implement adequate 
safeguards to minimize the risk of counterfeiting of the few securities 
that are still issued in definitive form.

F. Open Registered Mail and Express Policy

    The FCA is proposing to repeal subpart P of part 615, which 
consists of Secs. 615.5500, 615.5520, and 615.5530. These three 
regulations govern the shipment of negotiable securities through the 
United States Postal Service. The regulations of subpart P of part 615 
were designed to eliminate the System's exposure to loss at a time when 
FCS negotiable securities were routinely shipped by mail between the 
Bureau of Printing and Engraving and the Federal Reserve Bank of New 
York. The practice of shipping negotiable securities through the mail 
was discontinued several years ago. The advent of electronic and 
computer technology for transferring negotiable securities through the 
book-entry system has rendered subpart P of part 615 obsolete.

G. Contributions and Membership in Other Organizations

    Two FCBs petitioned the FCA either to delete or amend 
Sec. 618.8220. This regulation requires the boards of directors of FCS 
banks and associations to approve: (1) Charitable contributions; and 
(2) the payment of membership dues in any voluntary association, club, 
or society. The regulation further requires boards of directors, during 
the approval process, to consider the business benefits and tax 
consequences of such contributions and memberships for the bank or 
association.
    The commenters contend that Sec. 618.8220 prohibits an 
institution's board of directors from delegating responsibility for 
such matters to management. The commenters also assert that board 
approval often prevents a Farm Credit bank or association from honoring 
unforeseen charitable requests in a timely manner. In this context, the 
commenters expressed concern that an FCS institution's reputation in 
its community will suffer damage if it does not respond to requests 
from charities and benevolent societies in a prompt and prudent manner.
    The FCA agrees with the commenters that Sec. 618.8220 unnecessarily 
interferes in the business operations of System institutions. 
Furthermore, Sec. 618.8220 unnecessarily prescribes management 
practices to System banks and associations. The FCA observes that 
Sec. 618.8220 imposes requirements on FCS institutions that are not 
commensurate with the safety and soundness risks posed by System 
charitable and social activities. The FCA's examination and enforcement 
powers can adequately deter System institutions from conducting these 
activities in an unsafe and unsound manner. For these reasons, the FCA 
is proposing to remove Sec. 618.8220 to provide FCS institutions the 
additional flexibility they are seeking.

List of Subjects

12 CFR Part 614

    Agriculture, Banks, Banking, Foreign trade, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 615

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Rural areas.

12 CFR Part 618

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

    For the reasons stated in the preamble, parts 614, 615, and 618 of 
chapter VI, title 12 of the Code of Federal Regulations are proposed to 
be amended to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. The authority citation for part 614 continues to read as 
follows:

    Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 
2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 
3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 
4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 
7.12, 7.13, 8.0, 8.5, of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 
2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 
2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 
[[Page 2555]] 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 
100-233, 101 Stat. 1568, 1639.

Subpart M--Loan Approval Requirements


Sec. 614.4470  [Amended]

    2. Section 614.4470 is amended by removing the words ``and approved 
by the Farm Credit Administration'' from paragraphs (b)(1) and (b)(3).

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    3. The authority citation for part 615 continues to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 
6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 
U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 
2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 
2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 
2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart C--Issuance of Bonds, Notes, Debentures and Similar 
Obligations


Sec. 615.5104  [Removed]

    4. Section 615.5104 is removed.


Sec. 615.5105  [Amended]

    5. Section 615.5105 is amended by removing paragraph (c).

Subpart F--Property and Other Investments


Sec. 615.5170  [Amended]

    6. Section 615.5170 is amended by removing paragraphs (b), (c), 
(d), (e) and the designation for paragraph (a).

Subpart G--[Removed and reserved]

    7. Subpart G, consisting of Sec. 615.5190, is removed and reserved.

Subpart O--Issuance of Farm Credit Securities


Sec. 615.5498  [Removed and reserved]

    8. Section 615.5498 is removed and reserved.

Subpart P--[Removed and reserved]

    9. Subpart P, consisting of Secs. 615.5500, 615.5520, and 615.5530, 
is removed and reserved.

PART 618--GENERAL PROVISIONS

    10. The authority citation for part 618 continues 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).

Subpart F--Miscellaneous Provisions


Sec. 618.8220  [Removed and reserved]

    11. Section 618.8220 is removed and reserved.

    Dated: January 4, 1995.
Floyd Fithian,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 95-489 Filed 1-9-95; 8:45 am]
BILLING CODE 6705-01-P