[Federal Register Volume 60, Number 126 (Friday, June 30, 1995)]
[Rules and Regulations]
[Pages 34090-34104]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16097]



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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB43


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency), by the Farm 
Credit Administration Board (Board), issues a final regulation 
governing Technical Assistance and Financially Related Services and 
Member Insurance. Subpart A of the final regulation defines technical 
assistance, financial assistance and financially related services and 
clarifies what types of services the Farm Credit System (System or FCS) 
institutions are authorized to provide. The final regulation maintains 
the FCA's ability to regulate safety and soundness risks while allowing 
FCS institutions greater flexibility to exercise statutory authorities. 
The existing prior approval requirement is replaced with a list of 
authorized services, a post-review process for all services that have 
been authorized by the FCA, and a procedure for obtaining FCA 
authorization to offer a new service that has not been previously 
reviewed and authorized. The final rule replaces the FCA Board Policy 
Statement on Out-Of-Territory Financially Related Services (FCA-PS-50 
BM-10-June-93-03) and the FCA Bookletter on Out-Of-Territory 
Financially Related Services dated 

[[Page 34091]]
September 3, 1993. The final Member Insurance regulation clarifies 
existing rules and reduces regulatory burdens wherever possible.

EFFECTIVE DATE: The final regulation shall become effective upon the 
expiration of 30 days after publication in the Federal Register, during 
which either or both Houses of Congress are in session. Notice of the 
effective date will be published in the Federal Register.

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: On October 31, 1994, the FCA proposed 
amendments to its regulation on financially related services and member 
insurance. 59 FR 54399. 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 
(hereinafter referred to as ``related services'') by banks and 
associations.
    Farm Credit System institutions have expressed a desire to serve 
the evolving needs of farmers and ranchers more effectively through 
their statutory authority for providing related services. The FCA 
understands the System's desire to offer the fullest range of related 
services allowable under statutory authorities, as long as safety and 
soundness risks can be managed.
    The FCA has concluded that, under most circumstances, it is 
appropriate to replace the current prior approval requirement with 
specific regulatory criteria for determining which services can be 
offered and under what circumstances. However, in its role as a safety 
and soundness regulator, the FCA will continue to review new services 
in order to ensure that they are legally authorized and do not present 
excessive risk to the System. The FCA believes this is a reasonable 
approach and that it is impracticable to prescribe specific regulations 
for new services that have yet to be offered by the System. Consistent 
with the FCA's role as an arm's-length regulator, the final rule 
requires an institution offering a service to assume primary 
responsibility for the related services it provides. The FCA will 
ensure safety and soundness and compliance primarily through use of its 
examination and supervisory powers.

I. Regulatory Burden

    The final regulation accomplishes a significant reduction in 
regulatory burden for System institutions and reduces the FCA's 
administrative costs of assuring compliance with the regulation. It 
replaces an outdated prior approval requirement with regulatory 
guidance that holds individual institutions more accountable for their 
activities. The remaining regulatory costs are justified in order to 
meet statutory requirements and address safety and soundness concerns.

II. Public Comments

    The comment period on the proposed regulation at Sec. 618.8000 
closed on December 30, 1994. The FCA received a total of 116 comment 
letters from the public. These included 111 letters from System 
institutions in addition to the letters from the Farm Credit Council 
(FCC) on behalf of its membership; the American Bankers Association 
(ABA); the Independent Bankers Association of America (IBAA); the 
Savings and Community Bankers Association (SCBA); and Minnesota Mutual 
Insurance Corporation (Minnesota Mutual). Prior to finalizing its 
comments, the FCC received input and concurrence on its comments from 
its membership and a work group established by System institutions to 
study related services. The comments received from System institutions 
included letters from directors/stockholders and employees of the 
institutions.
    Two additional letters were received after the comment period 
closed, one from the Kentucky Bankers Association (KBA) and one from an 
FCS association. Because the KBA's comments were essentially the same 
as those made by the ABA, the responses to the ABA comments address the 
comments made by the KBA. The FCS association's comments were 
essentially the same as the majority of those received from other 
System institutions and are similarly addressed.
    With a few exceptions, the comments from System institutions and 
the FCC were overwhelmingly supportive. They concluded that the FCA has 
achieved an appropriate balance between its statutory responsibility to 
focus on safety and soundness issues and the need to remove unnecessary 
regulatory burdens. They identified the reduction in prior approval 
requirements as an example of significantly reducing regulatory burden. 
The exceptions include disagreement with the proposed rule on out-of-
territory related services, and 11 System institutions suggested 
additional revisions to the process, the eligibility criteria, and the 
insurance issues.
    The trade industry groups were more critical of the proposed 
regulation. They expressed concerns that it exceeds the System's 
statutory authorities, that it may create possible competitive 
disadvantages for commercial banks, and that it may pose safety and 
soundness risks by reducing involvement by the FCA and System banks. 
The trade industry groups also commented on a number of specific points 
in the proposed regulation.
    The following narrative summarizes general concerns raised by the 
trade industry groups (ABA, IBAA, TBA, and SCBA) about the proposed 
regulation, addresses specific comments received on the various 
sections of the regulation during the comment period, and responds to 
those comments.

III. General Comments

    The trade industry groups are concerned that the proposed 
regulation would allow System institutions to exceed existing statutory 
authorities; they believe any expansion of authorities would be more 
appropriately addressed through legislative means. They further believe 
the proposed rule allows System institutions greater latitude to 
provide services that are not justified by the needs of the borrowers. 
The IBAA also believes that elements of the proposed rule may increase 
safety and soundness risks or allow a System institution to compete 
unfairly against private corporations. It concludes that these changes 
would cause the FCA to give up much of its mandated regulatory 
oversight and power to control abuses of these functions. Finally, the 
trade industry groups suggest that, with this proposal, the FCA is not 
only permitting but also encouraging the System to violate the statute.
    The FCA believes the Act clearly authorizes System institutions to 
offer a variety of related services, subject to regulation by the FCA 
for safety and soundness concerns. Further, the Supreme Court has 
recently confirmed that a bank regulator is to be given great deference 
in interpreting the statute it is charged to enforce.1 The statute 
clearly 

[[Page 34092]]
authorizes System institutions to provide financial and technical 
assistance to borrowers, applicants, and members and to make available 
to them related services appropriate to their on-farm and aquatic 
operations under regulations prescribed by the FCA. Therefore, the FCA 
believes it is well within its authority to define by regulation such 
related services, the conditions under which they can be offered, and 
to whom they can be offered. Furthermore, the FCA believes that its 
interpretation of these statutory authorities must take into account 
changing conditions in the agricultural and financial sectors. The 
FCA's role as a safety and soundness regulator requires that it openly 
recognize changing conditions and respond accordingly.

    \1\ See, Nations Bank v. Variable Annuity Life Insurance 
Company, 786 F. Supp. 6639 (SD Tex. 1991), rev'd 998 F. 2d 1295 (5th 
Cir. 1993), rev'd U.S. Dkt. No. 93-1612 (Jan. 8, 1995).
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    The IBAA commented that it has long opposed measures to expand the 
powers granted to System institutions and objected to the publication 
of the proposed rule prior to a new congressional session. The FCA 
disagrees and points out that the final rule is well within the FCA's 
statutory authority and, like the statute, the proposed regulation 
limits authorized services to the on-farm operations of persons or 
entities eligible to borrow from the System. Further, farm related 
businesses and rural home borrowers were specifically not included as 
eligible recipients for related services.
    The trade industry groups also commented that the proposed rule 
would lead to, or encourage, predatory loan pricing by System 
institutions. However, much of the comment by the ABA is not relevant 
to the regulation being promulgated because the objection deals 
directly with loan pricing, not related services. They also objected to 
a statement in the preamble suggesting that the rule would allow 
related services even if priced at cost or at a slight loss in order to 
increase customer satisfaction or attract new customers. The ABA 
contends that this aspect of the proposed rule encourages the bundling 
of below-cost services with loans in such a manner that loan packages 
would be priced below market rates. Contrary to this assertion, the 
proposed and final rule discourage such packaging. For example, 
Sec. 618.8015 retains the existing requirement to disclose separately 
the cost of any related service from loan fees and, if the service is 
required as a condition of the loan, to inform the recipient that 
purchasing the service from a System institution is optional. Thus, the 
regulation does not encourage related services to be bundled with 
loans. In addition, in most cases there is no requirement that the 
purchaser have a lending relationship in order to receive a related 
service.
    The IBAA claims that for safety and soundness reasons below-market 
pricing of services should not be allowed and that the FCA should 
oversee the pricing of such products. The FCA believes that the 
feasibility analysis required by Sec. 618.8020 will ensure that the 
pricing of each related service is justified. Each institution offering 
such a service must conduct a feasibility analysis, which includes 
pricing and an evaluation of the market. Related service programs will 
also be examined by the Agency to ensure they are being operated in a 
safe and sound manner.

A. Section-by-Section Analysis of Comments Received

1. Section 618.8000--Definitions
    The FCA received several comments on the definition of related 
services in proposed Sec. 618.8000(b). The ABA believes the definition 
exceeds what is contemplated by the statute because it contains the 
phrase ``pertains to'' the recipient's on-farm operations rather than 
the phrase ``appropriate to'' that is used in the existing regulation 
and the statute. The ABA contends that ``appropriate to'' is narrower 
and more carefully tailored than ``pertains to'' and requires a 
considerably stronger nexus between the farm operation and the related 
service. The FCA did not intend for the definition of related services, 
as proposed, to expand the types of services that may be provided under 
the statute, but believed that the proposed rule defined related 
services using a more common term. In order to be responsive to the 
commenters and alleviate any concerns that the definition of related 
services has expanded System institutions' authorities beyond those 
granted in the statute, the definition in the final rule has been 
modified to mirror the wording in the statute.
    The IBAA commented that although the proposed regulation defines 
the term ``related services'' to include, but not be limited to, 
technical assistance, financial assistance, financially related 
services, and insurance, it did not specify what types of activities 
these terms might encompass. Further, the IBAA is opposed to the 
addition of ``financial assistance'' as a related service because it 
believes financial assistance should be addressed through regulations 
governing lending or similar functions. The FCA noted in the proposed 
regulation that several terms are used in the statute to describe a 
category of non-lending type activities in which System institutions 
are authorized to engage. Financial assistance and technical assistance 
are two such terms used in section 3.7(b) of the Act to describe the 
non-lending services banks for cooperatives are authorized to provide 
to their customers. For the purpose of this regulation, financial 
assistance does not include making loans or leases or any other type of 
lending activity. Confusion over these terms is the primary reason that 
the FCA proposed using a single term to reference the types of services 
that may be provided by the different types of System institutions. In 
fact, the IBAA's comment further supports the need for one general term 
rather than continuing to use several terms, such as financial 
assistance, that could have different meanings. The IBAA's arguments 
for change were not convincing; therefore, the final regulation remains 
as proposed in this regard.
    The FCC agreed with the FCA's statement in the proposed preamble 
that related services should be broadly construed. The FCC also agreed 
that the definition should not include advertising or purely 
promotional activities, but it suggested that services provided by 
third parties (with the cooperation of a System entity), which present 
little, if any, risk of financial liability to the System entity, 
should likewise not be considered ``related services.''
    The FCA confirms its statement in the preamble to the proposed rule 
that advertising and purely promotional activities are not intended to 
be included within the definition of related services. The FCA further 
acknowledges that the distinction between promotional activities and 
related services can be unclear. Although it is easy to conclude that 
passing out pens with a Farm Credit logo is a purely promotional 
activity, and that providing farm recordkeeping for eligible borrowers 
is a related service, there are many activities that will fall in 
between.
    The FCA also recognizes that System institutions participate in 
various business arrangements through third parties, and it is often 
difficult to determine whether an institution is, in fact, offering a 
related service by cooperating with a third party provider. Assisting 
individual borrowers in preparing their tax returns is clearly a 
related service, whereas renting out an association conference room for 
a 4-H Club lecture is not a related service. However, when the service 
is provided by a third party in cooperation with a System institution, 
the line between 

[[Page 34093]]
what is or is not a related service will often be more difficult to 
draw.
    The FCA concludes that neither advertising and promotional 
activities, nor services provided by third parties, should be 
automatically excluded from the definition of related service in the 
final rule. Rather, a case-by-case evaluation must be made for the 
activities based on a number of factors. The level of risk in a 
particular service, even if provided by a third party, is not the sole 
deciding factor as to whether a proposed service meets the definition 
of a related service. Likewise, the mere existence of a third party as 
the service provider is not determinative as to whether an activity is 
or is not a related service. In addition, the lack of profitability is 
not necessarily determinative when evaluating whether promotional 
activities are related services. Various factors (such as the nature of 
the activity, who provides the service, and the level of involvement 
and responsibility of both parties) should be used in evaluating 
whether an activity is properly considered a ``related service.'' The 
statute requires that related services provide assistance to eligible 
borrowers in managing their on-farm operations and should always be 
used as a guide when questions arise.
    Four associations commented that the FCA should define related 
services in such a way as to eliminate activities that are necessarily 
incidental to lending or leasing activities (such as appraisal 
services) and are reasonably and customarily performed in the business 
of rural or agricultural lending and leasing. These associations 
contend that such an exclusion from the definition of related services 
would eliminate unnecessary regulatory burdens such as the need for 
approving the feasibility of activities that are inherently feasible 
because they are normal and customary activities of institutions in 
their primary business of lending and leasing.
    The FCA addressed this issue in the preamble to the proposed 
regulation. See 59 FR 54402, October 31, 1994. The commenters have 
provided no information that would cause the FCA to resolve this issue 
in a different manner. The fact that an institution customarily 
performs a service as part of its lending function does not 
automatically mean that the service, when provided on an independent 
fee basis, would not be a related service. Nor does it necessarily 
follow that establishing a program to provide a service on a fee basis 
will always make good business sense for an institution. Each activity 
must be evaluated to determine the statutory authority that enables the 
institution to engage in the activity and what statutory restraints 
exist on the exercise of that authority. As discussed in the preceding 
paragraph, there is no bright-line test or absolute standard that the 
Agency could adopt in the regulation to categorically exclude certain 
types of activities. The FCA is not convinced that it is necessary to 
exclude certain activities from the definition of related services; 
thus, the definition has been adopted as proposed.
    The FCC commented that the definition of System banks and 
associations in proposed Sec. 618.8000(c) should be modified to 
incorporate service corporations in order to eliminate any uncertainty 
as to whether those entities are authorized to offer related services. 
In the preamble to the proposed rule, the FCA noted that because 
section 4.25 of the Act grants service corporations the powers and 
authorities of Farm Credit banks, they would continue to be authorized 
to provide related services. In addition, Sec. 611.1136 of this chapter 
provides that service corporations are subject to the regulations 
governing banks and associations. Nevertheless, although the FCA does 
not believe it is required, service corporations have been included in 
the final definition of ``System banks and associations'' in order to 
eliminate any uncertainty.
    Unless specifically excepted, all provisions of part 618 apply to 
service corporations, and service corporations may offer those services 
that System banks are authorized to offer. With regard to eligibility 
criteria, service corporations are authorized to provide services to 
entities eligible to borrow from the owners of the service corporation, 
as prescribed in Sec. 618.8005(d). The FCA notes, however, that certain 
service corporations may be restricted by charter or the special 
purposes for which they were created from offering related services or 
certain types of related services. For example, service corporations 
are prohibited by section 4.25 of the Act from offering insurance. 
Service corporation charters may also include special restrictions on 
the manner in which they can offer related services or on the manner in 
which certain provisions of part 618 of this chapter apply to their 
offering of services. Finally, the Related Services List may also 
contain special conditions that affect how a service corporation can 
offer a related service.
2. Section 618.8005--Eligibility
    The IBAA commented that the proposed regulation was not clear as to 
whether marketers and processors would be eligible for related services 
regardless of whether they were eligible for borrowing. It further 
stated that if such entities were eligible for related services, but 
not eligible for borrowing, then the eligibility criteria were too 
vague and ambiguous. The IBAA believes that marketers and processors 
should only be eligible for related services if a debtor-creditor 
relationship already exists between the entity and a System 
institution.
    In response, the FCA notes that Sec. 618.8005(a) of the proposed 
regulation provides that Farm Credit banks and associations may offer 
related services to persons eligible to borrow as defined in 
Sec. 613.3045 of the regulations, which provides the requirements for 
on-farm throughput for lending eligibility. Therefore, marketers and 
processors must be eligible to borrow from a System institution in 
order to receive related services. On the other hand, the Act does not 
require that only current borrowers may receive related services (apart 
from credit life and disability insurance), and the Agency declines to 
impose such a limitation by regulation. Accordingly, the suggestions 
regarding the eligibility of marketers and processors were not adopted.
    The FCC and two associations recommended that Sec. 618.8005 be 
revised to enable System banks and associations to provide related 
services to farm-related businesses and rural homeowners. The FCA 
believes that a change in the Act is required before farm-related 
businesses and rural homeowners could be considered eligible recipients 
of related services. Currently, the Act restricts related services 
offered by Farm Credit banks and associations to those that are 
appropriate to on-farm or aquatic operations. Farm-related businesses 
and rural homeowners who do not have farm or aquatic operations would 
not be eligible for services that must, by statute, be appropriate to 
such operations.
    Numerous System commenters expressed support for proposed 
Sec. 618.8005(d), now Sec. 618.8005(e), which authorizes the provision 
of related services to recipients that would not otherwise meet the 
requirements of Sec. 618.8005(a) through (c). As proposed, this 
provision was limited to services provided that were a ``part of or 
pertained to'' a transaction between an eligible borrower and the 
recipient of the service. Based on a concern that this language might 
permit an expansion of related services beyond the Agency's intentions, 
the language has been modified in the final rule. The rule now states 
that the service may be provided only if it is ``requested by the 
eligible 

[[Page 34094]]
borrower or necessary to the transaction.'' As a result, appraisals, 
loan servicing, and other services that are necessary to a transaction 
with an eligible borrower may be provided to any party to the 
transaction. In situations in which the related service may be useful, 
but perhaps not necessary, it may be provided to any party to the 
transaction at the request of the eligible borrower.
    The IBAA does not believe that this authority is necessary or 
justifiable and believes that it constitutes an unwarranted expansion 
of authorized services. As noted in the preamble to the proposed rule, 
this provision was included in order to accommodate eligible borrowers 
who were not able to receive related services directly due to 
circumstances involving their transactions with non-eligible entities. 
See 59 FR 54402, October 31, 1994. For example, an eligible borrower 
who needs an appraisal of agricultural real estate in connection with a 
loan application with a commercial bank or the former Farmers Home 
Administration (FmHA) is typically precluded from obtaining it, because 
the commercial bank regulations and FmHA procedures generally require 
that the eligible borrower's appraisal be procured by the lender. The 
FCA has determined that the purposes of the Act would be frustrated if 
eligible borrowers could not receive related services solely because 
the regulations of other Federal agencies or the transactional 
requirements with other entities preclude them from directly 
contracting for the services from System institutions. Further, the FCA 
has concluded that System institutions are authorized by statute to 
provide related services for persons eligible to borrow, even if a non-
eligible entity is involved in the transaction and may be the party 
that actually obtains the service on behalf of the person eligible to 
borrow.
    For these reasons, the FCA believes that Sec. 618.8005(e) is 
necessary in order to ensure that eligible borrowers are able to 
receive related services and is justified by the Act under factual 
situations presented to the FCA. The FCA further believes that this 
provision, as modified in the final rule, ensures that the System will 
continue to be able to appropriately serve farmers and ranchers as 
Congress intended.
    One of the associations that commented favorably on 
Sec. 618.8005(e) suggested that this authority could be used in 
situations in which an intermediary business would be providing a 
bundle of services that include some offered by System institutions. 
However, it noted that in some instances it may be difficult if not 
impossible to trace the end-user of the information and services. 
Therefore, it urged the FCA to interpret Sec. 618.8005(e) to allow 
services to be provided to those business entities because the services 
would ultimately benefit eligible farmers and ranchers and members of 
the agricultural community. The FCA is unable to interpret 
Sec. 618.8005(e) to allow related services to be provided in situations 
in which the transaction and the eligible borrower receiving the 
services cannot be readily identified as such. Although the FCA 
recognizes that farmers and agriculture in general may benefit from 
System institutions being able to provide services to other non-
eligible entities that in turn serve agricultural interests, the FCA 
does not believe that a general benefit to agriculture is sufficient to 
meet the eligibility requirements of the Act. Therefore, related 
services may only be provided pursuant to Sec. 618.8005(e) when an 
identifiable eligible borrower is a party to the same transaction.
    In the preamble to the proposed regulation, the FCA noted that 
banks for cooperatives would continue to be subject to the requirements 
of section 3.7(b) of the Act and Sec. 613.3120 when providing related 
services in connection with export and import transactions pursuant to 
proposed Sec. 618.8005(d), now Sec. 618.8005(e). Subsequent to the 
approval of the proposed regulation on September 29, 1994, the Farm 
Credit System Agricultural Export and Risk Management Act (Pub. L. 103-
376, October 19, 1994) removed the requirement in section 3.7(b) that a 
voting stockholder of the bank substantially benefit from services 
provided in connection with export transactions. The FCC requested that 
FCA clarify the impact of this statutory amendment in the final rule. 
The FCA confirms that in light of Pub. L. 103-376, the requirements of 
3.7(b) and Sec. 613.3120 of this chapter (that a voting stockholder 
must substantially benefit from related services) only apply in 
connection with import transactions.
    After considering all of the comments received on Sec. 618.8005, 
adding new paragraph (d), clarifying the scope of paragraph (e), and 
addressing legislative amendments, the FCA has adopted Sec. 618.8005 as 
modified.
3. Section 618.8010--Related Services Authorization Process
    Comments and suggestions in this area were received from the ABA, 
IBAA, SCBA, FCC, and four System associations and included 
recommendations on the following issues. A large majority of the System 
institutions commented positively on the changes made to this section, 
supported the streamlined process, and felt the proposed regulation 
would reduce regulatory burdens.
    The ABA is concerned that the scope of the sample RS List, in 
Appendix A of the proposed rule, exceeds the definition of related 
services in the proposed regulation. However, it does not reference any 
specific service or give examples of how it considers the definition to 
be improperly interpreted. The FCA has concluded that all of the listed 
related services fall within the definition of related services in 
proposed and final Sec. 618.8000(b) and within System institutions' 
statutory authorities.
    The ABA also perceived the preamble to the proposed rule as 
allowing System institutions to provide services that might currently 
be offered in the System but which had not previously been approved. 
The FCA did not intend to permit any institution to offer unauthorized 
services. However, the Agency did not previously approve all types of 
technical assistance programs which would now come under the definition 
of related service. Consequently, the proposed regulation included a 
cautionary statement and a sample list because once the final RS List 
is published, no service may be offered unless it is on the list. The 
FCA was not notified during the public comment period of any related 
service being offered that was not on the sample RS List, thus 
confirming the Agency's conclusion that all services currently being 
offered are already on the sample RS List. The only comments received 
pertaining specifically to the sample RS List focused on how some of 
the insurance services or special conditions were described on the 
list. The sample RS List was modified slightly to reflect these 
suggestions and will be published both as an appendix to the final 
regulation and in a bookletter subsequent to the finalization of this 
regulation. (See comments on the RS List at the end of this preamble.)
    The ABA commented that no related service should be approved unless 
the public has at least 60 days to comment on it. Similarly, the IBAA 
recommended that System institutions be required to file a Notice of 
Intent, which would state that a related service is going to be 
offered, in order to allow entities outside the System to object to 
programs that would place them at a competitive disadvantage. The 
proposed rule does not require mandatory public comments on all 
services but allows the FCA to publish new services where appropriate. 

[[Page 34095]]

    While there is no statutory requirement for publication of services 
or a public notice and comment period, the Agency believes that its 
evaluation of new services, particularly complex or controversial 
service proposals, will be aided by public comment. It was for this 
reason that the FCA published the sample RS List with the proposed 
regulations. As a result, there is a greater standard of public 
disclosure than existed previously under the prior approval rule.
    However, there may be situations in which public comment is not 
necessary or beneficial to the safety and soundness of the System and 
may impose a burden on System institutions while having little, if any, 
overriding benefit. An example would be a potential service that is 
very similar to one already on the RS List. Finally, whether or not 
services are published for comment, the FCA will continue to measure 
all new service proposals against the statutory authorities and 
evaluate them based on safety and soundness concerns. Therefore, the 
proposed regulation was not changed in response to these comments.
    Regarding the commenters' desire for public notice of new services 
and general concerns over competition between System institutions and 
other banking institutions, Congress authorized such competition when 
it enacted the related service provisions in 1971. Competition was a 
major issue at the time the legislation was enacted and one that was 
thoroughly debated.2 Public notice and comment requirements were 
not placed in the Act, and it would not be appropriate for the FCA to 
limit the offering of related services under the statute simply because 
offering the service might have a competitive impact on non-System 
entities. The FCA's mission of ensuring the safety and soundness of 
System institutions would preclude it from unnecessarily limiting the 
System's ability to successfully compete with other entities that share 
its market.

    \2\ See, Pub. L. 92-181 (Dec. 10, 1971) and its legislative 
history.
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    The SCBA is concerned that the regulation permits System 
institutions to provide services without effective regulatory oversight 
and congressional scrutiny. It states that the proposal does far more 
than reduce regulatory burden and is inconsistent with congressional 
actions dealing with the System, commercial banks, and savings 
institutions. To the contrary, the FCA believes that the regulation 
maintains a distinction between determining whether a new service is 
authorized under the statute and evaluating the feasibility of 
implementing a particular program at a particular institution. 
Elimination of the prior approval of each related service program 
relieves regulatory burden. This does not eliminate the FCA's 
responsibility for safety and soundness, but merely shifts oversight to 
the examination and enforcement processes. Determination of statutory 
authorities continues to be closely controlled in the approval process 
and, contrary to the SCBA's comment, is not inconsistent with recent 
congressional actions.
    The FCC and four associations expressed concern that System 
institutions will be precluded from offering a new service because 
another institution's proposal was previously denied. They asked for 
clarification on whether the denial or modification of a service 
proposed by a specific institution is intended to apply to only that 
institution or to all institutions. While the FCA's intent to consider 
new services as Systemwide initiatives was clear, they expressed 
concern that disapproval of a proposed new service would preclude a 
resubmission that appropriately addresses the reasons for denial. This 
result was not intended by the Agency. Approvals or denials are not 
expected to be specific to the institution making the request. Action 
on new services will generally be based on the type of service proposed 
and not on how the service program will be implemented by a given 
institution. As long as a particular type of service is authorized, it 
will be put on the RS List, but it could be limited to certain types of 
institutions or subject to various conditions to address safety and 
soundness concerns. Notwithstanding this, disapproval of a particular 
service request does not preclude approval of a different request at 
another time. The FCA expects, however, that any subsequent request 
would satisfactorily address the concerns noted in previous 
disapprovals. There may also be services that either are not authorized 
under the statute or present so many inherent risks to safety and 
soundness that it would be inappropriate for any System institution to 
provide them.
    The FCC also commented that if a request for a new service is 
denied, the notification of denial should include an explanation for 
the denial. The FCA agrees. While this was intended to be understood in 
the proposed regulation, proposed Sec. 618.8010(b)(5) has been modified 
to clarify this point.
    The FCC and three associations commented that the process could be 
improved by requiring the FCA to immediately notify an institution upon 
receipt of a related service proposal and provide an FCA contact for 
future reference. Also, once the FCA determines a proposal is complete, 
the commenters felt the institution should be notified in writing that 
the 60-day approval process has begun. This suggestion is consistent 
with existing FCA practices and administrative processes. The FCA 
intends to provide immediate notification of receipt of a new service 
proposal, including a preliminary conclusion as to the completeness of 
the proposal and when the 60-day period begins. If more information is 
needed later or complex issues arise, such as requesting the charter of 
a new organization to provide such services, the FCA may choose to 
extend this period for another 60 days. Because these actions are 
already a part of FCA's administrative practices, changes were not made 
to the proposed regulation.
    The FCC recommended that the FCA should notify the applying 
institution of the results of its actions within the 60-day timeframe 
for acting on proposed new related services. In addition, the FCC 
suggested that notice of FCA's decision to other System institutions 
should occur after written notice is given to the requesting 
institution. The FCA agrees that notification should be included within 
the 60-day period and that notice to the requesting institution should 
occur first; Sec. 618.8010(b)(5) has been modified accordingly.
    The SCBA and IBAA commented that a well-defined, narrow list of 
permissible related services should be included in the final rule to 
prevent unauthorized, and possibly unsound, services from being 
provided by System institutions. It believes unauthorized services may 
not be detected in a timely manner through the examination process. 
They suggested that, at a minimum, institutions should notify the FCA 
of their intent to offer these services for the first time. The FCA 
believes that the ``Related Services List'' attached to the final rule 
is a well-defined list of permissible related services. Proposed 
Sec. 618.8010(c)(3) would have required institutions to notify the FCA 
examination team of their intent to offer a service program within 30 
days of implementing a related service already on the RS List. The FCA 
agrees, however, that a prior notification could be beneficial in 
preventing an unauthorized and possibly unsafe or unsound service 
program from being implemented because it would give the examiners an 
opportunity to discuss a proposed service program with the offering 
institution prior to implementation. 

[[Page 34096]]
Therefore, the final regulation at Sec. 618.8010(c)(3) has been 
modified to require notification to the FCA 10 business days before an 
institution may begin to offer a service already on the RS List.
    The IBAA and the SCBA commented on the elimination of the prior 
approval of related service programs, the additional elimination of the 
prior approval of district and bank policies, and the elimination of 
the requirement for annual bank reviews of association services. The 
commenters concluded that elimination of these types of oversight 
activities jeopardizes the safety and soundness of System institutions 
and weakens the Agency's monitoring and control over System 
institutions. They further believe that reliance on the examination 
process alone is inadequate. The IBAA also commented on the removal of 
the records requirement in the current regulation at 
Sec. 618.8000(b)(4).
    The FCA does not believe that elimination of the FCA prior approval 
or the annual bank review function creates significant safety and 
soundness risks, but rather, that the final regulation eliminates 
duplicative evaluations of authorities to provide new services. Program 
risks that are incurred by individual institutions offering related 
services can be adequately controlled by a number of factors, 
including: (1) Special conditions placed on the RS List for services 
raising special concerns; (2) mandatory feasibility analysis prior to 
offering any related service programs; (3) bank oversight and review 
through feasibility analyses and certain conditions imposed through 
general financing agreements (GFAs); (4) notification of the 
appropriate Office of Examination field office before a service is 
first offered; and (5) periodic examination of program operations and 
results by the FCA with appropriate follow-up in exercising its 
supervisory power as warranted. The final regulation and other existing 
regulations are adequate to address safety and soundness concerns and 
provide the FCA with appropriate oversight of the process.
4. Section 618.8015--Policy Guidelines
    There were no specific comments received on this section of the 
proposed regulation, and the final regulation is adopted as proposed.
5. Section 618.8020--Feasibility Requirements
    Three System commenters stated that the final rule should recognize 
that the extent of the feasibility analysis required is dependent on 
whether or not the service is offered for a profit and the overall 
risks of the service to the institution. The FCA agrees that the extent 
of the analysis will vary; however, it does not agree that 
profitability is the sole determining factor. In fact, it is 
conceivable that a service that is ``low-priced'' or ``free'' to the 
recipient would still bear a cost to the institution and would require 
more extensive analysis to justify offering it. The extent of the 
analysis should be appropriate to the level of institution involvement 
and the financial and operational risks in a service.
    Four other System commenters urged the FCA to explain in its 
commentary that the final rule could be interpreted as minimizing the 
regulatory requirements for offering certain types of services. They 
conclude that services that are normal and customary activities of 
institutions in their primary business of lending and leasing should be 
considered inherently feasible and, therefore, not subject to the 
regulation. The FCA disagrees with the commenters. Although converting 
a lending-related activity into a fee service will often prove 
feasible, this will depend on many factors, including market demand, 
pricing opportunities, and capital position. The cost benefit analysis 
required by Sec. 618.8020(b) will enable the institution to determine 
whether offering a fee service will promote its business objectives.
    The ABA commented that it believes that the FCA's approach to 
meeting the statute's feasibility requirement is flawed because the 
proposed regulatory language does not offer a definition of feasibility 
but instead states that feasibility is a function of 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. The commenter further states that 
the proposed rule does not address issues of managerial and financial 
capability to provide a related service, i.e., management structure, 
employee qualifications, and capital position. Lastly, the commenter 
recommended that a detailed and specific feasibility determination be 
required from each institution for each related service to be offered. 
The IBAA also believes that the feasibility criteria are too loose, but 
it did not elaborate.
    The FCA agrees with the commenters that managerial and financial 
capabilities ought to be addressed in the feasibility analysis. 
Although the proposed rule contains various managerial and financial 
assessments, Sec. 618.8020(b)(1) has been modified to include a 
specific requirement for an evaluation of the consistency of the 
program with the institution's capital plan. Section 618.8020(b)(3)(i) 
continues to require ``[a]n evaluation of the operational costs and 
risks involved in offering the program, such as management and 
personnel requirements, training requirements, and capital outlays.'' 
The recommendation for a detailed and specific feasibility 
determination is also already reflected in the rule. Section 618.8020 
begins with a requirement that an institution document program 
feasibility for every related service program it provides.
    Regarding the criticism that the proposed rule offers no definition 
of feasibility, the FCA believes that the approach taken is 
comprehensive and will be effective. The final rule specifies the cost 
and benefit criteria by which feasibility must be determined. It 
requires an institution to analyze the program against an array of 
business factors and to document its conclusion that this analysis 
demonstrates the program's feasibility.
    The IBAA urged that the feasibility analysis include a 
demonstration that a need for the service exists. The FCA believes that 
a prudent feasibility analysis would necessarily include an evaluation 
of the market and a discussion of the need for a particular service. In 
fact, Sec. 618.8020(b)(2) specifically requires an evaluation of 
market, pricing and competition issues.
6. Section 618.8025--Feasibility Reviews
    The proposed rule reduces the role of the bank when an association 
is offering a related service. The IBAA believes that more oversight 
should be maintained because association activity ultimately places the 
bank and, therefore, the taxpayer at risk.3 In particular, the 
commenter believes that there is a danger of a bank simply ``rubber 
stamping'' programs without giving adequate review of feasibility and, 
therefore, the proposed rule does not meet the statutory requirement. 
The FCA disagrees with this conclusion. The statute requires the bank 
to determine the feasibility of each related service offered by an 
institution, but it is silent regarding who must do the actual 
feasibility analysis. The most appropriate persons to do the analysis 
are the persons who will be providing the service. The bank will then 
fulfill its oversight duties by verifying that the 

[[Page 34097]]
analysis is complete and that the analysis establishes the feasibility 
of the service. The bank also has considerable supervisory control 
through regulatory and funding mechanisms such as its GFAs. 
Furthermore, the FCA will be scrutinizing the banks' reviews and 
general oversight of association and service corporation operations as 
a part of the examination function.

    \3\ The FCA notes that pursuant to section 4.4 and other 
sections of the Act, the United States is not liable for obligations 
of System institutions. Thus, there is no direct risk to the 
taxpayers.
---------------------------------------------------------------------------

    The IBAA also believes that the FCA should review the feasibility 
of programs offered by individual associations to ensure safety and 
soundness. The FCA agrees with this comment and believes that the 
proposed and final rules do not indicate otherwise. In fact, the 
preamble to the proposed rule states that the examination function will 
evaluate compliance, performance, and safety and soundness. The FCA 
firmly believes that the ongoing examination function is fully capable 
of protecting the public and the investor.
    One System institution proposed that association boards of 
directors, rather than the district bank, be given the authority to 
verify and certify the adequacy of program feasibility and concluded 
that the FCA could issue a cease and desist order if it later 
determines that the feasibility analysis for a service is incomplete. 
The FCA clarifies that association boards already have the authority to 
verify feasibility. In fact, they are expected to approve the offering 
of all related services and, by doing so, approve the adequacy of the 
feasibility analysis. In addition, the FCA does not believe that the 
commenters suggested approach would fulfill the statutory requirement 
for bank determination of feasibility.
    Three System commenters asked for clarification regarding the 
feasibility analysis for those services that are currently being 
offered at the time the final rule becomes effective. They also 
concluded that if a bank review is only needed on a first-time service, 
then an institution need not resubmit a feasibility analysis for a 
service that was previously offered.
    The FCA agrees that for those services that are being offered prior 
to the effective date of the final rule, an institution does not need 
to resubmit a feasibility analysis. However, for those situations where 
an institution formerly offered a particular service, but is not 
currently offering it, Sec. 618.8025 has been modified to require bank 
review of feasibility for any service that an institution did not offer 
during the most recently completed business cycle (generally 1 year). 
In other words, in addition to services never offered before, 
previously offered but currently inactive services will require bank 
review of the feasibility analysis.
    In summary, proposed Sec. 618.8025(a) was modified to require bank 
review for any service that an institution will be offering that it did 
not offer during the most recently completed business cycle. Because 
service corporations are referenced in the definition of ``System banks 
and associations,'' Sec. 618.8025(b) has been added to require that, 
prior to offering a related service for the first time, a service 
corporation's feasibility analysis must be verified by the owners of 
the service corporation. If the owners all agree, any one bank with 
significant ownership interest can be delegated this responsibility.
7. Section 618.8030--Out-of-Territory Related Services
    One Farm Credit Bank and two affiliated associations raised 
concerns about providing related services outside of an institution's 
chartered lending territory. The proposed regulation at Sec. 618.8030 
allows System institutions to provide related services outside of their 
chartered territories, provided they obtain the consent of at least one 
FCS bank or association authorized to lend (i.e., direct lender) in 
that territory. Further, the proposed rule does not distinguish between 
an institution having the right to invite a third party service 
provider into its territory or consenting to an unsolicited request to 
offer out-of-territory services.
    The commenters are concerned about the competitive implications of 
allowing such activities and feel the FCA should impose additional 
conditions beyond simply receiving the consent of at least one 
institution. They believe the competition will result because most 
related services will be purchased in conjunction with a lending 
relationship, and an institution's opportunity to offer out-of-
territory services will be broader than the authority to extend credit 
out-of-territory. While the bank agrees that requiring the consent of 
all institutions chartered to serve a given territory could interfere 
with an institution's right to determine what services it wishes to 
provide its members, it also believes that the related service 
regulation should not create an unlevel playing field for System 
institutions sharing the same geographic territory.
    The commenters suggest requiring System institutions that want to 
offer out-of-territory services to offer such services to all 
institutions sharing the same territory on the same or equitable terms 
and conditions. They argue that concern for the System's future well-
being justifies this additional burden, which they perceive as minimal. 
The bank suggests that having authority to offer services outside of a 
chartered lending territory could have a significant impact. The 
commenter's suggestion would provide each institution with an equal 
opportunity to negotiate for a service to be provided in its territory. 
Institutions could decline to authorize another institution to provide 
services to its customers on its behalf, but no one institution would 
be in a position to prevent any other FCS institutions from reaching 
agreements and providing services to their customers.
    The FCA understands the commenter's concerns regarding intra-System 
competition, but it also notes that related services differ from 
lending and that services are not always offered in the same manner as 
loan products. While some intra-System competition for loans exists, 
System institutions are limited by charter to providing specific types 
of loans for certain purposes (i.e., short-, intermediate-, or long-
term loans). By contrast, intra-System competition is inherent in the 
way eligibility for related services is determined, because related 
services can be provided to an entity that is ``eligible to borrow'' 
from an institution. Thus, for example, both PCAs and FLBAs are 
authorized to provide services to the same borrowers in their chartered 
territories.
    The Agency has concluded that the commenters proposal does not 
solve many of the problems associated with the additional competition 
created by out-of-territory related services. Under the commenter's 
proposal, the requirement for an opportunity to negotiate for the 
service could lead to cumbersome, protracted negotiations, could pose 
more than a minimal burden on System institutions, and would still 
result in only one institution being required to give its consent for 
an out-of-territory institution to compete with another institution in 
the territory.
    Notwithstanding that some competition inherently exists in 
providing related services in a given territory, the Agency recognizes 
that the provision of related services out-of-territory creates the 
potential for additional intra-System competition. Thus, the Agency 
believes that the proposed rule should be modified to address some of 
the issues raised by the commenters. The final regulation has been 
modified to limit competition without consent in situations where 
services are already being provided to borrowers. Final 
Sec. 618.8030(a) provides that an out-of-territory institution must 
obtain the consent of all chartered institutions currently offering the 
same 

[[Page 34098]]
service in the territory in which the service will be provided.
    Consent must be obtained regardless of whether the institution is 
offering the service itself or through an out-of-territory System 
institution or a third party. If no institution in the territory is 
offering the same service that the out-of-territory institution wishes 
to offer, the out-of-territory institution need only obtain the consent 
of any one direct lender chartered to serve the territory.
    The Agency believes that the final regulation balances the 
territorial rights of institutions, the rights of institutions to 
control the manner in which they conduct their business, and the needs 
of borrowers for related services. If borrowers in a territory already 
have access to a particular related service, there is no compelling 
need to allow additional competition from an out-of-territory 
institution without the consent of the institutions currently offering 
the same services. Although the Agency believes that this is the most 
appropriate resolution of the out-of-territory issue, the Agency 
welcomes additional comments on Sec. 618.8030.
    Another comment by the IBAA on out-of-territory related services 
concerned retaining a requirement in the existing rule that the service 
provided within the offering (out-of-territory) institution's chartered 
territory remain the primary component of that institution's services. 
The comment is grounded in terms of cooperative principles in that a 
key premise for forming a cooperative is to primarily do business with, 
and for the benefit of, its own members. While the FCA acknowledges 
this premise, it believes that decisions on business practices are best 
left to the membership and local boards of directors, rather than the 
FCA. The restriction advocated by the IBAA could impair the ability of 
Farm Credit institutions to meet their customers' needs for related 
services, particularly when the service in question is unique or not 
widely available from other sources. It should also be noted that a 
System bank board is free to impose more stringent requirements for 
their territory (such as is recommended in the three comment letters) 
than the minimal ones being set forth by the FCA.
    Four System associations commented that the proposed relaxation of 
the limitations on out-of-territory service offerings should be 
considered in the context of the FCA's proposed policy statement on 
``Non-Exclusive Territories'' (59 FR 17543, April 13, 1994). These 
associations submitted comments on the proposed policy statement 
earlier in 1994. The FCA considered all of the comments on the proposed 
policy statement in drafting Sec. 618.8030 and believes the final rule 
is an appropriate resolution to related service issues at this time. 
However, the FCA notes that adoption of a final board policy statement 
on non-exclusive territories may require future changes to the 
regulation.
    The IBAA expressed safety and soundness concerns about permitting 
System institutions to expand related service programs beyond the 
boundaries of their chartered lending territories. It stated that the 
FCA needs to exert oversight in this area if institutions significantly 
expand programs in large or distant geographic areas. The IBAA believes 
that allowing institutions to market services nationwide would 
contradict current statutory language that requires the FCA to charter 
institutions to serve specific areas.
    There are no geographic restrictions in the Act on the ability of 
the FCA to issue or amend institution charters. See, Act, sections 
5.17, 1.3, 2.0, and 2.10. In fact, the Agency has the authority to 
issue nationwide charters or amend an existing charter to authorize 
nationwide activities. Further, the regulation requires an appropriate 
feasibility analysis covering an institution's ability to manage its 
proposed service program operation in all areas where the program is 
offered. The examination function will ensure that all institution 
activities, regardless of where conducted, are conducted in a safe and 
sound manner. Therefore, the FCA does not agree with the IBAA and has 
made no changes in response to its comments on this issue.
    Section 618.8030(d) has been added in order to address service 
corporations. A service corporation may provide related services 
outside of its chartered territory (i.e., the chartered territory of 
its owners) subject to the requirements of Sec. 618.8030(a)-(c). 
However, service corporations cannot give consent to an out-of-
territory institution to offer services in the service corporation's 
(or its owners) territory.

B. Subpart B--Member Insurance

1. Section 618.8040--Authorized Insurance Services
    The IBAA commented that the proposed regulation allows out-of-
territory associations to offer credit or term life and credit 
disability insurance to any individual who has a borrowing relationship 
with a System institution, but not necessarily with the bank or 
association selling the insurance. The IBAA is concerned that this will 
allow a single institution to sell insurance nationwide and believes 
that such ``expansion'' should not be allowed because System 
institutions are chartered to serve specific areas and local farmers. 
As noted earlier, the FCA has the authority to charter institutions to 
serve specific territories, which may include nationwide charters. 
Further, the FCA does not agree that this would result in an expansion 
of insurance services. The proposed and final rule simply permit System 
institutions to serve their members' needs without obligating each 
association to have the ability to offer the insurance products itself.
    The IBAA disagreed with the FCA's conclusion that the System should 
be able to sell spouses credit insurance because a spouse may have a 
contractual liability for the debt by operation of state law. The basis 
for its disagreement is that the FCA has not established a need for the 
System to provide such a service. The FCA notes that the insurance 
would be sold to the borrower, on the life of the spouse, not sold 
directly to the spouse. There is no statutory requirement that the FCA 
establish a need for a service before the System is authorized to offer 
it. However, when an institution decides to offer a particular related 
service, as a part of its feasibility analysis, it must evaluate the 
potential market for that service in the areas in which the service 
will be offered. The FCA directs the commenters to the preamble to the 
proposed regulation for supporting discussion on this issue (59 FR 
54405, October 31, 1994). No change was made to the final regulation in 
response to this comment.
    The IBAA also commented that, by eliminating the requirement that a 
debtor-creditor relationship exist for System institutions to provide 
other insurance products, such as crop insurance, and by allowing 
``members'' to be eligible to buy crop insurance, the FCA has exceeded 
congressional intent by allowing the System to provide insurance to 
non-System borrowers. The FCA notes that the legislative history of 
section 4.29 of the Act indicates that the debtor-creditor relationship 
applies only to credit or term life and credit disability insurance (or 
similar types) in that this insurance must be ``appropriate to protect 
the loan commitment in the event of death or disability of the 
debtors.'' See 59 FR 54399, October 31, 1994. Therefore, the debtor-
creditor requirement for ``other'' insurance was removed in order to 
allow System institutions to exercise the full authority granted by the 
Act. As a result, for ``other'' types of insurance, purchasers need 
only be eligible to borrow (as with other types of related services).

[[Page 34099]]

    Because section 4.29 of the Act only authorizes borrowers or 
members to purchase insurance, the Agency felt it was necessary to 
define ``member'' in the proposed regulation. The FCA did not intend 
for the definition of member to be interpreted to mean that persons not 
eligible to borrow could purchase ``other'' insurance from System 
institutions. In order to clarify this point, the FCA revised the 
definition of member in Sec. 618.8040(b)(2) of the final rule to 
include the phrase ``eligible to borrow.''
2. Section 618.8040(b)(6)
    Several commenters asked that the 5-percent limitation on 
compensation for sale of insurance be removed from the final 
regulation. One association did not object to the 5-percent limitation 
for full-time loan officers who also sell insurance as a part of their 
job. However, the commenter felt this limitation was too restrictive 
for full-time insurance salespersons and those persons involved in 
direction or management of insurance sales. The association further 
believes that such a limitation is not needed because the conflict of 
interest between loan making and insurance is not present, and it 
argued that such a limitation would restrict its ability to attract and 
motivate highly qualified insurance personnel.
    The FCA continues to believe that unrestricted incentive 
compensation based on volume of insurance sales may lead to conflicts 
of interest or coercion in the case of loan officers and other 
employees involved in the lending operations of an institution. 
However, the FCA also recognizes that the potential for conflicts of 
interest or coercion is significantly less with regard to full-time 
insurance personnel. The FCA also agrees that in the case of full-time 
insurance sales personnel, such a limitation could impair an 
institution's ability to attract the best qualified people to these 
positions. Accordingly, proposed Sec. 618.8040(b)(6) is modified so 
that, with respect to full-time insurance personnel or full-time 
managers and supervisors of insurance departments, the 5-percent 
limitation only applies to the sale of credit life and similar types of 
insurance (insurance that pays on a loan or mortgage in the event of 
death or disability of the debtor).
    One commenter suggested that the final regulation should include 
commentary notes stating that insurance is the only service with 
regulatory restrictions on employee incentive compensation. The FCA 
does not believe that this is necessary because the regulatory 
structure and language make it clear that the restriction on employee 
incentive compensation applies only to insurance.

C. Public Comments Received on the Sample Related Services List

    The FCC commented that under Farm Business Consulting and 
Cooperative Business Consulting Services, the requirement that 
institutions must have procedures in place to ``ensure conflicts of 
interest do not occur between the credit and the business consulting 
functions'' is too burdensome. The FCC suggested that the special 
condition should require that institution ``policies address and manage 
conflicts of interest to reduce risk to the entity by avoiding or 
disclosing certain conflicts as may be appropriate.'' The FCA 
recognizes that, as stated, the condition could be onerous. The Agency 
expects institutions to eliminate conflicts of interest whenever 
possible and operationally feasible. However, there may be instances 
when such conflicts cannot be eliminated, but with proper operating 
procedures, can be managed in such a way as to limit the risk posed to 
the institution to an acceptable level. Language in the attached RS 
List was modified to more clearly state this requirement.
    Minnesota Mutual commented that the sample RS List did not include 
two types of insurance services, individual term life and mortgage 
accidental death insurance, currently offered by System institutions. 
The FCC also commented that ``Group Term Life Insurance'' should be 
changed to ``Term Life Insurance'' to conform to section 4.29(a)(1) of 
the Act. Although the FCA intended that these types of insurance be 
included within those on the RS List, the list has been modified to 
more accurately reflect these concerns.
    The FCC commented that crop hail insurance and multiple-peril crop 
insurance should be combined into one category of single- and multiple-
peril insurance in order to accommodate other types of single-peril 
crop insurance that may be available or become available in the future. 
After researching the legislative history of the 1980 amendments to the 
Act, the FCA believes that it is appropriate to limit the types of crop 
insurance that the System could sell to hail and multiple-peril crop 
insurance as is plainly stated in the Act. Accordingly, the FCA did not 
make this suggested change to the RS List.
    As a final note, a small number of technical changes were made to 
proposed part 618, subparts A and B, in order to enhance the clarity of 
the regulations. Technical changes were also made to parts 611 and 620 
in order to conform with the regulatory changes in part 618.

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 are 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, 
4.21, 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, 2209, 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 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).


Sec. 618.8030  [Redesignated as 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. 

[[Page 34100]]

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 type of activity provided 
by a System bank or association that is appropriate 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, Federal land credit associations, and service 
corporations formed pursuant to section 4.25 of the Act.


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 of 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) Service corporations formed pursuant to section 4.25 of the Act 
may offer related services to persons eligible to borrow from the 
owners of the service corporation, pursuant to paragraphs (a), (b), 
(c), and (e) of this section.
    (e) System banks and associations may provide related services to 
recipients that do not otherwise meet the requirements 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 requested by an eligible borrower or necessary to 
the transaction between the parties. Such services include, but are not 
limited to, fee appraisals of agricultural assets provided to any 
Federal agency, commercial banks, and other lenders.


Sec. 618.8010  Related services authorization process.

    (a) Authorities. System banks and associations may only offer 
related services that meet the criteria specified in this regulation 
and are authorized by the FCA.
    (b) New service proposals. (1) A System bank or association that 
proposes or intends 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, a statement of 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 related 
service or program to offer a related service.
    (3) At its discretion the FCA may, at any time 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 to authorize a new service. The FCA shall approve 
the request, deny the request, or publish the service 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) Within the time period established in paragraph (b)(4) of this 
section, the FCA shall notify the requesting institution of its 
actions. Following notification of the requesting institution, the FCA 
will notify all System banks and associations of its determination on 
the proposed service by bookletter or other means. If a service is not 
authorized, the reasons for denial will be included in the 
notifications to the System and the requesting institution.
    (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 and enforcement process.
    (2) The FCA shall make available to all System banks and 
associations a list of such related services (``related services list'' 
or ``list'') and will update the list in accordance with paragraph 
(b)(5) of this section. The list will contain the following:
    (i) A description of each related service; and
    (ii) The types of institutions authorized to offer each type of 
related service;
    (iii) Identification of any special conditions on how the related 
service may be offered. The special conditions and description of the 
service will be fully detailed in FCA's notice to System institutions 
under paragraph (b)(5) of this section.
    (3) At least 10 business days prior to 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 in writing and provide it with a description 
of the proposed related service program.


Sec. 618.8015  Policy guidelines.

    (a) The board of directors of each System bank or association 
providing related services must adopt a policy addressing related 
services. The policy shall 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 
shall also be subject to review under an appropriate 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 must be separately identified 
from loan interest charges and disclosed to the recipient of the 
service prior to providing or implementing the service. 

[[Page 34101]]



Sec. 618.8020  Feasibility requirements.

    For every related service program a System bank or association 
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 that demonstrates program 
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, and whether offering 
the service is consistent with the long-term goals described in its 
capital plan;
    (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 expected profitability. This analysis should 
include an explanation of how the program will contribute to the 
overall financial health of the institution; 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 eliminate or appropriately manage these 
conflicts.


Sec. 618.8025  Feasibility reviews.

    (a) 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 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 program feasibility must be fully supported and 
communicated to the association in writing within 60 days of its 
submission to the bank.
    (b) Prior to a service corporation offering a service for the first 
time or offering a service that it did not offer during the most 
recently completed business cycle (generally 1 year), the owners of the 
service corporation must verify that the service corporation has 
performed a feasibility analysis pursuant to Sec. 618.8020. If the 
owners all agree, one bank with a significant ownership interest can be 
delegated this responsibility.


Sec. 618.8030  Out-of-territory related services.

    (a) System banks and associations may offer related services 
outside their chartered territories subject to the following 
conditions:
    (1) The System bank or association obtains consent from all 
chartered institutions currently offering the same type of service in 
the territory in which the service is to be provided; or
    (2) If no System bank or association is currently offering the same 
type of service in the territory, then the out-of-territory institution 
must obtain the consent of at least one direct lender institution 
chartered in the territory in which the related service is to be 
provided.
    (3) The consent obtained pursuant to paragraphs (a)(1) and (a)(2) 
of this section shall be in the form of a written agreement with 
specific terms and conditions including timeframes.
    (b) System banks and associations providing out-of-territory 
services must fulfill all requirements of subparts A and B of this part 
618.
    (c) 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. If a financial obligation exists, then the consenting 
institution must comply with Secs. 618.8015, 618.8020 and 618.8025.
    (d) Service corporations must follow the requirements of this 
section in offering related services out-of-territory. A service 
corporation cannot consent to an out-of-territory institution providing 
services in its chartered territory.
    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 new 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 any System bank or association, without regard to whether such 
institution is the provider. 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 of a System bank or association. For the 
purposes of this section, ``member'' means someone eligible to borrow 
who is a stockholder or participation certificate holder and 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 and association personnel shall not benefit from insurance 
sales by receipt of commissions or gifts from underwriting insurance 
companies. However, employees may participate in an incentive plan 
under which incentive compensation is provided based on the sale of 
insurance.
    (i) In any single year, for all employees except full-time 
insurance personnel or full-time supervisors or managers of insurance 
departments, incentive compensation attributable to sales of all types 
of insurance cannot exceed an amount equivalent to 5 percent of the 
recipient's annual base salary.
    (ii) In any single year, for full-time insurance personnel and 
full-time supervisors and managers of insurance departments, incentive 
compensation for sales of credit life and similar types of insurance 
(i.e. insurance that pays on a loan or mortgage upon the death or 
disability of the debtor) cannot exceed an amount equivalent to 5 
percent of the recipient's annual base salary.
    (iii) No incentive compensation limit applies to sales of other 
insurance (crop, title, etc.) by full-time insurance personnel or full-
time supervisors or managers of insurance departments.
* * * * * 

[[Page 34102]]


PART 620--DISCLOSURE TO SHAREHOLDERS

    7. 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]

    8. 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: June 26, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.

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[FR Doc. 95-16097 Filed 6-29-95; 8:45 am]
BILLING CODE 6705-01-C