[Federal Register Volume 60, Number 226 (Friday, November 24, 1995)]
[Rules and Regulations]
[Pages 57913-57916]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-28583]



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FARM CREDIT ADMINISTRATION

12 CFR Ch. VI

RIN 3052-AB53


Statement on Regulatory Burden

AGENCY: Farm Credit Administration.

ACTION: Final Statement on Regulatory Burden.

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SUMMARY: This is the second phase of an ongoing effort by the Farm 
Credit Administration (FCA) to reduce regulatory burdens on the Farm 
Credit System (FCS or System). Many System institutions responded to 
the FCA's request for comments by identifying regulations that they 
consider to be burdensome. The FCA deleted several unnecessary or 
obsolete regulations in the first phase of this project. This document 
informs the public of those regulations that the FCA will retain 
without amendment because they are necessary to: (1) Implement or 
interpret the Farm Credit Act of 1971, as amended (Act), or (2) protect 
the safety and soundness of the System. The FCA also identifies pending 
or future actions that will respond to the remaining regulatory burden 
issues.

EFFECTIVE DATE: November 24, 1995.

[[Page 57914]]


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 (Statement) seeking public comment on the appropriateness of 
requirements that the FCA regulations impose on the FCS. See 58 FR 
34003 (June 23, 1993). 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. In response to the notice, System 
institutions or their trade associations requested that the FCA repeal 
or amend several regulations.
    In the first phase of this project, the FCA reduced unnecessary 
regulatory burdens on the FCS by repealing several regulations and two 
Agency prior approval requirements. See 60 FR 20008 (Apr. 24, 1995); 60 
FR 27401 (May 24, 1995).
    Today, the FCA notifies the FCS and other interested parties of 
those regulations that it will retain without amendment. Although 
System institutions sought the repeal or modification of the 
regulations identified below, the FCA, consistent with its Statement on 
Regulatory Philosophy,\1\ concludes that these regulations are either 
required by statute or are necessary for safety and soundness. For 
these reasons, the FCA will not delete or amend the following 
regulations: Secs. 611.1122; 614.4070; 614.4165; 614.4335; 614.4336; 
614.4337; and 615.5172. An explanation of the FCA's rationale for these 
particular regulatory requirements follows.

    \1\ See 60 FR 26034, May 16, 1995.
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II. Regulations That Will Be Retained Without Revision

A. Merger Requirements

    Two commenters suggested that the FCA revise Sec. 611.1122, which 
establishes timing and disclosure requirements for the merger of FCS 
institutions. One of the commenters asserted that the regulation 
mandates excessive periods for review and consideration of merger 
applications. As a result, the commenters believe that Sec. 611.1122 
unnecessarily postpones the effective date of such mergers. The 
commenters suggested that the FCA develop new procedures to expedite 
mergers of FCS banks and associations. In addition, one of the 
commenters advised the FCA to revise Sec. 611.1122 because it requires 
too many disclosures to members.
    Section 7.11 of the Act requires the FCA to act upon merger 
applications within 60 days of their receipt. In the event that the FCA 
fails to act within the 60-day period, the affected institutions are 
authorized by section 7.11 of the Act to submit their merger or 
consolidation plan directly to their shareholders. The 60-day period 
provides the FCA with sufficient time to review: (1) Complex 
transactions, or (2) multiple mergers or consolidations that are being 
processed concurrently. Although the Act allows the FCA 60 days to 
consider a proposed merger between System institutions, the Agency does 
not always require 60 days to process each merger application. The FCA 
acts upon the vast majority of corporate restructuring applications 
within the prescribed time period. However, the FCA requires the 
flexibility offered by section 7.11 of the Act and Sec. 611.1122 in 
order to process complex transactions. Although the FCA will not repeal 
the 60-day timeframe for processing corporate applications, it is 
considering approaches that could shorten the time for processing 
noncomplex or noncontroversial corporate applications.
    Commenters claim that Sec. 611.1122 requires too many disclosures 
to institution shareholders about pending consolidations and mergers. 
These commenters suggest that the FCA amend the regulation so it would 
require the merging or consolidating institutions to provide their 
shareholders with a brief summary of the proposed transaction. However, 
the commenters suggest that the regulation continue to require a 
complete disclosure to the FCA about such corporate restructurings.
    In the FCA's view, a brief summary of the proposed transaction does 
not adequately protect the right of shareholders to make informed 
decisions about the future of their institutions. When two or more 
institutions combine, stockholders exchange their equity interest in 
the original institution for stock in a larger institution. As owners 
of each FCS bank or association, the shareholders/borrowers have a 
right to make informed decisions about the future of their institution. 
For this reason, the FCA will not amend the disclosure requirements in 
Sec. 611.1122.

B. Chartered Territories

    A Farm Credit Bank (FCB) and its Federal land bank associations 
(FLBAs) have requested that the FCA repeal Sec. 614.4070 so that System 
institutions no longer have the authority to make or participate in 
loans outside their chartered territories. According to sections 1.5(6) 
and 2.2(13) of the Act, the lending authorities of FCS banks and 
associations are subject to FCA regulations. Furthermore, section 
5.17(a)(9) of the Act authorizes the FCA to prescribe regulations that 
are necessary or appropriate for carrying out the Act, while section 
5.17(a)(5) allows FCA regulations to confer approval upon certain 
actions of FCS institutions. In the absence of Sec. 614.4070, FCS banks 
and associations would only be authorized to make or participate in 
loans inside their chartered territories.
    The repeal of Sec. 614.4070 would deprive System institutions of 
the flexibility, under certain conditions, to finance borrowers who 
conduct operations outside their chartered territories. The consent and 
notification requirements in Sec. 614.4070 prevent unrestrained 
competition between System institutions. At this time, the FCA declines 
to modify or repeal Sec. 614.4070 because it balances the needs of 
borrowers and System institutions.

C. Borrower Stock Requirements for Loans Sold Into Secondary Markets

    Two commenters requested that the FCA repeal Sec. 614.4335(a), 
which requires borrowers whose loans are destined for sale in a 
secondary market to purchase stock in System institutions. These 
commenters claim that this stock-purchase requirement places System 
lenders at a disadvantage with their competitors.
    The FCA responds that the stock-purchase requirement in 
Sec. 614.4335 derives from section 4.3A(c) of the Act. Section 4.3A(c) 
of the Act states that all System institutions must sell stock when 
they make loans to new borrowers ``notwithstanding any other provision 
of this Act.'' Furthermore, section 4.3A(g) of the Act states that 
section 4.3A controls if it is inconsistent with any other provision of 
the Act except section 4.9A.
    Prior to 1987, former sections 1.16(c) and 2.13(f) of the Act 
expressly waived the requirement that borrowers purchase stock for 
loans that were destined for sale to, or participation 

[[Page 57915]]
with, non-System lenders. However, sections 1.16(c) and 2.13(f) of the 
Act were repealed by the Agricultural Credit Act of 1987 (1987 Act).\2\ 
Furthermore, section 301 of the 1987 Act consolidated the stock 
capitalization requirements for all Farm Credit banks and associations 
into section 4.3A of the amended Act, which indicates that all 
borrowers are required, without exception, to purchase stock in the 
System bank or association that makes their loans. The Act, as amended, 
no longer contains any provision that explicitly exempts borrowers 
whose loans are originated for sale from complying with the statutory 
stock-purchase requirement. The committee reports and the congressional 
debates to the 1987 Act are silent as to reasons why Congress amended 
the Act so it no longer exempts loans that are destined to secondary 
markets from the stock-purchase requirement. In fact, there is no 
indication in the legislation that Congress considered the impact 
section 4.3A of the Act would have on the: (1) Ability of FCS banks and 
associations to sell loans to non-System lenders; and (2) development 
of the Federal Agricultural Mortgage Corporation (Farmer Mac) as a 
secondary market for agricultural and rural home loans.

    \2\ Pub. L. 100-233, 101 Stat. 1568, (Jan. 6, 1988).
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    The FCA is aware that the stock-purchase requirement for loans 
destined to secondary markets causes inconvenience to System lenders 
and their borrowers. Nevertheless, Sec. 614.4335(a) is consistent with 
the plain language of section 4.3A of the Act. However, the FCA 
observes that FCS banks and associations have flexibility within the 
confines of section 4.3A of the Act to devise practical solutions that 
will minimize the difficulties associated with the borrower stock 
requirements. For example, a recent FCA Bookletter, OE-403 (Dec. 23, 
1994), concluded that FCS banks and associations are not required to 
sell stock if they ``table fund'' loans for non-System lenders that are 
certified Farmer Mac poolers.

D. Borrower Rights and Loan Sales

    Two commenters requested that the FCA amend Sec. 614.4336 so that 
borrower rights would not apply to loans that are sold to established 
secondary markets or non-System lenders. These commenters assert that 
borrower rights increase the transaction costs associated with the sale 
of loans to other lenders. More importantly, non-System institutions 
usually will not purchase loans that are subject to borrower rights 
requirements.
    In order to fully respond to the commenters, the FCA has examined 
those provisions of the Act that govern borrower rights on FCS loans. 
According to sections 4.14A(a) (5) and (6) of the Act, borrower rights 
attach only to loans that System banks (other than banks for 
cooperatives), associations, and other financing institutions make to 
farmers, ranchers, and aquatic producers and harvesters. Furthermore, 
the disclosure requirements in section 4.13 of the Act do not apply to 
consumer loans that are subject to the Truth in Lending Act, 15 U.S.C. 
1601 et seq. Thus, borrower rights requirements do not attach to home 
loans that System banks and associations make to rural residents who 
are not agricultural or aquatic producers. For this reason, the 
borrower rights provisions in title IV of the Act do not impede the 
sale of non-farm rural home loans to the Federal National Mortgage 
Association, the Federal Home Loan Mortgage Corporation, Farmer Mac, or 
non-System lenders.
    According to section 8.9(a) of the Act, borrower rights do not 
apply to agricultural mortgage loans that collateralize Farmer Mac 
securities. Furthermore, section 8.9(b) of the Act prescribes specific 
procedures for detaching borrower rights from agricultural mortgage 
loans that FCS lenders sell to Farmer Mac poolers. Two regulations, 
Secs. 614.4336(a)(1) and 614.4367(b), implement these statutory 
authorities.
    Some System institutions have expressed strong opposition to 
Sec. 614.4336(a)(2), which prescribes two alternatives for resolving 
borrower rights when loans are sold to non-System lenders that are not 
Farmer Mac poolers. More specifically, Sec. 614.4336(a)(2) requires the 
FCS lender to either: (1) Incorporate these statutory borrower rights 
into the loan agreement so that the purchaser assumes these 
obligations; or (2) obtain the borrower's signed, written consent to 
the sale, including the relinquishment of borrower rights. As noted 
earlier, System institutions assert that Sec. 614.4336(a)(2) 
effectively precludes the sale of most loans to non-System lenders.
    Some System lenders have opined that the sale of loans to non-
System institutions automatically extinguishes borrower rights. The FCA 
fully responded to this claim when Sec. 614.4336(a)(2) was adopted as a 
final regulation in 1992. See 57 FR 38237 (Aug. 24, 1992). From the 
FCA's perspective, the rationale for Sec. 614.4336(a)(2) remains valid.
    As explained in the preamble to Sec. 614.4336(a)(2), the FCA finds 
no support in either the Act or its legislative history for the claim 
that the loan sale authorities of FCS institutions supersede the 
borrower rights provisions in title IV of the Act. In fact, the 
System's loan sale authorities already existed at the time that the Act 
was amended to guarantee certain protections to FCS borrowers. In this 
context, Sec. 614.4336(a)(2) balances the statutory authority of System 
lenders to sell their loans with the borrower rights provisions of the 
Act. The FCA observes that Sec. 614.4336(a)(2) prevents potential 
disputes that could erupt if borrower rights issues are left unresolved 
when loans are sold to non-System lenders who are not Farmer Mac 
poolers. Uncertainty over the status of borrower rights may also deter 
an informed non-System lender from purchasing loans from FCS banks and 
associations.
    The approach advocated by the commenters would allow FCS 
institutions to unilaterally deprive borrowers of their statutory 
rights without their consent. Accordingly, the FCA will retain 
Sec. 614.4336(a) because it implements the Act by equitably balancing 
borrower rights with the authority of FCS banks and associations to 
sell loans to non-System lenders.
    Recently, the FCA has received inquiries about the application of 
borrower rights to loans that are guaranteed by other Federal agencies. 
This issue is currently under consideration at FCA.

E. Disclosures

    Under Sec. 614.4337(a), an FCS bank or association that sells a 
loan to another lender is required to disclose to the borrower 
specified information about the purchaser, the servicing agent, 
borrower rights, and changes in the loan terms. Two commenters 
suggested that the disclosure of loan sales and the corresponding 
reporting requirements in Sec. 614.4337(a) are unnecessary because they 
should be handled by the purchaser of the loan, rather than the FCS 
institution.
    The FCA believes that the disclosure requirements in 
Sec. 614.4337(a) are the responsibility of the seller, not the 
purchaser, of System loans. As previously discussed, the Act imposes 
borrower stock and borrower rights requirements on loans that are 
originated by System banks and associations. These institutions are in 
the best position to explain the impact of the sale on these matters. 
Furthermore, disclosures concerning servicing rights were added to this 
regulation after a General Accounting 

[[Page 57916]]
Office report criticized certain System loan sale practices that 
created hardships for many borrowers. See 57 FR 38237 (Aug. 24, 1992). 
As Sec. 614.4337 addresses the obligations of System institutions that 
originate and subsequently sell the borrowers' loans, the FCA will not 
repeal this regulation.

F. Investment in Farmers' Notes

    Several FCBs and associations requested that the FCA either 
eliminate or modify the full-recourse requirement in Sec. 615.5172, 
which authorizes PCAs and ACAs to invest in Farmers' Notes. This 
regulation authorizes PCAs and ACAs, in accordance with the policies 
prescribed by the boards of their funding banks, to invest in notes and 
other obligations evidencing the purchase of farm equipment, machinery, 
and supplies by farmers and ranchers from private dealers and 
cooperatives. The regulation requires that the debtors on these 
Farmers' Notes must be eligible to borrow from PCAs and ACAs. More 
importantly, Sec. 615.5172(d) states that ``all notes in which the 
association invests shall be endorsed with full recourse against the 
cooperative or dealer.''
    Commenters claimed that this full-recourse requirement adversely 
impacts System competitiveness in the short-term credit market and 
restrains their business opportunities.
    The commenters asserted that: (1) The recourse requirement should 
be a credit decision of the association, and (2) the full-recourse 
requirement is unrelated to safety and soundness.
    Although the FCA realizes that the full-recourse requirement in 
Sec. 615.5172(d) may deprive PCAs and ACAs of some profitable business 
opportunities, it implements several provisions of the Act. The 
Farmers' Notes program derives from section 2.2(10) of the Act, which 
authorizes associations to invest their funds, as approved by their 
funding bank, pursuant to FCA regulations. Therefore, the regulation 
implements the investment authorities, not the lending powers, of PCAs 
and ACAs. Because the full-recourse requirement precludes PCAs and ACAs 
from assuming any credit risk on Farmers' Notes, Sec. 615.5172(d) 
ensures that these instruments are treated as investments rather than 
loans.
    The full-recourse requirement prevents PCAs and ACAs from extending 
credit to an eligible borrower without complying with provisions of the 
Act that govern their lending authorities and capitalization 
requirements. Farm Credit banks and associations lack authority under 
sections 1.5(16) and 2.2(11) of the Act, respectively, to purchase 
operating loans from non-System lenders. Furthermore, the commenters' 
recommendation is incompatible with provisions of the Act that require: 
(1) System institutions to accord borrower rights on agricultural or 
aquatic loans, and (2) farmers to purchase voting stock when they 
obtain credit from a System lender. For these reasons, the FCA cannot 
delete or modify the full-recourse requirement in Sec. 615.5172(d) 
without an amendment to the Act to allow System banks and associations 
to purchase loans from non-FCS lenders.

III. Future Efforts To Reduce Unnecessary Regulatory Burdens on FCS 
Institutions

    All remaining regulatory burden issues that System institutions 
raised during the comment period are being addressed in separate 
regulatory projects that have already been assigned to specific FCA 
task forces. Within the past 2 years, the FCA has responded to some 
System concerns about regulatory burdens by adopting final investment 
and related services regulations. This summer, the FCA proposed new 
eligibility regulations that are designed to relieve unnecessary 
regulatory burdens on the FCS while simultaneously enforcing statutory 
requirements and promoting safety and soundness. The FCA work groups 
are considering possible amendments to existing regulations that 
govern: (1) General Financing Agreements; (2) Agency prior approvals; 
(3) quarterly reports to shareholders; (4) letters of credit for 
international trade; (5) credit underwriting standards and independent 
credit judgments on loan participation; and (6) the 10-day notification 
requirement for changes in interest rates. Separately, the FCA will 
review whether Sec. 611.330 could be amended so that FCS institutions 
could, under certain conditions, use ballots containing identity codes 
in non-weighted elections without compromising voter secrecy and the 
integrity of the electoral process. The Agency also plans to reevaluate 
the regulatory timeframes associated with the reconsideration of 
mergers, consolidations, and other corporate restructurings that have 
been approved by an institution's shareholders under Sec. 611.1122(k).
    Sections 4.9 and 5.17(a)(3) of the Act specifically require reports 
about young, beginning, and small farmer programs at FCS institutions. 
The FCA has no latitude to grant relief from these statutory reporting 
requirements. However, the Agency is currently considering whether 
Sec. 614.4165(d) is still necessary because other methods may be 
appropriate for ensuring compliance with the statutory reporting 
requirements for young, beginning, and small farmer programs.
    As part of its strategic plan, the FCA is considering comprehensive 
revisions to the Loan Accounting and Reporting System (LARS) and Call 
Report requirements. As results are achieved from this strategic goal, 
unnecessary or duplicative LARS and Call Report requirements on System 
institutions will be eliminated. However, changes to these reporting 
requirements and further changes to regulatory requirements must be 
accomplished without any adverse impact on the ability of the FCA to 
discharge its safety and soundness responsibilities under the Act.
    Except for the specific issues outlined above that may be addressed 
in ongoing regulation projects, the FCA considers this its final 
response to comments received pursuant to its regulatory burden 
request.

    Dated: November 17, 1995.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 95-28583 Filed 11-22-95; 8:45 am]
BILLING CODE 6705-01-P