[Federal Register Volume 61, Number 73 (Monday, April 15, 1996)]
[Proposed Rules]
[Pages 16403-16412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9155]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 61, No. 73 / Monday, April 15, 1996 /
Proposed Rules
[[Page 16403]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 614 and 619
RIN 3052-AB64
Loan Policies and Operations; Definitions; Loan Underwriting
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit
Administration Board (Board), proposes amendments to the regulations
relating to loan underwriting in response to comments received from the
Board's initiative to reduce regulatory burden, streamline the
regulations, and set clear minimum regulatory standards where
practicable. The proposed regulations would require each institution to
adopt loan underwriting policies and standards, eliminate unnecessary
regulations, and make other changes to the regulations governing
prudent credit administration, the lending authority of production
credit associations, and collateral evaluations.
DATES: Comments should be received on or before May 15, 1996.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination, Farm
Credit Administration, McLean, Virginia 22102-5090. Copies of all
communications received will be available for review by interested
parties in the Office of Examination, Farm Credit Administration.
FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Regulation Development, Office of
Examination, (703) 883-4498, TDD (703) 883-4444;
or
Joy E. Strickland, Senior Attorney, Regulatory Enforcement Division,
Office of General Counsel, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: On June 10, 1993, the FCA Board approved a
notice seeking public comment on the appropriateness of requirements
that the FCA regulations impose on the Farm Credit System (System or
FCS). See 58 FR 34003 (June 23, 1993). The FCA has addressed many of
those comments in previous rulemakings. Of the comments received in
response to the notice, 24 were related to loan underwriting and the
independent credit judgment rule for loan sale and purchase
transactions through agents. This rulemaking addresses those issues. In
addition to responding to the regulatory burden comments, the FCA is
also proposing other amendments to refocus regulatory requirements for
loan underwriting, make the regulations more understandable and useful
to the reader, set minimum regulatory standards, and make conforming
amendments.
In response to regulatory burden comments and in an attempt to
achieve consistency throughout the regulations in subparts C through E
of part 614, the FCA is proposing a substantial revision to the
structure and content of the regulations. In addition, some areas that
were addressed in loan underwriting are more properly the focus of
subpart A, Lending Authorities, and the FCA is proposing relocating
those items from subpart E to subpart A. The explanation of proposed
amendments to subpart A is contained in the discussion of the proposed
amendments to subpart E, Loan Terms and Conditions. Accordingly, the
following discussion begins with subparts C and D.
In order to provide readers with a guideline for the changes
proposed, the following is a list of changes for the proposed revisions
in parts 614 and 619:
Subpart A--Lending Authorities
Secs. 614.4000 through 614.4050--Revised.
Subpart C--Bank/Association Lending Relationship
Secs. 614.4100, 614.4110, and 614.4130--No changes proposed.
Sec. 614.4120--Revised.
Secs. 614.4135 through 614.4145--Deleted.
Subpart D--General Loan Policies for Banks and Associations
Sec. 614.4150--Revised.
Sec. 614.4160--Deleted.
Sec. 614.4165--Revised.
Subpart E--Loan Terms and Conditions
Sec. 614.4200--Revised.
Secs. 614.4210 through 614.4230--Deleted.
Sec. 614.4231--Revised.
Secs. 614.4232 and 614.4233--No changes proposed.
Subpart F--Collateral Evaluation Requirements
Secs. 614.4245 and 614.4250--Revised. No other amendments proposed.
Subpart H--Loan Purchases and Sales
Sec. 614.4325--Revised. No other amendments proposed.
Subpart J--Lending Limits
Secs. 614.4355 and 614.4358--Revised. No other amendments proposed.
Subpart Q--Banks for Cooperatives Financing International Trade
Sec. 614.4810--Revised. No other amendments proposed.
Part 619--Definitions
Secs. 619.9165 and 619.9290--Removed. No other amendments proposed.
I. Subparts C and D--Bank/Association Lending Relationship and General
Loan Policies for Banks and Associations
In response to the request for comments on regulatory burden, one
association commented that most Farm Credit Banks (FCBs) have changed
their relationship with associations from a supervisory to a wholesale
lending relationship. The association stated that the FCA examiners
encourage direct lender associations to adopt their own policies and
procedures. FCA regulations, however, continue to contemplate a
supervisory role for FCBs over association lending operations as if all
banks retained direct (retail) lending authorities without recognizing
the role of many banks as wholesale or discount lenders to Farm Credit
associations. The association stated that operational policies for
direct lenders should be developed by the associations rather than the
banks, but noted that this practice is inconsistent with existing
regulations and that clarifying language from the FCA would be helpful.
The criticized regulations, Secs. 614.4135, 614.4140, and 614.4145,
were promulgated in 1972 to implement the Farm Credit Act of 1971.
These regulations, addressing credit supervision, have not been amended
since their adoption. At that time, the banks in the Farm Credit System
[[Page 16404]]
performed many supervisory functions over associations, including
conducting credit reviews. The FCA's primary focus at the time was to
regulate the banks' own operations, including their supervision of
associations and did not emphasize the agency's present practice of
exercising its regulatory and enforcement authorities directly over
associations.
Since 1972, the importance of direct lender associations in the
Farm Credit System has increased substantially. As a result, many banks
are becoming wholesale lenders rather than direct lenders. Statutory
changes since 1972 in FCA's structure and authorities and in the
relationship of associations with their funding banks result in a
greater need for accountability of direct lender associations. The FCA
believes that autonomy in association operations promotes
accountability in many areas including prudent lending operations.
Therefore, the FCA proposes to delete existing Secs. 614.4135,
614.4140, and 614.4145 and clarify the role of Farm Credit Banks (and
Agricultural Credit Banks) in supervision of association's credit
operations. However, the FCA does not intend to minimize the importance
of general bank oversight of association credit activities that may
have a material impact on the bank and on the association's ability to
perform on its direct loan(s) from the bank. These issues, however, can
be appropriately addressed in the agreements governing the lending
relationship between a bank and an association.
The FCA believes that each direct lender, through its board of
directors, should adopt and follow its own policies and procedures for
operations. The FCA agrees with the commenter that duplication and
possibly conflict may result when an association is required by
regulation to abide by district policies and at the same time is
encouraged to develop its own local policies and procedures.
In order to emphasize that the responsibility for developing
prudent loan policies and underwriting standards rests with each
institution, the FCA proposes to delete certain existing regulations.
For example, Sec. 614.4150 currently defines ``sound loan.'' Rather
than define ``sound loan'' by regulation, the FCA proposes to require
each institution to adopt loan underwriting policies and standards that
contain measurable criteria appropriate for the type of loan and the
institution's risk-bearing capacity, which criteria can be used to
determine whether the applicant's operational, financial, and
management resources are sufficient to ensure repayment of the debt
from cashflow, taking into account the borrower's other debt
obligations.
Existing Sec. 614.4160 requires that each bank adopt policies to
ensure that lending practices result in sound loans and specifies five
credit factors that must be analyzed and documented in evaluating the
creditworthiness of each loan applicant. The five credit factors
listed, however, need not be given the same weight in every transaction
and may be only a portion of the variables that should be considered in
some transactions. The FCA believes that each institution should have
the responsibility and the flexibility to adapt its loan underwriting
program to its particular circumstances without regulatory mandates for
the basic and well understood principles of prudent lending. Therefore,
existing Sec. 614.4160 would be deleted under the proposed regulations,
and the mandate for an appropriate analysis of creditworthiness would
be included in proposed Sec. 614.4150(g) governing loan underwriting
standards.
To implement the requirement that each institution must develop its
own policies, the FCA proposes a new regulation that addresses credit
supervision by each institution's board of directors and the
establishment of loan policies and underwriting standards by each
direct lending institution. In instances where direct lending authority
has not been transferred to the Federal land bank associations (FLBAs),
FCBs must still develop lending policies and standards that all FLBAs
within their respective districts must follow in making credit
decisions for the bank. Additionally, in certain circumstances where
loss exposure accrues to individual FLBAs through loss sharing
agreements with the FCB, loan policies and standards may be needed by
FLBAs to augment and supplement those established by their supervisory
banks.
The proposed rule, Sec. 614.4150, addresses the responsibility of
each institution's board of directors to adopt policies to guide
lending. Under these policies, each direct lending institution would be
required to adopt written standards for lending and issue written
policies, operating procedures, and control mechanisms that reflect
those standards for guidance in the extension and administration of
sound credit. These requirements parallel the current requirements in
existing Sec. 614.4145, which address each bank's responsibilities to
supervise credit operations in its district. This regulation would
clearly establish that each direct lending institution's board of
directors is not only accountable for providing policy direction for
credit operations, but also is responsible for more specific guidance
in the extension and administration of sound credit.
The FCA proposes to leave the prescription of specific credit
policies and underwriting standards to each direct lender institution's
board rather than to prescribe them by regulation. However, the
proposed regulation would require certain minimum standards that must
be addressed in the institution's policies. Proposed Sec. 614.4150
would require that the institution's policies and procedures address
minimum standards for credit information and verification, credit
analysis, loan disbursement and servicing, collateral requirements,
loan approval delegations and requirements for board reporting, loan
pricing requirements, prudent loan underwriting standards, loan terms
and conditions that are appropriate for a loan's purpose, and other
areas necessary for the professional conduct of a lending organization.
Under the proposed rule, the FCA would evaluate the adequacy of
each institution's policies to ensure that its board is providing
sufficient direction, guidance, and internal controls for the
institution's credit operations. The procedures implementing these
policies should be in sufficient detail to properly manage and control
risk in the institution's portfolio consistent with the institution's
risk-bearing capacity. Each lending program should be guided by
policies and underwriting standards that address the specific types of
risks associated with the types of loans within an institution's
overall lending program. The FCA believes that institutions should have
the flexibility to develop different lending programs for the types of
customers within their chartered territory. The FCA's primary concern
is whether or not the programs are conducted in a safe and sound manner
in compliance with the statute and the regulations.
The FCA is aware that some System institutions are making increased
use of credit scoring techniques in the evaluation of certain types of
loans. Credit scoring and other techniques used in minimum information
programs, when fully understood and well managed by an institution and
its board of directors, can be a valuable tool in making credit
decisions. These proposed regulatory changes will allow System
institutions the flexibility to use credit scoring and enhance minimum
information programs in credit delivery decisions.
[[Page 16405]]
Proposed Sec. 614.4150(g) would require each direct lending
institution to develop written, measurable loan underwriting standards
to be used to determine whether the applicant has the operational,
financial, and management resources necessary to ensure repayment of
the debt from cashflow, taking into consideration all other
obligations. Such standards would be required to be applied to each
loan transaction as appropriate, taking into consideration the amount
of the loan, the loan's purpose, the nature and type of credit risk and
enterprise being financed. The measurements should be quantitative to
the extent feasible (as for financial information), but may be
qualitative for factors that do not lend themselves to quantification,
but are considered important to the credit decision. Such standards and
their application would be required to be related to the institution's
risk-bearing ability and to take into account future credit risk
uncertainties. Under proposed Sec. 614.4150(g), each institution would
be required to embody the concepts underlying existing Secs. 614.4150
and 614.4160 in a comprehensive, written loan policy. In addition, the
proposed regulations would require that for any loans made that do not
meet the loan underwriting standards, the written credit analysis must
document the compensating factors or extenuating circumstances that
demonstrate repayment capacity. The FCA recognizes that even among
acceptable credits the level of perceived risk will vary. Accordingly,
a well capitalized institution with strong capital and sound earnings
potential will be better positioned to extend credit to a borrower who
appears to have the capacity to repay but nonetheless presents a higher
risk. A weaker institution will need to establish higher standards
until it improves its risk-bearing capacity.
Proposed Sec. 614.4150(h) would require that loan terms and
conditions are appropriate for the purpose of a loan. In this regard,
assets with a useful life of 5 to 10 years would not be financed with a
loan that has a 30-year repayment obligation. This provision is added
in order to retain the existing regulatory requirement in
Sec. 614.4160(e) that the institution has to consider the
constructiveness and practicality of the loan amount, purpose, and
terms and conditions.
Existing Sec. 614.4165 requires that bank lending policies give
special consideration to the credit needs of young, beginning, or small
farmers, ranchers, and producers or harvesters of aquatic products. The
regulation also defines terms and requires associations to make annual
reports to the banks regarding the operations and achievements in these
lending programs. The banks, in turn, are required to make annual
reports to the FCA. Although two institutions commented that the FCA
should eliminate the reporting requirements in Sec. 614.4165, these
requirements are statutory and cannot be eliminated. Section 4.19 of
the Act obligates each institution to take the needs of young,
beginning, and small farmers and ranchers into consideration and report
annually on its progress. However, the reporting instructions can be
eliminated as a regulatory requirement and be implemented instead
through the Agency's call report instructions. The FCA proposes to
retain the regulatory requirement to have a lending program for this
segment of the market, as required by section 4.19 of the Act, but to
transfer the instructions for reporting to the call report. The call
report instructions will provide specific direction and timing for
consistent reporting from System institutions to the FCA. The FCA will
continue to report to the Congress as the Act requires.
II. Subpart E--Loan Terms and Conditions
Existing Sec. 614.4200 requires institutions to set forth the terms
and conditions of each loan in a written loan agreement between the
borrower and the lender. Seven institutions commented that the FCA
should eliminate the requirement that loan terms and conditions be set
forth in a written loan agreement. Some of the commenters suggested
that the reference to a loan agreement should be changed to reference a
written instrument, thus permitting institutions to document loans in
the most appropriate fashion. Other commenters requested that the FCA
eliminate the loan agreement requirement for loans below a de minimus
level, such as $250,000. Finally, one commenter noted that the
requirement that loan terms and conditions be adequately disclosed to
the borrower prior to closing is unclear and troublesome and should be
deleted.
The FCA originally adopted the requirement for a loan agreement
between the lender and borrower in order to ensure that borrowers have
the requisite information in order to meet all loan conditions and to
provide institutions with a means of imposing a legal obligation on
borrowers to provide certified financial statements. See 55 FR 24861
(June 19, 1990). Because the FCA is proposing amendments to its
financial statement collection requirements and wishes to provide
institutions with more flexibility, the FCA is proposing to delete the
requirement that there be a loan agreement for each loan. Instead,
proposed Sec. 614.4200(a)(1) would require institutions to set forth
the terms and conditions of each loan in a written instrument. Such
written instrument could be a loan agreement, promissory note, or other
instrument appropriate to the type and amount of the credit extended.
The FCA notes that continued use of loan agreements is a prudent
practice for complex loans, loans of above average risk, and loans with
conditions that are not standard or that contain elements that the
borrower must fulfill prior to loan closing or during the term of the
loan. The FCA also notes that when periodic financial statements are
required, the written instrument used to convey terms and conditions or
the promissory note should create a legal obligation on the part of the
borrower to provide the statements.
Proposed Sec. 614.4200(a)(2) also would replace the current rules
with a simple requirement that the borrower be given notice of the
terms and conditions of the loan prior to loan closing. Existing
Sec. 614.4200 requires that if the loan closing will occur more than 15
days after notification of the approval is provided to the borrower,
the notice of approval must set forth the terms and conditions on which
credit will be extended. One institution commented that the regulator
should not prescribe the contents of the notice of approval. The FCA
does not wish to dictate to institutions what may be contained in its
notice of approval to borrowers. However, the FCA continues to believe
that it is important that borrowers receive prompt written notice of
all terms and conditions on which credit will be extended. It is
especially important that the borrower receive prompt written notice in
situations where the borrower must take certain actions prior to loan
closing. Therefore, the proposed regulations would require institutions
to provide prompt written notice of approval of the loan and ensure
that loan terms and conditions are properly and promptly disclosed to
the borrower not later than loan closing. In addition, copies of all
documents executed by a borrower in connection with the closing of a
loan under titles I or II of the Act must be provided to the borrower
at the time of execution and any time thereafter that the borrower
requests copies. This is a requirement of section 4.13A of the Act for
each
[[Page 16406]]
qualified lender and is restated in the regulation as a matter of
convenience.
The FCA also notes that System institutions are subject to the
requirements of the Federal Equal Credit Opportunity Act (ECOA), 15
U.S.C. 1691 et seq., with respect to the timing and content of
notification of action taken on credit applications. The ECOA generally
requires creditors to provide applicants with notice that their credit
request has been approved or denied within 30 days after receiving a
completed application and entitles rejected applicants to learn the
principal, specific reasons for the adverse decision. Proposed new
Sec. 614.4200(a)(3) incorporates by reference the requirements
contained in the ECOA's implementing Regulation B, 12 CFR 202.9.
The FCA received comments from nine institutions regarding the
requirements in existing Sec. 614.4200 and the former requirement in
section 1.10(a)(5) of the Act regarding obtaining financial statements
from borrowers. Section 1.10(a)(5) of the Act, which required financial
statements for long-term real estate loans at least every 3 years or
sooner as determined by the FCA through regulation, was removed from
the statute by the Farm Credit System Reform Act of 1996 (1996
Amendments)(Pub. L. 104-105, Feb. 10, 1996).
Several institutions commented that the requirement for obtaining
annual financial statements from borrowers was excessive. One
institution stated that institutions should obtain financial statements
from borrowers based upon an institution's assessment of risk with
respect to categories of loans. Another stated that the need for
periodic financial information should be determined according to loan
size, complexity, and performance history as well as the institution's
risk-bearing ability. One commenter stated that the requirement to
obtain periodic financial statements should be changed from obtaining
statements annually to obtaining them every 3 years as required in the
Act. Finally, one institution stated that there should be an annual
requirement only for loans in excess of one million dollars.
The FCA agrees that as long as institutions have in place
sufficient loan underwriting standards that include requirements for
obtaining necessary financial information, annual submission of a
verifiable balance sheet and an income statement is not needed for many
loans. As a result, the FCA is proposing significant amendments to the
existing financial information requirements in Sec. 614.4200, including
a proposed separation of the provisions requiring that financial
statements be obtained when making or renewing a loan from the
requirement for requiring periodic financial statements during the term
of a loan. The FCA believes it is essential, for safety and soundness
reasons, that appropriate financial information be required when making
every loan, and that certain loans, i.e. those with larger balances and
those not classified acceptable, should be supported with more detailed
financial information, which is provided by a balance sheet and income
statement.
The FCA proposes to retain the general requirement that when
making, renewing, or taking a material servicing action, such as a
release of a significant portion of the collateral, institutions obtain
a verifiable balance sheet and income statement, certified true and
correct by the borrower, for certain categories of loans made under
title I or II of the Act. However, rural home loans and loans of
$500,000 or less that are amortized monthly would be exempt from this
regulatory requirement, and institutions would be given the flexibility
to address this need through their own credit standards and lending
policies. A borrower's monthly payment record on such a loan provides
an ongoing indication to a lender of the borrower's financial condition
and repayment capacity. The FCA is also proposing that all other loans
and commitments with an aggregate outstanding balance of $100,000 or
less per borrower be exempt from the requirement to obtain financial
statements when making and servicing such loans. Under each exemption,
however, institutions would be required to have adequate procedures and
controls in place to obtain and verify sufficient financial information
to establish repayment capacity and assess the risk in the loan.
The requirement for obtaining periodic financial statements is also
modified in the proposed regulations. The regulation would require
annual financial statements for all loans, except: (1) Rural home
loans; (2) loans (other than rural home loans) amortized monthly of
$500,000 or less; (3) loans classified acceptable that have an
aggregate outstanding balance and commitment per borrower of $200,000
or less; and (4) loans that have an aggregate outstanding balance and
commitment per borrower of $100,000 or less, regardless of credit
classification.
The FCA believes that obtaining verifiable balance sheets and
income statements is a necessary tool for managing adversely classified
credit. As the credit risk in a particular loan increases, identified
through its assigned credit classification, it is imperative that the
lender have complete and accurate borrower financial information to
appropriately monitor and service the account. For loans classified
acceptable under $200,000, the FCA believes that institutions should
have the flexibility to forego reviews of annual financial statements,
but encourages institutions to require financial statements for loans
under this threshold in which the risk level warrants closer
monitoring. Such financial information would permit lenders to learn of
any potential changes in the borrower's repayment capacity. The FCA
acknowledges that there are no industrywide standards for the size or
complexity of loans warranting current and complete financial
information. However, prudent credit practices dictate that risk be
assessed in each loan. The FCA believes that the best method for
assessing risk in certain loans is through an analysis of a balance
sheet and income statement and incorporates such practices in its
proposed amendments to Sec. 614.4200. The FCA proposes $200,000 as an
appropriate threshold to require balance sheets and income statements,
even for acceptable loans.
The FCA received four comments regarding the security requirements
for long-term real estate loans. Existing Sec. 614.4210(a) requires
that long-term real estate mortgage loans must be secured by a first
lien on an interest in real estate comprising agricultural property, an
eligible farm-related business, an eligible rural residence, or real
estate used as an integral part of an eligible aquatic operation.
Additional security may be taken for long-term real estate loans, but
it may not be included in meeting the requirement in Sec. 614.4210(b)
that funds only be advanced if the outstanding loan balance after the
advance would not exceed 85 percent of the appraised value of the real
estate taken as primary security.
One commenter requested that the FCA remove the requirement that
the primary security for a loan be agricultural land and suggested that
the requirement creates an eligibility test for both the borrower and
the collateral. Another commenter suggested that any additional
security taken should be considered toward meeting the loan-to-value
limitation in Sec. 614.4210(b). Two commenters suggested that the FCA
eliminate the existing requirement to report regularly to the
institution's board any advance of funds by an
[[Page 16407]]
institution to protect the institution's collateral position.
In response to the commenters and in order to achieve the goal of
adequately collateralized loans and safe and sound lending activities
with a minimum of regulatory burden, the FCA is proposing to delete
existing Sec. 614.4210. Requirements relating to security for long-term
loans would be placed in revised Sec. 614.4200, General requirements.
Under the proposal, Sec. 614.4200(c)(1) would continue to require long-
term real estate mortgage loans to be secured by a first lien on real
estate. The proposed regulation would also maintain the existing
requirement regarding the agricultural nature of the real estate
security and continue to permit other real estate to be taken as
additional security. The proposal would, however, delete the
requirement in existing Sec. 614.4210(b) that only the value of the
agricultural property be considered for the purpose of meeting the
loan-to-value ratio. When both agricultural and nonagricultural
property is taken as security, the total value of the real estate may
be considered, provided that the security is primarily agricultural, in
that the value of the agricultural property is greater than the other
real estate security.
The FCA believes that this modification preserves the rural focus
of long-term mortgage lenders contemplated by section 1.7 of the Act
and also implements the safety and soundness concern reflected in the
loan-to-value requirements of section 1.10. At the same time, the
proposal would offer institutions greater flexibility to take the type
of real estate collateral that best secures each loan. If the proposed
regulations are adopted, the FCA will require institutions to include
standards for real estate collateral that ensure safe and sound lending
practices in their loan policies and underwriting standards, pursuant
to proposed Sec. 614.4150 and subpart F of part 614.
The FCA is also proposing to delete the requirement to report
periodically to the institution's board of directors in situations in
which the institution has advanced funds in order to protect its
collateral position. Instead, the FCA expects the board of directors of
each institution to direct management to establish appropriate
procedures and reporting requirements for monitoring and controlling
the advance of funds to protect collateral. Institutions should
document that the advance is in the institution's best interest despite
the fact that the real estate may not fully secure the advance.
The FCA is proposing another modification to implement a provision
of the 1996 Amendments regarding the loan security requirements.
Existing Sec. 614.4210(b) requires that no funds can be advanced if the
outstanding loan balance after the advance exceeds 85 percent (or 97
percent if guaranteed by a Government agency) of the appraised value of
the real estate taken as primary security. Section 202 of the 1996
Amendments provides that a loan on which private mortgage insurance
(PMI) is obtained may exceed 85 percent of the appraised value of the
real estate security to the extent that the loan amount in excess of 85
percent is covered by PMI. The proposed regulations would incorporate
this change in revised Sec. 614.4200(c)(1).
The FCA also received a comment relating to the requirements for
intermediate-term loans in existing Sec. 614.4220. The commenter stated
that the FCA should eliminate the requirement that intermediate-term
loans be specifically identified and have a regular level amortization
schedule (i.e., no graduated schedules, balloons, or bullet
maturities). The institution asserts that good credit sense should
dictate loan terms, rather than limiting them through regulation.
In response, the FCA notes that loans that currently must be
amortized and specifically identified are loans that are made for major
capital items, such as new equipment and new or remodeled buildings and
facilities. Existing Sec. 614.4220(b)(2) requires that the maturity of
such loans must be shorter than the useful life of the item, and the
amount outstanding must at all times be less than the value of the item
after normal depreciation.
The FCA believes that existing Sec. 614.4220(b)(2) contains an
important credit philosophy that should be maintained by Farm Credit
lenders. However, the FCA believes that matters such as loan
amortization and maturity for short-term loans are more appropriately
addressed in each lender's loan underwriting policies and standards and
that prudent underwriting standards would reflect such a philosophy.
Therefore, the FCA proposes to delete the requirements in
Sec. 614.4220(b)(2). The items in Sec. 614.4220 that address loan terms
would be relocated to Sec. 614.4040 in subpart A, and the items
addressing loan underwriting standards and loan security requirements
are contained in the proposed amendments to Sec. 614.4200. As a result
of incorporating the provisions relating to short- and intermediate-
term loans in Secs. 614.4040 and 614.4200, existing Sec. 614.4220 is
proposed to be deleted. In addition, the proposed regulations would
codify guidance that the FCA has provided to institutions regarding
loans made by production credit associations (PCAs) that have
amortization schedules longer than 7 years.
Proposed Sec. 614.4200(c)(3) would continue the provision in
existing Sec. 614.4220(b)(1) that short- and intermediate-term loans
may be secured or unsecured as the documented creditworthiness of the
borrower warrants. Institutions would be expected to include collateral
standards for short-and intermediate-term loans in the loan
underwriting standards adopted pursuant to proposed Sec. 614.4150.
Existing Sec. 614.4040 would be amended to specify the terms for which
PCAs can make loans. Authority would continue for PCAs to make loans
with maturities of up to 7 years and make loans with maturities in
excess of 7, but not more than 10 years, if authorized in policies
adopted by the funding bank. The FCA is proposing to add flexibility
for PCAs to make loans with maturities of 10 years or less having
amortization schedules of up to 15 years when such loans are authorized
in policies approved by the funding bank.
The FCA notes that neither the Act nor FCA regulations prohibit
PCAs from offering borrowers a loan amortization period greater than
the term of the loan with a balloon payment at maturity. Nor are PCAs
precluded from refinancing such loans when safety and soundness
conditions are met and the circumstances warrant such action.
Therefore, the FCA is clarifying in the proposed regulations that PCAs
may make loans with maturities of 10 years or less that are amortized
over a period of up to 15 years, the longest period that Congress has
considered appropriate for production lenders. This authority is
subject to the following restrictions:
(1) The loan may be refinanced only if the lender determines at
maturity that the loan meets its current loan policy and loan
underwriting criteria;
(2) Any refinancing of the loan may not extend beyond 15 years from
the date of the original loan; and
(3) The loan must be for refinancing or acquisition of a capital
asset or other permissible purpose and may not be made solely to
finance the acquisition of real estate.
The FCA notes that in making loans with an amortization in excess
of 10 years, institutions cannot include an explicit or implicit
guarantee or promise of refinancing. However, prudent lending criteria
dictate that PCAs should determine whether a borrower's circumstances
are likely to warrant refinancing of the balloon payment at
[[Page 16408]]
the maturity date. Also, the FCA clarifies that although loans cannot
be made solely for the purpose of acquiring real estate, loans may be
made for facility expansions that include the purchase of real estate
on which to build the facilities. Finally, the FCA reiterates that any
loans made by PCAs with an amortization in excess of 7 years must be
authorized in policies adopted by the funding bank. In adopting such
policies, the FCA expects the bank boards to consider the competitive
impact on other chartered System institutions operating in the district
territory and minimize any disruptive impact of new lending programs to
the extent possible, consistent with the authority to make loans with
an amortization of up to 15 years.
The PCAs will continue to have the authority to make loans with
terms of up to 15 years to producers and harvesters of aquatic products
for major capital expenditures. Such loans are not subject to the
restrictions delineated above.
The FCA also proposes to continue the requirement that all short-
and intermediate-term loans be made with maturities that are
appropriate for the purpose of the loan and comply with the
institution's loan underwriting standards. This requirement would be
moved to Sec. 614.4040.
III. Other Proposed Amendments
The FCA is proposing a clarifying amendment to Sec. 614.4050 that
would recognize the authority of agricultural credit associations
(ACAs) to make long-term real estate mortgage loans of not less than 5
nor more than 40 years, rather than not less than 10 nor more than 40
years as stated in the existing regulation. The current provision was
adopted in order to recognize that ACAs have the option to make loans
under their short- and intermediate-term lending authority without
requiring a first lien on real estate if the term is 10 years or less.
The proposed amendment would clarify that an ACA has the option of
making loans with maturities between 5 and 10 years under either its
long-term or its short- and intermediate-term lending authority as
appropriate.
The FCA received a comment relating to regulatory burden that
pertains to the independent credit judgment requirements of
Sec. 614.4325(e). The commenter states that this regulation eliminates
the ability of FCS institutions to fully utilize an agent in the
administration of loan participations. The regulation requires that
independent credit judgment be applied by an employee of the purchasing
participant, and does not allow the authority to be delegated to an
agent who is not an employee.
The FCA agrees that an institution may sometimes find it
advantageous to use an agent in connection with its loan purchase
authorities. The FCA observes, however, that the institution's board
remains fully accountable for transactions through agents and fully
responsible for the sound administration of all loans, whether made
directly by the institution or purchased through the institution's
participation authority. Therefore, the FCA proposes, by adding a new
Sec. 614.4325(h), to allow transactions through agents as long as the
institution remains accountable for all the agent's actions by ensuring
that the agent complies with the institution's specific underwriting
and other criteria for the purchase of loans. The FCA proposes that
these types of transactions are permissible, only if: (1) The
institution's board establishes the necessary criteria in a written
agency agreement that outlines the scope of the agent relationship and
obligates the agent to follow the institution's loan underwriting
standards; and (2) the agent relationship is reviewed periodically by
the institution's board to determine if the agent's actions are in the
best interest of the institution. In order to maintain the independent
judgment of the institution, the proposed regulation also requires that
the agent must be independent of the seller or any intermediate broker
in the transaction.
The FCA Board believes that these actions represent the minimum
practices that will not only outline the authority of the agent, but
also establish how the institution will hold the agent accountable for
compliance with the institution's loan policies and underwriting
standards. The FCA Board expects an agent agreement to outline the type
of business that is acceptable to the board and specific authorities
with respect to approval levels, reporting requirements, and other
performance elements that the board of directors could utilize to
ensure that the agent relationship is in the institution's best
interest. Given the supervisory role of a bank and its control over the
association's funding, the FCA believes it would not be practical for
an association to attempt to hold its funding bank accountable.
Therefore, under proposed Sec. 614.4325(h)(3), a funding bank will be
specifically prohibited from being an agent for an association it
funds.
The FCA Board is also proposing amendments that are not a result of
the regulatory burden comments, but are nonetheless consistent with
FCA's initiatives to reduce burden and clarify existing regulations
where necessary.
The FCA proposes to delete Sec. 614.4222, non-farm rural home
loans, and relocate the provisions to Sec. 614.4200(c)(4) that pertain
to general security requirements for such rural home loans. This action
is proposed to achieve more consistent and concise regulations. The FCA
notes that there is an outstanding proposed amendment to Sec. 614.4222,
and this proposal will be in addition to the amendment proposed at 60
FR 47121 (September 11, 1995).
The FCA proposes to delete Sec. 614.4230 and include the provisions
on security for title III loans in a new Sec. 614.4200(c)(5), in the
same manner as is proposed for Sec. 614.4222. The provisions in
Sec. 614.4230(a) pertain to loan underwriting and must be considered by
the institution pursuant to proposed Sec. 614.4150.
The FCA proposes to significantly revise Sec. 614.4231, which
contains the specific requirements outlined for different commodity
programs, and instead require that loans on commodities covered by
government programs comply with the criteria established for those
programs. This revision is proposed because of the changing nature of
the government programs for the listed commodities.
Since their publication in 1995, the FCA has received several
requests to review certain provisions of the collateral regulations
contained in this subpart. Specifically, Farm Credit institutions and
examiners have pointed out two potentially burdensome areas: (1) The
applicability of the collateral evaluation requirements in
Sec. 614.4250 within an institution's small loan program; and (2) the
income capitalization approach to valuing collateral and related
provisions of Sec. 614.4265.
Comments received suggest the amount of documentation specifically
required by Sec. 614.4250 (a)(4), (a)(5), and (a)(6) is burdensome and
yields little extra risk protection for loans that qualify under an
institution's small loan program. In addition to comments received from
System institutions, FCA examiners have observed some instances in
which these particular collateral evaluation requirements may be
impeding prudent underwriting of certain loans in some institutions.
Some lending officials have made unsecured loans in the institution's
small loan program rather than taking available collateral to avoid the
documentation burden of Sec. 614.4250. The FCA now recognizes that
certain elements of
[[Page 16409]]
collateral evaluations required in the existing regulation may not be
conducive to the effective and efficient delivery of credit demanded by
the current market place for certain small, low risk loans. The FCA
believes such programs can be structured to ensure prudent lending
practices are imposed and remain in place while alleviating the burden
of the existing regulations.
The FCA proposes to amend Secs. 614.4245 and 614.4250 by making
parts of Sec. 614.4250 requirements inapplicable to an institution's
small loan program. However, each System institution must establish
appropriate procedures for the valuation of collateral taken to secure
loans under any small loan program. At a minimum, these procedures
should require documentation and certification of the value of the
collateral taken for small loans by an individual sufficiently skilled
to assign values to the collateral taken. The FCA believes certain
minimum requirements for collateral evaluations will sufficiently
document valuations for loans qualifying under an institution's small
loan program and meet the central, but not all, requirements of the
Uniform Standards of Professional Appraisal Practice (USPAP)
guidelines. The FCA, through this proposal, seeks to ensure that the
most essential requirements of Sec. 614.4250 for small loan programs,
namely paragraphs (a)(1), (a)(2), (a)(3), and (a)(7), are retained. To
accomplish this change, a new paragraph Sec. 614.4245(d) is proposed to
permit an institution to adopt policies and standards for a small loan
program that exclude documentation requirements presently existing in
Sec. 614.4250 (a)(4) through (a)(6). A corresponding modification is
proposed for Sec. 614.4250. This proposal would allow greater
flexibility to institutions and require that policies and standards be
adopted that address small loan program collateral criteria.
Requirements contained in (a)(1), (a)(2), (a)(3), and (a)(7) of
Sec. 614.4250 would continue to apply to an institution's small loan
program. These provisions require all collateral evaluations to be
based on the property's market value, be in a written format, consider
the property's use or intended use, and contain a certification by a
competent appraiser/evaluator. The FCA further observes that the use of
a limited or restricted appraisal, completed in accordance with USPAP
Standard 2.2, is a valid statement of value under the revisions to this
section. While the FCA is proposing to exempt certain requirements
contained in Sec. 614.4250(a), institutions are reminded that if real
estate is taken as collateral and State-sanctioned (certified or
licensed) appraisers are used for the valuation process, the proposed
exclusion of the provisions contained in Sec. 614.4250 (a)(4) through
(a)(6) may cause the resulting evaluations not to comply with USPAP and
State certification or licensing standards in certain instances. In
such cases, appraisers/evaluators may not meet terms and conditions
under which those States have certified or licensed them. This,
however, is considered a professional issue and institutions may
include the provisions of Sec. 614.4250(a)(4) through (a)(6) as they
deem appropriate.
The second area concerning the Agency's collateral regulations
centers on the clarification of requirements of the departure
provisions and income capitalization approach to valuing collateral
found in Sec. 614.4265. The FCA has received several comments and
suggestions to reconsider the appropriate use of, or exclusion of, one
or more of the three recognized approaches to valuation of real estate.
Most comments focused on Sec. 614.4265(b) and the intent and purpose of
the requirements of Sec. 614.4265 (d) and (e). Upon review and
consideration of comments received and the changes proposed herein, the
FCA concludes that no revisions to the existing requirements of
Sec. 614.4265 should be made. However, the FCA believes it is necessary
to clarify the purposes of, and alternatives provided by, Sec. 614.4265
(d) and (e), and the FCA intends to make this clarification through its
bookletter process.
Finally, the FCA proposes to clarify that Sec. 614.4325, purchase
and sale of interests in loans, also applies to transactions involving
pools of loans in the same manner as they apply to transactions
pertaining to individual loans. The FCA proposes an expanded definition
of the term ``interests in loans'' in Sec. 614.4325(a)(1) to include
transactions involving a pool of loans. The FCA is proposing this
amendment to relieve any potential regulatory burden and clarify how
pool transactions are to be handled.
The FCA proposes many conforming amendments within subparts A, C,
H, J, and Q of part 614, and in part 619 so that affected regulations
are consistent with the substantive changes proposed. Certain
conforming amendments in subpart A are in regulation sections that are
proposed to be revised as conforming amendments in the proposed rule
addressing eligibility and scope of financing. See 60 FR 47103
(September 11, 1995). The conforming amendments in this rulemaking are
in addition to those proposed on September 11, 1995, and include
Secs. 614.4000, 614.4010, 614.4020, 614.4030, 614.4040, 614.4050,
614.4222, and 614.4810.
List of Subjects
12 CFR Part 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 619
Agriculture, Banks, Banking, Rural areas.
For the reasons stated in the preamble, parts 614 and 619 of
chapter VI, title 12 of the Code of Federal Regulations are proposed to
be amended to read as follows:
PART 614--LOAN POLICIES AND OPERATIONS
1. The authority citation for part 614 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4101b, 4106, and 4128; Secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E. 4.18, 4.18A, 4.19, 4.36,
4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5
of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017,
2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121,
2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201,
2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 2219a, 2219b,
2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f,
2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat.
1568, 1639.
Subpart A--Lending Authorities
2. Section 614.4000 is amended by removing the words ``agricultural
credit association of a Federal land credit association'' and adding in
its place, the words ``agricultural credit association or a Federal
land credit association'' in the introductory text of paragraph (f),
and revising paragraph (a) to read as follows:
Sec. 614.4000 Farm Credit Banks.
(a) Long-term real estate lending. Except to the extent such
authorities are transferred pursuant to section 7.6 of the Act, Farm
Credit Banks are authorized to make, subject to the requirements in
Sec. 614.4200 of this part, real estate mortgage loans with maturities
of not less than 5 years nor more than 40 years and continuing
commitments to make such loans.
* * * * *
3. Section 614.4010 is amended by removing the reference
``Sec. 614.4230''
[[Page 16410]]
and adding in its place, the reference ``Sec. 614.4200'' in paragraphs
(d)(1) and (d)(2); and revising paragraph (a) to read as follows:
Sec. 614.4010 Agricultural credit banks.
(a) Long-term real estate lending. Except to the extent such
authorities are transferred pursuant to section 7.6 of the Act,
agricultural credit banks are authorized to make, subject to the
requirements of Sec. 614.4200, real estate mortgage loans with
maturities of not less than 5 years nor more than 40 years and
continuing commitments to make such loans.
* * * * *
Sec. 614.4020 [Amended]
4. Section 614.4020 is amended by removing the reference
``614.4230'' and adding in its place, the reference ``614.4200'' in
paragraphs (a)(1) and (a)(2).
5. Section 614.4030 is amended by revising paragraph (a) to read as
follows:
Sec. 614.4030 Federal land credit associations.
(a) Long-term real estate lending. Federal land credit associations
are authorized to make, subject to the requirements of Sec. 614.4200,
real estate mortgage loans with maturities of not less than 5 years nor
more than 40 years and continuing commitments to make such loans.
* * * * *
6. Section 614.4040 is amended by removing paragraph (b);
redesignating paragraphs (c) and (d) as new paragraphs (b) and (c),
respectively; removing the reference ``paragraph (c)(2)'' and adding in
its place, the reference ``paragraph (b)(2)'' in newly designated
paragraph (b)(1) introductory text; and by revising paragraph (a) to
read as follows:
Sec. 614.4040 Production credit associations.
(a) Loan terms.
(1) Production credit associations are authorized to make or
guarantee loans and other similar financial assistance for the
following terms:
(i) Repayable in not more than 7 years;
(ii) Repayable in more than 7 years, but not more than 10 years,
subject to authorization in policies approved by the funding bank;
(iii) Repayable in not more than 15 years to producers or
harvesters of aquatic products for major capital expenditures,
including but not limited to the purchase of vessels, construction or
purchase of shore facilities, and similar purposes directly related to
the producing or harvesting operation; 'and
(2) Subject to policies approved by the funding bank, production
credit associations may make loans authorized under paragraph (a)(1) of
this section that are amortized over a period not to exceed 15 years,
provided that:
(i) The loan may be refinanced only if the lender determines, at
the time of maturity, that the loan meets its loan policy and
underwriting criteria;
(ii) Any refinancing may not extend repayment beyond 15 years from
the date of the original loan; and
(iii) The loan is not being made solely for the purpose of
acquiring real estate;
(3) Short- and intermediate-term loans shall be made with
maturities that are appropriate for the purpose of the loan and that
comply with the institution's loan underwriting standards adopted
pursuant to Sec. 614.4150 and the general requirements of Sec. 614.4200
of this part.
* * * * *
7. Section 614.4050 is amended by adding introductory text and by
revising paragraphs (a) and (b) to read as follows:
Sec. 614.4050 Agricultural credit associations.
Agricultural credit associations are authorized to make, subject to
the requirements of Sec. 614.4200 of this part:
(a) Long-term real estate mortgage loans with maturities of not
less than 5 nor more than 40 years, and continuing commitments to make
such loans; and
(b) Short- and intermediate-term loans and provide other similar
financial assistance for a term not more than 10 years (15 years for
aquatic producers and harvesters).
* * * * *
Subpart C--Bank/Association Lending Relationship
Sec. 614.4120 [Amended]
8. Section 614.4120 is amended by removing the words ``the factors
set forth in Secs. 614.4150 and 614.4160'' and adding in their place,
the words ``the loan underwriting policies and standards adopted
pursuant to Sec. 614.4150'' in the last sentance of paragraph (a).
Secs. 614.4135, 614.4140, and 614.4145 [Removed]
9. Sections 614.4135, 614.4140, and 614.4145 are removed.
Subpart D--General Loan Policies for Banks and Associations
Secs. 614.4150, 614.4160 [Removed]
10. Sections 614.4150 and 614.4160 are removed.
11. New section 614.4150 is added to read as follows:
Sec. 614.4150 Lending policies and loan underwriting standards.
Under the policies of its board, each institution shall adopt
written standards for prudent lending and shall issue written policies,
operating procedures, and control mechanisms that reflect prudent
credit practices and comply with all applicable laws and regulations.
Written policies and procedures shall, at a minimum, prescribe:
(a) The minimum supporting credit information, frequency for
submission of information, and verification of information required in
relation to loan size, complexity and risk exposure;
(b) The procedures to be followed in credit analysis;
(c) The minimum standards for loan disbursement, servicing and
collections;
(d) Requirements for collateral and methods for its administration;
(e) Loan approval delegations and requirements for reporting to the
board;
(f) Loan pricing practices;
(g) Loan underwriting standards that include measurable standards
for determining that an applicant has the operational, financial, and
management resources necessary to repay the debt from cashflow, are
appropriate for each loan program and the institution's risk-bearing
ability, and consider the nature and type of credit risk, amount of the
loan, and enterprise being financed;
(h) Requirements that loan terms and conditions are appropriate for
loan purposes; and
(i) Such other requirements as are necessary for the professional
conduct of a lending organization, including documentation for each
loan transaction of compliance with the loan underwriting standards or
the compensating factors or extenuating circumstances that establish
repayment capacity notwithstanding the failure to meet any single loan
underwriting standard.
12. Section 614.4165 is amended by removing paragraphs (b) and (c);
redesignating paragraphs (d) and (e) as new paragraphs (b) and (c); and
revising paragraph (a) to read as follows:
Sec. 614.4165 Special credit needs.
(a) The board of each direct lender institution shall adopt
policies to establish programs to provide credit and related services
to young, beginning, and small farmers, ranchers, and producers or
harvesters of aquatic products.
* * * * *
Subpart E--Loan Terms and Conditions
13. Section 614.4200 is revised to read as follows:
[[Page 16411]]
Sec. 614.4200 General requirements.
(a) Terms and conditions. (1) The terms and conditions of each loan
made by a Farm Credit bank or association shall be set forth in a
written document, such as a loan agreement, promissory note, or other
instrument appropriate to the type and amount of the credit extension,
in order to establish loan conditions and performance requirements and,
where appropriate, to obligate the borrower to provide financial
statements, certified true and correct by the borrower, as required or
requested during the term of the loan. Copies of all documents executed
by the borrower in connection with the closing of a loan made under
titles I or II of the Act shall be provided to the borrower at the time
of execution and at any time thereafter that the borrower requests
additional copies.
(2) The terms and conditions of all loans shall be adequately
disclosed in writing to the borrower not later than loan closing. For
loans made under titles I and II of the Act, the institution shall
provide prompt written notice of the approval of the loan.
(3) Applicants shall be provided notification of the action taken
on each credit application in compliance with the requirements of 12
CFR 202.9.
(b) Obtaining borrower financial statements. As part of the loan
underwriting policies adopted pursuant to Sec. 614.4150, each direct
lender institution must adopt policies and procedures for obtaining
sufficient financial information from all borrowers in order to
establish repayment capacity and assess the risk inherent in each loan.
In addition, for loans, except rural home loans, made under titles I or
II of the Act:
(1) Farm Credit banks and associations shall require from each
borrower a verifiable balance sheet and income statement that has been
certified true and correct as a condition precedent to making, renewing
or extending the terms of a loan or taking any material servicing
action for the following loans:
(i) Monthly payment loans with an aggregate outstanding balance of
loans and commitments per borrower greater than $500,000; and
(ii) Loans, except monthly payment loans, with an aggregate
outstanding balance of loans and commitments per borrower greater than
$100,000.
(2) Farm Credit banks and associations shall require annually from
each borrower a verifiable balance sheet and income statement that has
been certified true and correct for the following loans:
(i) Monthly payment loans with an aggregate outstanding balance of
loans and commitments per borrower greater than $500,000;
(ii) Loans, except monthly payment loans, with an aggregate
outstanding balance of loans and commitments per borrower greater than
$200,000; and
(iii) Loans, except monthly payment loans, that are classified as
less than acceptable and that have an aggregate outstanding balance of
loans and commitments per borrower greater than $100,000.
(c) Security. (1) Long-term real estate mortgage loans must be
secured by a first lien interest in real estate. No funds shall be
advanced, under a legally binding commitment or otherwise, if the
outstanding loan balance after the advance would exceed 85 percent (or
97 percent as provided in section 1.10(a) of the Act) of the appraised
value of the real estate, except that a loan on which private mortgage
insurance is obtained may exceed 85 percent of the appraised value of
the real estate to the extent that the loan amount in excess of 85
percent is covered by such insurance. Real estate securing long-term
mortgage loans must be comprised primarily of agricultural or rural
property, including agricultural land, a farm-related business, a
marketing or processing operation, a rural residence, or real estate
used as an integral part of an aquatic operation.
(2) Notwithstanding the requirements of paragraph (c)(1) of this
section, the lending institution may advance funds for the payment of
taxes or insurance premiums with respect to the real estate, reschedule
loan payments, grant partial releases of security interests in the real
estate, and take other actions necessary to protect the lender's
collateral position. Any action taken that results in exceeding the
loan-to-value limitation shall be in accordance with a policy of the
institution's board of directors and adequately documented in the loan
file.
(3) Short- and intermediate-term loans may be secured or unsecured
as the documented creditworthiness of the borrower warrants.
(4) In addition to the requirements in paragraph (c)(1) of this
section, a long-term, non-farm rural home loan, including a revolving
line of credit, shall be secured by a first lien on the property,
except that it may be secured by a second lien if the institution also
holds the first lien on the property. A short- or intermediate-term
loan on a rural home, including a revolving line of credit, must be
secured by a lien on the property unless the financing is provided
exclusively for repairs, remodeling, or other improvements to the rural
home, in which case the credit may be secured by other property or
unsecured if warranted by the documented creditworthiness of the
borrower.
(5) Except as provided in Sec. 614.4231, loans made under title III
of the Act may be secured or unsecured, as appropriate for the purpose
of the loan and the documented creditworthiness of the borrower.
Secs. 614.4210, 614.4220, 614.4222, 614.4230 [Removed]
14. Sections 614.4210, 614.4220, 614.4222, and 614.4230 are
removed.
15. Section 614.4231 is revised to read as follows:
Sec. 614.4231 Certain seasonal commodity loans to cooperatives.
Loans on certain commodities that are part of government programs
shall comply with the criteria established for those programs. Security
taken on program commodities shall be consistent with prudent lending
practices and ensure compliance with the government program. The bank
shall provide for periodic review by bank officials of any custodial
activities and shall provide notice to the custodians that their
activities are subject to review and examination by the Farm Credit
Administration.
Subpart F--Collateral Evaluation Requirements
16. Section 614.4245 is amended by adding a new paragraph (d) to
read as follows:
Sec. 614.4245 Collateral evaluation policies.
* * * * *
(d) An institution's board of directors may adopt modified
collateral evaluation requirements, consistent with Sec. 614.4250(b),
for loans designated as part of a small loan program, which shall be
limited to loans to borrowers with aggregate outstanding balances to
the institution of $100,000 or less.
* * * * *
17. Section 614.4250 is amended by removing the words
``Specifically, all collateral evaluations must:'' and adding in their
place, the words ``Except for security taken on loans that are
designated as part of an institution's small loan program, all
collateral evaluations must:'' in paragraph (a) introductory text;
redesignating paragraph (b) as new paragraph (c) and adding new
paragraph (b) to read as follows:
Sec. 614.4250 Collateral evaluation standards.
* * * * *
[[Page 16412]]
(b) Collateral evaluations of property that secures a loan
designated as part of an institution's small loan program must comply
only with the requirements of paragraphs (a)(1), (a)(2), (a)(3), and
(a)(7) of this section.
* * * * *
Subpart H--Loan Purchases and Sales
18. Section 614.4325 is amended by removing the reference
``Sec. 614.4160'' and adding in its place, the words ``the loan
underwriting standards adopted pursuant to Sec. 614.4150'' in the
fourth sentence of paragraph (e); revising paragraph (a)(1); and adding
new paragraph (h) to read as follows:
Sec. 614.4325 Purchase and sale of interests in loans.
(a) * * *
(1) Interests in loans means ownership interests in the principal
amount, interest payments, or any aspect of a loan transaction and
transactions involving a pool of loans, including servicing rights.
* * * * *
(h) Transactions through agents. Transactions pertaining to
purchases of loans, including the judgment on creditworthiness, may be
performed through an agent, provided that:
(1) The institution establishes the necessary criteria in a written
agency agreement that outlines, at a minimum, the scope of the agency
relationship and obligates the agent to comply with the institution's
underwriting standards;
(2) The institution periodically reviews the agency relationship to
determine if the agent's actions are in the best interest of the
institution;
(3) Restrictions.
(i) An association's funding bank cannot act as its agent; and
(ii) The agent must be independent of the seller or intermediate
broker in the transaction.
Subpart J--Lending Limits
Sec. 614.4355 [Amended]
19. Section 614.4355 is amended by removing the word ``seasonal''
and adding in its place, the word ``commodity'' the second place it
appears in paragraphs (a)(6) and (b)(1) respectively, and in paragraph
(a)(8).
Sec. 614.4358 [Amended]
20. Section 614.4358 is amended by removing the words ``on the
credit factors set forth in Sec. 614.4160'' and adding in their place,
the words ``under the loan underwriting standards adopted pursuant to
Sec. 614.4150'' in paragraph (a)(1)(ii).
Subpart Q--Banks for Cooperatives Financing International Trade
Sec. 614.4810 [Amended]
21. Section 614.4810 is amended by removing the words ``credit
factors listed in Sec. 614.4160'' and adding in their place, the words
``the loan underwriting standards adopted pursuant to Sec. 614.4150''
in paragraph (b).
PART 619--DEFINITIONS
21. The authority citation for part 619 continues to read as
follows:
Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6,
7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243,
2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).
Secs. 619.9165 and 619.9290 [Removed]
22. Sections 619.9165 an 619.9290 are removed.
* * * * *
Dated: April 9, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-9155 Filed 4-12-96; 8:45 am]
BILLING CODE 6705-01-P