[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]



 ========================================================================
 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.
 
 ========================================================================
 

  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.

-----------------------------------------------------------------------

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