[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Proposed Rules]
[Pages 24907-24909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12411]



 ========================================================================
 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. 97 / Friday, May 17, 1996 / Proposed 
Rules  

[[Page 24907]]



FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB67


Loan Policies and Operations; Other Financing Institutions

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Farm Credit Administration (FCA) requests public comment 
through an Advance Notice of Proposed Rulemaking (ANPRM) concerning 
potential revisions to the regulations in subpart P of part 614 that 
govern the funding and discount relationship between Farm Credit System 
(Farm Credit, FCS, or System) banks that operate under title I of the 
Farm Credit Act of 1971, as amended (Act), and non-System other 
financing institutions (OFIs). Farm Credit Banks (FCBs) and 
agricultural credit banks (ACBs) are authorized to fund and discount 
certain short- and intermediate-term loans for non-System lenders, such 
as commercial banks, savings associations, credit unions, trust 
companies, agricultural credit corporations, and other agricultural and 
aquatic lenders as part of their mission to finance agriculture, 
aquaculture, and other specified rural credit needs. External 
developments, such as the consolidation of the commercial banking 
industry, the advent of interstate banking and branching, the gradual 
reduction of Federal assistance to agriculture and rural communities, 
and the increased interest of non-System financial institutions in 
additional sources of funding and liquidity may necessitate revisions 
to the regulations in subpart P of part 614 so that System banks can 
fulfill their obligation to meet demands in rural communities for 
short- and intermediate-term credit. The purpose of any future 
rulemaking would be to ensure that eligible and creditworthy farmers, 
ranchers, aquatic producers and harvesters, processing and marketing 
operators, farm-related businesses, and rural homeowners will continue 
to have access to affordable, dependable, and stable short- and 
intermediate-term credit through both System and non-System lenders. 
Specifically, this ANPRM seeks comments regarding the FCA's OFI 
regulations and how they may be revised to better implement the 
statutory provisions.

DATES: Written comments should be received on or before July 16, 1996.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio, 
Associate Director, Regulation Development, Office of Examination, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090 or sent by facsimile transmission to the FAX number at (703) 734-
5784. 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:

Eric Howard, Policy Analyst, Regulation Development, Office of 
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 
883-4498, or
Richard A. Katz, Senior Attorney, Regulatory Enforcement Division, 
Office of General Counsel, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The Agricultural Credit Act of 1923 1 
created 12 Federal intermediate credit banks (FICBs) to discount 
agricultural production loans for national and State banks, trust 
companies, savings associations, credit unions, agricultural credit 
corporations, incorporated livestock loan companies, and other 
specified lenders. In 1930, Congress authorized the former FICBs to 
make secured loans and advances directly to such institutions 
(hereinafter OFIs).2 As a result, OFIs could borrow from and 
discount production agricultural loans with System banks before the 
Farm Credit Act of 1933 3 created production credit associations 
(PCAs) as an alternative source of financing the operating needs of 
farmers and ranchers.
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    \1\ Pub. L. No. 503, 42 Stat. 1454, (Mar. 4, 1923).
    \2\ Pub. L. No. 439, 46 Stat. 816, (June 26, 1930).
    \3\ Pub. L. No. 75-73D, title II, 48 Stat. 257, 259, (June 16, 
1933).
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    The legislative history to the Act reveals that Congress originally 
granted OFIs discount privileges at System banks in order to redress 
the scarcity of operating credit for farmers and ranchers.4 During 
the past 73 years, Congress has responded to the changing demands of 
agricultural producers and other rural residents for affordable short- 
and intermediate-term credit by updating the statutory authorities of 
the FICBs and their successor FCBs and ACBs 5 to provide funding 
and financial assistance to both System and non-System lenders. 
Currently, section 1.7(b) of the Act authorizes OFIs to obtain funding 
from FCBs or ACBs for any loan that a PCA could make under section 2.4 
of the Act to eligible farmers, ranchers, aquatic producers and 
harvesters, processing and marketing operators, farm-related 
businesses, and rural homeowners.
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    \4\ See H. R. Rep. No. 1712, 67th Cong., 1st. Sess. (Feb. 25, 
1923), P. 17.
    \5\ Section 410 of the Agricultural Credit Act of 1987 (1987 
Act) created the FCBs through the mandatory merger of the Federal 
Land Bank and the FICB in each Farm Credit district. See Pub. L. No. 
100-233, Sec. 410, 101 Stat. 1568, 1637, (Jan. 6, 1988). Section 7.0 
of the Act allows a FCB to merge with a bank for cooperatives in 
order to form an ACB. Section 7.0 of the Act derives from section 
416 of the 1987 Act. Section 7.0 was further amended by section 
408(b) of the Agricultural Credit Technical Corrections Act of 1988. 
See Pub. L. No. 100-233, Sec. 416, 101 Stat. 1568, 1645, (Jan. 6, 
1988); Pub. L. No. 100-399, Sec. 408(b), 102 Stat. 989, 1001, (Aug. 
17, 1988).
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    Section 1.7(b)(4) of the Act requires the FCA to enact regulations 
that assure that funding from Farm Credit banks operating under title I 
of the Act will be ``available on a reasonable basis'' to any national 
bank, State bank, trust company, agricultural credit corporation, 
incorporated livestock loan company, savings association, credit union, 
association of agricultural producers engaged in making loans to 
farmers and ranchers, or corporation engaged in making loans to 
producers or harvesters of aquatic products that: (1) Is significantly 
involved in lending for agricultural or aquatic purposes; (2) 
demonstrates a continuing need for supplementary sources of funds to 
meet the credit requirements of its agricultural or aquatic borrowers; 
(3) has limited access to national or regional capital markets; and (4) 
does not use the services of System banks to extend

[[Page 24908]]

credit to persons and for purposes that cannot be financed by a PCA 
under title II of the Act. According to the legislative history to 
section 1.7(b)(4) of the Act,6 Congress intended that Farm Credit 
banks act as a primary funding and liquidity source for small, local 
OFIs so they in turn could meet certain short- and intermediate-term 
credit needs in their rural communities.7 However, the legislative 
history to section 1.7(b)(4) of the Act also indicates that Congress 
did not intend to exclude other agricultural creditors from funding or 
discounting loans with System banks,8 so long as they have a need 
for supplementary funds that cannot be met through access to national 
or regional capital markets.
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    \6\ Current section 1.7(b)(4) derives from section 203 of the 
Farm Credit Act Amendments of 1980 (1980 Act). See Pub. L. No. 96-
592, Sec. 203, 94 Stat. 3437, 3441, (Dec. 24, 1980). Section 203 of 
the 1980 Act substantially revised former section 2.3 of the Act, 
which set forth the lending authorities of the FICBs. The new OFI 
eligibility criteria in section 203 of the 1980 Act were 
incorporated into former section 2.3(d) of the Act. Section 401 of 
the 1987 Act, which set forth the powers and obligations of the 
FCBs, recodified the requirements in former section 2.3(d) as 
section 1.7(b)(4) of the Act. See Pub. L. No. 100-233, Sec. 401, 101 
Stat. 1568, 1625 (Jan 6, 1988).
    \7\ See H.R. 96-1287, 96th Cong., 2d. Sess., (1980), 21, 32-34. 
See also 126 Cong. Rec. H 10960-64 (daily ed. Nov. 19, 1980).
    \8\ Id.
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    Section 1.7(b) of the Act requires FCBs and ACBs to extend credit 
to qualified OFIs (within the confines of safety and soundness) as part 
of their mission to finance agriculture, aquaculture, and other 
specified rural credit needs. While many OFIs often compete directly 
with PCAs and agricultural credit associations (ACAs) that own voting 
stock in the FCB or ACB, the Act requires Farm Credit banks to extend 
funding on a safe and sound lending basis to any qualified OFI so that 
farmers, ranchers, aquatic producers and harvesters, farm-related 
businesses and rural homeowners have access to affordable and 
dependable credit.
    The number of OFIs that fund or discount loans with System banks 
has declined from a peak of 327 in 1982 to 22 on December 31, 1995. 
Furthermore, the amount of credit that System banks have extended to 
OFIs has decreased from almost $914 million in 1981 to $230.8 million 
as of December 31, 1995. The farm crisis of the 1980s caused a decline 
in overall agricultural debt, which in turn, substantially reduced the 
number of OFIs and their demand for System financing. The FCS also 
experienced significant financial stress between 1984 and 1989, and 
many OFIs terminated their discounting relationship with System banks 
because: (1) They sought to reduce their exposure to loss by retiring 
their investments in FCS banks; (2) the FCS no longer offered 
competitive rates; or (3) several OFIs ceased operations as a result of 
merger or closure. Many rural commercial banks, including some OFIs, 
merged with regional banks or bank holding company networks that did 
not qualify for OFI status because they were no longer significantly 
engaged in agricultural lending.
    The financial strength of Farm Credit banks has significantly 
improved in the past several years. As a result, FCBs and ACBs are 
better positioned to help increase the availability of reasonably 
priced and dependable credit in many of America's rural communities. 
Efforts by Federal and State governments to balance their budgets may 
reduce direct assistance to agriculture and rural development in future 
years. As rural areas require greater private sector investment to 
sustain their economic viability, local financial institutions are 
seeking alternative means to provide affordable credit to their 
communities on a sustainable basis. Rural lenders also face liquidity 
problems from time-to-time. Loan-to-deposit ratios at rural depository 
institutions are now at historically high levels.9 As the 
commercial banking industry continues to consolidate into large 
national and regional networks it is unclear how the credit needs in 
rural communities will be affected.
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    \9\ A recent study indicates that loan-to-deposit ratios at 
commercial banks of all sizes that substantially engage in 
agricultural lending have risen from 53.6 percent in 1987 to 86.2 
percent as of June 30, 1995. See Economic Research Service, U.S. 
Dep't of Agriculture, (AIS-60), Agricultural Income and Finance 
Situation and Outlook Report, 11, 53. (Feb. 1996).
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    Today, several non-System financial institutions are once again 
expressing interest in obtaining FCS funding for their short- and 
intermediate-term loans to agricultural and other rural borrowers. 
However, many of these non-System institutions perceive barriers that 
impede their access to System funding. Although a variety of factors 
may have contributed to the historical decline in the OFI lending 
program, the FCA wants to eliminate any regulatory restrictions that 
are not required by the Act and its legislative history or do not 
promote safety and soundness of the FCS.
    The FCA wants to ensure that the relationship between Farm Credit 
banks and OFIs provides another means for meeting the short- and 
intermediate-term credit needs of agricultural producers and other 
rural borrowers, as Congress intended. The existing regulations were 
enacted in 1981, after Congress amended the OFI provisions in the Act. 
See 46 FR 51886 (Oct. 22, 1981). As a result of external developments 
over the past 15 years, the FCA believes that it is now time to review 
these regulations in subpart P of part 614 to determine whether they 
are appropriately addressing the credit needs of non-System 
institutions that lend to agriculture and rural communities. An ANPRM 
will give all interested parties an opportunity to provide the FCA with 
information to assist it in developing proposed regulations that will 
be responsive to the credit needs of OFIs and their borrowers.10 
Furthermore, the FCA seeks guidance about how new regulations can best 
promote equitable treatment of OFIs and System associations by FCBs and 
ACBs. Comments from non-System lenders are encouraged so that the FCA 
can consider the needs and concerns of eligible financial institutions 
that the Agency does not examine or regulate.
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    \10\ The FCA is aware that Congress is considering proposals 
that would provide non-System financial institutions greater access 
to funding and discount relationships with System banks. These 
legislative proposals go substantially beyond what the existing 
statute allows. Should any of these proposals be enacted, the FCA 
would review the regulations in light of the new statutory 
provisions.
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    The Act establishes certain requirements that OFIs must meet in 
order to initiate and maintain a relationship with the FCS. For 
example, section 1.10(b) of the Act authorizes FCBs and ACBs to extend 
credit to OFIs so they can make short- and intermediate-term loans to 
persons who would be eligible to obtain credit from PCAs.11 
Additionally, each OFI is required by section 4.3A(c)(1)(D)(iii) of the 
Act to purchase non-voting equity in its funding FCB or ACB. Finally, 
the same borrower rights that PCAs must provide also apply to OFI loans 
that are funded by a Farm Credit bank.
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    \11\ Section 1.10(b) of the Act allows FCBs and ACBs to extend 
financial services to PCAs, ACAs, and OFIs so they can make: (1) 
Aquatic loans that mature within 15 years; and (2) loans to farmers, 
ranchers, farm-related businesses, and non-farm rural homeowners 
that mature within 7 years, unless the bank's board, under the 
regulations of the FCA, approve loans that are repayable within 10 
years.
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    Safety and soundness issues will also be addressed when the FCA 
proposes new OFI regulations. OFIs may pose different safety and 
soundness considerations for the FCA than direct lender associations. 
For example, OFIs may merit a different regulatory treatment than 
System associations for questions relating to collateral and lien 
perfection because, in contrast to System associations, OFIs can borrow

[[Page 24909]]

from other lenders without the permission of their System funding 
banks. In contrast to the authorities vis-a-vis FCS institutions, the 
FCA lacks broad authority to: (1) Appoint a conservator or receiver for 
insolvent OFIs; 12 or (2) determine the priority of claims against 
OFIs in liquidation.13
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    \12\ Section 4.12(b) of the Act grants the FCA ``exclusive power 
and jurisdiction to appoint a conservator or receiver'' for FCS 
banks and associations.
    \13\ For the past 65 years, the Federal courts have interpreted 
various Farm Credit Acts as authorizing the FCA to determine the 
priority of claims for System institutions in liquidation. See 
Wheeler v. Greene, 280 US 49 (1929); Knox National Farm Loan 
Associations v. Phillips, 300 US 194 (1937); Little v. First South 
Production Credit Association, CA No. J890021 (W) (S.D. Miss. May 
16, 1990).
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    The FCA requests comments and information that address the 
following questions:

I. Eligibility for OFI Status

A. Significant Involvement in Agricultural or Aquatic Lending

    1. What criteria (such as assets, income, composition of the loan 
portfolio, or other factors) best determine whether an OFI is 
significantly involved in agricultural or aquatic lending as required 
by section 1.7(b)(4)(B)(i) of the Act and what specific threshold, if 
any, should new regulations use? Please explain your recommendation.
    2. How should the FCA define an agricultural lender? Would the 
profiles of agricultural lenders established by other Federal agencies 
be useful? Please explain your recommendation.

B. An OFI's Need for Supplemental Sources of Funds

    What criteria should be used to determine whether depository and 
non-depository OFIs demonstrate a continuing need for supplementary 
sources of funds to meet the credit requirements of their agricultural 
or aquatic borrowers, as required in section 1.7(b)(4)(B)(ii) of the 
Act? Please explain your recommendations.

C. OFI Access to National or Regional Capital Markets

    1. Has the existing regulatory definition of ``national or regional 
capital markets'' in Sec. 614.4540 become outmoded? If so, what factors 
in today's financial environment demonstrate that an OFI has limited 
access to ``national or regional capital markets?''
    2. The Riegle-Neal Interstate Banking and Branching Efficiency Act 
of 1994 will enable bank holding companies and their commercial bank 
affiliates to expand, over time, their interstate banking and branching 
networks. How will this law affect the concept of limited access to 
``national or regional capital markets'' in section 1.7(b)(4)(B)(iii) 
of the Act?

D. Mergers, Consolidations, and Acquisitions of OFIs

    When an OFI merges, consolidates, or is acquired by another 
financial institution, the eligibility of the successor entity to 
borrow from an FCB or an ACB must be established anew. Under what 
conditions, if any, should a successor to an existing OFI be entitled 
to ``grandfather'' rights?

E. Parent and Affiliate Relationships

    1. What factors should determine whether an OFI applicant is 
considered together with its parents and affiliates as a single entity?
    2. Section 1.7(b)(4)(D) of the Act establishes specific criteria 
for FCA review of OFI application denials based on the OFI's subsidiary 
or affiliate relationships. Under Secs. 614.4550 and 614.4555, the FCA 
creates a review procedure when an FCB or ACB rejects an OFI's request 
for financing for any reason. In the interest of eliminating 
unnecessary prior approvals and case-by-case reviews, the FCA requests 
comments on whether there is a compelling need for the regulations to 
continue to require an FCA review of all OFI applications that have 
been denied. Please explain your recommendation.

F. Eligibility of Major Financial Institutions

    The statute and the legislative history indicate that agricultural 
lenders that do not meet the criteria of sections 1.7(b)(4)(B) (ii) and 
(iii) of the Act could still fund or discount certain loans with System 
banks. What restrictions, if any, should the regulations impose on 
System funding to these types of institutions?

II. Place of Discount

    1. Should new regulations continue the territorial restrictions in 
existing Sec. 614.4660 which require that an OFI must obtain financing 
from the FCB or ACB (designated System bank) in whose territory: (1) 
The OFI maintains its headquarters; or (2) more than 50 percent of the 
OFI's borrowers is concentrated? If not, what criteria should determine 
which Farm Credit bank should finance an OFI? Please explain your 
recommendation.
    2. Under what circumstances, if any, should new regulations allow 
an FCB or ACB to extend financing to an OFI that does not operate in 
its chartered territory if the designated System bank does not approve 
the OFI's application?
    3. Are there any aspects of the Riegle-Neal Interstate Banking and 
Branching Efficiency Act of 1994 that the FCA should consider as it 
develops new regulatory provisions that determine the place of discount 
for commercial banks and nonbank affiliates of bank holding companies 
whose networks operate in the chartered territories of more than one 
Farm Credit bank? Please explain your recommendation.

III. Safety and Soundness

A. Supplemental Collateral

    Under what circumstances, if any, should OFIs be required by the 
new regulations to pledge cash and readily marketable securities or 
other assets as additional collateral for their loans from System 
banks?

B. OFI Lending Limit

    Current regulations at Sec. 614.4565 impose a lending limit on 
OFIs. Is this limit appropriate? If not, what alternatives do you 
suggest and why? How should concentration risk be addressed in a 
general financing agreement between an OFI and a Farm Credit bank?

C. Insolvency of an OFI

    How should new regulations safeguard the interests of an FCB or ACB 
when an OFI is liquidated?

IV. Fair Treatment Between OFIs and Direct Lender Associations

    1. Do current regulations adequately and appropriately ensure that 
FCBs and ACBs accord impartial and equitable treatment to both FCS 
associations and OFIs? If not, what changes should be made and why?
    2. The regulations currently require, with certain limited 
exceptions, that OFIs must be treated in a manner that is comparable to 
direct lender associations. To the extent feasible, the FCA seeks to 
ensure that OFIs and FCS associations are treated equitably by their 
funding banks. What circumstances, if any, justify different standards 
concerning equity investment in the funding bank, interest rate 
charges, and servicing fees?

V. Other Issues

    Are there other regulatory changes, not addressed above, that would 
improve an FCS bank's ability to serve an OFI and its agricultural 
customers? Please explain your recommendations.

    Dated: May 13, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-12411 Filed 5-16-96; 8:45 am]
BILLING CODE 6705-01-P