[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Rules and Regulations]
[Pages 4429-4451]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2058]
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Rules and Regulations
Federal Register
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Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 /
Rules and Regulations
[[Page 4429]]
FARM CREDIT ADMINISTRATION
12 CFR Parts 613, 614, 615, 618, 619, 620, and 626
RIN 3052-AB10
Eligibility and Scope of Financing; Loan Policies and Operations;
Funding and Fiscal Affairs, Loan Policies and Operations, and Funding
Operations; General Provisions; Definitions; Disclosure to
Shareholders; Nondiscrimination in Lending; Capital Adequacy and
Customer Eligibility
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA) through the FCA Board
(Board) adopts amendments (final rule) to the current regulations
governing the capital adequacy provisions and the customer eligibility
provisions for Farm Credit System (Farm Credit, FCS, or System)
institutions. This rule adds core surplus and total surplus standards
for banks, associations, and the Farm Credit Leasing Services
Corporation (Leasing Corporation); adds a collateral ratio for banks;
and adds procedures for setting higher capital standards for individual
institutions and for issuing capital directives, when warranted. The
rule also incorporates recent amendments to the Farm Credit Act of
1971, as amended (Act), which govern the eligibility rules for lending
under title III of the Act and provide Farm Credit banks and
associations with new authorities to participate with non System
lenders in loans to similar entities. The final rule eliminates
restrictions in the current eligibility regulations that are not
required by the Act and makes other technical, clarifying, and
conforming changes. The final rule relocates the nondiscrimination in
lending regulations to a new part without change.
DATES: This regulation shall become effective 30 days after publication
in the Federal Register during which either or both houses of Congress
are in session. Notice of the effective date will be published in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Dennis K. Carpenter, Senior Policy Analyst, and John J. Hays, Policy
Analyst, Office of Policy Development and Risk Control, Farm Credit
Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-
4444,
or
Rebecca S. Orlich, Senior Attorney, and Richard A. Katz, Senior
Attorney, Office of General Counsel, Farm Credit Administration,
McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: The FCA proposed amendments to the capital
provisions of its regulations for FCS institutions on July 25, 1995 (60
FR 38521) and to the customer eligibility provisions on September 11,
1995 (60 FR 47103). In response to comments received, the FCA combined
the two proposals and published proposed amendments to the capital
adequacy and customer eligibility provisions of its regulations for
Farm Credit institutions on August 13, 1996 (reproposed rule). See 61
FR 42092. The 30-day comment period expired on September 12, 1996.
I. Summary of the Changes in the Final Rule
A. The capital provisions of the final rule contain the following
changes from the reproposed rule:
1. Associations may include in their core surplus allocated
equities that are includible in their total surplus and that are not
scheduled to be revolved in the next 3 years. Such equities may
comprise up to 2 percentage points of an association's 3.5-percent
minimum core surplus to risk-adjusted assets requirement, with the
remaining 1.5 percent in unallocated surplus and includible perpetual
stock.
2. Banks for cooperatives (BCs) and agricultural credit banks
(ACBs) may include nonqualified allocated equities that are issued to
non-System entities and that do not have an established plan or
practice of revolvement. Such equities may comprise up to 2 percentage
points of a BC's or ACB's 3.5-percent minimum core surplus requirement,
with the remaining 1.5 percent in unallocated surplus and includible
perpetual stock.
3. If specifically provided for in an institution's capital
adequacy plan, the institution may retire or cancel purchased and
allocated equities includible in core surplus for application against
the indebtedness on a defaulted loan without causing similar remaining
equities to be excluded from the core surplus ratio. The institution
may also pay out allocated equities in the event of the death of a
former borrower whose loan has been repaid. In both cases, the
institution board must determine that retirement or revolvement is in
the best interest of the institution.
4. Retirement of less than an entire class or series of equities
includible in core surplus, other than in the circumstances described
in item 3 above, will result in the disallowance of remaining similar
equities from core surplus.
5. If approved by the FCA, a capital instrument or a particular
balance sheet account issued to or related to another System
institution may be included in an institution's core or total surplus.
6. The Leasing Corporation may include its C Stock issued to Farm
Credit banks in the total surplus ratio.
B. The eligibility provisions applicable to title I and title II
lenders incorporate the following changes from the reproposed rule:
1. The final regulation retains the existing definition of bona
fide farmer or rancher in Sec. 613.3010(a). This and the other
definitions in Sec. 613.3010 are redesignated as Sec. 613.3000(a) in
order to replace the reproposed definitions. The reproposed definitions
for agricultural assets and agricultural land, Sec. 613.3000(a)(1) and
(2), are withdrawn. The existing definition of agricultural land is
retained without change in Sec. 619.9025. Reproposed Sec. 613.3000(d),
addressing limitations on financing a farmer's other credit needs under
the reproposed definitions, is also withdrawn.
2. Existing Sec. 613.3005(a) is retained as final Sec. 613.3005 to
determine the scope of financing for farmers, ranchers, and producers
or harvesters of aquatic products.
[[Page 4430]]
3. The final rule offers some flexibility in the use of the 75th
percentile of local housing values to establish what constitutes
moderately priced housing. It requires each FCS institution to support
its determination with appropriate documentation whenever the
institution adopts a value above the 75th percentile of housing values
in the rural area where it is located.
II. Public Comments Received
The FCA received 1591 comment letters in response to the reproposed
rule concerning capital adequacy and customer eligibility provisions.
There were 1079 comments addressing the customer eligibility rules and
580 comments addressing the reproposed capital adequacy
provisions.1
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\1\ The total number of comments received on the individual
provisions of the final rule does not total 1591 because several
commenters responded to both capital and customer provisions in a
single comment letter.
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The FCA received 881 comments from System institutions and their
members/borrowers, including a comment letter from the System's
Presidents' Finance Committee, which reflected the views of System
banks and associations (System joint comment) concerning the capital
adequacy rules, as well as a letter from the Farm Credit Council (FCC),
also on behalf of the System institutions, on the customer eligibility
provisions. Of the remaining comments, 723 were from commercial banks,
26 from trade associations, 22 from members of Congress who transmitted
constituent letters, and three from State government agencies. The
national trade associations, in addition to the FCC, that commented
included: the American Bankers Association (ABA), the Independent
Bankers Association of America (IBAA), the Credit Union National
Association (CUNA), and the National Farmers Union (NFU). The States
from which banking chapters and affiliates of their national
associations submitted comments included Virginia, Wisconsin, Nebraska,
Pennsylvania, Arizona, California, Alaska, Hawaii, Montana, New Mexico,
Nevada, Oregon, Utah, Washington, Idaho, Colorado, Michigan, New York,
Indiana, Georgia, Maine, Louisiana, and South Dakota. In addition to
the written comments received, a group of System representatives made
an oral presentation of its views to Agency staff concerning the
capital adequacy provisions.
III. The Final Rule
After carefully considering the comments received on the reproposed
rule and further deliberation, the FCA adopts a rule governing capital
adequacy and customer eligibility for FCS financing. The FCA responds
to the specific concerns of the commenters as it explains the
provisions of the rule.
A. Capital Adequacy Provisions
Of the 580 written comments received on the capital provisions, six
were from System banks (AgFirst FCB (two letters), Western FCB,
AgriBank FCB, CoBank ACB, and St. Paul BC), one was from the Leasing
Corporation, 35 were from System associations, 532 were from borrowers/
shareholders of several agricultural credit associations (ACAs), one
was from the System's Presidents' Planning Committee on behalf of
System institutions (System joint comment), four were from various
State and national cooperative councils, and one was from the ABA on
behalf of its commercial bank members.
Responses to the capital provisions varied widely. Of the five
System banks that commented, one bank fully supported the reproposal
and urged the FCA not to diminish required levels by lowering ratios or
widening the definition of eligible capital. Two System banks supported
the reproposal as revised by minor changes suggested in the System
joint comment. Those changes are more fully described below. The other
two System banks suggested changes to the reproposal primarily as it
affected associations operating on a Subchapter T basis for tax
purposes. Of the System associations that submitted comments, a few
supported the reproposal, but the majority asked for changes in the
core surplus requirement. Likewise, the cooperative councils and the
association borrowers opposed the core surplus ratio components as
applied to associations. The ABA commented that it supported the
stiffening of capital requirements for System institutions and offered
a general opinion that the reproposal was not stringent enough.
1. Core Surplus Ratio Capital Standard
The majority of the comments on capital pertained to the core
surplus ratio in the reproposed rule. A System bank, the Leasing
Corporation, and several associations supported the core surplus ratio
as reproposed, and other System institutions generally supported the
ratio with minor revisions.
Many other respondents, including System associations, made the
same criticisms of the core surplus ratio that they had made of the
unallocated surplus ratio in the originally proposed capital
regulations. They asserted that the core surplus ratio was contrary to
cooperative principles, unfairly differentiated between unallocated
surplus and allocated surplus, and discouraged institutions from
operating as Subchapter T cooperatives. They stated their belief that
an institution with allocated equities in addition to a minimum level
of unallocated surplus was a stronger institution than one with the
same amount of unallocated surplus but no allocated equities. For a
detailed description of these comments, see 61 FR 42092, 42094 (Aug.
13, 1996). Most of these respondents did not address specifically the
inclusion of nonqualified allocated equities in the core surplus ratio.
A System bank that did address the inclusion of nonqualified
allocated equities disagreed with the FCA's statement that inclusion of
such equities would eliminate most of the disincentives to operate on a
Subchapter T basis and stated that single taxation is an extremely
important tool for managing tax liabilities on association earnings.
An association objected to the requirement that associations deduct
the net investment in the affiliated bank from the core surplus ratio.
Another association stated that an association should not have to
deduct this investment unless the bank does not meet its minimum
capital requirements.
A respondent questioned the meaning of the statement in the
reproposal preamble that the FCA expected a ``healthy portion'' of core
surplus to be made up of unallocated surplus. See 61 FR 42095-96 (Aug.
13, 1996). The respondent stated that ``healthy'' appeared to be a
subjective evaluation and asserted that ``[t]he requirement of a
`healthy' sum of unallocated surplus runs contrary to the cooperative
nature of the System.''
Two System associations stated that the risk monitoring systems
already in place--the Farm Credit System Insurance Corporation, the
Market Access Agreement, the Contractual Interbank Performance
Agreement, general financing agreements, and ``a very aggressive
regulator''--were sufficient to control risk.
A System bank recommended that the core surplus of associations be
calculated by means of two separate ratios: first, measure unallocated
retained earnings (URE) with no deduction for the investment in the
bank; second, measure total surplus with a deduction for the investment
in the bank. The bank pointed out that ``[t]he only situation in which
the member's investment would be impaired at the point in which losses
exceeded association unallocated surplus net of its investment in the
bank
[[Page 4431]]
would be one in which the association's investment in the bank was
impaired at the same time.'' The bank also stated that tax
considerations, not capital requirements, should be the basis on which
an institution should decide whether to allocate equities on a
nonqualified or a qualified basis. Several associations recommended
that the core surplus for associations be calculated on a more broadly
defined basis by including all permanent capital less the investment in
the bank.
The System, in its joint comment, recommended that the FCA permit a
call on preferred stock when a bank is overcapitalized or in a
declining rate environment. It also recommended that the FCA include in
core surplus, on a case-by-case basis, newly developed or modified
equities or accounts held by other System institutions.
One commenter requested that the FCA permit revolvements of
nonqualified allocated equities as long as the revolvements do not
result in failure to meet the core surplus requirement. Another
commenter stated that it agreed with the FCA's rationale for including
nonqualified allocated equities in core surplus but suggested that
redemptions be permitted when a borrower dies or defaults on a loan.
The commenter also stated that nonqualified allocations between System
institutions ought to be includible by one institution in core surplus
and suggested that the allocations be included in the core surplus of
the issuing institution.
In response to the comments, and upon further deliberation about
the components and quality of core surplus, the FCA has made several
changes to the core surplus requirement in the final rule. The
principal change is that associations with allocated equities, which
are primarily associations that operate as Subchapter T cooperatives,
may include certain longer-term qualified as well as nonqualified
allocated equities. However, allocated equities may comprise no more
than 2 percentage points of the association's minimum 3.5-percent core
surplus requirement. Includible longer-term equities are allocated
equities not subject to a revolvement plan or subject to a revolvement
plan of at least 5 years and not scheduled for distribution during the
next 3 years. The remaining 1.5 percentage points of the minimum core
surplus requirement must be made up of unallocated retained earnings
and perpetual stock not subject to a revolvement plan or practice.
This decision reflects the FCA's judgment that a formula including
allocated equities that are not scheduled for retirement within the
next 3 years provides a method for achieving a stable capital base for
associations without discouraging patronage distributions. Longer-term
allocated equities, while they may not be perpetual in nature, do
provide important capital protection for as long as they are held, and
an institution's board can delay a scheduled distribution when it is in
the best interest of the institution. By counting allocated equities
only when they are not within 3 years of revolvement, institutions are
less likely to have to interrupt scheduled revolvements to meet their
capital standards in times of adversity because they have 3 years in
which to adjust continuing allocations or take other protective
measures. Similarly, if an institution suffers because many of its
borrowers are experiencing adverse economic circumstances, a sufficient
amount of unallocated surplus will better enable the institution to
continue to make planned distributions during the next 3 years, at a
time when its borrowers may need cash distributions most. In addition,
permitting an association to count both qualified and nonqualified
allocations in the core surplus ratio gives an association flexibility
to select which type of allocation to make based primarily on business
considerations rather than regulatory considerations.
For the BC and any ACB which, like Subchapter T associations, also
have equities allocated to non-System borrowers, the Agency decided not
to allow inclusion in core surplus of any qualified allocated equities
or of nonqualified allocated equities scheduled for revolvement for
several reasons.\2\ Such banks have higher lending limits--from 35 to
50 percent of the lending limit base for certain BC loans compared to a
25-percent limit for all other Farm Credit institutions. The BC and any
ACB carry greater interest rate risk than associations and carry
certain forms of operational risk from which associations are largely
insulated. Unlike associations, these banks are jointly and severally
liable on Systemwide obligations. In addition, the existing BC and ACB
have made a significant portion of their credit extensions to
relatively few borrowers, a situation that results in a concentration
of risk. Finally, the BC and ACB have only the single exclusion of
qualified and revolving nonqualified allocated equities from their core
surplus ratio, whereas associations must also deduct their net
investment in their affiliated bank. Therefore, the FCA has determined
that it is appropriate that such banks maintain a core surplus ratio of
at least 3.5 percent, comprised of unallocated surplus and nonqualified
allocated equities with no plan or practice of retirement. Nonqualified
allocated equities may comprise no more than 2 percentage points of the
institution's minimum 3.5-percent core surplus requirement. As with
associations, the remainder must be comprised of unallocated retained
earnings and perpetual stock.
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\2\ This same rule by its language also applies to the FCBs;
however, the effect of this rule on FCBs is expected to be minimal.
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When an institution's ratio of unallocated surplus together with
any perpetual stock includible in core surplus to risk-adjusted assets
amounts to less than 1.5 percent, the institution may not count more
than 2 percentage points of allocated equities in determining
compliance with the 3.5-percent core surplus requirement. For example,
if an institution's unallocated surplus and includible perpetual stock
were 1.4 percent of risk-based assets, and its ratio of long-term
allocated equities were 5 percent, its core surplus ratio would be 3.4
percent, because allocated equities could be counted only up to 2
percentage points. If the institution's ratio of unallocated surplus
and perpetual stock were 1.6 percent and its ratio of long-term
allocated equities were 5 percent, however, its core surplus ratio
would be 6.6 percent. In this instance, the entire amount of long-term
allocated equities would be included in the core surplus ratio because
at least 1.5 percent of the institution's minimum requirement was
comprised of unallocated surplus and perpetual stock. The FCA notes
that the restriction on the use of allocated equities in the
computation of the core surplus ratio applies only to the components in
the computation of the core surplus ratio and is not intended to limit
the use of such allocated equities in building and maintaining other
required capital levels.
In establishing the minimum core surplus requirement at 3.5
percent, the FCA expects institutions to treat the core surplus
requirement and its components as a regulatory minimum and to establish
a target or goal for adequate capital based on their particular
circumstances. There may be circumstances where the FCA considers the
institution's component levels of surplus to be inadequate, even when
its core surplus ratio is at or above 3.5 percent (because the
operations of the institution are of higher risk), and may take
supervisory action, as warranted.
The final rule permits all institutions to retire equities and
apply the proceeds against indebtedness on a defaulted loan
[[Page 4432]]
without disallowance of remaining equities of the same class or series
from treatment as core surplus, subject to the following conditions:
(1) The institution must specifically provide for such retirements in
the capital adequacy plan approved by its board of directors and the
circumstances under which they may occur; (2) the institution must
charge off an amount of the indebtedness on the loan equal to the
amount of the equities that are retired or canceled; and (3) the
institution board must determine that each such retirement is in the
best interest of the institution. Retirable equities include purchased
stock as well as allocated stock and surplus. The Agency made this
change to accommodate foreclosure laws of States that preclude the
recovery of a deficiency in certain situations. In these cases, it may
be more advantageous to the institution to retire a borrower's
equities. In other cases, it will be in the best interest of the
institution not to retire equities. Institutions are required to make
this determination before the equities are retired.
The final rule also permits institutions to retire allocated stock
and equities in the event of the death of a holder of such equities who
did not have a loan outstanding with the institution at the time of his
or her death, without disallowing remaining equities from treatment as
core surplus, provided that the institution's capital adequacy plan
specifically authorizes such retirements and that the institution
determines that these retirements are in the best interest of the
institution. This provision enables institutions to make retirements to
help liquidate a former borrower's estate, especially in cases where
the allocated equities may not be transferable. The provision, however,
does not apply to retirements of purchased stock, which the statute
requires to be transferable. Title to such stock and the accruing
benefits thereto, including dividends, can be transferred by the estate
executor to the heirs of the former borrower's estate. Although these
provisions allow an institution to retire equities in these
circumstances without disqualifying equities of the same class, they do
not relieve the institution of its obligation to meet its regulatory
capital standards and to maintain such higher levels of capital as may
be needed in its particular circumstance.
The FCA has deleted from the final rule provisions that would have
enabled an institution to retire a pro rata amount of a class or series
of stock or equities without causing the remaining class or series of
stock or equities to be disallowed from treatment as core surplus. The
Agency reconsidered those provisions and determined that the partial
retirements or revolvements would raise an implication that the
equities are not considered to be a permanent source of capital by the
institution. If partial retirements of includible perpetual stock were
commonplace, the FCA believes that this practice would undermine
stockholders' perception of the perpetual character of the stock or
equities. Therefore, if an institution retires includible stock or
equities other than in connection with a section 4.14B restructuring or
the death or default of a borrower, the remaining equities of the same
class or series will be disallowed from treatment as core surplus.
The FCA has expanded a reproposed provision, permitting inclusion
of a newly developed or modified capital instrument or particular
balance sheet account with FCA approval, to include existing capital
instruments and balance sheet accounts as well. Existing equities
issued or allocated to other System institutions will continue to be
excluded from an institution's core surplus as a general principle. But
the FCA will consider including existing equities as well as any newly
developed or modified capital instrument or a particular balance sheet
account related to another System institution in core surplus on a
case-by-case basis. The FCA is not presently aware of any existing
equities held by other System institutions that it believes would be
appropriate to include in an institution's core surplus, but it may
consider the appropriateness of including any such equities in the
future.
The FCA did not make any other changes recommended by commenters to
the core surplus ratio. The final rule continues to require
associations to deduct the net investment in the bank from core
surplus, for the reasons set forth in the preamble to the reproposed
rule at 61 FR 42096 (Aug. 13, 1996). With respect to the comment that
current risk monitoring systems are sufficient to control risk, the FCA
was not convinced that the current risk monitoring systems assure that
institutions have adequate high quality capital. The FCA believes this
final rule does provide such assurances. The suggestion that the core
surplus ratio for associations be replaced by ratios that separately
measure local surplus and unallocated surplus was rejected because
compliance with the ratios could be achieved by an association that has
no local unallocated surplus (and equivalent perpetual equities) and,
as the commenter observes, would not assure sufficient capital in the
event that the bank is financially stressed at the same time the
affiliated association is stressed. For a fuller explanation of the
need for local unallocated surplus, see 60 FR 38523 (July 25, 1995).
With respect to the suggestion in the System joint comment that a call
on preferred stock would be prohibited, the FCA notes that redemption
of perpetual preferred stock was neither strictly prohibited in the
reproposed rule nor prohibited in the final rule.
In the final rule, the core surplus ratio must be calculated by the
institution as of each monthend. A summary of the core surplus
computation follows:
The ratio numerator:
Undistributed earnings/unallocated surplus (as defined in the FCA
Call Report instructions) less: for associations only, the net
investment in its affiliated bank, which is--
Total investment in a System bank:
Less: Investment in association by such bank, up to an amount equal
to the association's investment in the bank;
Less: Agency/servicing investment in such bank;
Less: Participation investment in such bank;
Plus: Perpetual common or noncumulative preferred stock held by
non-System entities and not purchased as a condition of obtaining a
loan, provided that the institution has no established plan or practice
of retiring the stock;
Plus: any other equities or accounts approved by the FCA for
inclusion in core surplus;
Plus: for banks only, nonqualified patronage allocations held by
persons or entities other than System institutions, provided that the
institution has no established plan or practice of retiring such
allocations;
Plus: for associations only, nonqualified and qualified patronage
allocations held by persons or entities other than other System
institutions, provided that either the allocations are subject to a
revolvement plan of at least 5 years and will not be distributed within
the next 3 years, or the institution has no established plan or
practice of retiring such patronage;
Less: investments in the Leasing Corporation and goodwill as
required in the computation of the institution's permanent capital
ratio (Sec. 615.5210(e)(6) and (7)); Divided by--
The ratio denominator:
Risk-adjusted asset base per the permanent capital regulations.
2. Total Surplus Ratio Capital Standard
Commenters raised two issues with regard to the reproposed total
surplus
[[Page 4433]]
ratio: the treatment of the Leasing Corporation's C Stock and the
inclusion of certain subordinated debt. The preamble to the reproposed
regulations stated that the Class C Stock issued by the Leasing
Corporation could not be included in the Leasing Corporation's total
surplus because the level of stock fluctuates, somewhat similarly to
borrower stock, based on lease volume. The Leasing Corporation
commented that its C Stock should be included in the total surplus
calculation because it is held by System banks, which also fund the
leases. Because a customer of the Leasing Corporation has no equity at
risk in the corporation, any decision either to conduct additional
business with the corporation or to terminate existing leasing
relationships does not involve a consideration by the customer of the
capital level of the corporation. Therefore, the risk of borrower
flight based on concerns about stock impairment is non-existent.
The FCA concludes that the basic characteristics of the C Stock
have many similarities to other FCS institutions' stock and equities
that are includible in total surplus. Therefore, the C Stock should be
included in the Leasing Corporation's total surplus computation.
In its joint comment, the System requested that subordinated debt
with characteristics of preferred stock be included in permanent
capital and total surplus, on the ground that commercial banks and
thrifts are permitted to include this type of subordinated debt in
their Tier 2 capital. The issue of the treatment of subordinated debt
in any capital ratios for System institutions was not addressed in the
reproposal or in the 1995 capital proposal, and the FCA believes that
it would be inappropriate to include this in the final rule. The Agency
is considering this issue as part of the next phase of its review of
the capital regulations.
Upon reaching these conclusions, the FCA determines the total
surplus ratio will be calculated by the institution as of each month
end, with a minimum requirement of 7 percent. A summary of the
computation is as follows:
The ratio numerator:
Undistributed earnings/unallocated surplus per FCA Call Report;
Plus: certain perpetual common or noncumulative perpetual preferred
stock held by non-System entities and not purchased as a condition of
obtaining a loan;
Plus: certain nonqualified and qualified allocated equities with
revolvement cycles, if any, of at least 5 years;
Plus: term stock with an original maturity of at least 5 years
(reduced by 20 percent per year during the last 5 years of its term);
Plus: any other equities or accounts approved by the FCA for
inclusion in total surplus;
Less: any equities or accounts required by the FCA to be deducted
from total surplus;
Less: any deductions for goodwill and investments in the Leasing
Corporation as required in the computation of the institution's
permanent capital ratio pursuant to Sec. 615.5210(e) (6) and (7);
Less: for associations only, an amount equal to the amount of
allocated bank equities counted as permanent capital by the bank;
Less: for banks only, an amount equal to the amount of bank
equities counted as association permanent capital.
Divided by--
The ratio denominator:
Risk-adjusted asset base per the permanent capital regulations.
3. Collateral Ratio Capital Standard for Banks
A System bank opposed a collateral ratio that excludes allocated
capital counted by associations for two reasons: the allotment
agreement does not change the actual liquidity position of the bank,
and the deduction appears to be premised on the belief that the
allotment agreements are enforceable and that every association will
call on the bank to retire such capital at the same time.
As explained in the preamble to the reproposal, the exclusion of
allocated capital counted as association permanent capital is intended
to eliminate the double-leveraging of shared capital and is not based
on assumptions about the enforceability of the allotment agreements.
Inclusion of this capital would enable banks and associations to
double-leverage the same capital for the permanent capital and
collateral ratios. The FCA has decided to adopt the collateral ratio as
reproposed without changes for the reasons expressed here and as found
in 61 FR 42097-98 (Aug. 13, 1996). Under the final rule, the net
collateral ratio is calculated as follows:
The ratio numerator is a bank's net collateral, which equals:
A bank's total eligible collateral as defined by Sec. 615.5050
(except that eligible investments as described in Sec. 615.5140 are to
be valued at their amortized cost),
Less: an amount equal to that portion of the allocated investments
of affiliated associations that is not counted as permanent capital of
the bank.
Divided by--
The ratio denominator, which equals:
The bank's total liabilities.
4. Borrower Stock Retirement Provisions
The FCA received no comments on the reproposal's provisions
enabling institutions to delegate the retirement of borrower stock
under certain conditions. However, the final rule clarifies the board's
obligation to determine that the institution's capital position will
remain adequate after any stock retirements made under delegated
authority.
5. Individual Institution Capital Ratios and Capital Directives
The FCA received no comments on the reproposal's provisions
establishing procedures for setting individual institution capital
ratios and issuing capital directives. The FCA adopts these provisions
without change.
6. Other Capital Issues
The System, in its joint comment, recommended that the existing
permanent capital regulations be harmonized with the reproposal to
include term preferred stock in permanent capital. The FCA agrees that
term preferred stock, which is includible in total surplus, should also
be permanent capital on the same basis as it is considered to be total
surplus. That is, the stock must have an original maturity of 5 years
or more, and in each of the last 5 years before maturity will be
counted in permanent capital at a discount of 20 percent. Thus, at the
beginning of 5 years before maturity the discount will be 20 percent;
at the beginning of 4 years prior to maturity the discount will be 40
percent; and so forth until there is a 100-percent discount at the
beginning of one year prior to maturity. The FCA has added a
stipulation that the institution must have the option to defer payment
of dividends on such preferred stock. This qualification is consistent
with the qualification placed on the type of preferred stock that may
be included in the regulatory capital (Tier 2) of national banks.
In addition, the FCA added language to the definitions of total
surplus and core surplus to clarify that deductions required in the
computation of an institution's permanent capital ratio must also be
made in the computation of the institution's surplus ratios. Goodwill
and the investment by a Farm Credit bank in the Leasing Corporation
must be deducted from a bank's surplus ratios just as they are deducted
from the bank's permanent capital.
Several System associations inquired regarding the inclusion in
core surplus of a tax-deferred asset representing taxes
[[Page 4434]]
paid on nonqualified allocated equities. The FCA notes that, based on
generally accepted accounting principles (GAAP), in circumstances where
redemption is sufficiently ascertainable, the tax benefits associated
with nonqualified allocations may be recorded as an asset. In the final
rule, this tax-deferred asset is includible in the core surplus of
institutions if the related nonqualified allocated equities are
included in core surplus. The FCA notes that it is presently reviewing
the treatment of this and all other types of tax-deferred assets in the
minimum capital requirements and will address this issue in the next
phase of its review of the capital regulations.
A System association inquired whether a purchase of stock by a
System bank in its affiliated association would have the effect of
reducing an association's ``net investment in the bank,'' thereby
increasing the association's core surplus correspondingly. The FCA
agrees that this is a correct interpretation of the reproposal and
notes that the Agency would treat such an investment as financial
assistance or paid-in capital subject to prior FCA approval under
Sec. 615.5171.
7. Basis for Conclusions and Positions Taken in the Final Capital
Adequacy Provision
The FCA believes that the changes in the final rule are consistent
with its views of the purposes of capital and the need for high quality
capital, as set forth in the supplementary information to the
originally proposed capital amendments. See 60 FR at 38522-27 (July 27,
1995). The FCA incorporates that information herein by reference. At
that time, the Agency explained its position that a mixture of capital
components is necessary to achieve a sound capital structure and that
each institution should have a minimum amount of secure capital,
exclusive of borrower stock, that is not at risk at another System
institution. Compliance with the permanent capital and total surplus
ratios may be achieved with a variety of components--most types of
capital meet the definition of permanent capital, and the total surplus
measurement includes both perpetual and preferred stock, as well as
both unallocated and allocated surplus. The need for a minimum amount
of secure capital is addressed by the core surplus ratio, which
generally excludes capital at risk at other System institutions.
The additions made to the components of core surplus in the final
rule reflect the FCA's recognition that some equities allocated to non-
System entities are close to unallocated surplus as a source of quality
capital. Nonqualified allocated equities with no plan or practice of
retirement are considered highly stable and have low borrower
expectations of distribution. Revolving allocated equities, being
somewhat less stable, are only partially included, and the associations
that may include them are required to maintain a positive level of
local unallocated surplus in order to meet the 3.5-percent requirement.
The FCA believes that the core and total surplus and bank
collateral standards embody the principles set forth in the 1988
international Basle Accord that provide for minimum levels of risk-
based high quality and supplementary capital. Capital standards for
commercial banks and thrifts were adopted by their Federal banking
regulators in 1989 based on Basle Accord recommendations, and
subsequent studies have shown that such standards, which also include a
leverage ratio, are an improvement over the previous flat-rate
standards alone.3 In the FCA's view, the capital requirements in
the final rule in their overall effect are very similar to the
standards applied to the commercial banks and thrifts.
---------------------------------------------------------------------------
\3\ See John P. O'Keefe, Risk-Based Capital Standards for
Commercial Banks: Improved Capital Adequacy Standards? FDIC Bank
Review, Spring/Summer 1993, vol. 6, no. 1, 1-13. More recently,
economists at the Federal Reserve Bank of Boston reviewed the
capital ratios used to trigger regulatory intervention. They
concluded that the current bank risk-based and leverage ratios are
lagging indicators of a bank's financial health and suggested that a
workable solution would be to raise the capital thresholds for
taking prompt corrective action. See Joe Peek and Eric A. Rosengren,
The Use of Capital Ratios to Trigger Intervention in Problem Banks:
Too Little, Too Late, The New England Economic Review, September/
October 1996, 49-58.
---------------------------------------------------------------------------
The FCA believes that the capital provisions in the final rule
establish standards that encourage the building of a sound capital
structure in System institutions, which will improve the likelihood of
an institution's survival during periods of economic stress and thereby
improve the safety and soundness of the System as a whole. The FCA
believes that these regulations provide a meaningful measure of capital
adequacy and are appropriate for all System institutions to which they
apply.
B. Customer Eligibility Provisions
1. General Comments
Generally, FCS institutions and their borrowers endorsed the FCC's
comment letter, which favored the reproposed rule but recommended
certain modifications. One State agency supported the reproposed rule
while another opposed it. All other non-System commenters and one FCS
borrower opposed the reproposed regulations. Many commercial bank
commenters and their trade associations urged the FCA to abandon all
efforts to amend the existing eligibility regulations.
Some commenters suggested that the FCA postpone rulemaking action
on customer regulations until such time that Congress might address
this issue. The FCA has consulted with the Senate and House Agriculture
Committee staff about these customer regulations during the past 6
months. Based on these discussions and comments received during two
public comment periods, the FCA has determined that it is appropriate
to proceed with the final customer regulations.
While many comments focused on specific provisions of the
reproposed regulations, other comments raised public policy issues
about the role of government-sponsored enterprises (GSEs) and the
extent to which they should be allowed to compete with other credit
providers. All comments were categorized and will be addressed
according to topics that follow.
a. Role of the FCS. The role of the FCS, as a GSE, and the extent
to which it should be allowed to compete with other non-GSE credit
providers were issues that were frequently raised by commercial bankers
in opposition to the reproposed regulations. These commenters asserted
that the FCS should provide credit only to certain segments of the
agricultural and rural economy that are not served adequately by other
lenders. These same commenters also state that the FCA should allow the
FCS to expand only into certain rural credit markets that have been
neglected by the private sector.
The FCA finds that these customer regulations enable FCS banks and
associations to exercise their express statutory powers appropriately.
Neither the Act nor its legislative history support claims by
commercial bankers that the FCS is a lender of last resort that may
serve only those rural credit markets that have been abandoned by other
lenders. Rather, the Act requires the FCS to maintain a presence in
rural credit markets at all times, thereby assuring the availability of
adequate credit for agriculture, aquaculture, and other specified
sectors of the rural economy. The FCS fulfills this function by
financing agriculture, farm-related businesses, non-farm rural
homeowners, cooperatives, and rural utilities in both good and bad
economic times. The presence of the System promotes
[[Page 4435]]
competitive behavior among other lenders that serve these markets and
contributes to the preservation of a well functioning capital market
for agriculture and other rural credit needs. The FCA believes that
farmers would not continue to have ready access to reliable and
competitive credit if the FCS ceased to exist.
The comment letters reveal a widespread misunderstanding about the
System's purpose and relationship to the Federal government and to the
public. Contrary to the beliefs of many commenters, the Farm Credit
System is not a taxpayer-funded, government loan program. The Federal
government: (1) Holds no capital stock in FCS institutions; (2)
appoints no members to the boards of directors of any FCS bank or
association; and (3) appropriates no funds to the System. Rather, FCS
banks and associations are cooperatives that are owned and controlled
by their member-borrowers.
In response to claims that commercial bankers face significantly
greater regulatory burdens than the FCS, the FCA observes that its
examination, enforcement, and regulatory powers over the FCS are
comparable to the authorities of other Federal bank regulatory
agencies. Additionally, FCS lenders are subject to regulatory capital
requirements, lending limits, and loan underwriting requirements. FCS
lenders are also generally subject to the same consumer credit laws as
commercial bankers, such as the Truth-In-Lending Act, Real Estate
Settlement Procedures Act, Equal Credit Opportunity Act, and the Home
Mortgage Disclosure Act. The requirements of section 4.19 of the Act to
implement specific programs to assist small, beginning, and young
farmers are not dissimilar from the obligations imposed on commercial
banks under the Community Reinvestment Act. Finally, the Act requires
titles I and II lenders to comply with numerous borrower rights
requirements for agricultural loans, which are compliance obligations
unique to FCS institutions.
Comments focused on Federal guarantees of System debt and the tax
status of FCS institutions also reflected many misconceptions. Certain
liabilities of both FCS banks and commercial banks are insured. The
financial obligations of FCS banks are insured by the Farm Credit
System Insurance Corporation (FCSIC), while the deposit liabilities, up
to $100,000 per depositor, of commercial banks and savings associations
are insured by the Federal Deposit Insurance Corporation (FDIC). The
FCA observes that the FDIC insurance fund is backed by the full faith
and credit of the United States whereas the FCSIC Insurance Fund is
not. Thus, there is no express Federal guarantee of System debt. In
contrast, commercial banks have an explicit Federal guarantee of their
deposit liabilities.
Although many commenters assume that the FCS is tax-exempt, System
institutions that are chartered under sections 2.0, 3.0, 7.0, and 7.8
of the Act (PCAs, BCs, ACBs, and ACAs) are subject to Federal taxation.
Thus, FCS institutions holding 63 percent of total System assets, as of
September 30, 1996, are subject to Federal taxation.
b. Safety and Soundness. Many commercial bank commenters assert
that the new customer regulations will undermine the solvency of the
FCS and expose the taxpayers to risk by encouraging System lenders to
expand rapidly into credit markets in which they lack expertise. The
FCA has found no factual basis for this concern. The FCS has 40 years
of experience in making loans for housing and other non-agricultural
purposes. Strict capital requirements and improved loan underwriting
standards, as well as effective regulatory oversight, will ensure that
System lenders appropriately manage the risks associated with their
loans. The capital provisions of this rule impose strict capital
requirements on all FCS lenders which will prevent unchecked growth in
System loan portfolios. The FCA has proposed new loan underwriting
regulations that will require each System institution to adopt specific
underwriting standards that contain measurable criteria appropriate for
the type of loan and the institution's risk-bearing capacity. In
addition to the strengthened capital requirements contained in this
rule, the FCSIC Insurance Fund (which currently exceeds $1 billion) and
the joint and several liability of all System banks on System
obligations further insulate investors in System obligations.
2. Financing for Bona Fide Farmers and Ranchers
Reproposed Sec. 613.3000 contained new definitions and provisions
that addressed the System's authorities to finance the housing,
domestic, and non-agricultural business needs of bona fide farmers,
ranchers, and aquatic producers and harvesters. It would have
established specific limitations on the amount of credit FCS
institutions could provide for housing and domestic needs and for non-
agricultural business purposes depending on whether the borrower was
actively engaged in agricultural or aquatic production and other
factors.
The reproposed definition of a bona fide farmer, rancher, or
aquatic producer or harvester would have distinguished ``active
farmers'' from those who owned agricultural land but are not engaged in
cultivating it. The FCA received comments about this definition from
the FCC, five commercial bank trade associations, and 342 commercial
banks. All commenters sought modifications to Sec. 613.3000(a)(3).
The FCC asserted that the reproposed rule defined bona fide farmer
and rancher more restrictively than current Sec. 613.3010(a). More
specifically, the commenter claimed that the active/passive concept in
reproposed Sec. 613.3000 would unduly limit the System's ability to
finance all classes of farm owners and operators. The FCC asserted that
the active/passive distinction ignores the current economic realities
of agriculture because it would favor parties who conduct agricultural
operations over those who own land where agricultural operations take
place. The FCC suggested specific revisions to Sec. 613.3000(a)(3) that
would address System concerns.
Many commercial bank commenters and their trade associations urged
the FCA to abandon all efforts to amend the existing regulations. Two
commercial bank trade associations objected to reproposed
Sec. 613.3000(a)(3)(i) because it would not impose a minimal amount or
percentage of income that a farmer must generate from agricultural
production in order to become an eligible FCS borrower. Many commercial
bank commenters expressed concern that this definition would allow
farmers with minimal agricultural production to borrow from the FCS for
non-agricultural purposes. Two commercial bank commenters offered
specific recommendations for revising the definition of a bona fide
farmer so that only farmers who derived a significant amount of their
income from agricultural production would be eligible to borrow from
the FCS.
The extent to which FCS institutions could finance the other credit
needs of bona fide farmers and ranchers generated more comments than
any other provision of the reproposed regulations. Commercial banks and
their trade associations asked the FCA to withdraw its proposal and
retain the existing regulation. These commenters asserted that
reproposed Sec. 613.3000(d) would convert FCS banks and associations
into full-service financial institutions that would primarily extend
non-agricultural credit to a vastly increased number of borrowers.
These
[[Page 4436]]
commenters state that Congress never intended for the FCS to supplant
commercial banks as the principal provider of non-agricultural credit
to farmers. Two commercial bank trade associations asserted that the
reproposed regulation would be incompatible with Congressional intent
unless, at a minimum, it required each borrower to have an outstanding
agricultural or aquatic loan with a System lender.
In the event that the FCA chose to adopt the reproposed regulation,
some commercial bank commenters sought revisions to Sec. 613.3000(d)
that would address their concerns about the System's ability to finance
the other credit needs of farmers. Several commenters suggested that
the FCA impose specific restrictions of the System's authority to
finance housing for both active and passive farmers. Many commercial
bank commenters suggested that only active farmers should be allowed to
borrow from the FCS for their domestic needs. One commercial bank
commenter stated that System institutions should be permitted to
finance only basic necessities for families that live and work on
farms, and suggested that the final regulation should specifically
forbid farmers from borrowing from the FCS for luxuries that are
unrelated to their agricultural activities.
System comments focused on the provisions of the reproposed
regulation that authorize FCS banks and associations to finance the
non-agricultural business needs of eligible farmers. The FCC asserted
the proposed limitation on non-agricultural business financing
unreasonably restricts farmer access to a reliable source of credit and
the ability of the System to meet its mission. This commenter stated
that the reproposed regulation would ignore the importance of off-farm
employment and off-farm income to the viability and continuity of most
farming operations. In the FCC's view, the limitation also conflicted
with the plain language of the Act, which places no limitation on the
financing of a borrower's other credit needs. The FCC suggested that
the final regulation authorize System institutions to finance the non-
agricultural business needs of eligible farmers to the full extent of
creditworthiness.
In view of the widespread negative response to the proposed change
in definitions and the accompanying limitations on financing other
credit needs, the FCA has decided not to proceed with its proposed
changes to the definitions or to the rules governing System financing
of farmers' other credit needs. The FCA has decided to retain the
definition of bona fide farmer or rancher in existing Sec. 613.3010(a),
redesignated as Sec. 613.3000(a)(1) and the scope of financing
provisions of Sec. 613.3005(a), redesignated as Sec. 613.3005.
The final regulation will continue to define a ``bona fide farmer
or rancher'' as ``a person owning agricultural land, or engaged in the
production of agricultural products, including aquatic products under
controlled conditions.'' The FCA also retains the existing definition
of ``producer or harvester of aquatic products'' in Sec. 613.3010(d),
but it has redesignated this provision as final Sec. 613.3000(a)(4).
Existing Sec. 613.3005(a) will continue to govern the scope of
financing for both agricultural and non-agricultural purposes. The FCA
recognizes that the proper role of the System in providing credit to
farmers is an important policy issue on which there are different
views. The Agency will continue to consider how this regulation can
address both the appropriate scope of FCS lending and the significant
changes in the agricultural environment, and this issue may be the
subject of future rulemakings.
The FCA has deleted Sec. 613.3005 (b) and (c) and redesignated
Sec. 613.3005(a) as final Sec. 613.3005. Paragraphs (b) and (c) of
Sec. 613.3005 pertain to banks for cooperatives and loan policy
development, respectively, and are not necessary in the final
regulation. As a conforming amendment, the FCA adopts final
Sec. 613.3000(b), which clarifies (in accordance with sections 1.11 and
2.4 of the Act) that FCBs, ACBs, and direct lender associations are
authorized to finance the agricultural, aquatic and other credit needs
of bona fide farmers, ranchers and aquatic producers or harvesters.
Final Sec. 613.3000(b) replaces reproposed Sec. 613.3000(b), (c) and
(d), and it connects the definition and eligibility provision in final
Sec. 613.3000 to the scope of financing provisions in Sec. 613.3005.
Because commercial bank commenters have indicated that existing
Sec. 613.3005 addresses their concerns about System financing of the
other credit needs of farmers, the FCA finds it unnecessary to address
alternative solutions that these commenters offered.
Reproposed Sec. 613.3000(a)(1) contained a definition of
``agricultural assets'' that would have determined the amount of non-
agricultural credit that bona fide farmers, ranchers, and aquatic
producers or harvesters could obtain from FCS banks and associations.
Under final Sec. 613.3005, a borrower's access to the FCS for non-
agricultural credit is not dependent on the ownership of agricultural
assets. As a result, a regulatory definition of ``agricultural assets''
is no longer needed, and therefore, it has been omitted from the final
regulation. Under the circumstances, the FCA need not address specific
suggestions by the commenters to refine reproposed Sec. 613.3000(a)(1).
The FCA has also decided not to incorporate the definition of
``agricultural land'' in reproposed Sec. 613.3000(a)(2) into the final
regulation. Rather, Sec. 619.9025 will continue to define
``agricultural land.'' This approach is consistent with the FCA's
decision to retain most of the definitions in the existing eligibility
regulations.
3. Eligibility of Non-Resident Foreign Nationals
Some commercial banks and their trade associations repeated their
earlier claims that the Act does not authorize non-resident foreign
nationals to borrow from the FCS. The preamble to the reproposed
regulation explained that the Act does not deny foreign nationals
access to the FCS. In fact, FCA regulations have permitted some foreign
nationals to borrow from the FCS for the past 20 years. See 61 FR 42103
(Aug. 13, 1996).
For this reason, final and redesignated Sec. 613.3000(a)(3)
authorizes FCS institutions to extend credit to non-resident foreign
nationals who have been lawfully admitted to the United States on a
visa that authorizes them to own property or operate a business. As a
result, individuals who are non-resident foreign nationals would be
permitted to obtain FCS financing for their agricultural or aquatic
operations and other needs in the United States on the same basis as
citizens and permanent residents.
4. Eligibility of Corporate Entities
Three commercial bank trade associations opposed Sec. 613.3000
(a)(5) and (d)(4), which establishes eligibility criteria and loan
purpose restrictions for legal entities that borrow from FCS banks and
associations. These commenters believe that the FCS should be
authorized to finance only the on-farm production activities of legal
entities and, even then, only when the legal entities are wholly owned
by active farmers.
The FCA notes that these recommendations are more restrictive than
the requirements in existing Sec. 613.3020(b), which neither required
farmers to own all of the voting stock or equity in an eligible legal
entity, nor precluded System lenders from financing the non-
agricultural activities of such borrowers. The FCA had
[[Page 4437]]
proposed to repeal the restrictions on eligibility in existing
Sec. 613.3020(b) because they were not required by the Act. However, to
address commercial bank concerns, the reproposal placed limitations on
the scope of financing for other credit needs for legal entities
related to ownership and involvement in agriculture. While the final
rule does not include the specific restrictions on eligibility of legal
entities in existing Sec. 613.3020(b), it retains existing
Sec. 613.3005(a) (redesignated as Sec. 613.3005), which defines the
scope of lending according to the degree of involvement in agriculture.
The FCA adopts reproposed Sec. 613.3000(a)(5) as final but
redesignates it as Sec. 613.3000(a)(2). As a result, all legal
entities, including those organized under Native American tribal law,
will now be eligible for FCS financing on the same basis as other
farmers.
5. Financing for Processing and Marketing Operations
The FCA received comments about its reproposed processing and
marketing regulation, Sec. 613.3010, from the ABA, IBAA, and CoBank,
ACB. The two commercial bank trade associations opposed provisions in
the regulation that govern the level of farmer ownership of a
processing and marketing unit and the requirements regarding the
farmer's throughput contribution. CoBank expressed concern about intra-
System competition for processing and marketing loans.
a. Farmer Control. The ABA and IBAA asserted that a separate
processing and marketing unit is ineligible for financing under
sections 1.11(a) and 2.4(a) of the Act unless bona fide farmers,
ranchers, or aquatic producers and harvesters own 100 percent of its
equity. The preamble to reproposed Sec. 613.3010(a)(1) responded to
this argument. See 61 FR 42106 (Aug. 13, 1996). As previously noted in
that preamble, a passage in the legislative history indicates that
Congress expressly contemplated joint processing and marketing ventures
between agricultural producers and investors so long as ineligible
parties do not ``exercise substantial control of the facility or
activity financed by the loan.'' 4 Because Sec. 613.3010(a)(1)
requires agricultural or aquatic producers to own more than 50 percent
of the voting stock or equity of an eligible processing and marketing
operation, investors or employees who are not farmers cannot exercise
``substantial control'' over the borrower. The FCA disagrees with the
opinion that any ownership by parties who are not agricultural or
aquatic producers renders a processing and marketing operation
ineligible for FCS financing under sections 1.11(a) and 2.4(a) of the
Act.
---------------------------------------------------------------------------
\4\ Colloquy between Senators Stewart and Zorinsky, 126 Cong.
Rec. 16560 (Dec. 13, 1980).
---------------------------------------------------------------------------
The ABA also asserted that the regulation violates the Act because
it allows a passive farm owner to obtain a processing and marketing
loan from a System bank or association that operates under title I or
II of the Act. A processing and marketing operation qualifies for FCS
financing under the Act and Sec. 613.3010 only if it is ``directly
related'' to the borrower's agricultural or aquatic operations. Passive
owners of agricultural land do not conduct a farming or ranching
operation, and in such situations, they would not satisfy the
eligibility criteria for a processing and marketing loan. Therefore,
the FCA adopts Sec. 613.3010(a)(1) as a final regulation without
revision.
b. Throughput Requirements. Two commercial bank trade associations
addressed the throughput requirements of Sec. 613.3010(a)(2). The ABA
asserted that allowing the FCS to finance a processing and marketing
operation where the borrower provides only a minimal portion of the
throughput is not authorized by the Act. The IBAA comment acknowledged
that the Act permits lending to borrowers who provide minimal
throughput but believes the FCA should encourage loans to applicants
whose throughput exceeds 20 percent. Both commenters asked the FCA to
retain the detailed paperwork requirements on FCS banks and
associations in former Sec. 613.3045.
The preambles to the proposed and reproposed regulations responded
to these arguments. See 60 FR 47107 (Sept. 11, 1995); 61 FR 42107 (Aug.
13, 1996). The FCA concludes that the new regulation implements the Act
by requiring that the processing and marketing operations be ``directly
related'' to the borrower's agricultural or aquatic activities and
requiring the borrower or its owner to contribute ``some portion'' of
the throughput. Compliance with the eligibility requirements for
processing and marketing loans is adequately assured through the
internal policies of FCS institutions and the FCA's examination and
enforcement powers. Furthermore, it should be noted that the statute
limits loans where less than 20 percent of throughput is provided by
the borrower to 15 percent of outstanding loans.
c. Intra-System Competition. CoBank, ACB opposed the FCA's decision
to rescind its original proposal to prohibit titles I and II lenders
from financing borrowers who are eligible for credit under title III of
the Act. CoBank's most recent comments about intra-System competition
focused exclusively on processing and marketing loans. The commenter
cited passages in the legislative history that indicate that titles I
and II lenders were not granted new authorities to finance the
processing and marketing operations of previously ineligible borrowers.
The commenter also relied on other passages in the legislative history
that indicate that Congress did not contemplate full-scale competition
for processing and marketing loans between FCS institutions that
operate under different titles of the Act.
The Act sets forth different eligibility criteria for processing
and marketing operators that are financed by FCBs and direct lender
associations from those financed by title III banks. Final
Sec. 613.3010 implements these statutory provisions, and therefore, it
prevents unrestrained intra-System competition for processing and
marketing loans. FCBs and their affiliated associations currently
finance some of those few processing and marketing operators that are
simultaneously able to satisfy the eligibility criteria in title I or
II and title III of the Act. The FCA is disinclined to adopt regulatory
provisions that would restrict FCBs' and associations' exercise of
their statutory authorities.
6. Financing Farm-Related Businesses
Four commercial bank trade associations and 15 commercial banks
submitted comments to the FCA about reproposed Sec. 613.3020, which
authorizes FCS banks and associations that operate under titles I and
II of the Act to finance farm-related businesses. Although one
commenter acknowledged that the FCA had revised Sec. 613.3020 to
address many of the concerns that commercial bankers expressed about
the original proposal, several commenters continued to raise objections
to other provisions of the reproposed regulations regarding farm-
related businesses.
a. On-Farm Requirement. One commercial bank trade association
opposed the repeal of Sec. 619.9120, which requires an eligible farm-
related business to furnish services on the farms and ranches of its
customers. This commenter believes that this ``on farm'' requirement is
mandated by sections 1.11(c)(1) and 2.4(a)(3) of the Act and their
legislative history. The FCA has concluded that neither the literal
language of the statute nor its legislative history require an eligible
farm-related business to actually perform services on the customer's
property. See 44 FR 69631 (Dec. 4, 1979); 60 FR 47108 (Sept.
[[Page 4438]]
11, 1995); 61 FR 42107 (Aug. 13, 1996). The commenter cited a passage
in the legislative history that indicates that off-farm storage and
processing facilities qualify as eligible farm-related businesses.
Accordingly, the FCA retains language of the reproposed regulation. See
61 FR 42119 (Aug. 13, 1996).
b. Custom-Type Services. Commercial bank commenters continued to
oppose the FCA's decision to repeal existing regulatory provisions that
require eligible borrowers to furnish ``custom-type'' services to
farmers and ranchers. Custom-type services are tasks that farmers and
ranchers can perform for themselves, but instead hire outside
contractors to perform. Although sections 1.11(c)(1) and 2.4(a)(3) of
the Act do not mention custom-type services, some commenters insist
that the statute requires eligible farm-related business borrowers to
perform only such services. Another commenter disputed statements in
the earlier preambles that the Act authorizes System lenders to finance
businesses that offer farmers and ranchers technologically advanced
services, such as the aerial or computer mapping of crop and soil
conditions.
Sections 1.11(c)(1) and 2.4(a)(3) of the Act require that eligible
borrowers furnish farm-related services that are ``directly related''
to the on-farm operating needs of farmers and ranchers. Examples of
permissible farm-related services mentioned in the legislative history
are clearly illustrative and do not exclude other services, including
technologically advanced services that directly assist farmers and
ranchers in agricultural production. Indeed, a commercial bank trade
association noted a passage in the legislative history that aerial crop
dusting would be a permissible service, yet this presumably is not an
activity that most farmers typically perform themselves.
Two commercial bank trade associations suggested that the FCA
incorporate a specific list of eligible farm-related businesses into
the final regulation. The suggested approach could prevent FCS banks
and associations from financing farm-related businesses that are
eligible to borrow under sections 1.11(c)(1) and 2.4(a)(3) of the Act.
Although the previous preambles contained examples of permissible
services, they were illustrative only, and not intended as a complete
list of permissible services. Even if it were possible to compile a
comprehensive list today, dynamic advances in the farm services
industry would quickly render it obsolete.
For this reason, and those previously provided, the FCA adopts as
final the repeal of the requirement that eligible farm-related
businesses furnish only ``custom-type'' services to farmers and
ranchers. See 60 FR 47108 (Sept. 11, 1995); 61 FR 42107 (Aug. 13,
1996).
c. Whole-Firm Financing. Three commercial bank trade associations
objected to the regulatory provisions that authorize: (1) ``Whole
firm'' financing to a business that derives more than 50 percent of its
income from furnishing farm-related services; and (2) financing only
for the farm-related services portion of a business that derives less
than 50 percent of its income from furnishing such services. Two
commenters claim that the Act authorizes FCS lenders to extend credit
only to parties who derive a majority of their income from farm-related
services. Three commenters also claimed that Sec. 613.3020 is
unenforceable because money is fungible, and businesses generally do
not keep separate sets of books for services and sales of goods. Under
these circumstances, the commenters argue that the FCA will be unable
to monitor the borrower's use of FCS funds to ensure that only farm-
related activities are financed.
The FCA concludes that final Sec. 613.3020 complies with the Act
because it restricts the FCS to financing entities that are primarily
devoted to farm-related service activities or if the borrower is not
primarily devoted to farm-related services, financing is restricted to
a level that such activities are accomplished in relation to the whole
business. The FCA has sufficient examination and enforcement powers to
ensure that FCS institutions comply with these regulations. As is the
case with all loans, routine examination of loan files will determine
whether each FCS institution has documented the eligibility of
borrowers who obtain financing for a farm-related business.
7. Financing Non-Farm Rural Homes
The FCC, two FCS associations, five commercial bank trade
associations, and two commercial banks commented about various aspects
of reproposed Sec. 613.3030, which governs non-farm rural home loans.
a. Owner-Occupied Dwellings. Three commercial bank trade
associations and one commercial bank opposed the proposed elimination
of the existing regulatory requirement that the borrower occupy the
dwelling. According to these commenters, the Act does not authorize FCS
institutions to finance non-farm rural homes that are tenant-occupied.
The FCA observes that neither sections 1.9(3), 1.11(b), and 2.4(b)
of the Act nor their legislative history require the borrower to occupy
a house which is financed by the FCS. As the FCA observed in the
preamble to the reproposed regulation, the repeal of the owner-
occupancy requirement advances the rationale of the System's rural home
finance authority, which is to ensure the availability of affordable
housing for rural residents. See 61 FR 42109 (Aug. 13, 1996). The
statutory requirement that the FCS finance housing for rural residents
is satisfied because the regulation requires either the owner or a
tenant to occupy the rural home as a principal residence.
b. Definition of Rural Area. Under reproposed Sec. 613.3030(a)(3),
a ``rural area'' is defined as ``open country within a State or the
Commonwealth of Puerto Rico, which may include a town or village that
has a population of not more than 2,500 persons.'' The FCA received
comments about this definition from the FCC and the IBAA. For the
reasons explained below, the FCA adopts the language of
Sec. 613.3030(a)(3) as reproposed.
The FCA proposed the repeal of a provision in existing
Sec. 613.3040(a)(3) that authorized FCS lenders to make home loans in
open agricultural areas within the political boundaries of ``towns''
where the population exceeds 2,500 inhabitants, subject to Agency prior
approval. The FCC asked the FCA to reinstate a provision in the final
rule that would allow FCS lenders to make loans in open, undeveloped
countryside which is devoted to agricultural production even if it has
been annexed by a ``town'' with more than 2,500 inhabitants. In the
commenter's opinion, the fact that this authority has been rarely used
in the past does not justify its repeal. If this provision is omitted
from the final regulation the FCC asked the FCA to ``grandfather'' all
exemptions that have already been granted under Sec. 613.3040(a)(3).
The FCA declines to retain the regulatory provision that permits
FCS banks and associations to finance non-farm rural housing in
``towns'' where the population exceeds 2,500 inhabitants. As the FCA
explained in the preamble to the reproposed regulation, the existing
provision is confusing and this exception has rarely been used. See 61
FR 42110 (Aug. 13, 1996). All exemptions that the FCA granted under
former Sec. 613.3040(c) will continue to be areas in which rural home
loans may be made as long as they meet the conditions upon which they
were approved.
[[Page 4439]]
The IBAA requested that the FCA amend Sec. 613.3030(a)(3) so it
authorizes FCS institutions to make non-farm rural housing loans only
in areas where agricultural enterprises predominate. The commenter
believes that this restriction is necessary so FCS institutions do not
finance housing in metropolitan areas. The commenter's concern is
already addressed, however, because Sec. 613.3030(a)(3) defines a rural
area as ``open country'' and limits System rural home lending to
communities where the population does not exceed 2,500 inhabitants.
These restrictions effectively prevent FCS lenders from financing
housing in urban and suburban areas.
c. Moderately Priced Housing. Reproposed Sec. 613.3030(a)(4)
established a two-tier definition of ``moderately priced housing.''
Under reproposed Sec. 613.3030(a)(4)(i), a rural home is moderately
priced if it satisfies the criteria in section 8.0 of the Act, thereby
qualifying as collateral for securities that are guaranteed by the
Federal Agricultural Mortgage Corporation (Farmer Mac). In the
alternative, Sec. 613.3030(a)(4)(ii) would allow FCS lenders to finance
rural homes that are below the 75th percentile of housing values for
the rural area where they are located, as determined by data from a
credible, independent, and recognized national or regional source, such
as a Federal, State, or local government agency, or an industry source.
The FCA received no comments about the Farmer Mac standard in
Sec. 613.3030(a)(4)(i), but the FCC, two FCS associations, and two
commercial bank trade associations sought revisions to
Sec. 613.3030(a)(4)(ii).
The FCC petitioned the FCA to omit the 75th percentile ceiling from
the final regulation and rely, instead, on the overriding requirement
that the FCS finance only moderately priced housing. The commenter
expressed concern that the regulatory ceiling may unnecessarily curtail
the System's ability to finance moderately priced rural housing. As an
alternative, the commenter suggested that the final regulation
establish the 75th percentile as a general guideline, while maintaining
the overriding standard that financing provided would be on moderately
priced homes.
In response to the comments, the final regulation provides that
non-farm rural housing is automatically deemed to be moderately priced
if it meets either the Farmer Mac criteria, or it falls below the 75th
percentile of housing values for the area where it is located, as
determined by a credible, independent, and recognized national or
regional source. In addition, FCS institutions will be permitted to
finance rural housing that exceeds the 75th percentile of housing
values in a rural area only if they determine that the housing in
question is moderately priced for the rural community where it is
located, using data from a credible, independent, and recognized
national or regional source. The FCA expects System institutions to
fully document information that justifies a decision to finance homes
as moderately priced that exceed the 75th percentile for housing values
in the locale where such loans are made. This approach will give System
institutions the flexibility to serve non-farm rural homeowners, while
implementing the statutory requirement that the FCS finance only
moderately priced homes.
Two FCS associations suggested that Federal Home Loan Mortgage
Corporation (Freddie Mac) or Federal National Mortgage Association
(Fannie Mae) limits determine the moderately priced standard for FCS
rural home lending. The FCA previously declined this recommendation.
See 61 FR 42111 (Aug. 13, 1996). Freddie Mac and Fannie Mae maximum
loan amounts may not be generally representative of moderately priced
housing in rural areas because they include housing values in urban and
suburban communities. Furthermore, the Freddie Mac and Fannie Mae
maximum loan amounts are not universally accepted measures of
moderately priced housing. Instead, they are based on loan amounts.
Two commercial bank trade associations do not believe that
Sec. 613.3030(a)(4)(ii) should allow FCS institutions to determine
moderately priced housing values in their territories. These commenters
expressed concern that the FCA will not be able to take corrective
action against System institutions that have closed loans on expensive
homes prior to examination. As an alternative, these commenters asked
the FCA to adopt a uniform national standard so that FCS rural home
lending is specifically targeted to low and middle income rural
residents. The commenters did not explain whether they wanted the FCA
to prescribe a single price that would apply nationwide or a nationally
recognized standard that takes regional variations of prices into
account.
The FCA has incorporated Farmer Mac's national standard for
moderately priced rural housing into the final regulation. As long as
FCS institutions adhere to the statutory requirement that they finance
only moderately priced rural homes, the FCA believes that they should
be allowed to select other measures of moderately priced housing that
are supported by data from a credible, independent, and recognized
national or regional source. The FCA has not been able to identify a
regionally focused standard for valuing moderately priced homes that is
not influenced by housing values in metropolitan areas. Although the
FCA originally proposed that FCS institutions use the most recent
edition of the Census of Housing, General Housing Characteristics,
published by the United States Bureau of Census to determine moderately
priced housing in their territories, (See 60 FR 47118 (Sept. 11,
1995)), the FCA subsequently withdrew this proposal in large measure
because commercial banks asserted that Census data inflated housing
values in rural areas that are near metropolitan areas. See 61 FR 42110
(Aug. 13, 1996). Commercial bank commenters have not identified any
credible or reliable national standard that reflects moderately priced
rural home values.
The FCA believes that Sec. 613.3030(a)(4)(ii) will effectively
restrain FCS lenders from financing rural homes that are not moderately
priced. The regulation requires each FCS lender to demonstrate that it
used a credible, independent, and recognized source to ascertain
moderately priced housing values in the specific locale where it makes
rural home loans. Any rural home loan for a home that is not moderately
priced is an ineligible loan. The FCA's enforcement powers are
sufficient to deter such violations. For these reasons, the FCA adopts
Sec. 613.3030(a)(4) as a final regulation without revision.
d. Loan Purposes. The FCA's original proposal would have imposed no
restrictions on the use of the proceeds from a loan that was secured by
the borrower's rural home. See 60 FR 47110 (Sept. 11, 1995). The FCA
responded to commercial bank concerns by rescinding this proposal and
restoring the loan purpose restrictions in the existing regulation. See
61 FR 42111 (Aug. 13, 1996). As a result, reproposed Sec. 613.3030(c)
states that FCS institutions may make loans to rural homeowners for the
purpose of buying, building, remodeling, improving, repairing rural
homes, and refinancing the existing indebtedness thereon. The preamble
to the reproposed regulation explained that System lenders are not
precluded from offering revolving credit lines to eligible rural home
borrowers so long as such loans are limited to purposes specified in
Sec. 613.3030(c). See 61 FR 42111 (Aug. 13, 1996).
The FCC and three FCS associations opposed the FCA's decision to
reinstate the purpose restrictions into the regulation because the
System will not be allowed to offer a full range of loan
[[Page 4440]]
products to non-farm rural homeowners. System commenters opined that
the FCA's original proposal is compatible with both the Act and safe
and sound lending practices. For these reasons, System commenters
petitioned the FCA to omit the purpose restrictions from the final
regulation. As an alternative, these commenters suggested that the
final regulation require that the loan must be predominately for the
purposes specified in Sec. 613.3030(c).
The final regulation retains the purpose restrictions in
Sec. 613.3030(c) without revision. The FCA has decided at this time
that rural homeowners qualifying under Sec. 613.3030 should be required
to use the proceeds of a System loan for the dwelling only.
The ABA and the IBAA challenged the preamble statement about the
System's authority to offer revolving credit lines to non-farm rural
homeowners if the loan proceeds are used for the purposes specified in
Sec. 613.3030(c). These commenters believe that the FCA is granting
System lenders new authorities to expand into the home equity mortgage
market, which they claim is adequately served by other lenders. Because
non-farm rural home loans cannot exceed 15 percent of each FCS
institution's loan portfolio, one commenter suggested that the FCA
should require System banks and associations to finance only the
purchase and construction of rural homes. Both commenters inquired how
the FCA will ensure that loan proceeds are not diverted for purposes
that are not authorized by the regulation.
Contrary to the commenters' beliefs, neither Sec. 613.3030(c) nor
its preamble confer new powers on FCS banks and associations. Instead,
they restate the System's existing rural home lending authorities. The
Act and other FCA regulations do not restrict the types of loan
products that System institutions may offer their customers for
permissible loan purposes. For this reason, both the existing and new
regulations allow non-farm rural homeowners to obtain revolving credit
lines from FCS banks and associations so long as the loan proceeds are
used for specified housing purposes. As before, FCS institutions will
still be required to maintain policies, procedures, and sufficient loan
controls that prevent non-farm rural home borrowers from using loan
proceeds for purposes that are not authorized by the regulation. The
FCA will continue to use its examination and enforcement powers to
ensure that FCS institutions comply with Sec. 613.3030(c).
Neither the Act nor its legislative history support commercial bank
claims that the FCS cannot offer home repair and improvement loans to
rural residents who are not farmers unless such credit is unavailable
elsewhere. Several passages of the legislative history confirm that
Congress specifically contemplated that the FCS would finance the
repair, improvement, and remodeling of non-farm rural homes.5 The
legislative history also reveals that Congress specifically considered
and rejected proposals that would have required credit to be
unavailable from other mortgage lenders before rural residents who were
not farmers, ranchers, or aquatic producers and harvesters could obtain
FCS financing for their housing needs.6
---------------------------------------------------------------------------
\5\ See 117 Cong. Rec. S12496 (Jul. 29, 1971); 117 Cong. Rec.
S19970 (Dec. 1, 1971).
\6\ H.R. Rep. 92-593, 92nd Cong., 1st. Sess., (Oct. 23, 1971),
p.12.
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8. Financing Domestic and International Activities by Title III Lenders
CoBank, the ABA, and IBAA commented on Secs. 613.3100 and 613.3200,
which govern domestic and international lending by title III banks.
While CoBank acknowledged that the FCA had addressed its concerns about
the original proposal, and it sought no further changes to these
regulations, the two bank trade associations continued to oppose
Sec. 613.3100(a)(5) because it would allow a BC or ACB to finance
cooperatives that provide business and financially related services to
their members. These two trade associations repeated their claim that
Congress intended for title III banks to finance only cooperatives that
aid production agriculture. The FCA responded to this opinion in the
preamble to the reproposed regulation, which documented that
Sec. 613.3100(a)(5) is supported by both the plain language of section
3.8(a) of the Act and its legislative history. See 61 FR 42112 (Aug.
13, 1996).
However, the IBAA's most recent comment letter relies on a
statement that a Senator made in 1971 to allege that the FCA
misconstrued the statute. The Senator stated that the Act does not
allow title III banks to finance cooperatives unless a majority of its
members ``are in fact engaged in agricultural or aquatic pursuits as
their major function.'' 7
---------------------------------------------------------------------------
\7\ 117 Cong. Rec. S12498 (July 29, 1971).
---------------------------------------------------------------------------
The Senator's comments address eligibility, not scope of financing,
for cooperatives that borrow from title III banks. Accordingly, the
Senator's statement does not support the claim that title III banks
lack authority to finance eligible service cooperatives that provide
business and financially related services to farmers, ranchers, aquatic
producers and harvesters, and their cooperatives.
Both the Act and its legislative history reveal that Congress
specifically contemplated that title III banks would finance
cooperatives that provide electricity, telephone service, and insurance
services to farmers. Furthermore, in 1980 and 1996, Congress relaxed
the farmer-membership requirements for service cooperatives. The FCA
adopts Secs. 613.3100 and 613.3200 as final regulations without
revision.
9. Participating in Similar Entity Loans
Reproposed Sec. 613.3300 implements the recently added authority
for FCS banks and associations to participate in loans that non-System
lenders make to similar entities, i.e. ineligible persons whose
operations are functionally similar to those of eligible borrowers. Two
commercial bank trade associations opposed this regulation because they
believe that the new customer regulations confer eligibility on parties
that Congress regards as similar entities. As a result, these
commenters claim that the new similar entity regulation will permit FCS
institutions to participate in non-agricultural loans. One of these
commenters requested that the FCA identify parties who will qualify as
similar parties under Sec. 613.3300.
The FCA has already responded to these concerns in the preambles to
both the proposed and reproposed regulations. The FCA again reaffirms
that Sec. 613.3300 is within the parameters of the Act, and it closely
tracks the language of the statute. Furthermore, Sec. 613.3300(b)
expressly prohibits FCS institutions from participating in non-
agricultural loans to similar entities, and the FCA previously denied
System requests to delete this purpose restriction from the regulation.
See 61 FR 42116 (Aug. 13, 1996). Finally, the preamble to the proposed
regulation identified four parties who qualify as similar entities for
FCS banks and associations that operate under titles I and II of the
Act. See 60 FR 47115 (Sept. 11, 1995). The FCA declines to incorporate
a list of similar entities into the regulation for the reasons
explained in the preamble to the reproposed regulation. See 61 FR 42115
(Aug. 13, 1996). The commenters have raised no other issues about
similar entities, and the FCA now adopts Sec. 613.3300 as a final
regulation without further amendment.
[[Page 4441]]
10. Other Proposed Amendments
The FCA received no comments about the proposed amendments to parts
614, 618, 619, and 626. These regulations are now adopted as final
regulations without revision, except for amendments to conform
regulation citations in subpart A of part 614 and Sec. 619.9025 in part
619. The conforming changes to subpart A of part 614 will be addressed
within FCA's final rule on loan underwriting and Sec. 619.9025 is
retained without revision.
IV. Regulatory Impact and FCA Regulatory Philosophy
These final regulations are consistent with the FCA Board's Policy
Statement on Regulatory Philosophy and achieve the Board's objective of
creating an environment that promotes the confidence of borrowers/
shareholders, investors and the public in the System's financial
strength and future viability. See 60 FR 26034 (May 16, 1995). The
objective of the final revisions to the capital adequacy regulations is
to establish standards that encourage the building of a sound capital
structure by System institutions. The building of a sound capital
structure at each institution would improve the likelihood of an
institution's survival during periods of economic stress and thereby
improve the safety and soundness of the System as a whole. The FCA
believes that these final regulations provide a meaningful measurement
of capital adequacy and would be appropriate for all System
institutions to which they apply.
The capital adequacy provisions of this rule would apply to all
System banks, associations, and the Leasing Corporation. During the
last 5 years, most of these institutions have been steadily increasing
both types of surplus identified by the reproposed regulations, and the
FCA estimates that most, if not all, of the institutions would achieve
the minimum standards in less than 7 years if these trends continue.
The final amendments to the customer eligibility regulations would
remove some of the existing restrictions that are not required by the
Act or necessary to implement it.
List of Subjects
12 CFR Part 613
Agriculture, Banks, Banking, Credit, Rural areas.
12 CFR Part 614
Agriculture, Banks, Banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 615
Accounting, Agriculture, Banks, Banking, Government securities,
Investments, Rural areas.
12 CFR Part 618
Agriculture, Archives and records, Banks, Banking, Insurance,
Reporting and recordkeeping requirements, Rural areas, Technical
assistance.
12 CFR Part 619
Agriculture, Banks, Banking, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, Banking, Reporting and
recordkeeping requirements, Rural areas.
12 CFR Part 626
Advertising, Aged, Agriculture, Banks, Banking, Civil rights,
Credit, Fair housing, Marital status discrimination, Sex
discrimination, Signs and symbols.
For the reasons stated in the preamble, parts 613, 614, 615, 618,
619, 620, and 626 of chapter VI, title 12 of the Code of Federal
Regulations are amended as follows:
PART 613--ELIGIBILITY AND SCOPE OF FINANCING
1. The authority citation for part 613 is revised to read as
follows:
Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1,
3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27, 5.9, 5.17 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075,
2093, 2122, 2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).
2. Subpart D (Secs. 613.3110 and 613.3120) is removed.
Subpart E--Nondiscrimination in Lending
Secs. 613.3145, 613.3150, 613.3151, 613,3152, 613.3160, 613.3170,
613.3175 (Subpart E) [Redesignated as Part 626]
3. Subpart E of part 613, consisting of Secs. 613.3145, 613.3150,
613.3151, 613.3152, 613.3160, 613.3170, and 613.3175 is redesignated as
new part 626, consisting of Secs. 626.6000, 626.6005, 626.6010,
626.6015, 626.6020, 626.6025, and 626.6030 respectively.
4. Subparts A, B, and C of part 613 are revised to read as follows:
Subpart A--Financing Under Titles I and II of the Farm Credit Act
Sec.
613.3000 Financing for farmers, ranchers, and aquatic producers or
harvesters.
613.3005 Lending objective.
613.3010 Financing for processing or marketing operations.
613.3020 Financing for farm-related service businesses.
613.3030 Rural home financing.
Subpart B--Financing for Banks Operating Under Title III of the Farm
Credit Act
613.3100 Domestic lending.
613.3200 International lending.
Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A
of the Act
613.3300 Participations and other interests in loans to similar
entities.
Subpart A--Financing Under Titles I and II of the Farm Credit Act
Sec. 613.3000 Financing for farmers, ranchers, and aquatic producers
or harvesters.
(a) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Bona fide farmer or rancher means a person owning agricultural
land or engaged in the production of agricultural products, including
aquatic products under controlled conditions.
(2) Legal entity means any partnership, corporation, estate, trust,
or other legal entity that is established pursuant to the laws of the
United States, any State thereof, the Commonwealth of Puerto Rico, the
District of Columbia, or any tribal authority and is legally authorized
to conduct a business.
(3) Person means an individual who is a citizen of the United
States or a foreign national who has been lawfully admitted into the
United States either for permanent residency pursuant to 8 U.S.C.
1101(a)(20) or on a visa pursuant to a provision in 8 U.S.C.
1101(a)(15) that authorizes such individual to own property or operate
or manage a business or a legal entity.
(4) Producer or harvester of aquatic products means a person
engaged in producing or harvesting aquatic products for economic gain
in open waters under uncontrolled conditions.
(b) Eligible borrower. Farm Credit institutions that operate under
titles I or II of the Act may provide financing to a bona fide farmer
or rancher, or producer or harvester of aquatic products for any
agricultural or aquatic purpose and for other credit needs.
Sec. 613.3005 Lending objective.
It is the objective of each bank and association, except for banks
for cooperatives, to provide full credit, to the extent of
creditworthiness, to the full-time bona fide farmer (one whose primary
business and vocation is farming, ranching, or producing or harvesting
aquatic products); and conservative credit to less than full-time
farmers for agricultural enterprises, and more restricted credit for
other credit
[[Page 4442]]
requirements as needed to ensure a sound credit package or to
accommodate a borrower's needs as long as the total credit results in
being primarily an agricultural loan. However, the part-time farmer who
needs to seek off-farm employment to supplement farm income or who
desires to supplement off-farm income by living in a rural area and is
carrying on a valid agricultural operation, shall have availability of
credit for mortgages, other agricultural purposes, and family needs in
the preferred position along with full-time farmers. Loans to farmers
shall be on an increasingly conservative basis as the emphasis moves
away from the full-time bona fide farmer to the point where
agricultural needs only will be financed for the applicant whose
business is essentially other than farming. Credit shall not be
extended where investment in agricultural assets for speculative
appreciation is a primary factor.
Sec. 613.3010 Financing for processing or marketing operations.
(a) Eligible borrowers. A borrower is eligible for financing for a
processing or marketing operation under titles I and II of the Act,
only if the borrower meets the following requirements:
(1) The borrower is either a bona fide farmer, rancher, or producer
or harvester of aquatic products, or is a legal entity in which
eligible borrowers under Sec. 613.3000(b) own more than 50 percent of
the voting stock or equity; and
(2) The borrower or an owner of the borrowing legal entity
regularly produces some portion of the throughput used in the
processing or marketing operation.
(b) Portfolio restrictions for certain processing and marketing
loans. Processing or marketing loans to eligible borrowers who
regularly supply less than 20 percent of the throughput are subject to
the following restrictions:
(1) Bank limitation. The aggregate of such processing and marketing
loans made by a Farm Credit bank shall not exceed 15 percent of all its
outstanding retail loans at the end of the preceding fiscal year.
(2) Association limitation. The aggregate of such processing and
marketing loans made by all direct lender associations affiliated with
the same Farm Credit bank shall not exceed 15 percent of the aggregate
of their outstanding retail loans at the end of the preceding fiscal
year. Each Farm Credit bank, in conjunction with all its affiliated
direct lender associations, shall ensure that such processing or
marketing loans are equitably allocated among its affiliated direct
lender associations.
(3) Calculation of outstanding retail loans. For the purposes of
this paragraph, ``outstanding retail loans'' includes loans, loan
participations, and other interests in loans that are either bought
without recourse or sold with recourse.
Sec. 613.3020 Financing for farm-related service businesses.
(a) Eligibility. An individual or legal entity that furnishes farm-
related services to farmers and ranchers that are directly related to
their agricultural production is eligible to borrow from a Farm Credit
bank or association that operates under titles I or II of the Act.
(b) Purposes of financing. A Farm Credit Bank, agricultural credit
bank, or direct lender association may finance:
(1) All of the farm-related business activities of an eligible
borrower who derives more than 50 percent of its annual income (as
consistently measured on either a gross sales or net sales basis) from
furnishing farm-related services that are directly related to the
agricultural production of farmers and ranchers; or
(2) Only the farm-related services activities of an eligible
borrower who derives 50 percent or less of its annual income (as
consistently measured on either a gross sales or net sales basis) from
furnishing farm-related services that are directly related to the
agricultural production of farmers and ranchers.
Sec. 613.3030 Rural home financing.
(a) Definitions.
(1) Rural homeowner means an individual who is not a bona fide
farmer, rancher, or producer or harvester of aquatic products.
(2) Rural home means a single-family moderately priced dwelling
located in a rural area that will be the occupant's principal
residence.
(3) Rural area means open country within a State or the
Commonwealth of Puerto Rico, which may include a town or village that
has a population of not more than 2,500 persons.
(4) Moderately priced means the price of any rural home that
either:
(i) Satisfies the criteria in section 8.0 of the Act pertaining to
rural home loans that collateralize securities that are guaranteed by
the Federal Agricultural Mortgage Corporation; or
(ii) Is otherwise determined to be moderately priced for housing
values for the rural area where it is located, as documented by data
from a credible, independent, and recognized national or regional
source, such as a Federal, State, or local government agency, or an
industry source. Housing values at or below the 75th percentile of
values reflected in such data will be deemed moderately priced.
(b) Eligibility. Any rural homeowner is eligible to obtain
financing on a rural home. No borrower shall have a loan from the Farm
Credit System on more than one rural home at any one time.
(c) Purposes of financing. Loans may be made to rural homeowners
for the purpose of buying, building, remodeling, improving, repairing
rural homes, and refinancing existing indebtedness thereon.
(d) Portfolio limitations.
(1) The aggregate of retail rural home loans by any Farm Credit
Bank or agricultural credit bank shall not exceed 15 percent of the
total of all of its outstanding loans at any one time.
(2) The aggregate of rural home loans made by each direct lender
association shall not exceed 15 percent of the total of its outstanding
loans at the end of its preceding fiscal year, except with the prior
approval of its funding bank.
(3) The aggregate of rural home loans made by all direct lender
associations that are funded by the same Farm Credit bank shall not
exceed 15 percent of the total outstanding loans of all such
associations at the end of the funding bank's preceding fiscal year.
Subpart B--Financing for Banks Operating Under Title III of the
Farm Credit Act
Sec. 613.3100 Domestic lending.
(a) Definitions. For purposes of this subpart, the following
definitions apply:
(1) Cooperative means any association of farmers, ranchers,
producers or harvesters of aquatic products, or any federation of such
associations, or a combination of such associations and farmers,
ranchers, or producers or harvesters of aquatic products that conducts
business for the mutual benefit of its members and has the power to:
(i) Process, prepare for market, handle, or market farm or aquatic
products;
(ii) Purchase, test, grade, process, distribute, or furnish farm or
aquatic supplies; or
(iii) Furnish business and financially related services to its
members.
(2) Farm or aquatic supplies and farm or aquatic business services
are any goods or services normally used by farmers, ranchers, or
producers and harvesters of aquatic products in their business
operations, or to improve the welfare or livelihood of such persons.
(3) Public utility means a cooperative or other entity that is
licensed under
[[Page 4443]]
Federal, State, or local law to provide electric, telecommunication,
cable television, water, or waste treatment services.
(4) Rural area means all territory of a State that is not within
the outer boundary of any city or town having a population of more than
20,000 inhabitants based on the latest decennial census of the United
States.
(5) Service cooperative means a cooperative that is involved in
providing business and financially related services (other than public
utility services) to farmers, ranchers, aquatic producers or
harvesters, or their cooperatives.
(b) Cooperatives and other entities that serve agricultural or
aquatic producers.
(1) Eligibility of cooperatives. A bank for cooperatives or an
agricultural credit bank may lend to a cooperative that satisfies the
following requirements:
(i) Unless the bank's board of directors establishes by resolution
a higher voting control threshold for any type of cooperative, the
percentage of voting control of the cooperative held by farmers,
ranchers, producers or harvesters of aquatic products, or cooperatives
shall be 80 percent except:
(A) Sixty (60) percent for a service cooperative;
(B) Sixty (60) percent for local farm supply cooperatives that have
historically served the needs of a community that would not be
adequately served by other suppliers and have experienced a reduction
in the percentage of membership by agricultural or aquatic producers
due to changed circumstances beyond their control; and
(C) Sixty (60) percent for local farm supply cooperatives that
provide or will provide needed services to a community, and are or will
be in competition with a cooperative specified in
Sec. 613.3100(b)(1)(i)(B);
(ii) The cooperative deals in farm or aquatic products, or products
processed therefrom, farm or aquatic supplies, farm or aquatic business
services, or financially related services with or for members in an
amount at least equal in value to the total amount of such business it
transacts with or for non-members, excluding from the total of member
and non-member business, transactions with the United States, or any
agencies or instrumentalities thereof, or services or supplies
furnished by a public utility; and
(iii) The cooperative complies with one of the following two
conditions:
(A) No member of the cooperative shall have more than one vote
because of the amount of stock or membership capital owned therein; or
(B) The cooperative restricts dividends on stock or membership
capital to 10 percent per year or the maximum percentage per year
permitted by applicable State law, whichever is less.
(iv) Any cooperative that has received a loan from a bank for
cooperatives or an agricultural credit bank shall, without regard to
the requirements in paragraph (b)(1)(i) of this section, continue to be
eligible for as long as more than 50 percent (or such higher percentage
as is established by the bank board) of the voting control of the
cooperative is held by farmers, ranchers, producers or harvesters of
aquatic products, or other eligible cooperatives.
(2) Other eligible entities. The following entities are eligible to
borrow from banks for cooperatives and agricultural credit banks:
(i) Any legal entity that holds more than 50 percent of the voting
control of a cooperative that is an eligible borrower under paragraph
(b)(1) of this section and uses the proceeds of the loan to fund the
activities of its cooperative subsidiary on the terms and conditions
specified by the bank;
(ii) Any legal entity in which an eligible cooperative has an
ownership interest, provided that if such interest is less than 50
percent, financing shall not exceed the percentage that the eligible
cooperative owns in such entity multiplied by the value of the total
assets of such entity; or
(iii) Any creditworthy private entity operated on a non-profit
basis that satisfies the requirements for a service cooperative and
complies with the requirements of either paragraphs (b)(1)(i)(A) and
(b)(1)(iii) of this section, or paragraph (b)(1)(iv) of this section,
and any subsidiary of such entity. An entity that is eligible to borrow
under this paragraph shall be organized to benefit agriculture in
furtherance of the welfare of the farmers, ranchers, and aquatic
producers or harvesters who are its members.
(c) Electric and telecommunication utilities.
(1) Eligibility. A bank for cooperatives or an agricultural credit
bank may lend to:
(i) Electric and telephone cooperatives as defined by section
3.8(a)(4)(A) of the Act that satisfy the eligibility criteria in
paragraph (b)(1) of this section;
(ii) Cooperatives and other entities that:
(A) Have received a loan, loan commitment, insured loan, or loan
guarantee from the Rural Utilities Service of the United States
Department of Agriculture to finance rural electric and
telecommunication services;
(B) Have received a loan or a loan commitment from the Rural
Telephone Bank of the United States Department of Agriculture; or
(C) Are eligible under the Rural Electrification Act of 1936, as
amended, for a loan, loan commitment, or loan guarantee from the Rural
Utilities Service or the Rural Telephone Bank.
(iii) The subsidiaries of cooperatives or other entities that are
eligible under paragraph (c)(1)(ii) of this section.
(iv) Any legal entity that holds more than 50 percent of the voting
control of any public utility that is an eligible borrower under
paragraph (c)(1)(ii) of this section, and uses the proceeds of the loan
to fund the activities of the eligible subsidiary on the terms and
conditions specified by the bank.
(v) Any legal entity in which an eligible utility under paragraph
(c)(1)(ii) of this section has an ownership interest, provided that if
such interest is less than 50 percent, financing shall not exceed the
percentage that the eligible utility owns in such entity multiplied by
the value of the total assets of such entity.
(2) Purposes for financing. A bank for cooperatives or agricultural
credit bank may extend credit to entities that are eligible to borrow
under paragraph (c)(1) of this section in order to provide electric or
telecommunication services in a rural area. A subsidiary that is
eligible to borrow under paragraph (c)(1)(iii) of this section may also
obtain financing from a bank for cooperatives or agricultural credit
bank to operate a licensed cable television utility.
(d) Water and waste disposal facilities.
(1) Eligibility. A cooperative or a public agency, quasi-public
agency, body, or other public or private entity that, under the
authority of State or local law, establishes and operates water and
waste disposal facilities in a rural area, as that term is defined by
paragraph (a)(5) of this section, is eligible to borrow from a bank for
cooperatives or an agricultural credit bank.
(2) Purposes for financing. A bank for cooperatives or agricultural
credit bank may extend credit to entities that are eligible under
paragraph (d)(1) of this section solely for installing, maintaining,
expanding, improving, or operating water and waste disposal facilities
in rural areas.
(e) Domestic lessors. A bank for cooperatives or agricultural
credit bank may lend to domestic parties to finance the acquisition of
facilities or equipment that will be leased to shareholders of the
[[Page 4444]]
bank for use in their operations located inside of the United States.
Sec. 613.3200 International lending.
(a) Definition. For the purpose of this section only, the term
``farm supplies'' refers to inputs that are used in a farming or
ranching operation, but excludes agricultural processing equipment,
machinery used in food manufacturing or other capital goods which are
not used in a farming or ranching operation.
(b) Import transactions. The following parties are eligible to
borrow from a bank for cooperatives or an agricultural credit bank
pursuant to section 3.7(b) of the Act for the purpose of financing the
import of agricultural commodities or products therefrom, aquatic
products, and farm supplies into the United States:
(1) An eligible cooperative as defined by Sec. 613.3100(b);
(2) A counterparty with respect to a specific import transaction
with a voting stockholder of the bank for the substantial benefit of
the shareholder; and
(3) Any foreign or domestic legal entity in which eligible
cooperatives hold an ownership interest.
(c) Export transactions. Pursuant to section 3.7(b)(2) of the Act,
a bank for cooperatives or an agricultural credit bank is authorized to
finance the export (including the cost of freight) of agricultural
commodities or products therefrom, aquatic products, or farm supplies
from the United States to any foreign country. The board of directors
of each bank for cooperatives and agricultural credit bank shall adopt
policies that ensure that exports of agricultural products and
commodities, aquatic products, and farm supplies which originate from
eligible cooperatives are financed on a priority basis. The total
amount of balances outstanding on loans made under this paragraph shall
not, at any time, exceed 50 percent of the capital of any bank for
cooperatives or agricultural credit bank for loans that:
(1) Finance the export of agricultural commodities and products
therefrom, aquatic products, or farm supplies that are not originally
sourced from an eligible cooperative; and
(2) At least 95 percent of the loan amount is not guaranteed by a
department, agency, bureau, board, or commission of the United States
or a corporation that is wholly owned directly or indirectly by the
United States.
(d) International business operations. A bank for cooperatives or
an agricultural credit bank may finance a domestic or foreign entity
which is at least partially owned by eligible cooperatives described in
Sec. 613.3100(b), and facilitates the international business operations
of such cooperatives.
(e) Restrictions.
(1) When eligible cooperatives own less than 50 percent of a
foreign or domestic legal entity, the amount of financing that a bank
for cooperatives or agricultural credit bank may provide to the entity
for imports, exports, or international business operations shall not
exceed the percentage of ownership that eligible cooperatives hold in
such entity multiplied by the value of the total assets of such entity;
and
(2) A bank for cooperatives or agricultural credit bank shall not
finance the relocation of any plant or facility from the United States
to a foreign country.
Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and
4.18A of the Act
Sec. 613.3300 Participations and other interests in loans to similar
entities.
(a) Definitions.
(1) Participate and participation, for the purpose of this section,
refer to multi-lender transactions, including syndications,
assignments, loan participations, subparticipations, other forms of the
purchase, sale, or transfer of interests in loans, or other extensions
of credit, or other technical and financial assistance.
(2) Similar entity means a party that is ineligible for a loan from
a Farm Credit bank or association, but has operations that are
functionally similar to the activities of eligible borrowers in that a
majority of its income is derived from, or a majority of its assets are
invested in, the conduct of activities that are performed by eligible
borrowers.
(b) Similar entity transactions. A Farm Credit bank or a direct
lender association may participate with a lender that is not a Farm
Credit System institution in loans to a similar entity that is not
eligible to borrow directly under Sec. 613.3000, 613.3010, 613.3020,
613.3100, or 613.3200, for purposes similar to those for which an
eligible borrower could obtain financing from the participating FCS
institution.
(c) Restrictions. Participations by a Farm Credit bank or
association in loans to a similar entity under this section are subject
to the following limitations:
(1) Lending limits.
(i) Farm Credit banks operating under title I of the Act and direct
lender associations. The total amount of all loan participations that
any Farm Credit bank, agricultural credit bank, or direct lender
association has outstanding under paragraph (b) of this section to a
single credit risk shall not exceed:
(A) Ten (10) percent of its total capital; or
(B) Twenty-five (25) percent of its total capital if a majority of
the shareholders of the respective Farm Credit bank or direct lender
association so approve.
(ii) Farm Credit banks operating under title III of the Act. The
total amount of all loan participations that any bank for cooperatives
or agricultural credit bank has outstanding under paragraph (b) of this
section to a single credit risk shall not exceed 10 percent of its
total capital;
(2) Percentage held in the principal amount of the loan. The
participation interest in the same loan held by one or more Farm Credit
bank(s) or association(s) shall not, at any time, equal or exceed 50
percent of the principal amount of the loan; and
(3) Portfolio limitations. The total amount of participations that
any Farm Credit bank or direct lender association has outstanding under
paragraph (b) of this section shall not exceed 15 percent of its total
outstanding assets at the end of its preceding fiscal year.
(d) Approval by other Farm Credit System institutions.
(1) No direct lender association shall participate in a loan to a
similar entity under paragraph (b) of this section without the approval
of its funding bank. A funding bank shall deny such requests only for
safety and soundness reasons affecting the bank.
(2) No Farm Credit bank or direct lender association shall
participate in a loan to a similar entity that is eligible to borrow
under Sec. 613.3100(b) without the prior approval of the bank for
cooperatives or agricultural credit bank that, at the time the loan is
made, has the greatest volume of loans made under title III of the Act
in the State where the headquarters office of the similar entity is
located.
(3) No bank for cooperatives or agricultural credit bank shall
participate in a loan to a similar entity that is eligible to borrow
under Sec. 613.3010 or 613.3020 without the prior consent of the Farm
Credit bank(s) in whose chartered territory the similar entity conducts
operations.
(4) All approvals required under paragraph (d) of this section may
be granted on an annual basis and under such terms and conditions as
the various Farm Credit System institutions may agree.
[[Page 4445]]
PART 614--LOAN POLICIES AND OPERATIONS
4a. The authority citation for part 614 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 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, 2279-2, 2279b, 2279b-1, 2279b-2,
2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101
Stat. 1568, 1639.
Subpart A--[Amended]
5. Section 614.4010 is amended by removing the words ``export or''
each place they appear in paragraphs (d)(4) and (d)(5); by removing the
reference ``(d)(3)'' and adding in its place ``(d)(4)'' in paragraph
(d)(5); and by adding new paragraphs (d)(6) and (d)(7) to read as
follows.
Sec. 614.4010 Agricultural credit banks.
* * * * *
(d) * * *
* * * * *
(6) Any party, subject to the requirements in Sec. 613.3200(c) of
this chapter, for the export (including the cost of freight) of
agricultural commodities or products therefrom, aquatic products, or
farm supplies from the United States to any foreign country, in
accordance with Sec. 614.4233 and subpart Q of this part 614; and
(7) Domestic or foreign parties in which eligible cooperatives, as
defined in Sec. 613.3100 of this chapter, hold an ownership interest,
for the purpose of facilitating the international business operations
of such cooperatives pursuant to the requirements of Sec. 613.3200 (d)
and (e) of this chapter.
* * * * *
6. Section 614.4020 is amended by removing the words ``export or''
each place they appear in paragraphs (a)(4) and (a)(5); by adding after
the words ``bank's board'', the reference ``, Sec. 614.4233,'' in
paragraph (a)(4); by removing the words ``board policy'' and adding in
their place, the words ``policies of the bank's board, Sec. 614.4233,''
in paragraph (a)(5); and by adding new paragraphs (a)(6) and (a)(7) to
read as follows:
Sec. 614.4020 Banks for cooperatives.
(a) * * *
* * * * *
(6) Any party, subject to the requirements in Sec. 613.3200(c) of
this chapter, for the export (including the cost of freight) of
agricultural commodities or products therefrom, aquatic products, or
farm supplies from the United States to any foreign country, in
accordance with Sec. 614.4233 and subpart Q of this part 614; and
(7) Domestic or foreign parties in which eligible cooperatives, as
defined in Sec. 613.3100 of this chapter, hold an ownership interest,
for the purpose of facilitating the international business operations
of such cooperatives pursuant to the requirements in Sec. 613.3200 (d)
and (e) of this chapter.
* * * * *
Subpart E--Loan Terms and Conditions
7. Section 614.4233 is amended by revising the introductory
paragraph to read as follows:
Sec. 614.4233 International loans.
Term loans made by banks for cooperatives and agricultural credit
banks under the authority of section 3.7(b) of the Act and
Sec. 613.3200 of this chapter to foreign or domestic parties who are
not shareholders of the bank shall be subject to following conditions:
* * * * *
Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing
of Other Financing Institutions
Sec. 614.4610 [Amended]
8. Section 614.4610 is amended by removing the words ``an
association in the district'' and adding in their place, the words
``any association funded by the bank'' in the first sentence and
removing the reference ``Sec. 613.3040(d)(2)'' and adding in its place
the reference ``Secs. 613.3010(b)(1) and 613.3030(d)''.
Subpart Q--Banks for Cooperatives Financing International Trade
9. The heading for subpart Q is amended by adding after the words
``Banks for Cooperatives'' the words ``and Agricultural Credit Banks''.
Sec. 614.4700 [Amended]
10. Section 614.4700 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in paragraphs (a) introductory text, (b), and (h).
Sec. 614.4710 [Amended]
11. Section 614.4710 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in the introductory paragraph and paragraph (c); by
adding after the words ``bank for cooperatives' '' the words ``or
agricultural credit bank's'' in paragraph (a)(1)(ii); by adding after
the words ``bank for cooperatives'' the words ``or an agricultural
credit bank'' each place they appear in paragraphs (a)(1) introductory
text, (a)(1)(i), (a)(3), (a)(5) and (b)(1).
Sec. 614.4720 [Amended]
12. Section 614.4720 is amended by adding after the words ``Banks
for cooperatives'' the words ``and agricultural credit banks'' in the
first sentence of the introductory paragraph.
Sec. 614.4800 [Amended]
13. Section 614.4800 is amended by adding after the words ``A bank
for cooperatives'' the words ``or an agricultural credit bank'' in the
first sentence.
Sec. 614.4810 [Amended]
14. Section 614.4810 is amended by adding after the words ``banks
for cooperatives'' the words ``and agricultural credit banks'' each
place they appear in paragraphs (a) introductory text and (b).
Sec. 614.4900 [Amended]
15. Section 614.4900 is amended by adding after the words ``bank
for cooperatives'' the words ``or an agricultural credit bank'' each
place they appear in paragraphs (a) through (d); and by adding after
the words ``banks for cooperatives'' the words ``and agricultural
credit banks'' in the first sentence of paragraph (i).
PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,
AND FUNDING OPERATIONS
16. The authority citation for part 615 is revised to read as
follows:
Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of
Pub. L. 100-233, 101 Stat. 1568, 1608.
[[Page 4446]]
Subpart H--Capital Adequacy
17. Section 615.5200 is amended by revising paragraphs (a) and (b)
introductory text to read as follows:
Sec. 615.5200 General.
(a) The Board of Directors of each Farm Credit System institution
shall determine the amount of total capital, core surplus, total
surplus, and unallocated surplus needed to assure the institution's
continued financial viability and to provide for growth necessary to
meet the needs of its borrowers. The minimum capital standards
specified in this part are not meant to be adopted as the optimal
capital level in the institution's capital adequacy plan. Rather, the
standards are intended to serve as minimum levels of capital that each
institution must maintain to protect against the credit and other
general risks inherent in its operations.
(b) Each Board of Directors shall establish, adopt, and maintain a
formal written capital adequacy plan as a part of the financial plan
required by Sec. 618.8440 of this chapter. The plan shall include the
capital targets that are necessary to achieve the institution's capital
adequacy goals as well as the minimum permanent capital and surplus
standards. The plan shall address any projected dividends, patronage
distribution, equity retirements, or other action that may decrease the
institution's capital or the components thereof for which minimum
amounts are required by this part. The plan shall set forth the
circumstances in which retirements or revolvements of stock or equities
may occur. If the plan provides for retirement or revolvement of
equities included in core surplus, in connection with a loan default or
the death of a former borrower, the plan must require the institution
to make a prior determination that such retirement or revolvement is in
the best interest of the institution, and also require the institution
to charge off an amount of the indebtedness on the loan equal to the
amount of the equities that are retired or canceled. In addition to
factors that must be considered in meeting the minimum standards, the
board of directors shall also consider at least the following factors
in developing the capital adequacy plan:
* * * * *
Sec. 615.5201 [Amended]
18. Section 615.5201 is amended by adding the words ``Federal land
credit association,'' after the words ``Federal land bank
association,''; and by removing the words ``National Bank for
Cooperatives,'' and adding in their place, the words ``agricultural
credit bank,'' in paragraph (g); and redesignating paragraphs (j)(5)
and (j)(6) as paragraphs (j)(6) and (j)(7); and by adding a new
paragraph (j)(5) to read as follows:
Sec. 615.5201 Definitions.
* * * * *
(j) * * *
(5) Term preferred stock with an original maturity of at least 5
years and on which, if cumulative, the board of directors has the
option to defer dividends, provided that, at the beginning of each of
the last 5 years of the term of the stock, the amount that is eligible
to be counted as permanent capital is reduced by 20 percent of the
original amount of the stock (net of redemptions);
* * * * *
19. Section 615.5205 is revised to read as follows:
Sec. 615.5205 Minimum permanent capital standard.
Each institution shall at all times maintain permanent capital at a
level of at least 7 percent of its risk-adjusted asset base.
20. Section 615.5210 is amended by removing paragraphs (f)(2)(i)(D)
and (f)(2)(v)(D); redesignating paragraph (f)(2)(v)(E) as new paragraph
(f)(2)(v)(D); adding a new paragraph (e)(10); and revising paragraphs
(e)(7) and (f)(2)(i)(C) to read as follows:
Sec. 615.5210 Computation of the permanent capital ratio.
* * * * *
(e) * * *
(7) Each institution shall deduct from its total capital an amount
equal to all goodwill, whenever acquired.
* * * * *
(10) The permanent capital of an institution shall exclude the net
impact of unrealized holding gains or losses on available-for-sale
securities.
(f) * * *
(2) * * *
(i) * * *
(C) Goodwill.
* * * * *
Sec. 615.5216 [Removed and reserved]
21. Section 615.5216 is removed and reserved.
Subpart I--Issuance of Equities
Sec. 615.5220 [Amended]
22. Section 615.5220 is amended by removing paragraph (f),
redesignating existing paragraphs (g), (h), and (i) as paragraphs (f),
(g), and (h), respectively; by removing the words ``may be more than,
but'' each place they appear in paragraphs (d) and (e); by adding the
words ``, agricultural credit banks (with respect to loans other than
to cooperatives),'' after the words ``For Farm Credit Banks'' in
paragraph (d); by adding the words ``and agricultural credit banks
(with respect to loans to cooperatives)'' after the words ``For banks
for cooperatives'' in paragraph (e); and by removing the words
``(including interim standards)'' in newly designated paragraph (f).
Sec. 615.5230 [Amended]
23. Section 615.5230 is amended by removing the words ``preferred
stock to be issued to the Farm Credit System Financial Assistance
Corporation and'' in paragraph (b)(1).
24. Section 615.5240 is amended by removing paragraph (b);
redesignating the introductory paragraph and paragraph (a) introductory
text as paragraphs (a) and (b) introductory text, respectively; adding
new paragraphs (b)(3) and (c); and revising newly designated paragraphs
(a) and (b)(2) to read as follows:
Sec. 615.5240 Permanent capital requirements.
(a) The capitalization bylaws shall enable the institution to meet
the minimum permanent capital adequacy standards established under
subparts H and K of this part and the total capital requirements
established by the board of directors of the institution.
(b) * * *
(2) For perpetual preferred stock issued to persons other than the
Farm Credit System Financial Assistance Corporation:
* * * * *
(3) For term preferred stock:
(i) Retirement must be solely at the discretion of the board of
directors and not upon a date certain, other than the original maturity
date, or upon the happening of any event, such as repayment of the
loan;
(ii) Retirement must be at not more than book value;
(iii) Dividends may be cumulative, but the board of directors must
have the option to defer payment; and
(iv) Disclosure must have been made pursuant to Sec. 615.5250 of
the nature of the investment and the terms and conditions under which
it is issued.
(c) Once an institution's board of directors has made a
determination that the institution's capital position is adequate, the
institution's board of directors may delegate to management the
decision whether to retire borrower stock, provided that:
[[Page 4447]]
(1) Any such retirements are in accordance with the institution's
capital adequacy plan or capital restoration plan;
(2) The institution's permanent capital ratio will be in excess of
9 percent after any such retirements;
(3) The institution meets and maintains all applicable minimum
surplus and collateral standards; and
(4) The aggregate amount of stock purchases, retirements, and the
net effect of such activities are reported to the board of directors
each quarter.
Sec. 615.5250 [Amended]
25. Section 615.5250 is amended by removing paragraph (c);
redesignating paragraphs (d) and (e) as paragraphs (c) and (d),
respectively; by removing the words ``(including interim standards)''
in paragraphs (a)(4)(ii) and newly designated (c)(3); and by removing
the words ``, including interim standards'' in paragraph (a)(4)(iii).
Subpart J--Retirement of Equities
Sec. 615.5260 [Amended]
26. Section 615.5260 is amended by adding the word ``or'' at the
end of paragraph (a)(2)(i); removing ``; or'' at the end of paragraph
(a)(2)(ii) and inserting a period in its place; and by removing
paragraphs (a)(2)(iii) and (d).
Sec. 615.5270 [Amended]
27. Section 615.5270 is amended by removing the words ``(including
interim standards)''; and adding the words ``or term stock at its
stated maturity'' after the reference ``Sec. 615.5290'' in paragraph
(b).
28. Subpart K is revised to read as follows:
Subpart K--Surplus and Collateral Requirements
Sec.
615.5301 Definitions.
615.5330 Minimum surplus ratios.
615.5335 Bank net collateral ratio.
615.5336 Compliance and reporting.
Subpart K--Surplus and Collateral Requirements
Sec. 615.5301 Definitions.
For the purposes of this subpart, the following definitions shall
apply:
(a) The terms institution, permanent capital, risk-adjusted asset
base, and total capital shall have the meanings set forth in
Sec. 615.5201.
(b) Core surplus.
(1) Core surplus means:
(i) Undistributed earnings/unallocated surplus less, for
associations only, an amount equal to the net investment in the bank;
(ii) Nonqualified allocated equities that are not distributed
according to an established plan or practice, provided that, in the
event that a nonqualified patronage allocation is distributed, other
than as required by section 4.14B of the Act, or in connection with a
loan default or the death of an equityholder whose loan has been repaid
(to the extent provided for in the institution's capital adequacy
plan), any remaining nonqualified allocations that were allocated in
the same year will be excluded from core surplus.
(iii) Perpetual common or noncumulative perpetual preferred stock
that is not retired according to an established plan or practice,
provided that, in the event that stock held by a borrower is retired,
other than as required by section 4.14B of the Act or in connection
with a loan default to the extent provided for in the institution's
capital plan, the remaining perpetual stock of the same class or series
shall be excluded from core surplus;
(iv) A capital instrument or a particular balance sheet entry or
account that the Farm Credit Administration has determined to be the
functional equivalent of a component of core surplus. The Farm Credit
Administration may permit an institution to include all or a portion of
such instrument, entry, or account as core surplus, permanently or on a
temporary basis, for purposes of this subpart.
(2) For associations only, other allocated equities may also be
included in the core surplus ratio to the extent permitted by
Sec. 615.5330(b)(3) if the following conditions are met:
(i) The allocated equities are includible in total surplus; and
(ii) The allocated equities, if subject to revolvement, are not
scheduled for revolvement during the next 3 years.
(3) The deductions required to be made by an institution in the
computation of its permanent capital pursuant to Sec. 615.5210(e) (6)
and (7) shall also be made in the computation of its core surplus.
(4) Core surplus shall not include equities held by other System
institutions unless approved pursuant to paragraph (b)(1)(iv) of this
section.
(5) The net impact of unrealized holding gains or losses on
available-for-sale securities shall be excluded from core surplus.
(6) The Farm Credit Administration may, if it finds that a
particular component, balance sheet entry, or account has
characteristics or terms that diminish its contribution to an
institution's ability to absorb losses, require the deduction of all or
a portion of such component, entry, or account from core surplus.
(c) Net collateral means the value of a bank's collateral as
defined by Sec. 615.5050 (except that eligible investments as described
in Sec. 615.5140 are to be valued at their amortized cost), less an
amount equal to that portion of the allocated investments of affiliated
associations that is not counted as permanent capital by the bank.
(d) Net collateral ratio means a bank's net collateral, divided by
the bank's total liabilities.
(e) Net investment in the bank means the total investment by an
association in its affiliated bank, less reciprocal investments and
investments resulting from a loan originating/service agency
relationship, including participations.
(f) Nonqualified allocated equities means allocations of earnings
designated to the institution's members that are not deducted from the
gross taxable income of the allocating institution at the time of
allocation.
(g) Perpetual stock or equity means stock or equity not having a
maturity date, not redeemable at the option of the holder, and having
no other provisions that will require the future redemption of the
issue.
(h) Qualified allocated equities means allocations of earnings that
are deducted from the gross taxable income of the allocating
institution and designated to the institution's members.
(i) Total surplus means:
(1) Undistributed earnings/unallocated surplus;
(2) Allocated equities, including allocated surplus and stock
which, if subject to revolvement or retirement, have an original
planned revolvement or retirement date of not less than 5 years and are
eligible to be included in permanent capital pursuant to
Sec. 615.5201(j)(4)(iv); and
(3) Stock that is not purchased or held as a condition of obtaining
a loan, provided that it is either perpetual stock or term stock with
an original maturity of at least 5 years, and provided that the
institution has no established plan or practice of retiring such
perpetual stock or of retiring such term stock prior to its stated
maturity. The amount of term stock that is eligible to be included in
total surplus shall be reduced by 20 percent (net of redemptions) at
the beginning of each of the last 5 years of the term of the
instrument.
(4) The total surplus of an institution shall exclude the net
impact of unrealized holding gains or losses on available-for-sale
securities.
(5) A capital instrument or a particular balance sheet entry or
account that the Farm Credit
[[Page 4448]]
Administration has determined to be the functional equivalent of a
component of total surplus. The Farm Credit Administration may permit
one or more institutions to include all or a portion of such
instrument, entry, or account as total surplus, permanently or on a
temporary basis, for purposes of this subpart.
(6) The Farm Credit Administration may, if it finds that a
particular component, balance sheet entry, or account has
characteristics or terms that diminish its contribution to an
institution's ability to absorb losses, require the deduction of all or
a portion of such component, entry, or account from total surplus.
(7) Any deductions made by an institution in the computation of its
permanent capital pursuant to Sec. 615.5210(e) (6) and (7) shall also
be made in the computation of its total surplus.
Sec. 615.5330 Minimum surplus ratios.
(a) Total surplus.
(1) Each institution shall achieve and maintain a ratio of at least
7 percent of total surplus to the risk-adjusted asset base.
(2) Each association shall compute its total surplus ratio by
deducting an amount equal to the amount of allocated bank equities
counted as permanent capital by the bank;
(3) Each Farm Credit bank shall compute its total surplus ratio by
deducting an amount equal to the amount of the bank's equities counted
as association capital.
(b) Core surplus.
(1) Each institution shall achieve and maintain a ratio of core
surplus to the risk-adjusted asset base of at least 3.5 percent, of
which no more than 2 percentage points may consist of allocated
equities otherwise includible pursuant to Sec. 615.5301(b)(2).
(2) Each association shall compute its core surplus ratio by
deducting an amount equal to the net investment in its affiliated Farm
Credit bank from its core surplus.
(c) An institution shall compute its total surplus and core surplus
ratios as of the end of each month.
Sec. 615.5335 Bank net collateral ratio.
(a) Each bank shall achieve and maintain a net collateral ratio of
at least 103 percent.
(b) A bank shall compute its net collateral ratio as of the end of
each month.
Sec. 615.5336 Compliance and reporting.
(a) Noncompliance and reporting. An institution that meets the
minimum applicable surplus ratios and net collateral ratio established
in Secs. 615.5330 and 615.5335 at or after the end of the quarter in
which these regulations become effective and subsequently falls below
one or more minimum requirements shall be in violation of the
applicable regulations. Such institution shall report its noncompliance
to the Farm Credit Administration within 20 calendar days following the
month end in which the institution initially determines that it is not
in compliance with the requirements.
(b) Initial compliance and reporting requirements.
(1) An institution that fails to satisfy one or more of its minimum
applicable surplus and net collateral ratios at the end of the quarter
in which these regulations become effective shall report its initial
noncompliance to the Farm Credit Administration within 20 days
following such quarter end and shall also submit a capital restoration
plan for achieving and maintaining the standards, demonstrating
appropriate annual progress toward meeting the goal, to the Farm Credit
Administration within 60 days following such quarter end. If the
capital restoration plan is not approved by the Farm Credit
Administration, the Agency shall inform the institution of the reasons
for disapproval, and the institution shall submit a revised capital
restoration plan within the time specified by the Farm Credit
Administration.
(2) Approval of compliance plans. In determining whether to approve
a capital restoration plan submitted under this section, the FCA shall
consider the following factors, as applicable:
(i) The conditions or circumstances leading to the institution's
falling below minimum levels, the exigency of those circumstances, and
whether or not they were caused by actions of the institution or were
beyond the institution's control;
(ii) The overall condition, management strength, and future
prospects of the institution and, if applicable, affiliated System
institutions;
(iii) The institution's capital, adverse assets (including
nonaccrual and nonperforming loans), allowance for loss, and other
ratios compared to the ratios of its peers or industry norms;
(iv) How far an institution's ratios are below the minimum
requirements;
(v) The estimated rate at which the institution can reasonably be
expected to generate additional earnings;
(vi) The effect of the business changes required to increase
capital;
(vii) The institution's previous compliance practices, as
appropriate;
(viii) The views of the institution's directors and senior
management regarding the plan; and
(ix) Any other facts or circumstances that the FCA deems relevant.
(3) An institution shall be deemed to be in compliance with the
surplus and collateral requirements of this subpart if it is in
compliance with a capital restoration plan that is approved by the Farm
Credit Administration within 180 days following the end of the quarter
in which these regulations become effective.
29. Subparts L and M are added to read as follows:
Subpart L--Establishment of Minimum Capital Ratios for an
Individual Institution
Sec.
615.5350 General--Applicability.
615.5351 Standards for determination of appropriate individual
institution minimum capital ratios.
615.5352 Procedures.
615.5353 Relation to other actions.
615.5354 Enforcement.
Subpart M--Issuance of a Capital Directive
615.5355 Purpose and scope.
615.5356 Notice of intent to issue a capital directive.
615.5357 Response to notice.
615.5358 Decision.
615.5359 Issuance of a capital directive.
615.5360 Reconsideration based on change in circumstances.
615.5361 Relation to other administrative actions.
Subpart L--Establishment of Minimum Capital Ratios for an
Individual Institution
Sec. 615.5350 General--Applicability.
(a) The rules and procedures specified in this subpart are
applicable to a proceeding to establish required minimum capital ratios
that would otherwise be applicable to an institution under
Secs. 615.5205, 615.5330, and 615.5335. The Farm Credit Administration
is authorized to establish such minimum capital requirements for an
institution as the Farm Credit Administration, in its discretion, deems
to be necessary or appropriate in light of the particular circumstances
of the institution. Proceedings under this subpart also may be
initiated to require an institution having capital ratios greater than
those set forth in Secs. 615.5205, 615.5330, or 615.5335 to continue to
maintain those higher ratios.
(b) The Farm Credit Administration may require higher minimum
capital ratios for an individual institution in view of its
circumstances. For example,
[[Page 4449]]
higher capital ratios may be appropriate for:
(1) An institution receiving special supervisory attention;
(2) An institution that has, or is expected to have, losses
resulting in capital inadequacy;
(3) An institution with significant exposure due to operational
risk, interest rate risk, the risks from concentrations of credit,
certain risks arising from other products, services, or related
activities, or management's overall inability to monitor and control
financial risks presented by concentrations of credit and related
services activities;
(4) An institution exposed to a high volume of, or particularly
severe, problem loans;
(5) An institution that is growing rapidly; or
(6) An institution that may be adversely affected by the activities
or condition of System institutions with which it has significant
business relationships or in which it has significant investments.
Sec. 615.5351 Standards for determination of appropriate individual
institution minimum capital ratios.
The appropriate minimum capital ratios for an individual
institution cannot be determined solely through the application of a
rigid mathematical formula or wholly objective criteria. The decision
is necessarily based in part on subjective judgment grounded in Agency
expertise. The factors to be considered in the determination will vary
in each case and may include, for example:
(a) The conditions or circumstances leading to the Farm Credit
Administration's determination that higher minimum capital ratios are
appropriate or necessary for the institution;
(b) The exigency of those circumstances or potential problems;
(c) The overall condition, management strength, and future
prospects of the institution and, if applicable, affiliated
institutions;
(d) The institution's capital, adverse assets (including nonaccrual
and nonperforming loans), allowance for loss, and other ratios compared
to the ratios of its peers or industry norms; and
(e) The views of the institution's directors and senior management.
Sec. 615.5352 Procedures.
(a) Notice. When the Farm Credit Administration determines that
minimum capital ratios greater than those set forth in Secs. 615.5205,
615.5330, or 615.5335 are necessary or appropriate for a particular
institution, the Farm Credit Administration will notify the institution
in writing of the proposed minimum capital ratios and the date by which
they should be reached (if applicable) and will provide an explanation
of why the ratios proposed are considered necessary or appropriate for
the institution.
(b) Response.
(1) The institution may respond to any or all of the items in the
notice. The response should include any matters which the institution
would have the Farm Credit Administration consider in deciding whether
individual minimum capital ratios should be established for the
institution, what those capital ratios should be, and, if applicable,
when they should be achieved. The response must be in writing and
delivered to the designated Farm Credit Administration official within
30 days after the date on which the institution received the notice. In
its discretion, the Farm Credit Administration may extend the time
period for good cause. The Farm Credit Administration may shorten the
time period with the consent of the institution or when, in the opinion
of the Farm Credit Administration, the condition of the institution so
requires, provided that the institution is informed promptly of the new
time period.
(2) Failure to respond within 30 days or such other time period as
may be specified by the Farm Credit Administration shall constitute a
waiver of any objections to the proposed minimum capital ratios or the
deadline for their achievement.
(c) Decision. After the close of the institution's response period,
the Farm Credit Administration will decide, based on a review of the
institution's response and other information concerning the
institution, whether individual minimum capital ratios should be
established for the institution and, if so, the ratios and the date the
requirements will become effective. The institution will be notified of
the decision in writing. The notice will include an explanation of the
decision, except for a decision not to establish individual minimum
capital requirements for the institution.
(d) Submission of plan. The decision may require the institution to
develop and submit to the Farm Credit Administration, within a time
period specified, an acceptable plan to reach the minimum capital
ratios established for the institution by the date required.
(e) Reconsideration based on change in circumstances. If, after the
Farm Credit Administration's decision in paragraph (c) of this section,
there is a change in the circumstances affecting the institution's
capital adequacy or its ability to reach the required minimum capital
ratios by the specified date, either the institution or the Farm Credit
Administration may propose a change in the minimum capital ratios for
the institution, the date when the minimums must be achieved, or the
institution's plan (if applicable). The Farm Credit Administration may
decline to consider proposals that are not based on a significant
change in circumstances or are repetitive or frivolous. Pending a
decision on reconsideration, the Farm Credit Administration's original
decision and any plan required under that decision shall continue in
full force and effect.
Sec. 615.5353 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the
required minimum capital ratios for an institution may be established
or revised through a written agreement or cease and desist proceedings
under part C of title V of the Act, or as a condition for approval of
an application.
Sec. 615.5354 Enforcement.
An institution that does not have or maintain the minimum capital
ratios applicable to it, whether required in subparts H and K of this
part, in a decision pursuant to this subpart, in a written agreement or
temporary or final order under part C of title V of the Act, or in a
condition for approval of an application, or an institution that has
failed to submit or comply with an acceptable plan to attain those
ratios, will be subject to such administrative action or sanctions as
the Farm Credit Administration considers appropriate. These sanctions
may include the issuance of a capital directive pursuant to subpart M
of this part or other enforcement action, assessment of civil money
penalties, and/or the denial or condition of applications.
Subpart M--Issuance of a Capital Directive
Sec. 615.5355 Purpose and scope.
(a) This subpart is applicable to proceedings by the Farm Credit
Administration to issue a capital directive under sections 4.3(b) and
4.3A(e) of the Act. A capital directive is an order issued to an
institution that does not have or maintain capital at or greater than
the minimum ratios set forth in Secs. 615.5205, 615.5330, and 615.5335;
or established for the institution under subpart L, by a written
agreement under part C of title V of the Act, or as a condition for
approval of an
[[Page 4450]]
application. A capital directive may order the institution to:
(1) Achieve the minimum capital ratios applicable to it by a
specified date;
(2) Adhere to a previously submitted plan to achieve the applicable
capital ratios;
(3) Submit and adhere to a plan acceptable to the Farm Credit
Administration describing the means and time schedule by which the
institution shall achieve the applicable capital ratios;
(4) Take other action, such as reduction of assets or the rate of
growth of assets, restrictions on the payment of dividends or
patronage, or restrictions on the retirement of stock, to achieve the
applicable capital ratios; or
(5) A combination of any of these or similar actions.
(b) A capital directive may also be issued to the board of
directors of an institution, requiring such board to comply with the
requirements of section 4.3A(d) of the Act prohibiting the reduction of
permanent capital.
(c) A capital directive issued under this rule, including a plan
submitted under a capital directive, is enforceable in the same manner
and to the same extent as an effective and outstanding cease and desist
order which has become final as defined in section 5.25 of the Act.
Violation of a capital directive may result in assessment of civil
money penalties in accordance with section 5.32 of the Act.
Sec. 615.5356 Notice of intent to issue a capital directive.
The Farm Credit Administration will notify an institution in
writing of its intention to issue a capital directive. The notice will
state:
(a) The reasons for issuance of the capital directive;
(b) The proposed contents of the capital directive, including the
proposed date for achieving the minimum capital requirement; and
(c) Any other relevant information concerning the decision to issue
a capital directive.
Sec. 615.5357 Response to notice.
(a) An institution may respond to the notice by stating why a
capital directive should not be issued and/or by proposing alternative
contents for the capital directive or seeking other appropriate relief.
The response shall include any information, mitigating circumstances,
documentation, or other relevant evidence that supports its position.
The response may include a plan for achieving the minimum capital
ratios applicable to the institution. The response must be in writing
and delivered to the Farm Credit Administration within 30 days after
the date on which the institution received the notice. In its
discretion, the Farm Credit Administration may extend the time period
for good cause. The Farm Credit Administration may shorten the 30-day
time period:
(1) When, in the opinion of the Farm Credit Administration, the
condition of the institution so requires, provided that the institution
shall be informed promptly of the new time period;
(2) With the consent of the institution; or
(3) When the institution already has advised the Farm Credit
Administration that it cannot or will not achieve its applicable
minimum capital ratios.
(b) Failure to respond within 30 days or such other time period as
may be specified by the Farm Credit Administration shall constitute a
waiver of any objections to the proposed capital directive.
Sec. 615.5358 Decision.
After the closing date of the institution's response period, or
receipt of the institution's response, if earlier, the Farm Credit
Administration may seek additional information or clarification of the
response. Thereafter, the Farm Credit Administration will determine
whether or not to issue a capital directive, and if one is to be
issued, whether it should be as originally proposed or in modified
form.
Sec. 615.5359 Issuance of a capital directive.
(a) A capital directive will be served by delivery to the
institution. It will include or be accompanied by a statement of
reasons for its issuance.
(b) A capital directive is effective immediately upon its receipt
by the institution, or upon such later date as may be specified
therein, and shall remain effective and enforceable until it is stayed,
modified, or terminated by the Farm Credit Administration.
Sec. 615.5360 Reconsideration based on change in circumstances.
Upon a change in circumstances, an institution may request the Farm
Credit Administration to reconsider the terms of its capital directive
or may propose changes in the plan to achieve the institution's
applicable minimum capital ratios. The Farm Credit Administration also
may take such action on its own motion. The Farm Credit Administration
may decline to consider requests or proposals that are not based on a
significant change in circumstances or are repetitive or frivolous.
Pending a decision on reconsideration, the capital directive and plan
shall continue in full force and effect.
Sec. 615.5361 Relation to other administrative actions.
A capital directive may be issued in addition to, or in lieu of,
any other action authorized by law, including cease and desist
proceedings, civil money penalties, or the conditioning or denial of
applications. The Farm Credit Administration also may, in its
discretion, take any action authorized by law, in lieu of a capital
directive, in response to an institution's failure to achieve or
maintain the applicable minimum capital ratios.
PART 618--GENERAL PROVISIONS
30. The authority citation for part 618 continues to read as
follows:
Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,
2200, 2211, 2218, 2243, 2244, 2252).
Subpart A--Related Services
Sec. 618.8005 [Amended]
31. Section 618.8005 is amended by removing the reference
``Secs. 613.3010, 613.3020 (a)(1), (a)(2), (b), and 613.3045'' in
paragraph (a) and adding in its place, the reference ``Secs. 613.3000
(a) and (b), 613.3010, and 613.3300'' and by removing the reference
``Secs. 613.3110 and 613.3120'' and adding in its place, the reference
``Secs. 613.3100, 613.3200, and 613.3300'' in paragraph (b).
Subpart J--Internal Controls
Sec. 618.8440 [Amended]
32. Section 618.8440 is amended by removing the reference
``Sec. 615.5200(b)'' and adding in its place, the references
``Secs. 615.5200(b), 615.5330 (c) or (d), and 615.5335(b)'' in
paragraph (b)(6).
PART 619--DEFINITIONS
33. 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. 619.9030, 619.9040, 619.9065, 619.9080, 619.9090, 619.9100,
619.9120, 619.9150, 619.9160, 619.9190, 619.9220, 619.9270, 619.9280,
619.9300, and 619.9310 [Removed]
34. Sections 619.9030, 619.9040, 619.9065, 619.9080, 619.9090,
619.9100, 619.9120, 619.9150, 619.9160, 619.9190, 619.9220, 619.9270,
619.9280, 619.9300, and 619.9310 are removed.
[[Page 4451]]
PART 620--DISCLOSURE TO SHAREHOLDERS
35. The authority citation for part 620 continues to read as
follows:
Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101
Stat. 1568, 1656.
Subpart B--Annual Report to Shareholders
36. Section 620.5 is amended by revising paragraphs (d)(1)(ix) and
(g)(4)(ii) to read as follows:
Sec. 620.5 Contents of the annual report to shareholders.
* * * * *
(d) * * *
(1) * * *
(ix) The statutory and regulatory restriction regarding retirement
of stock and distribution of earnings pursuant to Sec. 615.5215, and
any requirements to add capital under a plan approved by the Farm
Credit Administration pursuant to Secs. 615.5330, 615.5335, 615.5351,
or 615.5357.
* * * * *
(g) * * *
(4) * * *
(ii) Describe any material trends or changes in the mix and cost of
debt and capital resources. The discussion shall consider changes in
permanent capital, core and total surplus, and net collateral
requirements, debt, and any off-balance-sheet financing arrangements.
* * * * *
PART 626--NONDISCRIMINATION IN LENDING
37. The authority citation for part 626 is added to read as
follows:
Authority: Secs. 1.5, 2.2, 2.12, 3.1, 5.9, 5.17 of the Farm
Credit Act (12 U.S.C. 2013, 2073, 2093, 2122, 2243, 2252); 42 U.S.C.
3601 et seq.; 15 U.S.C. 1691 et seq.; 12 CFR 202, 24 CFR 100, 109,
110.
Sec. 626.6025 [Amended]
38. Newly designated Sec. 626.6025 is amended by removing the
reference ``Sec. 613.3160(b)'' and adding in its place, the reference
``Sec. 626.6020(b)'' in paragraph (b).
* * * * *
Dated: January 23, 1997.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 97-2058 Filed 1-29-97; 8:45 am]
BILLING CODE 6705-01-P