[Federal Register Volume 62, Number 189 (Tuesday, September 30, 1997)]
[Rules and Regulations]
[Pages 51007-51015]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-25934]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 619

RIN 3052-AB64


Loan Policies and Operations; Definitions; Loan Underwriting

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA), through the FCA Board 
(Board), issues a final rule amending its regulations relating to loan 
underwriting in response to comments received from the Board's 
initiative to reduce regulatory burden and in an effort to streamline 
the regulations and set clear minimum regulatory standards where 
appropriate. The Board's action eliminates unnecessary regulations, 
requires each Farm Credit System (System or FCS) institution to adopt 
loan underwriting policies and standards, and makes other changes to 
the regulations governing prudent credit administration.

EFFECTIVE DATE: These regulations shall be effective upon the 
expiration of 30 days 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:

John J. Hays, Policy Analyst, Regulation Development Division, Office 
of Policy Development and Risk Control, 703) 883-4498, TDD (703) 883-
4444;

 or

Joy E. Strickland, Senior Attorney, Regulatory Enforcement Division, 
Office of General Counsel, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On April 15, 1996, the Board published 
proposed amendments to the regulations relating to loan underwriting, 
loan sale and purchase transactions, and the lending authority of 
production credit associations (PCAs). The amendments were proposed 
largely in furtherance of comments received on the Board's request for 
public comment on the appropriateness of requirements that the FCA 
regulations impose on the System. See 58 FR 34003 (June 23, 1993). The 
FCA has addressed many of those comments in previous rulemakings. The 
proposed amendments addressed the remaining regulatory burden issues 
that relate to loan underwriting and the independent credit judgment 
rule for loan sale and purchase transactions through agents. In 
addition to responding to the regulatory burden comments, the FCA also 
proposed other amendments to refocus regulatory requirements for loan 
underwriting, make the regulations more understandable and useful to 
the reader, set minimum regulatory standards, and make conforming 
amendments.
    The FCA received a total of 20 comments on the proposed amendments. 
Seventeen (17) Farm Credit institutions and the Farm Credit Council 
(FCC) submitted comments. The FCA also received comments from the 
Appraisal Subcommittee of the Federal Financial Institutions 
Examination Council, and the American Society of Farm Managers and 
Rural Appraisers, Inc. (collectively, appraisal groups). In general, 
all of the System commenters expressed support for the proposed 
regulation and its goal of reducing regulatory burden. Most of the 
System commenters also supported FCA's proposals to streamline the 
regulations governing the bank/association relationship and place more 
decision-making authority and accountability with direct lender 
associations. One association commented favorably on the entire 
proposal and suggested no changes. Other System commenters stated that 
although the proposal is a large step toward reducing regulatory 
burden, it did not reduce enough burden in certain areas. Also, some 
banks and associations requested clarification of the proposed new 
responsibilities of associations and the remaining areas of bank 
direction and supervision of associations. The appraisal groups 
commented that although they understood the FCA's reasons for the 
proposed changes to Secs. 614.4245 and 614.4250, the changes were 
inconsistent with the Uniform Standards of Professional Appraisal 
Practice (USPAP). The appraisal groups suggested alternatives for the 
FCA to achieve its objectives and ensure that appraisals remain in 
compliance with USPAP.
    Specific comments and changes to the proposed amendments will be 
addressed in the section-by-section analysis of the comments that 
follows. Except for changes noted in the section-by-section analysis, 
the FCA adopts the proposed amendments as final. Specific comments 
relating to proposed Sec. 614.4200(b), which contained requirements for 
obtaining borrower financial statements, will be addressed in the 
discussion of Subparts C and D--Bank/Association Lending Relationship 
and General Loan Policies for Banks and Associations. In order to 
provide readers with a guideline for the amended regulations, the 
following is a list of changes this final rule will make to parts 614 
and 619:

Subpart A--Lending Authorities

Secs. 614.4000 through 614.4050--Revised.

Subpart C--Bank/Association Lending Relationship

Secs. 614.4100, 614.4110, and 614.4130--No changes made.
Sec. 614.4120--Revised.
Secs. 614.4135 through 614.4145--Deleted.

Subpart D--General Loan Policies for Banks and Associations

Sec. 614.4150--Revised.
Sec. 614.4160--Deleted.
Sec. 614.4165--Revised.

Subpart E--Loan Terms and Conditions

Sec. 614.4200--Revised.


Secs. 614.4210 through 614.4230--Deleted.

Sec. 614.4231--Revised.
Secs. 614.4232 and 614.4233--No changes made.

Subpart F--Collateral Evaluation Requirements

Sec. 614.4245--Revised.

[[Page 51008]]

Subpart H--Loan Purchases and Sales

Sec. 614.4325--Revised.

Subpart J--Lending Limits

Sec. Sec. 614.4355 and 614.4358--Revised.

Subpart O--Banks for Cooperatives Financing International Trade

Sec. 614.4810--Revised.

Part 619--Definitions

Secs. 619.9165 and 619.9290--Removed.
I. Subpart A--Lending Authorities
    The FCA received 12 comments on proposed Sec. 614.4040, which 
codifies guidance that the FCA has provided to institutions regarding 
loans made by PCAs that have amortization schedules longer than 7 
years. The commenters were evenly split, with 6 commenters expressing 
support for the proposal and 6 commenters objecting to the proposal. 
The comments received in support of the proposal generally stated that 
the provisions are appropriate for PCA lending and should not be 
broadened or modified. Two PCA commenters noted that the proposal was 
more than adequate to offer direction to direct lenders.
    All except one of the commenters requesting modification of the 
proposal generally believe that it is too restrictive. They object to 
the proposed 15-year limitation on amortization periods for PCA loans 
because they assert that the statutory 15-year limit applies only to 
the term of the loan, not the loan amortization. Those commenters also 
stated that the prohibition against a PCA making loans solely to 
acquire real estate is without statutory basis and inconsistent with a 
PCA's ability to take ``owned'' real estate as collateral. They 
asserted their belief that the loan purpose restriction was implemented 
only to minimize competition between System institutions. These 
commenters suggested the following changes: (1) Apply the 15-year 
amortization restriction only to loans with 7 to 10-year terms; (2) 
delete any loan purpose restriction; and (3) clarify that the 
authorizing policy is the bank's not the association's. One PCA 
expressed agreement with the comments regarding the 15-year and loan 
purpose restrictions, but differed from the foregoing comments by 
urging that the authority for amortizing these loans should be through 
association policy rather than bank policy and control. One jointly 
managed PCA/Federal land bank association (FLBA) agreed with this PCA 
commenter and suggested that bank approval should not be required for 
association policies to exercise these authorities and that association 
board policies on this issue need only comply with general policies and 
standards of the funding bank.
    A bank and a FLBA requested clarification of four issues regarding 
the loan purpose restriction under Sec. 614.4040(a)(2): (1) Is the 
purpose of the loan limited only to financing of facilities; (2) if 
real estate is purchased along with a facility, must the real estate be 
integral to the operation or can the real estate be separate, 
unimproved land, such as two parcels that the seller will only sell 
together; (3) if the real estate can be separate, is there a limit on 
the value of the real estate versus the value of the facility; and (4) 
can a PCA make a loan solely for the purchase of real estate if the PCA 
has another production loan to the borrower?
    With regard to the comment that Congress intended the 15-year 
limitation to apply only to loan term, rather than loan amortization, 
the FCA agrees, in part, with the commenters' interpretation of the 
Farm Credit Act of 1971, as amended (Act), and its legislative history. 
Under the Act, Federal land credit associations (FLCAs) have the 
authority to make loans with terms of greater than 15 years, while PCAs 
are limited to loan terms of less than 15 years. Although the 15-year 
limitation technically applies only to a loan's term, rather than a 
loan's amortization, 15 years is the outward limit of PCA loan-making 
authority approved by Congress. The FCA concludes that the 15-year 
limitation is consistent with the differing lending authorities of PCAs 
and FLCAs and recognizes the importance of the Act's distinction 
between long-term real estate lenders and short-and intermediate-term 
lenders. Based on the outward limits placed on loan term and the 
differences between PCA and FLCA lending authorities, the FCA continues 
to believe that the 15-year limitation is appropriate and adopts the 
limitation and the loan purpose restrictions as proposed. The FCA 
clarifies that the loan purpose restriction only applies to loans 
amortized for longer than the maximum loan term otherwise authorized 
for PCAs in Sec. 614.4040(a)(1).
    Since there is a possibility of competition between short- and 
long-term lenders in some areas if PCAs amortize loans over periods 
longer than their maximum authorized loan terms, the FCA believes that 
System borrowers would be best served if the institutions affected by 
this issue develop the policies to address it. Because both long- and 
short-term lenders are represented at the bank level, the bank, through 
its association directors and stockholders, is in the best position to 
develop a policy that appropriately considers the needs of the 
borrowers and the relationships and conditions existing in each 
district. Therefore, the FCA adopts as final the requirement that 
association authority to amortize loans under Sec. 614.4040(a)(2) is 
pursuant to funding bank approval. The FCA also notes that, pursuant to 
section 1.10 of the Act, bank approval continues to be required for PCA 
authority to make loans with terms of more than 7, but not more than 10 
years.
    In response to the questions raised regarding the loan purpose 
restriction in Sec. 614.4040(a)(2), the FCA concludes that the 
amortization authority in Sec. 614.4040(a)(2) can be used for any 
authorized purpose for PCA lending, with the exception that it may not 
be used solely to finance the acquisition of unimproved real estate. 
Although the restriction excludes loans for the purpose of purchasing 
unimproved real estate (the real estate will be considered unimproved 
even though it may include minimal improvements, such as fencing), the 
authority in Sec. 614.4040(a)(2) clearly provides for the acquisition 
of production facilities and the land upon which the facilities are 
located. There are many types of loans that fall between these two 
boundaries, including those addressed in the bank's questions. The FCA 
believes that the institutions involved should establish reasonable 
standards for judging compliance with the loan purpose restrictions for 
the same reasons that it believes that authority for the amortization 
period should be addressed in bank policy, i.e., it allows the 
amortization authority to be best tailored to the needs of the 
borrowers and the relationships between the institutions in each 
district. Therefore each PCA's policy, subject to bank approval, for 
implementing the authority in Sec. 614.4040(a)(2) should clearly state 
under what circumstances such financing will occur. In response to the 
bank's fourth question, however, PCAs are not authorized to finance the 
acquisition of unimproved real estate under this authority solely 
because they also have outstanding production or equipment loans to the 
borrower.
    Commenters also suggested two technical changes to 
Sec. 614.4040(a)(2): (1) Change the point at which the underwriting 
criteria must be met for refinancing from ``maturity'' to the time of 
``refinancing'' because a loan may be refinanced prior to its maturity 
date; and (2) change the term ``real estate'' to ``land'' to more 
clearly authorize the financing of buildings. The FCA agrees that the 
term ``refinance'' is more appropriate than ``maturity'' and has

[[Page 51009]]

amended the regulation accordingly. A borrower may wish to refinance a 
loan prior to the maturity date, and any refinancing cannot extend the 
ultimate repayment of the loan more than 15 years from the date of the 
original loan. The FCA believes that the clarifications provided in the 
previous paragraph should clear up any doubt that this authority may be 
used to finance buildings and other facilities. Therefore, the FCA 
adopts in final the term ``real estate'' as proposed.
    The FCA also received 2 comments stating that the amended PCA 
amortization authority could result in agricultural credit associations 
(ACAs) having less authority to make short-and intermediate-term loans 
than PCAs. Although the FCA agrees with the commenters that ACAs should 
have at least the same authorities as PCAs, applying the provisions of 
Sec. 614.4040(a)(2) to ACAs would have the unintended result of 
unnecessarily restricting ACAs' authority. Since there are no 
limitations in the Act on the length of amortizations for loans and the 
existing requirement in Sec. 614.4220(c) that short-and intermediate-
term loans with maturities in excess of 7 years must be amortized over 
the term of the loan will be deleted by this rule, there will be no 
restrictions on amortizations of loans made by an ACA. As stated above, 
the restriction on a PCA's amortization authority derives from the 
Act's distinction between long-and short-term lenders. Because an ACA 
may make short-, intermediate-, and long-term loans, there is no need 
to restrict amortizations for ACA loans. Therefore, the FCA believes 
that applying Sec. 614.4040(a)(2) would unnecessarily restrict ACA 
lending and is not making the change requested.
II. Subparts C and D--Bank/Association Lending Relationship and General 
Loan Policies for Banks and Associations
    The FCA proposed to clarify the role of Farm Credit Banks (FCBs) 
and agricultural credit banks (ACBs) in the supervision of 
associations' credit operations. The FCA believes that autonomy in 
association operations promotes accountability in many areas, including 
prudent lending operations. Also, the FCA believes that each direct 
lender, through its board of directors, should adopt and follow its own 
policies and procedures for operations. As noted previously, most of 
the commenters were in support of this change and philosophy. The final 
rule deletes existing Secs. 614.4135, 614.4140, and 614.4145 as 
proposed. However, in taking this action, the FCA recognizes the 
continuing importance of general bank oversight of association credit 
activities that may have a material impact on the bank and on the 
association's ability to perform on its direct loan(s) from the bank.
    The FCA proposed a new regulation, Sec. 614.4150, to address credit 
supervision by each institution's board of directors and to require 
that loan policies and underwriting standards must be adopted by each 
direct lending institution. The FCA received six comment letters on 
proposed Sec. 614.4150. The commenters sought clarification of the term 
``measurable standards'' in Sec. 614.4150(g) and stated that loan 
underwriting standards should not include specific ratios, such as debt 
coverage and liquidity, on which to base each loan decision. The 
commenters also felt that while there is support for measurable 
standards, documenting each loan not in compliance with each standard 
(Sec. 614.4150(i)) is unduly burdensome. They contend that standards 
should be applicable only to the primary portion of the loan portfolio 
or a majority of the industry or market that the lender finances and 
that the focus should be on documenting those loans in significant 
noncompliance with the standards as a whole. The FCC also suggested 
alternative language for Sec. 614.4150(i) to encompass this philosophy.
    The commenters are concerned that Sec. 614.4150(i) requires that a 
single set of standards be applicable to all loans. In response, the 
FCA does not intend to require institutions to establish specific 
ratios that necessarily apply to all loans. It may be prudent to apply 
distinct ratios to differing loans. In developing standards, each 
direct lender is expected to identify the similar types of loans in 
their portfolios, based on such items as similar operations, sources of 
repayment, collateral, and economic or geographic characteristics, and 
to establish loan underwriting standards tailored to address the 
strengths and weaknesses of each type of loan and the institution's 
ability to absorb the risk posed by such loans. Such standards should 
include ratios, measures, scoring, and other specific credit evaluation 
tools appropriate to the portion of the portfolio being addressed and 
the institution's risk-bearing capacity. In addition to specific 
standards, general lending guidelines that have applicability to 
different types of loans can be useful in identifying risk and may be 
necessary for unusual loans that do not fit within any of the lenders' 
primary lending areas. A number of things will affect the level of 
detail in standards, such as the importance of loan type to the 
institution's portfolio and the level of risk in the type of loan, and 
the regulations do not prescribe a set formula.
    Regarding documentation of noncompliance with the loan underwriting 
standards, the regulation requires that whenever a loan does not meet 
any of the standards established for that type of loan, the reason for 
making an exception to the standards and accepting the loan must be 
documented. The FCA believes that this documentation is critical on an 
individual loan basis and any burden that arises from this 
documentation is outweighed by the importance of the documentation to 
sound credit administration. The amount of loans that may require 
documentation of noncompliance and the detail of such documentation 
will vary according to the standards developed by each institution, and 
any burden of such documentation can be reduced by well-tailored, 
specific standards. Therefore, the FCA believes the requirements of 
Sec. 614.4150 (g) and (i) are appropriate and adopts them as proposed 
with minor syntactical changes to paragraph (g).
    The commenters also noted that proposed Sec. 614.4150(h) does not 
entirely serve the purpose of existing Sec. 614.4160(e) because a 
loan's structure should be determined not only by the loan's purpose, 
as required by Sec. 614.4150(h), but also by the terms, conditions, and 
collateral, which are referenced in existing Sec. 614.4160(e). The FCA 
has revised paragraph (h) to state that loan terms and conditions must 
be appropriate for the loan. Use of the term ``loan'' includes the 
requirement that the terms and conditions must be appropriate for the 
purpose of the loan and any other relevant criteria of the loan, such 
as collateral. The commenters also requested clarification that 
underwriting standards do not have to be included in the policies 
adopted by the institutions' boards of directors pursuant to 
Sec. 614.4150. The FCA clarifies that loan underwriting standards must 
be adopted pursuant to board policies but are not required to be 
contained in board policies.
    An FCB commenter asserted that the regulations should not be 
interpreted to prohibit banks from establishing ``bright line'' credit 
standards for associations in general financing agreements (GFAs). 
Further, the bank asserts that as long as the FCA approves GFAs, it can 
review any ``bright line'' standards for appropriateness through that 
avenue. If, on the other hand, the FCA removes the banks' ``regulatory 
authority'' to establish credit standards for direct lenders, the FCA 
should eliminate its

[[Page 51010]]

approval of GFAs and make clear that the GFAs can include bank approval 
of association credit standards and/or compliance with bank collateral 
requirements. The FCC requested clarification about the apparent 
conflict between the proposal and section 2.4(a) of the Act, which 
appears to say that PCAs are required to make loans under standards 
approved by the bank. Association commenters requested clarification 
that banks do not have to approve association lending policies.
    In response to the comments regarding what should be included in 
GFAs, it is the FCA's general belief that banks can establish credit 
criteria for associations as appropriate to reflect the risks in the 
direct loans. This issue will be addressed in revisions to the 
regulations governing GFAs 1. The provisions of this 
regulation reflect the FCA's views that detailed underwriting standards 
for direct lender loans are the responsibility of that lender.
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    \1\ The FCA published proposed amendments to the regulations 
governing GFAs on March 24, 1997 (62 FR 13842).
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    Some commenters questioned whether Sec. 614.4150 conflicts with the 
provisions of section 1.5(17) of the Act. Section 1.5(17) of the Act 
authorizes banks to adopt standards for lending. Nothing in the revised 
regulation prohibits the banks from continuing to adopt standards for 
making direct loans to direct lender associations and for FLBA lending. 
Some comments also questioned whether Sec. 614.4150 is consistent with 
section 2.4(a) of the Act. In response, the banks will continue to 
develop standards appropriate to ensure repayment of the direct loan, 
which in turn helps ensure the safety and soundness of all of the 
institutions in the district. The FCA believes that section 2.4(a) 
neither requires that banks prescribe detailed association lending 
standards nor prohibits associations from adopting standards to govern 
their own lending operations. Therefore, the FCA believes that 
Sec. 614.4150 is consistent with the Act.
    The FCA received comments from the FCC and nine institutions 
regarding the proposed requirements for obtaining borrower financial 
statements in Sec. 614.4200(b). Most of the commenters urged deleting 
all of proposed paragraph (b) except the first sentence. The commenters 
strongly believe that even though the financial statement provision was 
a significant reduction over existing requirements, the proposal did 
not go far enough. They asserted that the proposal was inconsistent 
with the FCA regulatory philosophy statement, the FCA Board Chairman's 
remarks in the FCA's 1995 annual report, Congressional intent in the 
Act, proposed Sec. 614.4150, and the FCA's role as an arms-length 
regulator. They also asserted that the proposal was not necessary for 
safety and soundness. According to the commenters, this provision of 
the regulation micro-manages this one aspect of lending operations, 
which is in stark contrast with the overall objective of the proposed 
regulation to put loan underwriting in the hands of direct lenders. 
Commenters asserted that the thresholds for obtaining financial 
statements should not be set by regulation. Instead the standards 
should be set by each direct lender institution according to the 
institution's financial position, capital strength, risk-bearing 
ability, credit quality, portfolio, and operations of the individual 
institutions and borrowers (as applicable). The commenters contend that 
in this way safety and soundness will be better measured because 
standards will be developed on an institution-specific basis.
    In addition, the commenters noted that a regulation requiring 
institutions to request financial statements at loan origination for 
all loans above a set threshold limits the institutions' ability to use 
credit scoring with creditworthy customers. They urged that a 
borrower's total lending relationship, if quite large, should not 
prevent the use of credit scoring on small transactions. Also, 
obtaining financial statements at each material servicing action is 
vague and could be costly to the System, especially where actions such 
as release of collateral pose no risk to the lender. The commenters 
also asserted that requesting financial statements can cause problems 
in enforcement. They stated that in their experience, very few 
borrowers respond to requests, requiring considerable time and money on 
the institution's part to obtain the statements, and that it has been 
especially difficult to enforce a financial statement submission 
requirement if a borrower meets all other loan obligations. Finally, 
the commenters stated that the requirement can needlessly drive away 
good borrowers and create a competitive disadvantage.
    One commenter suggested that if the FCA maintains a requirement 
regarding financial statements, the requirement should only apply to 
adversely classified loans above $100,000. Another stated that if the 
requirement is maintained, ``material servicing action'' should be 
changed to ``any servicing action that materially increases the 
borrower's access to credit, reduces the institution's collateral 
protection, or otherwise materially increases the institution's risk 
position.'' Also, the threshold should be changed to $250,000. This 
commenter also urged changing ``less than acceptable'' to 
``Substandard, Doubtful, and Loss.'' Finally, one PCA commenter 
supported the proposal and believes that the requirements for financial 
statements are appropriate.
    After careful consideration of the issues surrounding borrower 
financial statements and the comments received on the proposed 
regulation, the FCA concludes that requiring each direct lender to 
develop standards for obtaining financial statements and other 
financial information is appropriate. The FCA does not adopt proposed 
Sec. 614.4200(b) and, instead, incorporates the substance of the first 
sentence of this paragraph into the loan underwriting standards 
required by Sec. 614.4150. This relocation reflects the decision to 
treat this issue as a loan underwriting standard rather than as loan 
terms and conditions. Section 614.4150(a) now requires that an 
institution's policies and procedures must prescribe the minimum 
supporting credit and financial information necessary and the frequency 
for collection of such information.
    The final regulation requires that each institution include in its 
policies and procedures how and when to obtain and use financial 
information, including financial statements, to determine 
creditworthiness for repayment of loans. The policies must be specific 
as to when collection of items such as balance sheets, income 
statements, and statements of cashflows will be required and must 
address the times for their collection, such as at loan inception, when 
taking servicing actions, and periodically during the term of the loan. 
The requirements for setting parameters of when to obtain and use 
financial information must take into consideration basic criteria 
including, but not limited to, loan size, loan type, loan 
classification, frequency of payment, source of repayment, applicant's 
operation, and capital position and risk bearing capacity of the 
institution. The FCA will evaluate and determine the appropriateness of 
each institution's policies and procedures on lending practices, 
including collection of financial information, during the examination 
process.
    As noted in the preamble to the proposed regulations, there are no 
industrywide standards for the size or complexity of loans warranting 
current and complete financial information. However, prudent credit 
practices dictate that risk be assessed in each

[[Page 51011]]

loan. The FCA continues to believe that the best method for assessing 
risk in certain loans is through analysis of items such as a balance 
sheet and income statement and considers the absence of information 
necessary to document loan performance expectations to be an unsafe and 
unsound lending practice. The FCA also notes that the approach for 
addressing the collection and use of financial statements in credit 
analysis in this final rule is consistent with the approach taken by 
other Federal financial institution regulatory agencies.
    Finally, the FCA notes the commenters' concerns regarding potential 
reluctance of some borrowers to submit financial statements and 
requiring them to do so. However, the FCA believes that for loans where 
prudent lending dictates obtaining and evaluating financial statements, 
the safety and soundness benefits to the institution outweigh the 
potential negative reactions of borrowers. Thus, adequate controls for 
enforcing institution policies regarding obtaining financial statements 
are expected with implementation of this regulation.
    Other than the changes previously noted to paragraphs (a), (h), and 
(i), the FCA adopts Sec. 614.4150 as proposed. The FCA also notes that 
in instances where direct lending authority has not been transferred to 
the FLBAs, the banks must develop lending policies and standards that 
all FLBAs within their respective districts must follow in making 
credit decisions for the bank. Additionally, in certain circumstances 
where loss exposure accrues to individual FLBAs through loss-sharing 
agreements with the FCB, loan policies and standards may be needed by 
FLBAs to augment and supplement those established by their supervisory 
banks.
    The FCA received three comments on proposed Sec. 614.4165, which 
requires that bank lending policies give special consideration to the 
credit needs of young, beginning, and small farmers, ranchers, and 
producers or harvesters of aquatic products. The commenters recommended 
revising existing paragraph (e) to place the responsibilities for 
grouping specialized enterprises according to risk with the direct 
lender, whether bank or association. The FCA agrees with the comment 
and has revised existing paragraph (e) (now redesignated as paragraph 
(c)) to place the responsibility for grouping specialized enterprises 
with direct lenders, rather than with the banks, consistent with other 
changes in this final rule. Commenters were also concerned that the 
proposed changes in the regulation will result in additional regulatory 
burden by increasing reporting requirements. They requested 
clarification of narrative reporting requirements, asked whether 
definitions will be in call reports, and asked how the changes will 
reflect the requirements for special enterprises. In response to the 
commenters, the FCA clarifies that the reporting requirements, which 
are statutory, will not change as a result of the final amendments to 
Sec. 614.4165. The amendments merely eliminate the duplication and 
inconsistencies that exist between the call reports and regulations. 
Also, necessary definitions will continue to be included in the call 
reports as they are now and may be modified as the young, beginning, 
and small farmer lending environment changes. Therefore, other than the 
changes noted to redesignated paragraph (c), the amendments to 
Sec. 614.4165 are adopted as proposed.
III. Subpart E--Loan Terms and Conditions
    The FCA received two comments on proposed Sec. 614.4200(a)(1). The 
commenters suggested that the FCA change the language to refer solely 
to a ``written document or documents,'' because loan terms and 
conditions may be set forth in more than one document. The FCA 
recognizes that terms and conditions may be included in more than one 
document and to alleviate any confusion, amends Sec. 614.4200(a)(1) to 
refer to a ``written document or documents.'' However, the FCA 
continues to list sample documents in the regulation and reiterates 
that the list is illustrative only, and does not require that terms and 
conditions be set forth in any particular written document.
    The FCA also received three comments on Sec. 614.4200(c)(1) 
regarding the security requirements for long-term real estate loans. An 
ACA commented that the proposed requirement that collateral taken to 
secure long-term real estate mortgages must consist primarily of 
agricultural real estate limits a System institution's ability to serve 
diversified agriculture and creditworthy customers. It asserted that 
properties in metropolitan areas, such as nurseries and properties 
purchased for the purpose of farming in the future, have high non-
agricultural or commercial values, often over the agricultural value of 
the property. An FCB commenter supported the concept of the proposed 
amendment but stated that rather than focusing on the value of the 
collateral, the amount of agricultural collateral required should be 
based on the amount of the loan. The bank suggests that a better 
approach to preserve the rural focus of System lending is to require 
that the amount of money that may be loaned on the non-agricultural 
collateral cannot exceed the amount that could be loaned on the 
agricultural collateral. Finally, the commenter suggested that the FCA 
add ``buildings or improvements thereto'' after ``agricultural land'' 
because such improvements add value to the land.
    The FCA believes that the requirement that the primary collateral 
must be more than 50 percent agricultural or rural land is consistent 
with the mandate in section 1.7(a)(1) of the Act that FCS institutions 
make real estate mortgage loans in rural areas. The FCA also recognizes 
and supports the position that lenders should take the maximum 
collateral possible and appropriate to ensure safe and sound lending. 
In order to clarify Sec. 614.4200(b)(1), the FCA is specifying in the 
regulation that the collateral taken to meet the loan-to-value 
limitation in Sec. 614.4200(b)(1) must be primarily agricultural or 
rural property. If collateral is available in addition to the 
collateral taken to meet the loan-to-value requirement, the lender can, 
and is strongly encouraged to, take any additional collateral that 
appropriately secures the loan. There is no requirement that this 
additional collateral be agricultural or rural property. In response to 
the commenters' questions, if the value of the non-agricultural or non-
rural property taken as additional collateral is greater than the value 
of the collateral taken to meet the loan-to-value limitation, the 
excess value of such additional collateral will not result in a 
violation of this section.
    Regarding the suggestion to add the words ``buildings and 
improvements'' after ``agricultural land,'' the FCA interprets the term 
``agricultural land'' to include any buildings and improvements that 
have been made to the land and modifies proposed Sec. 614.4200(c)(1) 
(now paragraph (b)(1)) to reference ``agricultural land and 
improvements made thereto.'' Such improvements are normally considered 
in establishing the value of the land for collateral purposes.
    The FCA received a comment that institutions should have the 
authority to take a second lien on property serving as primary 
collateral to meet the loan-to-value ratio for agricultural loans, as 
long as the lender also holds the first lien on the property. Similar 
authority was proposed in Sec. 614.4200(c)(4) for rural home loans, and 
the commenter stated that it should apply to agricultural loans as 
well. According to the commenter, having a second lien on property 
while already holding a first

[[Page 51012]]

lien to collateralize another loan results in the same level of 
security for the lender as having only a first lien position in another 
piece of property. Also, the commenter stated that the security 
requirements in the Act are the same for both rural home loans and 
agricultural loans. The FCA agrees with the commenters that the first 
lien loan security requirements in the Act are the same for all real 
estate mortgage loans. Therefore, the FCA amends Sec. 614.4200(b)(1) to 
authorize lenders to take a second lien interest in real property if 
the lender already holds a first lien interest in the property, because 
the effective result of both liens is a first lien on the property. 
Except for this change, the clarification of agricultural land, and the 
changes previously discussed regarding relocating requirements for 
collection of financial information to Sec. 614.4150 (and the 
redesignation of paragraphs as a result), Sec. 614.4200 is adopted as 
proposed.
IV. Subpart F--Collateral Evaluation Requirements
    The FCA received comments from two appraisal groups and four System 
institution commenters regarding proposed modifications to 
Secs. 614.4245 and 614.4250. The appraisal groups concurred that there 
is a need to simplify the appraisal process in low-risk, small loan 
programs, but thought that the amendments proposed were not the best 
way to accomplish the simplification. The appraisal groups suggested 
that the USPAP contains sufficient flexibility to meet the collateral 
evaluation needs of small loan programs. They further suggested that if 
the use of limited appraisals under USPAP rule 1 and summary and 
restricted reports under rule 2 are not sufficient, the FCA could 
specify appropriate additional departures in regulations, which would 
allow appraisers to use the USPAP jurisdictional exception.
    Since the publication of the collateral evaluation regulations in 
1995, the FCA has received several requests to review those 
regulations, because institutions have asserted that certain provisions 
are potentially burdensome. The FCA proposed amendments to 
Secs. 614.4245 and 614.4250 in an attempt to address those concerns. 
After reviewing the comments on the proposed amendments and 
reconsidering the requirements of the regulations and comments received 
on the collateral evaluation regulation subsequent to publication, the 
FCA has decided to withdraw the majority of the proposed amendments to 
Secs. 614.4245 and 614.4250 and modify others.
    The FCA believes that the departure provisions of USPAP are 
sufficient to meet the needs of System institutions in their small loan 
programs and encourages institutions to follow those provisions in 
developing small loan programs. Once those provisions are implemented, 
the FCA will consider whether modifications to the regulations are 
necessary to create a jurisdictional exception.2 The FCA 
also welcomes institutions to contact the FCA for guidance in using the 
USPAP departure provisions in small loan programs.
---------------------------------------------------------------------------

    \2\ A jurisdictional exception is intended to provide a saving 
or severability clause intended to preserve the balance of USPAP if 
one or more of the parts of USPAP are determined to be contrary to 
the law or public policy of a jurisdiction. FCA would have to 
establish a jurisdictional exception by regulation.
---------------------------------------------------------------------------

    The FCA received comments from System institutions to withdraw the 
$100,000 loan size limitation on small loan programs referenced in the 
proposed amendment to Sec. 614.4245 and provide more flexibility for 
small real estate loans and loans for the purchase of new equipment and 
vehicles. The FCA agrees with the commenters that a $100,000 blanket 
limitation for all small loan programs is not appropriate. Regarding 
added flexibility, the FCA believes that the institutions can make use 
of the USPAP provisions mentioned above for both small real estate 
loans and loans for the purchase of new equipment and vehicles and that 
changes are not necessary. Therefore, the FCA withdraws the proposed 
amendments to Sec. 614.4250. The FCA adopts as final the proposed 
amendments to Sec. 614.4245(d), except that the word ``modified,'' the 
reference to Sec. 614.4250(b), and the limitation that small loan 
programs consist of loans of $100,000 or less are removed and the term 
``minimum information program'' is added in place of small loan 
program. With regard to these changes, the FCA notes that institutions 
with minimum information programs must set the parameters of those 
programs in their policies and loan underwriting standards. Such 
parameters should include, but are not necessarily limited to, 
portfolio limitations, maximum loan size, collateral requirements, and 
information required for documentation of repayment capacity.
V. Subpart H--Loan Purchases and Sales
    The FCA received three comments, two from associations and one from 
the FCC, regarding the proposed restrictions in Sec. 614.4325 on the 
funding bank serving as an agent for an association in purchasing 
loans. The commenters stated that restricting the funding bank from 
acting as an association's agent limits the System's potential for 
cooperating on a regional or national basis to serve rural America. 
They offered trade credit projects and other situations in which the 
FCA has said that the use of credit scoring is appropriate as examples 
of projects that would be impeded if the funding bank were prohibited 
from serving as an association's agent. The commenters also noted that 
the restriction is inconsistent with the FCA's recognition of direct 
lender associations' autonomy and responsibility for their own lending 
operations. Further, it is the commenters' belief that there are 
different relationships between banks and associations in different 
districts, and the FCA should not impinge on those relationships by 
regulation. Finally, the commenters suggested that if the FCA is 
unwilling to remove the restriction entirely, the FCA should adopt the 
position that the funding bank can be an association's agent, but the 
association has the authority to terminate the agency relationship with 
a 90-day notice to the bank.
    In response to the commenters, the FCA notes that the restriction 
on a funding bank serving as an association's agent may appear 
inconsistent with the philosophy the FCA has adopted in these loan 
underwriting regulations that associations adopt their own lending 
standards and oversee their lending operations. However, the 
relationship between a funding bank and its associations can result in 
unequal bargaining positions between banks and associations and create 
conflicts with an association's ability to hold its agent, the funding 
bank, responsible for acting in the association's best interest. Thus, 
notwithstanding potential inconsistencies with association autonomy, 
the FCA believes it is necessary to take steps to minimize any damages 
caused by these conflicts. As suggested by the commenters, one way to 
minimize problems is to require institutions to include in the agency 
agreement a provision authorizing an association to terminate the 
agreement with notice to the funding bank. The FCA agrees with the 
commenters, but believes that termination alone would not be sufficient 
to remedy the damages caused by a bank's failure to act appropriately 
if an association has purchased loans prior to terminating the agency 
agreement. As a result, the FCA withdraws the proposed prohibition in 
Sec. 614.4325 against a funding bank serving as an association's agent. 
The final regulation contains a provision for termination of the agency 
agreement

[[Page 51013]]

with no more than a 60-day notice to the bank, and in addition, 
requires a provision in the agreement that the bank would be required 
to purchase from the association any loans that the association, in its 
sole discretion, determines do not comply with the terms of the agency 
agreement or the association's loan underwriting standards. The added 
provision will provide a remedy to an association injured by a bank's 
breach of the agency agreement and minimize any possible effect of an 
unequal bargaining position between a bank and an association. In 
addition, although the commenters suggested 90 days, the FCA believes 
that a shorter time period for the notice provides greater flexibility 
for an association to act in situations in which the association 
believes that the bank may not be acting in its interest. Further, 60 
days should give banks sufficient notice to make any arrangements 
necessary as result of termination of the agency agreement. In 
addition, the parties may, by mutual agreement, specify a notice period 
of less than 60 days. Other than withdrawing the funding bank 
restriction and adding the termination and damages provisions, the FCA 
adopts the amendments to subpart H as proposed.
    Finally, except where previously noted in this supplementary 
information, the proposed amendments, including the many conforming 
amendments within subparts A, C, H, J, and Q of part 614 and in part 
619, are adopted as final without change.

List of Subjects

12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 619

    Agriculture, Banks, Banking, Rural areas.

    For the reasons stated in the preamble, parts 614 and 619 of 
chapter VI, title 12 of the Code of Federal Regulations are amended to 
read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. The authority citation for part 614 continues to read as 
follows:

    Authority: 42 U.S.C. 4012a, 4104a, 4101b, 4106, and 4128; Secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E. 4.18, 4.18A, 4.19, 4.36, 
4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 
of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 
2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 
2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 
2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 2219a, 2219b, 
2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 
2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 
1568, 1639.

Subpart A--Lending Authorities

    2. Section 614.4000 is amended by removing the words ``agricultural 
credit association of a Federal land credit association'' and adding in 
its place, the words ``agricultural credit association or a Federal 
land credit association'' in the introductory text of paragraph (f), 
and revising paragraph (a) to read as follows:


Sec. 614.4000  Farm Credit Banks.

    (a) Long-term real estate lending. Except to the extent such 
authorities are transferred pursuant to section 7.6 of the Act, Farm 
Credit Banks are authorized, subject to the requirements in 
Sec. 614.4200 of this part, to make real estate mortgage loans with 
maturities of not less than 5 years nor more than 40 years and 
continuing commitments to make such loans.
* * * * *
    3. Section 614.4010 is amended by removing the reference 
``Sec. 614.4230'' and adding in its place, the reference 
``Sec. 614.4200'' in paragraphs (d)(1) and (d)(2); and revising 
paragraph (a) to read as follows:


Sec. 614.4010  Agricultural credit banks.

    (a) Long-term real estate lending. Except to the extent such 
authorities are transferred pursuant to section 7.6 of the Act, 
agricultural credit banks are authorized, subject to the requirements 
of Sec. 614.4200, to make real estate mortgage loans with maturities of 
not less than 5 years nor more than 40 years and continuing commitments 
to make such loans.
* * * * *


Sec. 614.4020  [Amended]

    4. Section 614.4020 is amended by removing the reference 
``614.4230'' and adding in its place, the reference ``614.4200'' in 
paragraphs (a)(1) and (a)(2).
    5. Section 614.4030 is amended by revising paragraph (a) to read as 
follows:


Sec. 614.4030  Federal land credit associations.

    (a) Long-term real estate lending. Federal land credit associations 
are authorized, subject to the requirements of Sec. 614.4200, to make 
real estate mortgage loans with maturities of not less than 5 years nor 
more than 40 years and continuing commitments to make such loans.
* * * * *
    6. Section 614.4040 is amended by removing paragraph (b); 
redesignating paragraphs (c) and (d) as new paragraphs (b) and (c), 
respectively; removing the reference ``paragraph (c)(2)'' and adding in 
its place, the reference ``paragraph (b)(2)'' in newly designated 
paragraph (b)(1); and by revising paragraph (a) to read as follows:


Sec. 614.4040  Production credit associations.

    (a) Loan terms. (1) Production credit associations are authorized 
to make or guarantee loans and other similar financial assistance for 
the following terms:
    (i) Not more than 7 years
    (ii) More than 7 years, but not more than 10 years, subject to 
authorization in policies approved by the funding bank
    (iii) Not more than 15 years to producers or harvesters of aquatic 
products for major capital expenditures, including but not limited to 
the purchase of vessels, construction or purchase of shore facilities, 
and similar purposes directly related to the producing or harvesting 
operation
    (2) Subject to policies approved by the funding bank, production 
credit associations may amortize loans over a period greater than the 
loan terms authorized under paragraph (a)(1) of this section, provided 
that:
    (i) The loan is amortized over a period not to exceed 15 years
    (ii) The loan may be refinanced only if the lender determines, at 
the time of refinancing, that the loan meets its loan policy and 
underwriting criteria;
    (iii) Any refinancing may not extend repayment beyond 15 years from 
the date of the original loan; and
    (iv) The loan is not being made solely for the purpose of acquiring 
unimproved real estate; and
    (3) Short-and intermediate-term loans shall be made with maturities 
that are appropriate for the purpose and underlying collateral of the 
loan and that comply with an institution's loan underwriting standards 
adopted pursuant to Sec. 614.4150 and the general requirements of 
Sec. 614.4200 of this part.
* * * * *
    7. Section 614.4050 is amended by adding introductory text and by 
revising paragraphs (a) and (b) to read as follows:


Sec. 614.4050  Agricultural credit associations.

    Agricultural credit associations are authorized to make or 
guarantee, subject

[[Page 51014]]

to the requirements of Sec. 614.4200 of this part:
    (a) Long-term real estate mortgage loans with maturities of not 
less than 5 nor more than 40 years, and continuing commitments to make 
such loans; and
    (b) Short-and intermediate-term loans and provide other similar 
financial assistance for a term of not more than 10 years (15 years for 
aquatic producers and harvesters).
* * * * *

Subpart C--Bank/Association Lending Relationship


Sec. 614.4120  [Amended]

    8. Section 614.4120 is amended by removing the words ``the factors 
set forth in Secs. 614.4150 and 614.4160'' and adding in their place, 
the words ``the loan underwriting policies and standards adopted 
pursuant to Sec. 614.4150'' in the last sentence of paragraph (a).


Secs. 614.4135, 614.4140, and 614.4145  [Removed]

    9. Sections 613.4135, 613.4140, and 614.4145 are removed.

Subpart D--General Loan Policies for Banks and Associations


Secs. 614.4150, 614.4160, 614.4170  [Removed]

    10. Sections 614.4150, 614.4160, and 614.4170 are removed.
    11. New section 614.4150 is added to read as follows:


Sec. 614.4150  Lending policies and loan underwriting standards.

    Under the policies of its board, each institution shall adopt 
written standards for prudent lending and shall issue written policies, 
operating procedures, and control mechanisms that reflect prudent 
credit practices and comply with all applicable laws and regulations. 
Written policies and procedures shall, at a minimum, prescribe:
    (a) The minimum supporting credit and financial information, 
frequency for collection of information, and verification of 
information required in relation to loan size, complexity and risk 
exposure
    (b) The procedures to be followed in credit analysis
    (c) The minimum standards for loan disbursement, servicing and 
collections
    (d) Requirements for collateral and methods for its administration
    (e) Loan approval delegations and requirements for reporting to the 
board
    (f) Loan pricing practices
    (g) Loan underwriting standards that include measurable standards:
    (1) For determining that an applicant has the operational, 
financial, and management resources necessary to repay the debt from 
cashflow
    (2) That are appropriate for each loan program and the 
institution's risk-bearing ability; and
    (3) That consider the nature and type of credit risk, amount of the 
loan, and enterprise being financed
    (h) Requirements that loan terms and conditions are appropriate for 
the loan; and
    (i) Such other requirements as are necessary for the professional 
conduct of a lending organization, including documentation for each 
loan transaction of compliance with the loan underwriting standards or 
the compensating factors or extenuating circumstances that establish 
repayment of the loan notwithstanding the failure to meet any one or 
more loan underwriting standard.
    12. Section 614.4165 is amended by removing paragraphs (b) and (c); 
redesignating paragraphs (d) and (e) as new paragraphs (b) and (c) 
respectively; and revising paragraph (a) and the last sentence of newly 
designated paragraph (c) to read as follows:


Sec. 614.4165  Special credit needs.

    (a) The board of each direct lender institution shall adopt 
policies to establish programs to provide credit and related services 
to young, beginning, and small farmers, ranchers, and producers or 
harvesters of aquatic products.
* * * * *
    (c) * * * Where such programs are authorized, the direct lender 
institution board shall adopt appropriate policies that define criteria 
for the selection of specialized high-risk enterprises.

Subpart E--Loan Terms and Conditions

    13. Section 614.4200 is revised to read as follows:


Sec. 614.4200  General requirements.

    (a) Terms and conditions. (1) The terms and conditions of each loan 
made by a Farm Credit bank or association shall be set forth in a 
written document or documents, such as a loan agreement, promissory 
note, or other instrument(s) appropriate to the type and amount of the 
credit extension, in order to establish loan conditions and performance 
requirements. Copies of all documents executed by the borrower in 
connection with the closing of a loan made under titles I or II of the 
Act shall be provided to the borrower at the time of execution and at 
any time thereafter that the borrower requests additional copies.
    (2) The terms and conditions of all loans shall be adequately 
disclosed in writing to the borrower not later than loan closing. For 
loans made under titles I and II of the Act, the institution shall 
provide prompt written notice of the approval of the loan.
    (3) Applicants shall be provided notification of the action taken 
on each credit application in compliance with the requirements of 12 
CFR 202.9.
    (b) Security. (1) Long-term real estate mortgage loans must be 
secured by a first lien interest in real estate, except that the loans 
may be secured by a second lien interest if the institution also holds 
the first lien on the property. No funds shall be advanced, under a 
legally binding commitment or otherwise, if the outstanding loan 
balance after the advance would exceed 85 percent (or 97 percent as 
provided in section 1.10(a) of the Act) of the appraised value of the 
real estate, except that a loan on which private mortgage insurance is 
obtained may exceed 85 percent of the appraised value of the real 
estate to the extent that the loan amount in excess of 85 percent is 
covered by such insurance. The real estate that is used to satisfy the 
loan-to-value limitation must be comprised primarily of agricultural or 
rural property, including agricultural land and improvements thereto, a 
farm-related business, a marketing or processing operation, a rural 
residence, or real estate used as an integral part of an aquatic 
operation.
    (2) Notwithstanding the requirements of paragraph (b)(1) of this 
section, the lending institution may advance funds for the payment of 
taxes or insurance premiums with respect to the real estate, reschedule 
loan payments, grant partial releases of security interests in the real 
estate, and take other actions necessary to protect the lender's 
collateral position. Any action taken that results in exceeding the 
loan-to-value limitation shall be in accordance with a policy of the 
institution's board of directors and adequately documented in the loan 
file.
    (3) Short- and intermediate-term loans may be secured or unsecured 
as the documented creditworthiness of the borrower warrants.
    (4) In addition to the requirements in paragraph (b)(1) of this 
section, a long-term, non-farm rural home loan, including a revolving 
line of credit, shall be secured by a first lien on the property, 
except that it may be secured by a second lien if the institution also 
holds the first lien on the property. A short- or intermediate-term 
loan on a rural home, including a revolving line of credit, must be 
secured by a lien on the

[[Page 51015]]

property unless the financing is provided exclusively for repairs, 
remodeling, or other improvements to the rural home, in which case the 
loan may be secured by other property or unsecured if warranted by the 
documented creditworthiness of the borrower.
    (5) Except as provided in Sec. 614.4231, loans made under title III 
of the Act may be secured or unsecured, as appropriate for the purpose 
of the loan and the documented creditworthiness of the borrower.


Secs. 614.4210, 614.4220, 614.4222, 614.4230  [Removed]

    14. Sections 614.4210, 614.4220, 614.4222, and 614.4230 are 
removed.
    15. Section 614.4231 is revised to read as follows:


Sec. 614.4231  Certain seasonal commodity loans to cooperatives.

    Loans on certain commodities that are part of government programs 
shall comply with the criteria established for those programs. Security 
taken on program commodities shall be consistent with prudent lending 
practices and ensure compliance with the government program. The bank 
shall provide for periodic review by bank officials of any custodial 
activities and shall provide notice to the custodians that their 
activities are subject to review and examination by the Farm Credit 
Administration.

Subpart F--Collateral Evaluation Requirements

    16. Section 614.4245 is amended by adding a new paragraph (d) to 
read as follows:


Sec. 614.4245  Collateral evaluation policies.

* * * * *
    (d) An institution's board of directors may adopt specific 
collateral evaluation requirements, consistent with the regulations in 
this subpart, for loans designated as part of a minimum information 
program.

Subpart H--Loan Purchases and Sales

    17. Section 614.4325 is amended by removing the reference 
``Sec. 614.4160'' and adding in its place, the words ``the loan 
underwriting standards adopted pursuant to Sec. 614.4150'' in the 
fourth sentence of paragraph (e); revising paragraph (a)(1); and adding 
new paragraph (h) to read as follows:


Sec. 614.4325  Purchase and sale of interests in loans.

    (a) * * *
    (1) Interests in loans means ownership interests in the principal 
amount, interest payments, or any aspect of a loan transaction and 
transactions involving a pool of loans, including servicing rights.
* * * * *
    (h) Transactions through agents. Transactions pertaining to 
purchases of loans, including the judgment on creditworthiness, may be 
performed through an agent, provided that:
    (1) The institution establishes the necessary criteria in a written 
agency agreement that outlines, at a minimum, the scope of the agency 
relationship and obligates the agent to comply with the institution's 
underwriting standards;
    (2) The institution periodically reviews the agency relationship to 
determine if the agent's actions are in the best interest of the 
institution;
    (3) The agent must be independent of the seller or intermediate 
broker in the transaction; and
    (4) If an association's funding bank serves as its agent, the 
agency agreement must provide that:
    (i) The association can terminate the agreement upon no more than 
60 days notice to the bank;
    (ii) The association may, in its discretion, require the bank to 
purchase from the association any interest in a loan that the 
association determines does not comply with the terms of the agency 
agreement or the association's loan underwriting standards.

Subpart J--Lending Limits


Sec. 614.4355  [Amended]

    18. Section 614.4355 is amended by removing the word ``seasonal'' 
and adding in its place, the word ``commodity'' the second place it 
appears in paragraphs (a)(6) and (b)(1) respectively, and in paragraph 
(a)(8).


Sec. 614.4358  [Amended]

    19. Section 614.4358 is amended by removing the words ``on the 
credit factors set forth in Sec. 614.4160'' and adding in their place, 
the words ``under the loan underwriting standards adopted pursuant to 
Sec. 614.4150'' in paragraph (a)(1)(ii).

Subpart O--Banks for Cooperatives Financing International Trade


Sec. 614.4810  [Amended]

    20. Section 614.4810 is amended by removing the words ``credit 
factors listed in Sec. 614.4160'' and adding in their place, the words 
``the loan underwriting standards adopted pursuant to Sec. 614.4150'' 
in paragraph (b).

PART 619--DEFINITIONS

    21. The authority citation for part 619 continues to read as 
follows:

    Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6, 
7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243, 
2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).


Secs. 619.9165 and 619.9290  [Removed]

    22. Sections 619.9165 and 619.9290 are removed.

    Dated: September 24, 1997.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 97-25934 Filed 9-29-97; 8:45 am]
BILLING CODE 6705-01-P