[Federal Register Volume 63, Number 129 (Tuesday, July 7, 1998)]
[Rules and Regulations]
[Pages 36541-36549]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17844]



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  Federal Register / Vol. 63, No. 129 / Tuesday, July 7, 1998 / Rules 
and Regulations  

[[Page 36541]]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 614, 620, and 630

RIN 3052-AB67


Organization; Loan Policies and Operations; Disclosure to 
Shareholders; Disclosure to Investors in Systemwide and Consolidated 
Bank Debt Obligations of the Farm Credit System; Other Financing 
Institutions

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency), through the 
FCA Board (Board), issues a final rule amending its regulations that 
govern the funding and discount relationship between Farm Credit System 
(Farm Credit, FCS, or System) banks that operate under title I of the 
Farm Credit Act of 1971, as amended (Act), and non-System other 
financing institutions (OFIs). The final rule substantially expands 
access to System funding so OFIs can provide more short-and 
intermediate-term credit to parties who are eligible to borrow under 
sections 2.4(a) and (b) of the Act. The FCA has repealed several non-
statutory limits on OFI eligibility. The final rule assures access to 
any creditworthy OFI that is significantly involved in agricultural 
lending and demonstrates a continuing need for funds to serve its 
agricultural borrowers. Under certain circumstances, OFIs may seek 
financing from a Farm Credit Bank (FCB) or agricultural credit bank 
(ACB) other than the System bank that is chartered to serve its 
territory. The final rule requires FCBs and ACBs to finance OFIs only 
on a fully secured basis and to have full recourse to the OFI's 
capital.

EFFECTIVE DATE: 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: Eric Howard, Policy Analyst or S. 
Robert Coleman, Senior Policy Analyst, Regulation and Policy Division, 
Office of Policy Analysis, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4498,

      or

Richard A. Katz, Senior Attorney, Regulatory Enforcement Division, 
Office of General Counsel, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: This final rule completes a 2-year effort by 
the FCA to revise these regulations so that farmers, ranchers, and 
other eligible rural residents have greater access to credit through 
OFIs that are financed by FCBs and ACBs. On May 17, 1996, the FCA 
published an Advance Notice of Proposed Rulemaking seeking comments on 
how these regulations could be more responsive to the credit needs of 
OFIs and their borrowers. See 61 FR 24907. In response to these 
comments, the FCA proposed a rule that substantially revised the 
regulations in subpart P of part 614. See 62 FR 38223 (July 17, 1997). 
After considering the comments received, the FCA Board adopts a final 
rule that provides greater opportunities for OFIs to obtain funding 
from FCS banks so they can finance agriculture, aquaculture, and other 
specified rural credit needs.
    Sixteen comment letters were received in response to the proposed 
rule. Of this total, comments were received from 4 trade associations, 
5 FCS banks (one comment letter came from 2 FCS banks that are jointly-
managed), 4 System direct lender associations, a federation 
representing System production credit associations (PCAs), a commercial 
bank, a commercial bank holding company, and an existing OFI. Four 
trade associations submitted comments on behalf of their members: the 
American Bankers Association (ABA); the Independent Bankers Association 
of America (IBAA); the North Dakota Bankers Association (NDBA); and the 
Farm Credit Council (Council).
    The comment letters revealed a diverse range of views about OFI 
access to System funding. All System direct lender association 
commenters, except one, opposed any revision to the existing OFI 
regulation because of their concerns over competition. One commercial 
bank supported the proposed rule and urged the FCA to adopt it as a 
final rule without revision. Three commercial bank trade associations 
recognized the FCA's efforts to improve OFI access to System funding, 
but they recommended modifications to the rule. The remaining 
commenters focused on specific issues that were important to their 
institutions.
    Commercial bank trade associations opined that the FCA's regulatory 
proposal made progress toward granting OFIs more access to System 
funding. However, these commenters believe that several provisions of 
the statute discourage many commercial banks from becoming OFIs. The 
most commonly cited statutory impediments to greater commercial bank 
participation in this program include: (1) No authority for OFIs to 
obtain System bank funding \1\ for long-term mortgages; (2) lack of OFI 
representation on the boards of FCS funding banks; and (3) the need to 
offer borrower rights. For these reasons, the commenters again asked 
the FCA to support legislative initiatives that would remodel the FCS 
so it is similar to the Federal Home Loan Bank System. As the 
commenters acknowledge, the existing statute does not enable the FCA to 
accommodate some of their requests, and therefore, these issues are not 
addressed by this rulemaking.
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    \1\ As used in this preamble, references to Farm Credit banks 
apply only to FCBs and ACBs. Although the bank for cooperatives is 
also a System bank, it lacks statutory authority to finance the OFIs 
identified in section 1.7(b) of the Act.
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    Several PCA commenters expressed concern that expanded OFI access 
would place them at a competitive disadvantage. These commenters asked 
the FCA to enact regulations that provide PCAs with more business 
opportunities before final OFI regulations are adopted. Although 
several commenters stated that PCAs cannot effectively compete with 
OFIs until their intermediate-term lending authorities are expanded, 
section 1.10(b) of the Act establishes the maximum timeframe for 
intermediate-term loans.
    The FCA has considered the concerns of the commenters and adopts a 
final rule that balances the needs of these parties. The final rule 
incorporates

[[Page 36542]]

many of the commenters' suggestions and promotes a safe and sound 
lending relationship between System funding banks and their OFIs. The 
changes increase availability of credit to farmers, ranchers, aquatic 
producers and harvesters, and other eligible rural borrowers.

I. OFI Access

A. Proposed Rule and Comments

    The FCA proposed a two-tier approach for OFIs to establish their 
eligibility for a funding and discount relationship with a System bank. 
Under Sec. 614.4540(a), any financial institution that operates under 
one of the charters specified in section 1.7(b)(1)(B) of the Act may 
borrow from an FCB or ACB. Additionally, Sec. 614.4540(b) assures 
access to creditworthy OFIs that have at least 15 percent of their 
loans to agricultural or aquatic producers and enter into a 2-year 
funding agreement with an FCB or ACB. The regulations require OFIs to 
use System funding only to extend short- and intermediate-term credit 
to eligible persons for authorized purposes under sections 1.10(b) and 
2.4(a) and (b) of the Act. This new approach enables more OFIs to 
borrow from System banks, and as a result, farmers and ranchers should 
have greater access to affordable and dependable credit.
    The FCA proposed to repeal the following eligibility provisions of 
the existing regulations that are not required by the Act:
     The 60-percent loan-to-deposit ratio for OFIs that are 
depository institutions;
     The requirement that OFIs primarily use locally generated 
funds for lending operations;
     The automatic denial of access to any entity that 
primarily finances the sale of products by its affiliates;
     Consideration of an OFI applicant's relationship with its 
affiliates and subsidiaries; and
     A mandatory non-use fee for OFIs that fail to maintain a 
specified average daily loan balance.
    The FCA received comments on proposed Sec. 614.4540 from the ABA, 
IBAA, NDBA, and the Council. These commenters supported the repeal of 
the non-statutory OFI eligibility criteria that are identified above. 
The final rule repeals these provisions.
    Although all four trade associations supported greater OFI access 
to System funding, they expressed differing views on the need to modify 
proposed Sec. 614.4540. The NDBA supported the two-tier approach for 
OFI access. The Council requested that the FCA amend the regulation so 
it expressly conveys that System funding banks have discretion to deny 
the credit application of any OFI that is not covered by 
Sec. 614.4540(b).
    The ABA and IBAA requested amendments that would favor their 
respective constituencies. The IBAA believes that the regulation should 
favor small, rural community banks whereas the ABA opined that all 
banks that provide agricultural credit should be entitled to System 
funding. The IBAA commented that no lender should be granted access to 
the FCS unless agricultural loans comprise at least 10 percent of its 
loan portfolio. Although the IBAA supports the 15-percent threshold for 
assured access, it believes that OFIs that meet this criterion should 
be entitled to preferred status and special benefits, such as the 
lowest cost of funds from System banks and greater flexibility 
concerning collateral requirements. In contrast, the ABA suggested that 
any commercial bank should be assured access under final 
Sec. 614.4540(b) if agricultural loans comprise at least 10 percent of 
its loan portfolio, or exceed a fixed dollar amount, such as 
$5,000,000. In the ABA's view, the final rule should include a fixed 
dollar threshold because agricultural loans often comprise a small 
percentage of the loan portfolios of large commercial banks that are 
major providers of agricultural credit. This commenter believes that 
these large commercial banks deserve assured access to System funding.
    The ABA also asked the FCA to reorganize proposed Sec. 614.4540. 
The commenter suggested that the FCA relocate the provisions in 
proposed Sec. 614.4540(b) that enable FCBs and ACBs to deny the funding 
requests of OFIs that are assured access to Sec. 614.4540(c), which 
governs denials. The ABA stated that this change would clearly 
communicate the FCA's expectations to System banks and make this 
regulation more user-friendly.
    The IBAA requested that the FCA assume a more active role in 
collecting and reporting information about the efforts of each System 
bank to provide agricultural credit through OFIs. Specifically, the 
commenter suggested that the FCA appoint an Ombudsman to review 
complaints by OFIs. Additionally, the IBAA recommended that the FCA's 
Annual Report contain comprehensive information about the number of OFI 
applications, the number of funding requests that are either approved 
or denied, a summary of the reasons for denial, and the total amount of 
funds that System banks advance to OFIs. The IBAA also asked that the 
final regulations require outside board members to represent OFI 
interests and establish target goals for the minimum number of new 
commercial bank OFIs that each System bank will approve every year.

B. Final Rule

    Final Sec. 614.4540 retains the two-tier approach to OFI 
eligibility as proposed. The FCA continues to believe that this 
regulatory approach best implements the requirements of the Act. 
Section 1.7(b) of the Act and its legislative history indicate that 
Congress intended that Farm Credit banks primarily provide financial 
assistance to small, local OFIs, but it did not exclude other 
agricultural creditors from this program.\2\
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    \2\ See H.R. 96-1287, 96th Cong., 2d. Sess., (1980), 21, 32-34. 
See also 126 Cong. Rec. H 10960-64 (daily ed. Nov. 19, 1980).
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    The FCA was not persuaded by the IBAA's request to exclude large 
financial institutions and the ABA's request to grant most large 
commercial banks the same assured access to FCS funding as small, local 
OFIs. Accordingly, the FCA does not adopt the IBAA's recommendation to 
amend Sec. 614.4540(a) so that OFI applicants are automatically denied 
access to FCS funding if agricultural loans comprise less than 10 
percent of their loan portfolios. In addition, the final regulation 
does not incorporate the ABA's request that final Sec. 614.4540(b) 
grant assured access to OFIs that have at least $5,000,000 or 10 
percent of their loan portfolio in agricultural loans. The FCA 
emphasizes that the final regulation allows any institution, including 
large financial institutions, to fund or discount their agricultural 
loans with an FCB or ACB, but it does not assure access to creditworthy 
OFIs unless they have at least 15 percent of their loans in agriculture 
and enter into a 2-year funding relationship. The FCA continues to 
believe that the 15-percent threshold is the best measure of whether an 
OFI is significantly involved in agricultural or aquatic lending, as 
section 1.7(b)(4)(B)(i) of the Act requires.
    The IBAA requested that the final regulation require FCBs and ACBs 
to provide the lowest cost of funds and other special benefits to OFIs 
that are entitled to assured access. This request would unnecessarily 
involve the regulator in the daily business decisions of System banks. 
Additionally, final Sec. 614.4590 requires Farm Credit banks to treat 
their OFIs equitably and to determine loan rates through an objective 
process. The FCA believes that System funding banks should retain

[[Page 36543]]

discretion to negotiate the price of funding and other loan terms with 
OFIs. The final rule fulfills the FCA's responsibility to ensure that 
FCBs and ACBs abide by their statutory mission to finance creditworthy 
OFIs in a safe and sound manner.
    Many of the ABA's suggestions for reorganizing Sec. 614.4540 have 
been incorporated into the final rule. The FCA adopts proposed 
Sec. 614.4540(a) as a final regulation, without revision. This 
provision allows FCBs and ACBs to fund and discount short- and 
intermediate-term agricultural, aquatic, processing and marketing, 
farm-related business, and rural home loans for any financial 
institution that operates under a charter specified in section 
1.7(b)(1)(B) of the Act. As amended, final Sec. 614.4540(b) grants 
assured access to creditworthy OFIs that maintain at least 15 percent 
of their loan volume to agricultural and aquatic producers and enter 
into a 2-year funding or discount relationship with an FCB or ACB. 
Final Sec. 614.4540(c) retains the requirement in the proposed 
regulation that FCBs and ACBs establish objective policies and loan 
underwriting standards for determining the creditworthiness of each OFI 
applicant. Under final Sec. 614.4540(d), FCBs and ACBs can deny the 
funding requests of creditworthy OFIs that satisfy the conditions in 
Sec. 614.4540(b) only if such requests: (1) Adversely affect the Farm 
Credit bank's ability to achieve and maintain established or projected 
capital levels or raise funds in the money markets; or (2) otherwise 
expose the Farm Credit bank to safety and soundness risks. The Council 
requested that the FCA amend Sec. 614.4540(a) so it expressly conveys 
that System funding banks have discretion to deny the credit 
application of any OFI that is not assured access. This revision is 
unnecessary because Sec. 614.4540(c) requires FCBs and ACBs to develop 
loan underwriting standards for all OFI applicants. As a result, the 
framework of this regulation provides FCS banks appropriate discretion, 
under their policies and loan underwriting standards, to deny the 
funding requests of OFIs that are not assured access.
    Commercial bank trade associations commented that the proposed 
regulation did not require System funding banks to explain their reason 
for denying an OFI's application. In response to this concern, the FCA 
adds Sec. 614.4540(e) that requires System banks to expeditiously 
process all OFI funding requests and to promptly provide all applicants 
written notification of the credit decision. Additionally, System banks 
must provide the applicant with specific reasons for any adverse credit 
decision.
    In response to the IBAA's recommendation about comprehensive 
reporting on OFIs, the FCA adds new Sec. 614.4540(f), which requires 
the board of directors of each FCB and ACB to receive annual written 
reports about the scope of their OFI program activities during the 
preceding fiscal year. The FCA expects that these annual reports will 
identify:
     The number of OFI applicants by category (such as 
commercial banks, credit unions, agricultural credit corporations, 
etc.);
     The number of approved and denied OFI applications;
     A summary of the reasons for denying OFI applications;
     The total amount of funds advanced to OFIs; and
     Other information necessary to evaluate the success of the 
System bank's OFI program.
    Periodically, the FCA may issue special calls for this information.
    The FCA does not adopt the IBAA's request to appoint an OFI 
Ombudsman because there are more efficient ways for the FCA to address 
concerns that OFIs may raise. The FCA Board does not accept the IBAA's 
request that the Agency appoint outside board members to represent OFI 
interests and to establish target goals for OFI lending. The FCA has no 
authority under the Act to appoint directors to the boards of Farm 
Credit banks. In further response to the IBAA, the Agency believes that 
this rule offers FCS banks sufficient business incentives to extend 
more credit to OFIs. Additionally, a creditworthy OFI has the option to 
seek funding from another System funding bank if its designated FCB or 
ACB denies or fails to approve its application.

II. Place of Discount

    Proposed Sec. 614.4550 addresses place of discount for OFIs. 
Proposed Sec. 614.4550(a) specifies that an FCB or ACB provide funding, 
discount and other financial assistance to any OFI whose headquarters 
is located within the funding bank's chartered territory. Under 
proposed Sec. 614.4550(b), an FCB or ACB could finance an OFI whose 
headquarters is not located in its chartered territory if the System 
funding bank identified in Sec. 614.4550(a) consents, denies the OFI's 
application, or otherwise fails to approve the funding request pursuant 
to Regulation B of the Board of Governors of the Federal Reserve 
System, 12 CFR 202.2(f).
    The ABA, IBAA, NDBA, three FCBs and two PCAs commented on the place 
of discount rule. AgFirst FCB supported the FCA's proposal. This 
commenter believes that the proposal best enables FCS banks to fund 
OFIs in today's market. The IBAA suggested that the FCA modify its 
proposal to allow an OFI that is dissatisfied with its System funding 
bank to seek financing from any other FCB or ACB. The ABA and the NDBA 
urged the FCA to remove all geographic restrictions on place of 
discount. These commenters believe that geographic restrictions hamper 
the success of the OFI program because non-System financial 
institutions are required to seek funding from a System bank that is 
owned and controlled by their competitors. The FCB of Texas asserted 
that the existing regulation governing place of discount is sound and 
should not be changed. The commenter believes that the FCA's proposal 
will ultimately lead to unsafe and unsound competition between FCS 
banks for OFI business. The FCB of Texas opposed the proposal to make 
an OFI's headquarters the sole factor to determine the place of 
discount. Finally, two PCAs made the FCA aware of their concerns that 
associations lack similar opportunities to seek funding from other FCBs 
or ACBs. After the comment period expired, the FCA received an inquiry 
from an FCB about whether existing OFIs would be required to change 
their place of discount once the proposed regulation became final.
    The FCA Board believed the proposed rule established a balanced 
approach concerning the place of discount for OFIs. Traditionally, OFIs 
have been required to establish a funding or discount relationship with 
a System bank owned and controlled by their competitors. Several 
commenters believe that this factor explains why the program has not 
been widely used by commercial banks and other potential OFIs. The FCA 
has addressed this concern by proposing a regulation that provides 
additional flexibility concerning place of discount to OFI applicants.
    The FCA believes that some limitations on the place of discount for 
OFIs are appropriate because FCS charters specify territories that 
System institutions serve. Direct lender associations do not have the 
same options to obtain financing from other FCBs and ACBs, and 
therefore, the recommendations of the three commercial bank trade 
associations would not treat FCS direct lender associations fairly. 
Additionally, the ABA's and NDBA's suggestion would deny an FCB or ACB 
the first

[[Page 36544]]

opportunity to finance OFIs operating in its chartered territory. The 
final rule permits OFIs to apply to any System funding bank after the 
designated FCS bank rejects or fails to approve the OFI's application. 
The FCA was not persuaded by the FCB of Texas' argument that changes to 
the place of discount rule will lead to destructive competition that 
will ultimately undermine the safety and soundness of the FCS.
    In response to the comments, the FCA has modified proposed 
Sec. 614.4550 to provide additional flexibility regarding an OFI's 
place of discount. The final regulation continues to require OFIs to 
apply first to the FCS bank that serves the territory where the OFI 
operates. The FCA recognizes that some OFIs operate in the chartered 
territory of two or more FCS banks. Under the final regulation, an OFI 
may select the FCS funding bank that serves the territory where the OFI 
is headquartered, or alternatively, where more than 50 percent of the 
OFI's outstanding loan volume is concentrated.
    If the designated funding bank denies, or otherwise fails to 
approve an OFI's completed application within 60 days, final 
Sec. 614.4550(b) allows the OFI to apply to any other FCB or ACB. Under 
final Sec. 614.4550(c), the designated FCS bank may also grant an OFI 
its consent to seek financing from any other System funding bank. The 
FCA has redesignated this consent provision as final Sec. 614.4550(c) 
to enhance the clarity of the regulation. A new provision, 
Sec. 614.4550(d), states that an OFI is not required to terminate an 
established funding or discount relationship with its System funding 
bank if the OFI subsequently relocates its headquarters or experiences 
a shift in its loan volume concentration.
    As mentioned earlier, the FCB of Texas urged the FCA to retain the 
existing regulation on place of discount. However, the FCB of Texas 
asked the FCA to consider three alternatives if the final regulation 
allows OFIs to seek funding from other FCS banks. First, the commenter 
requested that the FCA modify the regulation to provide the designated 
FCS bank with the ``right of first refusal'' for any lending agreement 
that an OFI negotiated with another System bank. Second, the commenter 
wanted the FCA to determine whether another FCS bank should be 
permitted to finance each OFI that has been denied credit from the 
designated System bank for safety and soundness reasons. Finally, the 
FCB of Texas asked the FCA to clarify that the regulation prohibits an 
OFI from ``shopping'' FCS banks for funding on a loan-by-loan basis. 
The commenter sought confirmation that the regulation does not allow an 
existing OFI to fund or discount individual loans with another System 
bank if its funding bank rejects those same loans.
    The FCA believes a specific ``right of first refusal'' is 
unnecessary because the designated System bank will have already denied 
or failed to approve the OFI's initial application. The requirement 
that an OFI first seek funding from its designated bank is the 
equivalent of a ``right of first refusal.'' In response to the 
commenter's second request, the FCA need not determine whether another 
FCB or ACB can finance an OFI that has been denied credit by its 
designated funding bank because Sec. 614.4540(c) requires each FCB and 
ACB to establish its own objective policies and loan underwriting 
standards for determining an OFI applicant's creditworthiness. The FCA 
will examine the extension of credit to OFIs in the same context of 
safety and soundness as it does other risks held in the funding bank's 
portfolio. The FCA clarifies that the regulation does not permit an OFI 
to ``shop'' for FCS funding on a loan-by-loan basis because 
Sec. 614.4560(a)(1) requires all OFIs to execute a general financing 
agreement (GFA) to establish a funding or discount relationship with a 
System funding bank. Under the circumstances, Sec. 614.4550(b) applies 
to the overall relationship between an FCB or ACB and the OFI, not a 
specific discounted loan.

III. Requirements for OFI Funding Relationships

    Proposed Sec. 614.4560 implements several statutory provisions that 
govern the funding and discount relationship between OFIs and System 
funding banks. More specifically, each OFI is required to: (1) Execute 
a GFA with its System funding bank; (2) purchase non-voting stock in 
the System funding bank pursuant to the bank's bylaws; (3) extend 
credit only to parties and for purposes that are authorized by sections 
1.10(b) and 2.4(a) and (b) of the Act; (4) adhere to portfolio 
limitations on non-farm rural home loans and certain processing and 
marketing loans; and (5) comply with statutory and regulatory borrower 
rights requirements for all agricultural and aquatic loans that an FCB 
or ACB funds or discounts. Additionally, proposed Sec. 614.4560(e) 
implements section 5.21 of the Act, which enables the FCA to examine 
non-depository OFIs and obtain examination reports from the State 
regulators of commercial banks, trust companies, and savings 
associations. Under this regulatory provision, OFIs are required to 
execute the applicable consent forms or releases before they obtain 
financing from an FCB or ACB. Section 5.22 of the Act enables the FCA 
to receive examination reports directly from other Federal regulatory 
agencies.
    The FCA proposed to repeal existing Sec. 614.4650, which contains 
five criteria for a System funding bank to revoke or suspend an OFI's 
line of credit. The FCA expects each FCS bank to incorporate criteria 
for revoking or suspending its funding relationship with an OFI into 
its policies and loan underwriting standards. This issue should also be 
addressed in the GFA between an OFI and the System funding bank.
    The FCA received only one comment about proposed Sec. 614.4560. The 
IBAA commented that the FCA should establish general guidelines for 
FCBs and ACBs to follow when they negotiate GFAs with their OFIs. 
Additionally, the commenter suggested that the FCA consult with OFIs to 
develop a model GFA.
    The FCA recently adopted a GFA rule that eliminated Agency prior-
approval of GFAs. See 63 FR 12401, March 13, 1998. The new rule 
addresses the IBAA's concerns because they provide general guidelines 
for developing GFAs between System funding banks and OFIs. However, the 
FCA does not believe it should interfere in the business operations of 
System banks by negotiating with OFIs to develop a model GFA. The FCA 
adopts proposed Sec. 614.4560 as a final regulation.

IV. Recourse and Security Requirements

    Proposed Sec. 614.4570 would prohibit any FCB or ACB from extending 
credit to an OFI on an unsecured, limited, or non-recourse basis. 
Proposed Sec. 614.4570(a) requires an OFI to endorse all obligations 
that it funds or discounts through an FCB or ACB with full recourse or 
its unconditional guarantee. Proposed Sec. 614.4570(b)(1) requires each 
OFI to pledge all notes, drafts, and other obligations that are funded 
or discounted with the FCB or ACB as collateral for the credit 
extension. Proposed Sec. 614.4570(b)(2) obligates each FCB or ACB to 
perfect its security interest in such obligations and the proceeds 
thereunder in accordance with applicable State law.

A. Full Recourse

    An existing OFI, the Council, and two jointly managed FCBs opposed 
the full recourse requirement in Sec. 614.4570(a). The existing OFI 
commented that the full recourse requirement would

[[Page 36545]]

seriously jeopardize any new opportunities that the new regulation 
creates for expanded OFI access. One of the jointly managed FCBs 
expressed concern about how the full recourse requirement in the 
proposal would affect its relationship with an existing OFI and 
potential opportunities to finance new OFIs in the future. The Council 
believes recourse to an OFI's capital should be subject to negotiation 
between the parties, and each System bank's loan underwriting standards 
should address this issue.
    From a safety and soundness perspective, FCBs and ACBs need full 
recourse to an OFI's capital in the event of default. Full recourse is 
necessary because the final rule significantly expands OFI access to 
the FCS and it repeals many existing regulatory restraints on the 
funding and discount relationship between System banks and their OFIs. 
Section 1.7(b)(3)(A) of the Act prohibits a System bank from funding an 
OFI if its aggregate liabilities exceed ten times its paid-in and 
unimpaired capital and surplus. In light of this statutory safety and 
soundness requirement, the FCA believes that it is prudent for FCS 
banks to have full recourse to an OFI's capital. Additionally, the 
regulations in 12 CFR part 615, subpart H, require FCS lenders to hold 
sufficient capital as a cushion against risk in all loans. Full 
recourse to an OFI's capital strengthens the FCS funding bank's risk-
bearing capacity. System funding banks are required to have full 
recourse to the capital of direct lender associations. Since OFIs have 
access to other sources of funds, they may expose System funding banks 
to greater risk of loss than direct lender associations.

B. Security

    The FCA received comments from the ABA, IBAA, and the Council about 
the security OFIs are required to pledge under proposed 
Sec. 614.4570(b). The ABA and the IBAA requested that the final 
regulation provide OFIs with additional flexibility to pledge other 
types of collateral to their FCS funding bank. The ABA opposed 
Sec. 614.4570(b) because it requires OFIs to pledge all loans that are 
actually funded by the FCS bank as primary collateral. The commenter 
believes the requirement is particularly burdensome due to the tracking 
and recordkeeping that it entails. The ABA recommended that an OFI be 
allowed to pledge unrelated agricultural loans as collateral. The 
Council commented that loan perfection should be determined by the FCS 
funding bank's underwriting standards.
    The security requirements of Sec. 614.4570(b) ensure compliance 
with two sections of the Act. First, section 1.7(b) of the Act requires 
OFIs to use funds from a title I bank only for the purpose of extending 
short- and intermediate-term credit to eligible borrowers for 
authorized purposes under section 2.4(a) and (b) of the Act. Second, 
OFIs are required to track which loans are funded or discounted through 
the FCB or ACB funding relationship to ensure compliance with the 
borrower rights requirements of the Act. In light of these statutory 
requirements, the FCA does not adopt the ABA's suggestion to allow an 
OFI to pledge other agricultural loans as primary collateral to a 
System funding bank. However, Sec. 614.4570(c) permits System funding 
banks to accept long-term mortgages on agricultural assets as 
supplemental collateral. Final Sec. 614.4570(b)(2) requires that FCBs 
and ACBs perfect, in accordance with State law, a senior security 
interest in any and all obligations that an OFI pledges as collateral.
    In summary, the FCA's new regulatory approach for OFI financing 
affords OFIs greater flexibility and additional access to the FCS. To 
ensure the safe and sound implementation of the OFI program, the FCA 
adopts proposed Sec. 614.4570 as a final regulation without revision.

V. Limitation on the Extension of Funding, Discount and Other 
Similar Financial Assistance to an OFI

    Proposed Sec. 614.4580 derives from section 1.7(b)(3) of the Act. 
This statutory provision prohibits a System funding bank from extending 
credit to an OFI if its aggregate liabilities exceed ten times its 
paid-in and unimpaired capital and surplus, or a lesser amount 
established by the laws of the jurisdiction creating the OFI.
    The IBAA commented that the FCA should discourage FCBs and ACBs 
from establishing less than a 10:1 capital ratio, except under rare 
circumstances. The commenter expressed concerns that a more stringent 
capital requirement could raise an OFI's cost of borrowing from the 
System, and make this program less attractive to potential OFI 
applicants.
    The FCA expects each FCB and ACB to develop loan underwriting 
standards that address OFI capital requirements. Compliance with these 
loan underwriting standards are the basis for determining safety and 
soundness in credit extensions. The FCA believes System banks need the 
flexibility to tailor underwriting standards to manage the risks from 
OFIs, based on the banks' risk-bearing capacity. As a safety and 
soundness regulator, the FCA will not preclude FCBs and ACBs from 
establishing a capital requirement that is more stringent than the 10:1 
ratio in the statute. However, the final rule requires FCS funding 
banks to treat OFIs equitably in this and other matters. The FCA adopts 
proposed Sec. 614.4580 as a final regulation.

VI. Lending Limit to a Single OFI Borrower

    The FCA proposed to eliminate the existing regulatory lending limit 
on extensions of credit that OFIs make to their borrowers with FCS 
funds. The proposal acknowledged that some OFIs will remain subject to 
the lending limit that their primary regulator imposes under applicable 
Federal or State law. Additionally, the FCA expects each FCB or ACB to 
prudently manage the risk exposure caused by concentrations in OFI loan 
portfolios through its loan underwriting standards and the GFA.
    The FCA solicited commenters' views on whether the final rule 
should contain a lending limit on extensions of credit that an OFI 
makes to its borrowers with FCS funds. Additionally, the FCA requested 
suggestions for other approaches to manage and control risks 
originating through OFI lending relationships.
    The ABA, IBAA, and the Council supported the repeal of the existing 
50-percent lending limit on OFI borrowers. These commenters advised the 
FCA that the repeal of the lending limit would enhance the Farm Credit 
banks' ability to finance OFIs. These trade associations also claimed 
that the repeal of existing Sec. 614.4565 would not imperil the safety 
and soundness of System banks that maintain adequate loan underwriting 
standards. The IBAA requested that the final regulation prohibit FCBs 
and ACBs from establishing a lending limit below 50 percent. The IBAA 
also expressed concern that the FCA's proposal would impose the Federal 
or State lending limit on the affiliates and subsidiaries of regulated 
financial institutions.
    As the FCA originally proposed, the final rule repeals the lending 
limit in existing Sec. 614.4565. In response to the IBAA, the FCA 
observes that OFIs remain subject to any lending limit imposed by 
Federal or State law. If the OFI is not subject to a Federal or State 
lending limit, the funding banks' underwriting standards and the GFA 
will address single borrower concentration risks in the OFI's 
portfolio. The FCA rejects the IBAA suggestion that the final rule 
prohibit FCBs and ACBs from establishing a

[[Page 36546]]

lending limit of less than 50 percent because it is inconsistent with 
safety and soundness. The underwriting standards of each Farm Credit 
bank should ensure that concentrations in an OFI's loan portfolio do 
not expose the bank to unacceptable levels of risk.

VII. Equitable Treatment of OFIs and FCS Associations

    Proposed Sec. 614.4590 promotes the equitable treatment of OFIs and 
direct lender associations. Proposed Sec. 614.4590(a) would require 
FCBs and ACBs to apply objective loan underwriting standards for both 
types of borrowers. Under proposed Sec. 614.4590(b), the total charges 
a Farm Credit bank assesses an OFI must be comparable to the charges it 
imposes on direct lender associations. Furthermore, any variation in 
funding costs must be attributed to differences in credit risk and 
administrative costs.
    The IBAA and the NDBA commented on proposed Sec. 614.4590. 
According to the IBAA, references to ``similar'' underwriting standards 
and ``comparable'' overall cost of funds in the proposed regulation 
grants System banks too much discretion. The IBAA asserts that the 
interest rates and the overall cost of funds should be equal for both 
OFIs and direct lender associations. For this reason, the commenter 
believes that the final regulation should require System banks to 
disclose pricing information about their loans to FCS direct lender 
associations. According to the IBAA, ``equal treatment'' entails lower 
stock purchase requirements and mandatory dividend payments to OFIs 
because they are not afforded voting rights and other privileges. The 
NDBA commented that the final rule should require FCBs and ACBs to 
adopt ``objective and uniform underwriting standards and pricing 
requirements.''
    The FCA observes that there are fundamental differences between 
OFIs and direct lender associations. These differences make it 
difficult to compare the treatment of these two types of financial 
institutions. The following factors illustrate some of the basic 
differences between OFIs and direct lender associations that preclude 
identical treatment:
     OFIs have access to several funding sources whereas direct 
lender associations are required to borrow from their designated 
funding bank.
     Direct lender associations have significant amounts of 
capital invested in their System funding bank, but most OFIs do not.
     As part of a cooperative system, direct lender 
associations share in System gains and losses. In contrast, OFIs have 
limited exposure to System losses in the FCS.
     Administrative costs for funding a direct lender 
association and an OFI differ because OFIs are not required to maintain 
a long-term commitment with an FCB or ACB.
    Under these circumstances, the regulations can only require FCBs 
and ACBs to treat OFIs and direct lender associations equitably, but 
not equally. The FCA expects System funding banks to treat similarly 
situated associations and OFIs comparably. Any variation in the overall 
amounts that System funding banks charge OFIs and direct lender 
associations for capitalization requirements, interest rates, and fees 
shall be attributed to differences in credit risk and administrative 
costs.
    The FCA does not adopt any of the IBAA's suggestions for revising 
this regulation. The final regulation does not require dividend 
payments to OFIs, or establish OFI investment levels in System funding 
banks because the FCA regulations do not impose business practices on 
FCS institutions in the absence of compelling public policy or safety 
and soundness reasons. The final regulation does not compel FCS funding 
banks to charge identical rates to OFIs and FCS direct lender 
associations, and therefore, it is unnecessary for FCBs and ACBs to 
disclose pricing information for direct lender associations.
    The FCA finds merit in the NDBA's suggestion that Sec. 614.4590(a) 
should require FCBs and ACBs to establish comparable and objective loan 
pricing standards for both OFIs and direct lender associations. 
Accordingly, the FCA has incorporated this revision into final 
Sec. 614.4590(a). Additionally, the FCA substitutes ``comparable'' for 
``similar'' in final Sec. 614.4590(a) so that the language used 
throughout this regulation is consistent.

VIII. Miscellaneous Issues

A. Association Funding of OFIs

    One association asked the FCA to clarify that PCAs and agricultural 
credit associations can establish and manage OFI relationships on 
authority delegated by their System banks. The commenter observed that 
such a program, established under System bank guidelines, would become 
a natural adjunct to the participation authorities that associations 
now exercise. Although the Act authorizes only FCBs and ACBs to provide 
funding to OFIs, the FCA believes that direct lender associations have 
considerable opportunities for involvement in their funding bank's OFI 
relationships. Indeed, as funding banks have increasingly become 
wholesale lenders, associations may be in a position to recruit OFIs, 
assess the risk in the retail loans or collateral, and service the 
credit relationship on behalf of the bank. Through their participation 
authorities, associations may form effective alliances with other 
agricultural lenders for the benefit of farmers and ranchers.

B. Small Business Investment Companies

    A commercial bank holding company commented that the final 
regulation should permit Small Business Investment Companies (SBICs) to 
participate in the OFI program. According to the commenter, SBICs and 
similar state-chartered entities need access to additional stable pools 
of funds to support their agricultural lending operations. The 
commenter also suggested that the FCA follow the lead of the Federal 
Housing Finance Board and permit System banks to invest directly in 
SBICs.
    SBICs do not qualify as OFIs because they do not have one of the 
charters specified in section 1.7(b)(1)(B) of the Act. Additionally, 
Federal and State laws effectively preclude SBICs from participating in 
the OFI program. As a result, the final regulation does not allow SBICs 
to become OFIs.
    The OFI regulations do not implement the investment authorities of 
FCS banks under sections 1.5(15) and 3.1(13)(A) of the Act. An existing 
investment regulation, Sec. 615.5140, does not authorize System banks 
to invest in SBIC equities. However, the FCA recently proposed 
amendments to Sec. 615.5140, and the Agency will consider the 
commenter's request when it deliberates on the final investment 
regulation.

C. Insolvency

    The FCA received no comments about proposed Sec. 614.4600, which 
governs the insolvency of OFIs. The FCA adopts proposed Sec. 614.4600 
as a final rule.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, Banking, Rural areas.

12 CFR Part 614

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

12 CFR Part 620

    Accounting, Agriculture, Banks, Banking, Reporting and 
recordkeeping requirements, Rural areas.

[[Page 36547]]

12 CFR Part 630

    Accounting, Agriculture, Banks, Banking, Credit, Organization and 
functions (Government agencies), Reporting and recordkeeping 
requirements, Rural areas.
    For the reasons stated in the preamble, parts 611, 614, 620, and 
630 of chapter VI, title 12 of the Code of Federal Regulations are 
amended to read as follows:

PART 611--ORGANIZATION

    1. The authority citation for part 611 continues to read as 
follows:

    Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 
4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 
U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243, 
2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. 
L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003, and 1004.

Subpart P--Termination of Farm Credit Status--Associations

    2. Section 611.1205 is amended by revising paragraph (c) to read as 
follows:


Sec. 611.1205  Definitions.

* * * * *
    (c) OFI means an other financing institution that has established a 
funding and discount relationship with a Farm Credit Bank or an 
agricultural credit bank pursuant to section 1.7(b)(1) of the Act and 
the regulations in subpart P of part 614.
* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

    3. 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, 4.3A, 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, 8.9 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, 2154a, 
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, 2279aa-9); sec. 
413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart J--Lending Limits

    4. Section 614.4350 is amended by revising paragraph (a) to read as 
follows:


Sec. 614.4350  Definitions.

* * * * *
    (a) Borrower means an individual, partnership, joint venture, 
trust, corporation, or other business entity (except a Farm Credit 
System association or other financing institution that complies with 
the criteria in section 1.7(b) of the Act and the regulations in 
subpart P of this part) to which an institution has made a loan or a 
commitment to make a loan either directly or indirectly.
* * * * *
    5. Subpart P of part 614 is revised to read as follows:

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing 
of Other Financing Institutions

Sec.
614.4540  Other financing institution access to Farm Credit Banks 
and agricultural credit banks for funding, discount, and other 
similar financial assistance.
614.4550  Place of discount.
614.4560  Requirements for OFI funding relationships.
614.4570  Recourse and security.
614.4580  Limitation on the extension of funding, discount and other 
similar financial assistance to an OFI.
614.4590  Equitable treatment of OFIs and Farm Credit System 
associations.
614.4600  Insolvency of an OFI.

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing 
of Other Financing Institutions


Sec. 614.4540  Other financing institution access to Farm Credit Banks 
and agricultural credit banks for funding, discount, and other similar 
financial assistance.

    (a) Basic criteria for access. Any national bank, State bank, trust 
company, agriculture credit corporation, incorporated livestock loan 
company, savings association, credit union, or any association of 
agricultural producers engaged in the making of loans to farmers and 
ranchers, and any corporation engaged in the making of loans to 
producers or harvesters of aquatic products may become an other 
financing institution (OFI) that funds, discounts, and obtains other 
similar financial assistance from a Farm Credit Bank or agricultural 
credit bank in order to extend short- and intermediate-term credit to 
eligible borrowers for authorized purposes pursuant to sections 1.10(b) 
and 2.4(a) and (b) of the Act. Each OFI shall be duly organized and 
qualified to make loans and leases under the laws of each jurisdiction 
in which it operates.
    (b) Assured access. Each Farm Credit Bank or agricultural credit 
bank must fund, discount, or provide other similar financial assistance 
to any creditworthy OFI that:
    (1) Maintains at least 15 percent of its loan volume at a seasonal 
peak in loans and leases to farmers, ranchers, aquatic producers and 
harvesters. The Farm Credit Bank or agricultural credit bank shall not 
include the loan assets of the OFI's parent, affiliates, or 
subsidiaries when determining compliance with the requirement of this 
paragraph; and
    (2) Executes a general financing agreement with the Farm Credit 
Bank or agricultural credit bank that establishes a financing or 
discount relationship for at least 2 years.
    (c) Underwriting standards. Each Farm Credit Bank and agricultural 
credit bank shall establish objective policies and loan underwriting 
standards for determining the creditworthiness of each OFI applicant.
    (d) Denial of OFI access. A Farm Credit Bank or an agricultural 
credit bank may deny the funding request of any creditworthy OFI that 
meets the conditions in paragraph (b) of this section only when such 
request would:
    (1) Adversely affect a Farm Credit Bank or agricultural credit 
bank's ability to:
    (i) Achieve and maintain established or projected capital levels; 
or
    (ii) Raise funds in the money markets; or
    (2) Otherwise expose the Farm Credit Bank or agricultural credit 
bank to safety and soundness risks.
    (e) Notice to applicants. Each Farm Credit Bank or agricultural 
credit bank shall render its decision on an OFI application in as 
expeditious a manner as is practicable. Upon reaching a decision on an 
application, the Farm Credit Bank or agricultural credit bank shall 
provide prompt written notice of its decision to the applicant. When 
the Farm Credit Bank or agricultural credit bank makes an adverse 
credit decision on an application, the written notice shall include the 
specific reason(s) for the decision.
    (f) Reports to the board of directors. Each Farm Credit Bank and 
agricultural credit bank shall provide its board of directors with a 
written annual report regarding the scope of OFI program activities 
during the preceding fiscal year.


Sec. 614.4550  Place of discount.

    (a) A Farm Credit Bank or agricultural credit bank may provide 
funding, discounting, or other similar financial assistance to any OFI 
applicant that:
    (1) Maintains its headquarters in such funding bank's chartered 
territory; or
    (2) Has more than 50 percent of its outstanding loan volume to 
eligible

[[Page 36548]]

borrowers who conduct agricultural or aquatic operations in such 
funding bank's chartered territory.
    (b) If the Farm Credit Bank or agricultural credit bank identified 
in paragraph (a) of this section denies or otherwise fails to approve 
an OFI's funding request within 60 days of receipt of a ``completed 
application'' as defined by 12 CFR 202.2(f), the OFI may apply to any 
other Farm Credit Bank or agricultural credit bank for funding, 
discounting, or other similar financial assistance.
    (c) The Farm Credit Bank or agricultural credit bank may grant its 
consent for an OFI identified in paragraph (a) of this section to seek 
financing from another Farm Credit Bank or agricultural credit bank.
    (d) No OFI shall be required to terminate its existing funding or 
discount relationship with a Farm Credit Bank or agricultural credit 
bank if, at a subsequent time, an OFI relocates its headquarters to the 
chartered territory of another Farm Credit Bank or agricultural credit 
bank or the loan volume in the relevant territory falls below 50 
percent.


Sec. 614.4560  Requirements for OFI funding relationships.

    (a) As a condition for extending funding, discount and other 
similar financial assistance to an OFI, each Farm Credit Bank or 
agricultural credit bank shall require every OFI to:
    (1) Execute a general financing agreement pursuant to the 
regulations in subpart C of part 614; and
    (2) Purchase non-voting stock in its Farm Credit Bank or 
agricultural credit bank pursuant to the bank's bylaws.
    (b) A Farm Credit Bank or agricultural credit bank shall extend 
funding, discount and other similar financial assistance to an OFI only 
for purposes and terms authorized under sections 1.10(b) and 2.4(a) and 
(b) of the Act.
    (c) Rural home loans to borrowers who are not bona fide farmers, 
ranchers, and aquatic producers and harvesters are subject to the 
restrictions in Sec. 613.3030 of this chapter. Loans that an OFI makes 
to processing and marketing operators who supply less than 20 percent 
of the throughput shall be included in the calculation that 
Sec. 613.3010(b)(1) of this chapter establishes for Farm Credit Banks 
and agricultural credit banks.
    (d) The borrower rights requirements in part C of title IV of the 
Act, and section 4.36 of the Act, and the regulations in subparts K, L, 
and N of part 614 shall apply to all loans that an OFI funds or 
discounts through a Farm Credit Bank or agricultural credit bank, 
unless such loans are subject to the Truth-in-Lending Act, 15 U.S.C. 
1601 et seq.
    (e) As a condition for obtaining funding, discount and other 
similar financial assistance from a Farm Credit Bank or agricultural 
credit bank, all State banks, trust companies, or State-chartered 
savings associations shall execute a written consent that authorizes 
their State regulators to furnish examination reports to the Farm 
Credit Administration upon its request. Any OFI that is not a 
depository institution shall consent in writing to examination by the 
Farm Credit Administration as a condition precedent for obtaining 
funding, discount and other similar financial assistance from a Farm 
Credit Bank or agricultural credit bank, and file such consent with its 
Farm Credit funding bank.


Sec. 614.4570  Recourse and security.

    (a) Full recourse and guarantee. All obligations that are funded or 
discounted through a Farm Credit Bank or agricultural credit bank shall 
be endorsed with the full recourse or unconditional guarantee of the 
OFI.
    (b) General collateral. (1) Each Farm Credit Bank and agricultural 
credit bank shall take as collateral all notes, drafts, and other 
obligations that it funds or discounts for each OFI; and
    (2) Each Farm Credit Bank and agricultural credit bank shall 
perfect, in accordance with State law, a senior security interest in 
any and all obligations and the proceeds thereunder that the OFI 
pledges as collateral.
    (c) Supplemental collateral. (1) Each Farm Credit Bank and 
agricultural credit bank shall develop policies and loan underwriting 
standards that establish uniform and objective requirements to 
determine the need and amount of supplemental collateral or other 
credit enhancements that each OFI shall provide as a condition for 
obtaining funding, discount and other similar financial assistance from 
such Farm Credit bank.
    (2) The amount, type, and quality of supplemental collateral or 
other credit enhancements required for each OFI shall be established in 
the general financing agreement and shall be proportional to the level 
of risk that the OFI poses to the Farm Credit Bank or agricultural 
credit bank.


Sec. 614.4580  Limitation on the extension of funding, discount and 
other similar financial assistance to an OFI.

    (a) No obligation shall be purchased from or discounted for and no 
loan shall be made or other similar financial assistance extended by a 
Farm Credit Bank or agricultural credit bank to an OFI if the amount of 
such obligation added to the aggregate liabilities of such OFI, whether 
direct or contingent (other than bona fide deposit liabilities), 
exceeds ten times the paid-in and unimpaired capital and surplus of 
such OFI or the amount of such liabilities permitted under the laws of 
the jurisdiction creating such OFI, whichever is less.
    (b) It shall be unlawful for any national bank that is indebted to 
any Farm Credit Bank or agricultural credit bank, on paper discounted 
or purchased, to incur any additional indebtedness, if by virtue of 
such additional indebtedness its aggregate liabilities, direct or 
contingent, will exceed the limitation described in paragraph (a) of 
this section.


Sec. 614.4590  Equitable treatment of OFIs and Farm Credit System 
associations.

    (a) Each Farm Credit Bank and agricultural credit bank shall apply 
comparable and objective loan underwriting standards and pricing 
requirements to both OFIs and Farm Credit System direct lender 
associations.
    (b) The total charges that a Farm Credit Bank or agricultural 
credit bank assesses an OFI through capitalization requirements, 
interest rates, and fees shall be comparable to the charges that the 
same Farm Credit Bank or agricultural credit bank imposes on its direct 
lender associations. Any variation between the overall funding costs 
that OFIs and direct lender associations are charged by the same 
funding bank shall result from differences in credit risk and 
administrative costs to the Farm Credit Bank or agricultural credit 
bank.


Sec. 614.4600  Insolvency of an OFI.

    If an OFI that is indebted to a Farm Credit Bank or agricultural 
credit bank becomes insolvent, is in process of liquidation, or fails 
to service its loans properly, the Farm Credit Bank or agricultural 
credit bank may take over such loans and other assets that the OFI 
pledged as collateral. Once the Farm Credit Bank or agricultural credit 
bank exercises its remedies, it shall have the authority to make 
additional advances, to grant renewals and extensions, and to take such 
other actions as may be necessary to collect and service loans to the 
OFI's borrower. The funding Farm Credit Bank or agricultural credit 
bank may also liquidate the OFI's loans and other assets in order to 
achieve repayment of the debt.

[[Page 36549]]

PART 620--DISCLOSURE TO SHAREHOLDERS

    6. 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


Sec. 620.5  [Amended]

    7. Section 620.5 is amended by removing the word ``financial'' and 
adding in its place the word ``financing''; and by removing the words 
``, as defined in Sec. 614.4540(e) of this chapter'' in paragraph 
(a)(8).

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

    8. The authority citation for part 630 continues to read as 
follows:

    Authority: Secs. 5.17, 5.19 of the Farm Credit Act (12 U.S.C. 
2252, 2254).

Subpart B--Annual Report to Investors


Sec. 630.20  [Amended]

    9. Section 630.20 is amended by removing the words ``, as defined 
in Sec. 614.4540(e) of this chapter'' in paragraph (a)(1)(v).

    Dated: June 26, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-17844 Filed 7-6-98; 8:45 am]
BILLING CODE 6705-01-P