[Federal Register Volume 63, Number 205 (Friday, October 23, 1998)]
[Proposed Rules]
[Pages 56873-56878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28480]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 616, 618, and 621

RIN 3052-AB63


Loan Policies and Operations; Leasing; General Provisions; 
Accounting and Reporting Requirements

AGENCY: Farm Credit Administration.

ACTION: Reproposed rule; request for comment.

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SUMMARY: The Farm Credit Administration (FCA) through the Farm Credit 
Administration Board (Board) seeks additional comment on a rule to 
amend its regulations that provide Farm Credit System (System) 
institutions regulatory guidance concerning leasing activities. The 
reproposed rule addresses the comments received on the proposed rule 
and streamlines the regulations where appropriate. The reproposed rule 
provides clear and concise regulations pertaining to the System's 
leasing activities and clarifies existing regulations that apply to 
leasing.

DATES: Please submit your comments on or before December 7, 1998.

ADDRESSES: You may send us your comments via electronic mail to 
``[email protected]'' or through the Pending Regulations section of the 
FCA's interactive website at ``www.fca.gov.'' You may also mail or 
deliver your comments to Patricia W. DiMuzio, Director, Regulation and 
Policy Division, Office of Policy and Analysis, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, or 
send them by facsimile transmission to FAX number (703) 734-5784. You 
may review copies of all comments we receive in the Office of Policy 
and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:
John J. Hays, Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 
883-4444,
    or
James M. Morris, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.

SUPPLEMENTARY INFORMATION: On October 15, 1997, the FCA published a 
proposed rule that would replace the existing regulatory guidance 
relating to System institutions' leasing activities (62 FR 53581). The 
Farm Credit Leasing Services Corporation (FCL) and AgriBank, FCB 
(AgriBank) provided specific comments on the proposed rule. Ag Credit 
Agricultural Credit Association and AgFirst, Farm Credit Bank submitted 
general comments. After considering the four comment letters received, 
we revised the proposed rule and now seek additional comment. We have 
renumbered all sections in the reproposed part 616 and note the new 
section numbers as part of our discussion of the reproposed amendments.

1. Authority and Lessee Eligibility

    As originally proposed, Sec. 616.6100(a), (b), and (c) generally 
restated sections 1.11(c)(2), 2.4(b)(4), and 3.7(a) of the Farm Credit 
Act of 1971, as amended (Act). Because it is unnecessary to restate the 
Act in our regulations, we have omitted these paragraphs. The 
reproposed rule designates the remaining paragraph (d) as Sec. 616.6400 
and requires that an institution document that the lease of equipment 
or facility is authorized under its leasing authorities. In the 
reproposed rule, Sec. 616.6100 results from the redesignation of 
Sec. 616.6110, discussed below.

2. Purchase and Sale of Interests in Leases

    The existing definition of a ``loan'' in Sec. 614.4325(a)(3) 
includes leases and generally applies the loan purchase and sale rules 
to leases. This approach has proven unsatisfactory because the 
interests in a loan and lease are different; a lease cannot be divided 
into a principal amount and interest payments. The proposed rule 
intended to accommodate these differences by providing a new definition 
tailored to leases. We proposed to define a lease participation in 
Sec. 616.6000(d) as a fractional undivided interest in: (1) All of the 
lease payments; (2) the residual value of all of the property leased; 
or (3) all of the lease payments and the residual value of all of the 
property leased.
    AgriBank and the FCL raised technical concerns with the proposed 
approach. AgriBank suggested a clarification to the definition of 
``interests in leases'' in proposed Sec. 616.6000(a). The FCL 
recognized the difficulty of treating lease interests in the same 
manner as loan interests and requested further clarification. After 
considering these comments, we have concluded that a different and 
simpler approach is needed. The reproposed rule does not differentiate 
between ``participation'' interests in leases and other types of lease 
interests that can be purchased and sold. Reproposed Sec. 616.6100 
(Sec. 616.6110 in the proposed regulation), would authorize a System 
institution to purchase from any lessor any interest (including a 
participation interest) in a lease for equipment or facilities used in 
the operations of eligible borrowers. Specifically, the reproposed rule 
would:
    (1) Eliminate the distinctions concerning the authority to purchase 
``lease interests'' and ``lease participation interests'';
    (2) Eliminate cross-title restrictions on the purchase of lease 
interests; and
    (3) Eliminate the retention requirement concerning the purchase of 
lease interests from outside the System. At present, this provision 
requires that the servicer of the lease have at least a 10-percent 
ownership interest in the lease in order for a System institution to 
purchase an interest from a non-System lessor. We conclude that 
requiring the servicer to have an ownership interest is not necessary 
to manage risk and is not required by law.
    The reproposed rule omits as no longer necessary the definition of 
a lease participation in proposed Sec. 616.6000(d) and the definition 
of a participating institution in proposed Sec. 616.6000(e). Reproposed 
Sec. 616.6000(b) would define ``lease'' to include only those leases 
for equipment or facilities that are used in the operations of persons 
eligible to borrow under part 613 of this chapter.
    Eliminating the distinctions between ``lease interests'' and 
``participation interests'' enables us to shorten the regulation by 
eliminating proposed Sec. 616.6115. Reproposed Sec. 616.6100 would 
incorporate relevant provisions from proposed Sec. 616.6115. The 
following information explains how we combined these provisions:

[[Page 56874]]

     We rewrote paragraph (a) of Sec. 616.6100, as reproposed, 
to allow System institutions to purchase leases and interests in 
leases. The definition of ``lease'' would continue to limit the types 
of leases in which System institutions can purchase an interest, that 
is, leases of equipment or facilities used in the operations of 
eligible borrowers.
     We clarified that paragraph (b) of Sec. 616.6100, as 
reproposed, would reflect that the policy requirement applies only if 
an institution buys or sells interests in leases.
     We removed paragraph (b)(1) of proposed Sec. 616.6110, 
because there are no restrictions limiting to whom a System institution 
may sell interests in leases. We renumbered and clarified paragraphs 
(b)(2) through (b)(7) in reproposed Sec. 616.6100.
     We restructured paragraph (c), which contained 
requirements roughly parallel to Sec. 614.4325(d) requirements 
applicable to loans, to incorporate requirements contained in proposed 
Sec. 616.6115(a) and to add a provision concerning transactions through 
agents.
     We did not change paragraph (d).
     We removed paragraph (e) of proposed Sec. 616.6110 because 
it duplicates a provision in Sec. 616.6100(b).
     We redesignated paragraphs (f) and (g) as paragraphs (e) 
and (f) without change.
    AgriBank also suggested adding language to the regulation that 
would permit lease transactions through agents parallel to loan 
transactions permitted by Sec. 614.4325(h). We agree that lease 
transactions through agents should be permitted on the same basis as 
Sec. 614.4325(h) permits for loans. Reproposed Sec. 616.6100(c)(8) 
incorporates the rules contained in Sec. 614.4325(h). This provision 
would require a written agency agreement and periodic review of the 
agency relationship. If a funding bank serves as an association's 
agent, the agency agreement must provide for termination of the 
agreement upon 60-days notice to the bank. In addition, the agreement 
must provide that an association can require repurchase of the interest 
in a lease if the interest does not comply with either the agency 
agreement or the association's underwriting standards. Finally, a 
technical change is necessary in order to delete the term ``lease'' 
from the Sec. 614.4325(a)(3) definition of a ``loan'' for purposes of 
subpart H, since that subpart would no longer apply.

3. Customer Choice of Lease Provider

    Proposed Sec. 616.6120 would have required an institution making 
out-of-territory leases to obtain the concurrence of at least one 
institution offering similar leasing services in the territory. Upon 
reconsideration, we are deleting this requirement from the reproposed 
regulation in order to provide System institutions with additional 
flexibility to make leases beyond their designated territory. The 
reproposed rule would not require a System lessor to satisfy any notice 
or concurrence requirements in order to serve lessees beyond the 
lessor's territory. The reproposed regulation is now Sec. 616.6200.

4. Leasing Policies, Procedures, and Underwriting Standards

    The proposed Sec. 616.6200 would have required a System institution 
engaged in leasing to adopt a written policy (or policies) and 
underwriting standards. One provision of the proposed regulation would 
have required that a System lessor adopt written policies and 
procedures that require management to establish a prudent residual 
value at the inception of the lease. The FCL agreed with proposed 
Sec. 616.6200 in general, but requested that we delete the word 
``prudent'' as a modifier of the phrase ``residual value'' in proposed 
Sec. 616.6200(d). We have eliminated the term ``prudent'' from proposed 
Sec. 616.6200(d) and from the introductory text of Sec. 616.6200 
because it is unnecessary and the written policies and procedures must 
reflect lease practices that control risk. We have clarified in the 
reproposed regulation that policies must address the appropriateness of 
all terms and conditions, including the residual value. We also make a 
clarifying change to proposed Sec. 616.6200 to replace the general 
reference to part 614 with the specific reference to the requirements 
of Sec. 614.4150. To ensure that the list in proposed Sec. 616.6200 
does not duplicate any requirement of Sec. 614.4150, we have omitted 
proposed Sec. 616.6200(a) and (b) and redesignated the remaining 
paragraphs. The reproposed rule is now Sec. 616.6300.

5. Investment in Leased Assets

    We received no comments on the proposed provision concerning 
investment in leased assets, Sec. 616.6210, which would authorize an 
institution to purchase property to lease if the acquisition of such 
property is consistent with the type of leasing being conducted or 
planned in the future. The reproposed rule is now Sec. 616.6500.

6. Lending and Leasing Limits

    We received one comment on the proposal to make leases and loans to 
a single borrower subject to a ``lending and leasing limit.'' This 
provision would limit an institution's exposure to risk from a single 
borrower. The FCL sought clarification of the provision that allows 
certain interests sold to be excluded from computing the total loans 
and leases to a borrower. Proposed Sec. 614.4358(b)(5) would have 
excluded interests in leases sold if the sale agreement met three 
specific requirements. The third requirement, the subject of the FCL's 
comment, is that the agreement under which the interest is sold must 
provide for the sharing of all payments on a pro rata basis according 
to the percentage interest in the lease. The FCL commented that it is 
unclear how Sec. 614.4358(b)(5)(iii) applies when the participation 
interest is solely the residual value. We revised the reproposed rule 
in response to this comment. The pro rata sharing requirement would 
apply only to lease payments.
    We have made these additional changes to implement the leasing and 
lending limit regulations in subpart J of part 614 include:
     We clarified that the definition of ``borrower'' includes, 
for the purposes of subpart J, any customer to whom an institution has 
made a lease or a commitment to make a lease. See Sec. 614.4350(a).
     We expanded the definition of ``loan'' includes all types 
of leases (operating, financing, and lease interests). See 
Sec. 614.4350(c).
     The reproposed rule would prohibit a System institution 
from making a lease or a loan if the consolidated amount of all loans 
and leases to a single borrower exceeds a specific percentage of the 
institution's lending and leasing limit base. See Secs. 614.4352 
through 614.4355.
     The reproposed rule would prohibit the FCL from making 
leases to a single lessee or any related entities that exceed 25 
percent of the FCL's ``lending and leasing limit base.'' See 
Sec. 614.4356.
     We added the outstanding lease balances to the items 
included in the computation of obligations. See Sec. 614.4358(a)(1).
     All leases, except those that are permitted under 
Sec. 614.4361, must comply with the leasing and lending limits at all 
times. See Sec. 614.4360(d).

7. Portfolio Limitations

    Proposed Sec. 616.6230 would have limited leases made by Farm 
Credit Banks (FCBs), agricultural credit banks (ACBs), production 
credit associations (PCAs), Federal land credit associations and 
agricultural credit associations (ACAs), and the FCL to processing and 
marketing operations of agricultural or aquatic producers who supply 
less than

[[Page 56875]]

20 percent of the throughput. That provision would have included low-
throughput processing and marketing leases in computing loan portfolio 
restrictions contained in sections 1.11(a)(2) and 2.4(a)(1) of the Act. 
Loans and leases made to borrowers who supply less than 20 percent of 
the throughput used in a processing or marketing operation would have 
been subject to the 15-percent portfolio ceiling in Sec. 613.3010(b). 
Proposed Sec. 616.6230(b) would have imposed this 15-percent portfolio 
limitation on the FCL for leases it makes to processing or marketing 
operations.
    Upon reconsideration, we have concluded that the Act does not 
impose portfolio limitations on leases to processing and marketing 
operations. In the absence of a statutory requirement or a safety and 
soundness concern, we do not believe such a limitation on leasing 
activity is necessary. Therefore, we have not included proposed 
Sec. 616.6230 in the reproposed rule.

8. Stock Purchase Requirements

    We read the Act to impose a stock purchase requirement in 
connection with some leases, but not others. The Act authorizes FCBs to 
lease facilities and equipment to ``persons eligible for credit.'' In 
contrast, the Act authorizes PCAs and Banks for Cooperatives (BCs) to 
lease equipment only to ``stockholders,'' but does not prescribe any 
minimum stock purchase requirement. Therefore, lessees who lease 
equipment from PCAs, ACAs, BCs, or ACBs under titles II or III of the 
Act must be stockholders.
    Because cooperatives operate on a one-person, one-vote basis, the 
number of shares of stock does not affect membership rights. Therefore, 
the purchase of a single share of stock is sufficient to satisfy the 
stockholder requirement. Institutions may also satisfy the stock 
requirement by counting outstanding shares stockholders already own. 
The stock requirement in the reproposed rule would not apply to the FCL 
because its stockholders are System banks, rather than its lease 
customers. The disclosure requirements for equities issued as a 
condition to obtain a lease would be the same as disclosure 
requirements for equities issued as a condition to obtain a loan as 
required under Sec. 615.5250(a) and (b) of this chapter.
    AgriBank inquired whether System institutions could issue 
participation certificates to lessees, rather than stock. Because both 
stock and participation certificates satisfy the membership 
requirements of the Act, the FCA has allowed System institutions to use 
either one. We inserted the phrase ``or one participation certificate'' 
into the reproposed rule after the phrase ``at least one share of 
stock,'' in order to clarify that an institution may issue one 
participation certificate to satisfy the stock purchase requirement if 
authorized by the institution's bylaws. The reproposed rule is now 
Sec. 616.6700.

9. Disclosure Requirements

    The proposed rule contained two disclosure requirements. Proposed 
Sec. 616.6250(a) would have required that lease applicants be provided, 
not later than the time of lease closing, a copy of all lease documents 
signed by the lessee. In addition, proposed Sec. 616.6250(b) would have 
required a System institution to render its decision on the lease 
application in as expeditious a manner as is practical and provide 
prompt written notice of its decision to the applicant.
    The FCL questioned what constitutes ``lease closing.'' The FCL 
submits that if the term means lease commencement, this provision could 
pose a problem for System lessors because it is an industry practice 
for leases to commence on delivery and acceptance of the equipment by 
the lessee, while the paperwork may not be finalized until later. The 
FCL recommended that we omit the phrase ``not later than the time of 
lease closing'' or alternatively, replace it with the phrase ``within a 
reasonable time following lease closing.'' The reproposed rule is 
revised to require that copies be provided to a lessee within a 
reasonable time following lease closing.
    The FCL and AgriBank opposed the proposed requirement to provide 
notice of adverse action on applications. The FCL contends that 
requiring System lessors to provide notice of adverse action would 
increase administrative costs and result in an uneven playing field 
compared to System competitors. The FCL suggested, as an alternative, 
the adoption of a threshold similar to that contained in Federal 
Reserve Board Regulation M, which only applies to consumer leases of 
less than $25,000. AgriBank recommended that the FCA eliminate entirely 
the requirement to provide notice of adverse action because the 
requirement would go beyond current legal and regulatory requirements 
for other lessors.
    The FCA has deleted this requirement in the reproposed rule. 
However, the reproposal continues to require that an institution 
provide written notice of its decision on the application. While the 
FCA believes little additional burden would result from providing the 
reason(s) for adverse action, it is not required by law. The FCA 
continues to believe that providing such a notice is a good business 
practice. The reproposed rule is now Sec. 616.6800.
    The existing leasing regulations in Secs. 618.8050 and 618.8060 
will be deleted upon the effective date of the final rule. The 
reproposed rule also makes conforming technical changes to 
Secs. 614.4710 and 621.7.

List of Subjects

12 CFR Part 614

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

12 CFR Part 616

    Agriculture, Banks, banking, leasing.

12 CFR Part 618

    Agriculture, Archives and records, Banks, banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

12 CFR Part 621

    Accounting, Agriculture, Banks, banking, Penalties, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, parts 614, 618 and 621 are 
proposed to be amended and part 616 is proposed to be added to chapter 
VI, title 12 of the Code of Federal Regulations to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

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

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 
4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 
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, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 
2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); 
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart H--Loan Purchases and Sales


Sec. 614.4325  [Amended]

    2. Section 614.4325 is amended by removing the word ``leases,'' 
from paragraph (a)(3).
    3. The heading of subpart J is revised to read as follows:

[[Page 56876]]

Subpart J--Lending and Leasing Limits

    4. Section 614.4350 is amended by revising paragraphs (a) and (c) 
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. For the 
purposes of this subpart, the term ``borrower'' includes any customer 
to whom an institution has made a lease or a commitment to make a 
lease.
* * * * *
    (c) Loan means any extension of, or commitment to extend, credit 
authorized under the Act whether it results from direct negotiations 
between a lender and a borrower or is purchased from or discounted for 
another lender, including participation interests. The term ``loan'' 
includes loans and leases outstanding, obligated but undisbursed 
commitments to lend or lease, contracts of sale, notes receivable, 
other similar obligations, guarantees, and all types of leases. An 
institution ``makes a loan or lease'' when it enters into a commitment 
to lend or lease, advances new funds, substitutes a different borrower 
or lessee for a borrower or lessee who is released, or where any other 
person's liability is added to the outstanding loan, lease or 
commitment.
* * * * *


Sec. 614.4351  [Amended]

    5. Section 614.4351 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' each place they appear 
in the heading and in the entire section.


Sec. 614.4352  [Amended]

    6. Section 614.4352 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' in paragraphs (a) and 
(b)(1); and by adding the words ``and leasing'' between the words 
``lending'' and ``limits'' in paragraph (b)(2).


Sec. 614.4353  [Amended]

    7. Section 614.4353 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base''.


Sec. 614.4354  [Amended]

    8. Section 614.4354 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base''.


Sec. 614.4355  [Amended]

    9. Section 614.4355 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' in the introductory 
paragraph; and by removing the word ``lending'' in the headings of 
paragraphs (a) and (b).


Secs. 614.4356--614.4360  [Redesignated]

    10. Sections 614.4356 through 614.4360 are redesignated as 
Secs. 614.4357 through 614.4361; and a new Sec. 614.4356 is added to 
read as follows:


Sec. 614.4356  Farm Credit Leasing Services Corporation.

    The Farm Credit Leasing Services Corporation may enter into a lease 
agreement with a lessee if the consolidated amount of all leases and 
undisbursed commitments to that lessee or any related entities does not 
exceed 25 percent of its lending and leasing limit base.
    11. Newly designated Sec. 614.4358 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in the 
introductory text of paragraphs (a) and (b); by adding the words ``and 
lease balances outstanding'' after the word ``loans'' the first place 
it appears in paragraph (a)(1); by removing the reference 
``Sec. 614.4358'' and adding in its place the reference 
``Sec. 614.4359'' in paragraph (a)(3); by redesignating existing 
paragraph (b)(5) as paragraph (b)(6); and by adding a new paragraph 
(b)(5) to read as follows:


Sec. 614.4358  Computation of obligations.

* * * * *
    (b) * * *
    (5) Interests in leases sold when the sale agreement provides that:
    (i) The interest sold must be:
    (A) An undivided interest in all the lease payments or the residual 
value of all the leased property; or (B) A fractional undivided 
interest in the total lease transaction;
    (ii) The interest must be sold without recourse; and
    (iii) The sharing of all lease payments must be on a pro rata basis 
according to the percentage interest in the lease payments.
* * * * *


Sec. 614.4359  [Amended]

    12. Newly designated Sec. 614.4359 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in 
paragraphs (a) introductory text, (b), and (c); by removing the 
reference ``Sec. 614.4356'' and adding in its place, the reference 
``Sec. 614.4357'' in paragraph (a)(1)(iii); and by removing the 
reference ``Sec. 614.4358'' and adding in its place, the reference 
``Sec. 614.4359'' in the heading for column two in Table 1.
    13. Newly designated Sec. 614.4360 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in the 
heading and in paragraphs (a), (b), (c), and (d); by removing the 
reference ``Sec. 614.4360'' and adding in its place, the reference 
``Sec. 614.4361'' in paragraph (a); by removing the reference 
``Sec. 614.4359(b)(3)'' and adding in its place, the reference 
``Sec. 614.4360(b)(3)'' in paragraph (c); by redesignating paragraph 
(d) as paragraph (e); and by adding a new paragraph (d) to read as 
follows:


Sec. 614.4360  Lending and leasing limit violations.

* * * * *
    (d) All leases, except those that are permitted under the 
provisions of Sec. 614.4361, reading ``effective date of this subpart'' 
in Sec. 614.4361(a) and ``effective date of these regulations'' in 
Sec. 614.4361(b) as ``effective date of this amendment,'' shall be in 
compliance with the lending and leasing limit on the date the lease is 
made, and at all times thereafter.
* * * * *


Sec. 614.4361  [Amended]

    14. Newly designated Sec. 614.4361 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limits'' in each 
place they appear in paragraphs (a) and (b); and by removing the 
reference ``Sec. 614.4359'' and adding in its place, the reference 
``Sec. 614.4360'' in paragraph (b).

Subpart Q--Banks for Cooperatives and Agricultural Credit Banks 
Financing International Trade


Sec. 614.4710  [Amended]

    15. Section 614.4710 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limits'' in the last sentence of 
the introductory paragraph and in paragraphs (a)(2) and (a)(3).
    16. A new part 616 is added to read as follows:

PART 616--LEASING

Sec.
616.6000  Definitions.
616.6100  Purchase and sale of interests in leases.

[[Page 56877]]

616.6200  Out-of-territory leasing.
616.6300  Leasing policies, procedures, and underwriting standards.
616.6400  Documentation requirements.
616.6500  Investment in leased assets.
616.6600  Leasing limits.
616.6700  Stock purchase requirements.
616.6800  Disclosure requirements.

    Authority: 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, 3.9, 
3.10, 3.20, 3.28, 4.3, 4.3A, 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 
4.14D, 4.14E, 4.18, 4.18A, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 
5.10, 5.17, 7.0, 7.2, 7.3, 7.6, 7.8, 7.12, 7.13 of the Farm Credit 
Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 
2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 
2130, 2131, 2141, 2149, 2154, 2154a, 2199, 2200, 2201, 2202, 2202a, 
2202c, 2202d, 2202e, 2206, 2206a, 2211, 2212, 2213, 2214, 2219a, 
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279a-3, 2279b, 2279c-1, 
2279f, 2279f-1).

PART 616--LEASING


Sec. 616.6000  Definitions.

    For the purposes of this part, the following definitions shall 
apply:
    (a) Interests in leases means ownership interests in any aspect of 
a lease transaction, including, but not limited to, servicing rights.
    (b) Lease means any contractual obligation to own and lease, or 
lease with the option to purchase, equipment or facilities used in the 
operations of persons eligible to borrow under part 613 of this 
chapter.
    (c) Sale with recourse means a sale of a lease or an interest in a 
lease in which the seller:
    (1) Retains some risk of loss from the transferred asset for any 
cause except the seller's breach of usual and customary warranties or 
representations designed to protect the purchaser against fraud or 
misrepresentation; or
    (2) Has an obligation to make payments to any party resulting from:
    (i) Default on the lease by the lessee or guarantor or any other 
deficiencies in the lessee's performance;
    (ii) Changes in the market value of the assets after transfer;
    (iii) Any contractual relationship between the seller and purchaser 
incident to the transfer that, by its terms, could continue even after 
final payment, default, or other termination of the assets transferred; 
or
    (iv) Any other cause, except that the retention of servicing rights 
alone shall not constitute recourse.


Sec. 616.6100  Purchase and sale of interests in leases.

    (a) Authority to purchase interests in leases. A Farm Credit System 
institution may purchase leases and interests in leases.
    (b) Policies. Each Farm Credit System institution that sells or 
purchases interests in leases shall do so only in accordance with a 
policy adopted by its board of directors that addresses the following:
    (1) The types of leases in which the institution may purchase or 
sell an interest and the types of interests which may be purchased or 
sold;
    (2) The underwriting standards to be applied in the purchase of 
interests in leases;
    (3) Such limitations on the aggregate lease payments and residual 
amount of interests in leases that the institution may purchase from a 
single institution as are necessary to diversify risk, and such 
limitations on the aggregate amounts the institution may purchase from 
all institutions as are necessary to assure that service to the 
territory is not impeded;
    (4) Identification and reporting of leases in which interests are 
sold or purchased;
    (5) Requirements for securing from the selling lessor in a timely 
manner adequate financial and other information concerning the lessee 
needed to make an independent judgment; and
    (6) Any limitations or conditions to which sales or purchases are 
subject that the board deems appropriate, including arbitration.
    (c) Purchase and sale agreements. Each agreement to purchase or 
sell an interest in a lease shall, at a minimum:
    (1) Identify the particular lease(s) to be covered by the 
agreement;
    (2) Provide for the transfer of lessee information on a timely and 
continuing basis;
    (3) Identify the nature of the interest(s) sold or purchased;
    (4) Specify the rights and obligations of the parties and the terms 
and conditions of the sale;
    (5) Contain any terms necessary for the appropriate administration 
of the lease, including lease servicing and monitoring of the servicer 
and authorization and conditions for action in the event of lessee 
distress or default;
    (6) Provide for a method of resolution of disagreements arising 
under the agreement;
    (7) Specify whether the contract is assignable by either party; and
    (8) In the case of lease transactions through agents, comply with 
the provisions of Sec. 614.4325(h) of this chapter, reading the term 
``lease'' or ``leases'' in place of the term ``loan'' or ``loans,'' as 
applicable.
    (d) Independent judgment. Each institution that purchases an 
interest in a lease shall make a judgment on the payment ability of the 
lessee that is independent of the originating or lead lessor and any 
intermediary seller or broker prior to the purchase of the interest and 
prior to any servicing action that alters the terms of the original 
agreement, which judgment shall not be delegated to any person(s) not 
employed by the institution. A Farm Credit System institution that 
purchases a lease or any interest therein may use information, such as 
appraisals or inspections, furnished by the originating or lead lessor, 
or any intermediary seller or broker; however, the purchasing Farm 
Credit System institution shall independently evaluate such information 
when exercising its independent judgment. The independent judgment 
shall be documented by a payment analysis that considers factors set 
forth in Sec. 616.6300. The payment analysis shall consider such 
financial and other lessee information as would be required by a 
prudent lessor and shall include an evaluation of the capacity and 
reliability of the servicer. Boards of directors of jointly managed 
institutions shall adopt procedures to ensure that the interests of 
their respective shareholders are protected in participation between 
such institutions.
    (e) Sales with recourse. When a lease or interest in a lease is 
sold with recourse, it shall be accorded the following treatment:
    (1) The lease shall be considered, to the extent of the recourse or 
guaranty, a lease by the purchaser to the seller, as well as a lease 
from the seller to the lessee, for the purpose of determining whether 
total leases to a lessee are within the lending and leasing limits 
established in subpart J of part 614.
    (2) The amount of the lease subject to the recourse agreement shall 
be considered a lease sold with recourse for the purpose of computing 
capital ratios.
    (f) Similar entity lease transactions. The provisions of 
Sec. 613.3300 of this chapter that apply to interests in loans made to 
similar entities shall apply to interests in leases made to similar 
entities. In applying these provisions, the term ``loan'' shall be read 
to include the term ``lease'' and the term ``principal amount'' shall 
be read to include the term ``lease amount.''


Sec. 616.6200  Out-of-territory leasing.

    A System institution may make leases outside its chartered 
territory. A System institution making out-of-territory leases is not 
required to provide notification to, or obtain concurrence from, other 
System institutions.

[[Page 56878]]

Sec. 616.6300  Leasing policies, procedures, and underwriting 
standards.

    The board of each institution engaged in lease underwriting shall 
set forth a written policy (or policies) and procedures governing such 
activity that reflect lease practices that control risk and comply with 
all applicable laws and regulations. Any leasing activity shall comply 
with the lending policies and loan underwriting requirements in 
Sec. 614.4150 of this chapter. An institution engaged in the making, 
purchasing, or syndicating of leases also must establish written 
policies and procedures that address the additional risks associated 
with leasing. Written policies and procedures shall address the 
following, if applicable:
    (a) Appropriateness of the lease amount, purpose, and terms and 
conditions, including the residual value established at the inception 
of the lease;
    (b) Process for estimating the leased asset's market value during 
the lease term;
    (c) Types of equipment and facilities the institution will lease;
    (d) Remarketing of leased property and associated risks;
    (e) Property tax and sales tax reporting;
    (f) Title and ownership of leased assets;
    (g) Title and licensing for motor vehicles;
    (h) Liability associated with ownership, including any 
environmental hazards or risks;
    (i) Insurance requirements for both the lessor and lessee;
    (j) Classification of leases in accordance with generally accepted 
accounting principles; and
    (k) Tax treatment of lease transactions and associated risks.


Sec. 616.6400  Documentation requirements.

    Each institution shall adequately document that any asset it leases 
is within its statutory authority.


Sec. 616.6500  Investment in leased assets.

    An institution may acquire property to be leased, if the 
acquisition of the property is consistent with the leasing then 
conducted by the institution or is consistent with a business plan for 
expansion of the institution's existing leasing business or for entry 
into the leasing business.


Sec. 616.6600  Leasing limits.

    All leases made by Farm Credit System institutions shall be subject 
to the lending and leasing limits prescribed in subpart J of part 614 
of this chapter.


Sec. 616.6700  Stock purchase requirements.

    (a) Each System institution making an equipment lease under titles 
II or III of the Act shall require the lessee to purchase at least one 
share of stock or one participation certificate in accordance with its 
bylaws, unless the lessee already owns stock in the institution making 
the lease. This provision does not apply to the Farm Credit Leasing 
Services Corporation.
    (b) The disclosure requirements of Sec. 615.5250(a) and (b) of this 
chapter shall apply to stock (or participation certificates) purchased 
as a condition for obtaining a lease.


Sec. 616.6800  Disclosure requirements.

    (a) Each System institution shall furnish to each lessee a copy of 
all lease documents signed by the lessee in connection with the lease, 
within a reasonable time following lease closing.
    (b) Each System institution shall render its decision on a lease 
application in as expeditious a manner as is practical. Upon reaching a 
decision on a lease application, the institution shall provide prompt 
written notice of its decision to the applicant.

PART 618--GENERAL PROVISIONS

    17. The authority citation for part 618 continues to read as 
follows:

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 
2200, 2211, 2218, 2243, 2244, 2252).

Subpart C--Leasing

Subpart C--[Removed and Reserved]

    18. Subpart C, consisting of Secs. 618.8050 and 618.8060, is 
removed and reserved.

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

    19. The authority citation for part 621 continues to read as 
follows:

    Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11).

Subpart C--Loan Performance and Valuation Assessment


Sec. 621.7  [Amended]

    20. Section 621.7 is amended by removing the reference 
``Sec. 614.4358(a)(2)'' and adding in its place, the reference 
``Sec. 614.4359(a)(2)'' in paragraph (a)(2)(iii).
* * * * *
    Dated: October 20, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-28480 Filed 10-22-98; 8:45 am]
BILLING CODE 6705-01-P