[Federal Register Volume 63, Number 216 (Monday, November 9, 1998)]
[Proposed Rules]
[Pages 60219-60222]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29998]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 63, No. 216 / Monday, November 9, 1998 / 
Proposed Rules  

[[Page 60219]]


-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 614, and 618

RIN 3052-AB87


Organization; Loan Policies and Operations; General Provisions; 
Chartered Territories

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This proposed rule will amend Farm Credit Administration (FCA 
or Agency) regulations to provide customers of the Farm Credit System 
(FCS, Farm Credit, or System) with the opportunity to do business with 
the FCS lender of their choice. The rule proposes to amend regulations 
to permit farmers, ranchers, and other eligible customers to seek 
financing and related services from any association or FCS bank 
operating under title I or II of the Farm Credit Act of 1971, as 
amended (Act). The rule proposes to eliminate geographic barriers that 
often prevent an FCS lender from serving customers with operations 
beyond its designated territory. At the same time, the rule proposes to 
ensure every eligible customer's continued access to FCS credit and 
services. It also continues to obligate each Farm Credit Bank (FCB), 
agricultural credit bank (ACB), and association to extend sound, 
adequate, and constructive credit and offer related services to 
eligible customers within its chartered territory. An institution that 
extends credit or offers related services to borrowers beyond its 
designated territory must adopt a board policy and a business plan that 
adequately guide these activities. The rule also proposes to make 
conforming amendments to other regulations.

DATES: Please send your comments to us on or before February 8, 1999.

ADDRESSES: You may mail or deliver written 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 (703) 
734-5784. You may also submit comments via electronic mail to ``reg-
[email protected]'' or through the Pending Regulations section of our 
website at ``www.fca.gov.'' You may review copies of all comments we 
receive in the Office of Policy and Analysis, Farm Credit 
Administration.

FOR FURTHER INFORMATION CONTACT:
S. Robert Coleman, Senior Policy Analyst, Office of Policy and 
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TDD (703) 883-4444;
    or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. General

    The FCA proposes to repeal the restrictions in several existing 
regulations so eligible customers can seek financing and related 
services from the System institution of their choice. This is the first 
major step to implement the FCA Board's Philosophy Statement on Intra-
System Competition adopted July 14, 1998. We believe that the existing 
notice and consent restrictions on lending and related services have 
become burdensome to both borrowers and System institutions. This has 
been heightened by significant changes in agriculture and the financial 
markets. The removal of these restrictions will allow associations and 
System banks operating under title I or II of the Act to increase 
operating efficiencies and offer better service to creditworthy and 
eligible borrowers. With the removal of these existing restrictions, 
System lenders must modify their policies and business plans as 
necessary to ensure that they continue to operate in a safe and sound 
manner.
    We believe that the most efficient and least disruptive way to 
provide customers greater flexibility in selecting their FCS lender and 
service provider is through modification of existing regulations. The 
rule proposes to amend the regulations in parts 611, 614, and 618 to:
     Repeal the existing notification and consent requirements 
for lending and related services in Secs. 614.4070 and 618.8030;
     Allow eligible customers to apply for credit and related 
services from any association or Farm Credit bank operating under title 
I or II of the Act;
     Require each association or Farm Credit bank operating 
under title I or II of the Act to continue to fulfill its obligation to 
serve all eligible and creditworthy customers within its designated 
territory; and
     Continue to promote safety and soundness by requiring each 
System lender to develop appropriate policies and revise its business 
plans before material amounts of credit or related services are 
extended beyond its designated territory.

II. History and Background

    Section 1.1 of the Act states that the mission of the FCS is to 
furnish, on an ongoing basis, sound, adequate, and constructive credit 
and related financial services to America's agricultural and aquatic 
producers, their cooperatives, and other eligible rural residents. The 
FCS is organized as a nationwide network of cooperative banks, 
associations, and service corporations that are owned and controlled by 
the farmers, ranchers, aquatic producers or harvesters, and 
cooperatives that borrow from them. The charter of each System bank and 
association designates a geographic territory in which the institution 
will exercise its authorities. Although the two System banks that 
operate under title III of the Act have national charters to furnish 
credit and related services to cooperatives and rural utilities, all 
other System banks and associations have designated territories that 
cover a specified geographic region.
    In the past, the FCA has used its broad power to charter, regulate, 
and examine System institutions in a way that generally promoted 
exclusive territories. This policy, which worked well for the 
agricultural sector in earlier times, now unnecessarily restricts 
customers' choice of lenders and service providers and hinders the 
System's ability to provide ample, efficient, and high-quality credit 
and related services. Consolidations in many sectors of the 
agricultural economy have created fewer, larger, and more vertically 
integrated producers that operate in several locations and require more 
diversified financial services.

[[Page 60220]]

Additionally, consolidations in the financial services markets and 
rapidly changing technologies are creating new sources and methods of 
delivery for credit and related services that transcend geographic 
boundaries.
    The positive aspects of the former policy have eroded over the past 
decade as agriculture, in general, and the FCS, in particular, have 
restructured in response to significant economic changes. As a result 
of this restructuring, a notable amount of geographic competition has 
come about in the System. Both title III banks now operate nationally, 
providing cooperative customers with a choice of lender. In over 130 
counties across the country more than one FCS association now offers 
the same type of financing to eligible borrowers. Thus, in many parts 
of the country we have seen substantial departures from the notion of 
exclusive territories. Customers have benefited from this change. 
Furthermore, no safety and soundness concerns have arisen from FCS 
institutions that jointly serve these shared designated territories.
    Existing Sec. 614.4070 is an obstacle to the ability of consumers 
to transact business with the System lender that best fits their needs. 
The current rule details a complex and burdensome set of notice and 
consent requirements that depend on the location of the customer's 
operations and headquarters. In most instances, the customer may do 
business only with the FCS lender that serves the territory in which 
the customer conducts operations. As a general rule, existing 
Sec. 614.4070 prohibits an FCS lender from serving customers operating 
beyond the institution's designated territory unless the FCS 
institution designated to serve that territory consents. The existing 
regulation requires notice whenever a System lender finances the out-
of-territory activities of an existing borrower who also conducts 
operations and maintains headquarters in its chartered territory. 
Another provision of existing Sec. 614.4070 specifies that out-of-
territory lending should not constitute a significant shift of loan 
volume away from the institution's designated territory.
    Although some System lenders give the necessary consent freely upon 
a customer's request, others do not. The burden of obtaining consent 
and, at times not receiving it, impede the System's ability to serve 
the needs of eligible customers as Congress intended.

III. Customer Choice for Credit and Related Services

    We believe that each FCS institution operating under title I or II 
of the Act needs greater flexibility to serve all eligible customers, 
without regard to the location of the customer's operations so long as 
the services are conducted safely and soundly. For this reason, the FCA 
proposes to amend Sec. 614.4070 so that eligible customers can freely 
apply for credit and financial services from the FCS institution of 
their choice. This approach will benefit the public by increasing the 
sources and availability of credit and improving the quality of 
services available from System lenders. Additionally, this rule 
proposes to provide System institutions with a more flexible regulatory 
environment so they can improve their operating efficiencies and better 
serve their customers.
    Designating service territories through the chartering process has 
been, and will remain, the principal method of ensuring that every 
eligible customer has access to an FCS lender, as Congress intended. 
Proposed Sec. 614.4070(a) reaffirms that each association and FCS bank 
that operates under title I or II of the Act is obligated to serve 
eligible and creditworthy farmers, ranchers, aquatic producers or 
harvesters, farm-related businesses, and rural homeowners in its 
designated territory. This obligation encompasses the responsibility to 
offer an appropriate array of loan products and related services to all 
types of agricultural and aquatic operations within the bounds of 
safety and soundness. The designated territory also defines each 
lender's obligation under the Act to be responsive to the needs of 
young, beginning, and small farmers. Proposed Sec. 614.4070(a) will 
ensure that every eligible customer will continue to have an FCS lender 
that is committed to providing credit and related services in that 
customer's area.
    Proposed Sec. 614.4070(b) permits eligible farmers, ranchers, 
aquatic producers or harvesters, farm-related businesses, and rural 
homeowners to seek financing and related services from any association 
or FCS bank operating under title I or II of the Act. The proposed 
regulation also allows a bank or association to extend credit, 
participate in loans, and provide related services to any eligible 
applicant under its respective title I or II authorities. Implementing 
this authority for loan participations should help strengthen the 
System's safety and soundness. In particular it will benefit an FCS 
lender that has a high concentration of loans in only a few 
agricultural commodities in its designated territory. These 
institutions are especially vulnerable to fluctuations in commodity 
prices and downturns in the agricultural economy. Additionally, 
geographic restrictions raise concerns because institutions face 
increased risk to their loan portfolios from adverse weather, disease, 
and pest damage. Buying and selling participations in loans with other 
FCS institutions and lenders in other regions of the country help 
institutions diversify their loan portfolios and limit their exposure 
to risk in a single commodity and in a specific geographic area. This 
proposal includes conforming amendments that repeal restrictions on 
loan participations in existing Secs. 614.4000(d), 614.4010(e), 
614.4030(b), 614.4040(b), and 614.4050(c).
    Proposed Sec. 614.4070 also enhances customer choice for related 
services. Some associations and FCS banks operating under title I or II 
of the Act offer their customers related services while other 
institutions offer none. This proposal will repeal Sec. 618.8030, which 
contains the same consent and notice restrictions applicable to loans. 
This change will enable FCS customers to obtain related services even 
if their local FCS association does not offer the service they require.
    Sound business principles dictate the importance of developing and 
adopting a well-reasoned policy and business plan before any company 
implements a new or expanded program. New programs for FCS 
institutions, including the offering of credit and related services 
provided by this proposed rule, present new opportunities and new risks 
for System lenders. Proposed Sec. 614.4070(c) is designed to ensure 
that such programs are operated under the appropriate direction and 
control of each institution's board of directors.
    The FCA Board expects that each FCS institution board will adopt a 
policy, or revise its existing policy, to address any additional risks 
created by new programs before an institution conducts a material 
amount of business with customers in new geographic markets. In 
considering whether the new business is material, an institution should 
aggregate the volume of its loans, leases, participations and other 
interests, and related services. Additionally, each institution should 
integrate the opportunities and risks created by the new programs into 
its operational and strategic business plans, as discussed in 
Sec. 618.8040. In general, the policy and business plan should assess 
the institution's risk-bearing capacity and servicing capabilities to 
meet the needs of customers who reside in or conduct operations beyond 
the institution's designated territory. The institution board, in 
developing its policy and revising its business plan, should 
specifically:

[[Page 60221]]

     Consider how programs for providing credit and related 
services to a broader customer base will affect organizational 
efficiency, customer service, risk management, and operational 
capabilities;
     Establish specific operating objectives and strategies for 
such programs;
     Direct and control the institution's lending and related 
service activities conducted beyond its designated territory, ensuring 
that such activities are conducted in a safe and sound manner;
     Establish the types and amount of loans, loan 
participations, and related service activity to be permitted in new 
geographic markets;
     Assess risk associated with providing loans and related 
services in the new markets, establish risk-tolerance levels in 
relation to the institution's risk-bearing capacity, and consider loan 
portfolio concentrations; and
     Ensure existing loan underwriting criteria for loans and 
related services that will be offered in new geographic markets are 
appropriate, taking into consideration the institution's management 
capabilities and credit expertise, and the servicing requirements of 
loans made outside its designated territory.
    We expect the institution's board, as part of its obligations under 
the Act, to continue to ensure that the institution sufficiently meets 
the credit and related services needs of eligible customers within its 
designated territory, as required by proposed Sec. 614.4070(a). At the 
same time, we also expect each institution to maintain safe and sound 
operations, including adequate risk-bearing capacity for any new 
programs. As part of the board's responsibilities to ensure the 
continued safe and sound operations of its institution, we encourage 
each board to monitor, through periodic reporting requirements, the 
amount, quality, risk, and profitability of loans made to customers 
located in new geographic markets.
    FCA examiners will evaluate each program in view of the potential 
risks and possible effects on the institution's financial condition, 
its asset quality, capital, and earnings capacity. To help implement 
these regulatory revisions in the most safe and sound manner, we will 
issue additional guidance to our examiners and FCS institutions once 
the rule becomes final.

IV. Conforming Amendments

    Two additional FCA regulations, Secs. 611.1124 and 614.4525, 
contain consent requirements that limit the ability of customers to 
choose their FCS lender. We propose to revise these regulations.
    Section 611.1124 addresses loan transfers that occur when the FCA 
modifies association charters to transfer territory from one 
association to another. Under existing Sec. 611.1124(f)(6), loans are 
usually transferred to the association that acquires the territory, 
unless the associations agree otherwise. With the proposed change to 
Sec. 614.4070, there is no reason to assume that any territory transfer 
would necessarily result in the sale of loans in that territory. As 
amended, proposed Sec. 611.1124(f)(6) simply requires the association 
to advise its shareholders whether loans will be sold in connection 
with the transfer of territory and, if so, the terms of the sale.
    The FCA also proposes to repeal provisions in Sec. 614.4525(b) so 
that cooperation may be enhanced on special loan programs between 
System lenders and dealers and cooperatives that serve different 
geographical markets. Additionally, we are proposing to eliminate 
paragraphs (c) and (d) because the permissive provisions of these two 
paragraphs are unnecessary. FCS lenders do not need regulatory 
authority to make contracts with others to facilitate loan applications 
and closings, because this authority is clearly within their express 
powers under the Act. This proposal would retain existing paragraph (a) 
and the remainder of paragraph (b), recognizing that institutions 
developing and implementing special lending programs should have 
appropriate policies in place providing board direction and control.
    Additionally, the FCA is proposing to delete Sec. 614.4080 in its 
entirety. This regulation originally addressed cross-territory lending 
by the banks for cooperatives, but is no longer applicable since both 
banks that have title III authorities now have national charters as 
authorized by the Act.
    The FCA is also aware that System institutions have entered into a 
wide variety of agreements to serve customers in different geographic 
markets. Given the proposed changes to Sec. 614.4070 and related 
regulations, the FCA requests comment on whether such agreements raise 
issues that should be addressed in the 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 618

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

    For the reasons stated in the preamble, parts 611, 614, and 618 of 
chapter VI, title 12 of the Code of Federal Regulations are proposed to 
be 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; sec. 409 and 414 of Pub. L. 100-
399, 102 Stat. 989, 1003 and 1004.

Subpart G--Mergers, Consolidations, and Charter Amendments of 
Associations

    2. Section 611.1124 is amended by removing the phrase ``Each 
borrower whose real estate or operations is located in a territory that 
will be transferred'' in the first sentence of paragraph (l) and adding 
in its place, the phrase ``Each borrower whose loan is sold as 
described in paragraph (f)(6) of this section,''; by removing the last 
sentence of paragraph (l); and by revising paragraph (f)(6) to read as 
follow:


Sec. 611.1124  Territorial adjustments.

* * * * *
    (f) * * *
    (6) A statement of whether loans will be sold in connection with 
the transfer of territory and, if so, the terms of the sale.
* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

    3. 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, 4.3A, 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, 7.8, 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,

[[Page 60222]]

2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2097, 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, 2279c-1, 2279f, 2279f-1, 
2279aa, 2279aa-5, 2279aa-9); sec. 413 of Pub. L. 100-233, 101 Stat. 
1568, 1639.

Subpart A--Lending Authorities


Sec. 614.4000  [Amended]

    4. Section 614.4000 is amended by removing paragraph (d)(2); by 
removing the words ``and paragraph (d)(2) of this section'' in 
paragraph (d)(1); and by redesignating paragraphs (d)(1), (d)(1)(i), 
and (d)(1)(ii) as paragraphs (d) introductory text, (d)(1) and (d)(2), 
respectively.


Sec. 614.4010  [Amended]

    5. Section 614.4010 is amended by removing paragraph (e)(2); by 
removing the words ``and paragraph (d)(2) of this section'' in 
paragraph (e)(1); and by redesignating paragraphs (e)(1), (e)(1)(i), 
and (e)(1)(ii) as paragraphs (e) introductory text, (e)(1) and (e)(2), 
respectively.


Sec. 614.4030  [Amended]

    6. Section 614.4030 is amended by removing paragraph (b)(2); by 
removing the words ``and paragraph (b)(2) of this section'' in 
paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i), 
and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2), 
respectively.


Sec. 614.4040  [Amended]

    7. Section 614.4040 is amended by removing paragraph (b)(2); by 
removing the words ``and paragraph (b)(2) of this section'' in 
paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i), 
and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2), 
respectively.


Sec. 614.4050  [Amended]

    8. Section 614.4050 is amended by removing paragraph (c)(2); by 
removing the words ``and paragraph (c)(2) of this section'' in 
paragraph (c)(1); and by redesignating paragraphs (c)(1), (c)(1)(i), 
and (c)(1)(ii) as paragraphs (c) introductory text, (c)(1) and (c)(2), 
respectively.
    9. Subpart B is revised to read as follows:

Subpart B--Credit Extensions, Related Services and Designated 
Territories


Sec. 614.4070  Credit extensions, related services, and designated 
territories--Farm Credit Banks, agricultural credit banks, Federal land 
bank associations, Federal land credit associations, production credit 
associations, and agricultural credit associations.

    (a) Each association or Farm Credit bank operating under title I or 
II of the Act must furnish sound, adequate, and constructive credit and 
related services pursuant to section 1.1(a) of the Act to creditworthy 
and eligible borrowers who reside in or conduct operations in its 
designated territory.
    (b) Eligible customers may seek financing and related services from 
any association or Farm Credit bank operating under title I or II of 
the Act, and the Farm Credit bank or association may exercise its 
powers under subpart A of this part and part 618 of this chapter to 
make loans, participate in loans, and provide related services to any 
eligible borrower.
    (c) Each association or Farm Credit bank that conducts a material 
amount of business beyond its designated territory must adopt a board 
policy and business plan that address such activities.

Subpart O--Special Lending Programs


Sec. 614.4525  [Amended]

    10. Section 614.4525 is amended by removing paragraphs (c) and (d); 
and by removing the second sentence in paragraph (b).

PART 618--GENERAL PROVISIONS

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

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

Subpart A--Related Services


Sec. 618.8030  [Removed]

    12. Section 618.8030 is removed.

    Date: November 4, 1998.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 98-29998 Filed 11-6-98; 8:45 am]
BILLING CODE 6705-01-P