[Federal Register Volume 64, Number 123 (Monday, June 28, 1999)]
[Unknown Section]
[Pages 34515-34519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16149]


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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: Final rule.

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SUMMARY: This final rule clarifies existing regulations and provides 
Farm Credit System (FCS or System) institutions with more regulatory 
guidance about leasing activities. The rule reflects comments received 
from two public comment periods.

EFFECTIVE DATE: These regulations will become effective 30 days after 
publication in the Federal Register during which either or both houses 
of Congress are in session. We will publish a document announcing the 
effective date in the Federal Register.

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, we published a proposed 
rule to replace the existing regulatory guidance about System 
institutions' leasing activities (62 FR 53581). After considering the 
six comment letters received, we made revisions and asked for 
additional comment on a reproposed rule (63 FR 56873, Oct. 23, 1998).
    We received five comment letters on the reproposed rule; four from 
System banks and one from the Farm Credit Leasing Services Corporation 
(Leasing Corporation). The commenters commented about borrower rights, 
notice of action on applications, stock purchase requirements, and out-
of-territory leasing.

[[Page 34515]]

I. Discussion of Comments

A. Borrower Rights

    One commenter requested clarification of our interpretation that 
statutory borrower rights requirements do not apply to leasing. As 
stated in the preamble to the original proposal (62 FR 53581, Oct. 15, 
1997), borrower rights do not apply to lease transactions.

B. Notice of Action on the Application

    We received two comments on reproposed Sec. 616.6800, which 
requires that each institution provide the applicant written notice of 
its decision on a lease application. The first comment suggested the 
rule should allow verbal notice. The second comment suggested the 
notice could be either express or implied, allowing the lessor to 
notify an applicant of approval by delivering lease documents to the 
applicant without a separate written notice of approval.
    We believe that a written notice is appropriate to protect the 
interests of a lease applicant and to document that an institution has 
complied with this requirement. However, the notice does not have to be 
in a particular form and the delivery of written lease documents would 
satisfy the notice requirement.

C. Stock Purchase Requirements

    One bank requested a clarification of Sec. 614.4232, which requires 
that a lessee be a ``voting stockholder'' for a loan to a domestic 
lessor for leases on equipment or facilities (leveraged leases). Under 
Sec. 616.6700, an institution may satisfy the requirement that an 
equipment lessee be a stockholder by issuing either one share of stock 
or one participation certificate. The final regulation makes a 
conforming amendment to Sec. 614.4232 by removing the term ``voting'' 
to clarify that the bylaws could provide that a person owning one share 
of stock or one participation certificate would be considered a 
``stockholder'' for purposes of this section.

D. Out-of-Territory Leasing

    Final Sec. 616.6200 provides farmers, ranchers, cooperatives, and 
other FCS customers flexibility to choose an FCS lessor regardless of 
whether they are located within that lessor's ``territory.'' Section 
616.6200 does not require an FCS lessor to satisfy any notice or 
concurrence requirements to serve lessees beyond the lessor's 
territory.
    We received two comments on Sec. 616.6200. One Farm Credit Bank 
(FCB) commented: ``We commend you for removing territorial challenges 
through the addition of Sec. 616.6200. This will contribute toward 
System institutions being able to more effectively serve lease 
customers.'' While expressing appreciation for ``the efforts of the FCA 
to improve the regulatory environment in which System institutions 
operate,'' a second FCB suggested that ``any elimination of geographic 
operating territories with respect to leasing should be coordinated 
with the review of the proposed elimination of geographic boundaries 
with respect to lending activities under Sec. 614.4070, and action on 
this aspect of the leasing regulation should be deferred until such 
time as FCA has reviewed all comments on the proposed revision to 
section 614.4070.'' We do not believe that action on the reproposed 
leasing rule must be delayed until we consider proposed amendments to 
Sec. 614.4070, the customer choice rule. Our adoption of Sec. 616.6200, 
allowing potential customers to choose an FCS lessor regardless of 
whether they are located within that lessor's territory, neither 
depends on nor determines the fate of the proposed out-of-territory 
lending rule. See 63 FR 60219 (Nov. 9, 1998); 63 FR 69229 (Dec. 16, 
1998).
    It is clear in the Farm Credit Act of 1971, as amended (Act) that 
the express statutory authority to lease is separate and distinct from 
the authority to lend. Section 2.4(b)(4) of the Act expressly 
authorizes production credit associations (PCAs) (and agricultural 
credit associations (ACAs) pursuant to section 7.8) to own and lease 
equipment, or lease with option to purchase. Section 1.11(c)(2) 
expressly authorizes FCBs (and agricultural credit banks (ACBs) 
pursuant to section 7.2) to own and lease equipment or facilities, or 
lease with option to purchase, and authorizes Federal land credit 
associations pursuant to section 7.6 to own and lease facilities, or 
lease with option to purchase. Section 3.7(a) expressly authorizes 
banks for cooperatives (BCs) (and ACBs pursuant to section 7.2) to own 
and lease equipment, or lease with option to purchase. The Act clearly 
creates express leasing authorities separate from lending authorities, 
and in no case does the Act expressly restrict the geographic location 
of lease customers.
    The Farm Credit Administration (FCA) and the Farm Credit banks have 
long recognized the distinct nature of loans and leases in connection 
with the creation of the Leasing Corporation. Section 4.25 of the Act, 
which authorizes the establishment of service corporations, provides 
that a service corporation cannot ``extend credit.'' Our interpretation 
is that this provision does not apply to leases. Thus, the chartering 
of the Leasing Corporation was authorized because leases are not 
extensions of credit.
    The second FCB commented that ``FCA has * *  correctly * * * 
analyzed the statutory basis for leasing authorities as being 
independent of that for lending authorities,'' but indicates concern 
that ``the operational impact of out-of-territory leasing activity 
would be comparable to the impact of out-of-territory lending.'' For 
more than 10 years, the Leasing Corporation has had authority to 
compete nationwide with all other FCS lessors for all types of leasing 
business. Section 616.6200 establishes that other FCS lessors have the 
ability to compete nationwide with the Leasing Corporation on a level 
playing field.

II. Summary of Significant Provisions of Final Rule

A. Purchase and Sale of Interests in Leases

    The final regulation authorizes 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 final regulation:
    (1) Eliminates distinctions concerning the authority to purchase 
``lease interests'' and ``lease participation interests.'' The 
definition of ``lease'' limits the types of leases in which System 
institutions can buy an interest, that is, leases of equipment or 
facilities used in the operations of eligible borrowers;
    (2) Eliminates cross-title restrictions on the purchase of lease 
interests to provide more flexibility because there is no statutory 
restriction; and
    (3) Eliminates the retention requirement concerning the purchase of 
lease interests from outside the System. Requiring the servicer to have 
an ownership interest is not necessary to manage risk and is not 
required by law.
    The following two provisions are parallel to provisions that apply 
to loans: (1) Permit lease transactions through agents on the same 
basis that is permitted for loans; and (2) provide for the purchase of 
participations in leases made to similar entities on generally the same 
basis as the purchase of participations in similar entity loans.

B. Lending and Leasing Limit

    The final rule takes a consistent approach to limiting 
concentration of risk in individual System institutions. Limits on the 
financing (whether in the form of loans or leases) a System institution 
can provide to any one

[[Page 34516]]

customer protect against unnecessarily large risks to an institution's 
capital. Therefore, all loans and leases to a single customer will be 
measured against an institution's lending and leasing limit. The 
leasing limit for the Leasing Corporation under the final rule will 
limit its risk exposure in a manner similar to the lending and leasing 
limit that will apply to other System institutions.
     The definition of ``borrower'' includes any customer to 
whom an institution has made a lease or a commitment to make a lease.
     The definition of ``loan'' includes all types of leases 
(operating, financing, and lease interests).
     The rule prohibits a System institution from making a 
lease or a loan if the consolidated amount of all loans and leases to a 
single borrower exceeds 25 percent of the institution's lending and 
leasing limit base (except for loans made under title III of the Act, 
which vary between 10 percent and 50 percent depending on the type of 
loan and associated risk).
     The rule prohibits the Leasing Corporation from making 
leases to a single lessee or any related entities that exceed 25 
percent of the Leasing Corporation's lending and leasing limit base.
     The rule adds the outstanding lease balances to the items 
included in the computation of obligations.
     All leases, except those permitted under Sec. 614.4361, 
must comply with the leasing and lending limit at all times.

C. Out-of-Territory Leasing

    The final rule provides System institutions with more flexibility 
to make leases outside their chartered territory. A System lessor is 
not required to satisfy any notice or concurrence requirements in order 
to serve lessees beyond the lessor's territory.

D. Leasing Policies, Procedures, and Underwriting Standards

    The final regulation provides only a basic framework for leasing 
policies, procedures, and underwriting standards. From a safety and 
soundness perspective, System institutions engaged in leasing need to 
have adequate policies and procedures that address both loan and lease 
underwriting to ensure prudent management of both activities. From a 
payment risk perspective, we require institutions engaged in leasing to 
comply with the minimum loan underwriting standards in Sec. 614.4150 
regarding the minimum amount of financial information required of the 
applicant since the risks are very similar for loans and leases. The 
loan underwriting regulations require written policies and procedures 
to address underwriting standards such as the minimum supporting credit 
and financial information required, credit analysis procedures, and 
repayment capacity of the applicant. The complexity and depth of the 
policies and underwriting standards should be consistent with the 
current or planned leasing activities and the institution's risk-
bearing ability.

E. Documentation

    We require each institution to document that the leased equipment 
or facility is authorized to be leased under its leasing authorities. 
Equipment ordinarily is considered to be movable personal property. 
Facilities include property that is attached, often permanently, to 
real estate. Certain agricultural property may have attributes of both. 
We do not provide a specific regulatory definition of equipment and 
facility. We expect each System institution involved in leasing to have 
the necessary expertise to make such a determination, and we will 
review such determinations during the course of our examination 
process.

F. Investment in Leased Assets

    Section 616.6500 authorizes an institution to buy property to 
lease, if buying such property is consistent with the type of leasing 
activity being conducted or planned in the future. The purpose of this 
provision is to prohibit System institutions from speculating in the 
acquisition of property or facilities.

G. Stock Purchase Requirements

    We read the Act to impose a stock purchase requirement in 
connection with some leases, but not others. 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. An institution may also issue one 
participation certificate to satisfy the stock purchase requirement if 
authorized by the institution's bylaws. The stock requirement does not 
apply to the Leasing Corporation 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).

H. Disclosure Requirements

    The final regulation contains two disclosure requirements designed 
to protect an applicant's interest. The first requires that lease 
applicants be provided a copy of all lease documents signed by the 
lessee within a reasonable time following lease closing. The second 
requires 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.

I. Portfolio Limitations

    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.

III. Conforming Changes

    The existing leasing regulations in Sec. Sec. 618.8050 and 618.8060 
will be deleted upon the effective date of the final rule. The final 
rule makes conforming technical changes to Sec. Sec. 614.4710 and 
621.7. The final rule also makes a technical change in Sec. 614.4351 
and Sec. 618.8440 to correct erroneous citations. We also clarify in 
Sec. 616.6300 that although a board of directors sets policy, it must 
direct management to develop procedures that reflect lease practices 
that control risk.

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 
amended and part 616 is added to

[[Page 34517]]

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 E--Loan Terms and Conditions

    2. Section 614.4232 is amended by removing the word ``voting'' from 
the introductory text, and revising paragraph (c) to read as follows:


Sec. 614.4232  Loans to domestic lessors.

* * * * *
    (c) The lessee must hold at least one share of stock or one 
participation certificate; and
* * * * *

Subpart H--Loan Purchases and Sales


Sec. 614.4325  [Amended]

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

Subpart J--Lending and Leasing Limits

    5. 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 to which an institution 
has made a loan or a commitment to make a loan either directly or 
indirectly. Excluded are a Farm Credit System association or other 
financing institution that comply with the criteria in section 1.7(b) 
of the Act and the regulations in subpart P of this part. 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. This includes 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]

    6. 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; and by removing the reference 
``Sec. 615.5201(j)'' and adding in its place the reference 
``Sec. 615.5201(l) in paragraph (a).


Sec. 614.4352  [Amended]

    7. 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]

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


Sec. 614.4354  [Amended]

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


Sec. 614.4355  [Amended]

    10. 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).


Sec. Sec. 614.4356-614.4360  [Redesignated]

    11. Sections 614.4356 through 614.4360 are redesignated as 
Sec. Sec. 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.
    12. 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) 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]

    13. 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.
    14. Newly designated Sec. 614.4360 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in the 
heading and each place they appear 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

[[Page 34518]]

(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 permitted under 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,'' must comply with the lending and leasing limit on the 
date the lease is made, and at all times after that.
* * * * *


Sec. 614.4361  [Amended]

    15. 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]

    16. 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).
    17. 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.
616.6200 Out-of-territory leasing.
616.6300 Leasing policies, procedures, and underwriting standards.
616.6400 Documentation.
616.6500 Investment in leased assets.
616.6600 Leasing limit.
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).


Sec. 616.600  Definitions.

    For the purposes of this part, the following definitions 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 buy interests in leases. A Farm Credit System 
institution may buy leases and interests in leases.
    (b) Policies. Each Farm Credit System institution that sells or 
buys interests in leases must do so only under a policy adopted by its 
board of directors that addresses the following:
    (1) The types of leases in which the institution may buy or sell an 
interest and the types of interests which may be bought or sold;
    (2) The underwriting standards for the purchase of interests in 
leases;
    (3) Such limits on the aggregate lease payments and residual amount 
of interests in leases that the institution may buy from a single 
institution as are necessary to diversify risk, and such limits on the 
aggregate amounts the institution may buy 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 bought;
    (5) Requirements for securing from the selling lessor in a timely 
manner adequate financial and other information about the lessee needed 
to make an independent judgment; and
    (6) Any limits or conditions to which sales or purchases are 
subject that the board considers appropriate, including arbitration.
    (c) Purchase and sale agreements. Each agreement to buy or sell an 
interest in a lease must, 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 bought;
    (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 
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 buys an interest in 
a lease must 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. This must occur before the purchase of the interest 
and before any servicing action that alters the terms of the original 
agreement. The institution must not delegate such judgment to any 
person(s) not employed by the institution. A Farm Credit System 
institution that buys a lease or any interest in a lease may use 
information, such as appraisals or inspections, provided by the 
originating or lead lessor, or any intermediary seller or broker; 
however, the buying Farm Credit System institution must independently 
evaluate such information when exercising its judgment. The independent 
judgment must be documented by a payment analysis that considers 
factors set forth in Sec. 616.6300. The payment analysis must consider 
such financial and other lessee

[[Page 34519]]

information as would be required by a prudent lessor and must include 
an evaluation of the capacity and reliability of the servicer. Boards 
of directors of jointly managed institutions must adopt procedures to 
ensure 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:
    (1) For the purpose of determining the lending and leasing limit in 
subpart J of part 614 of this chapter, the lease must be considered, to 
the extent of the recourse or guaranty, a lease by the buyer to the 
seller, and in addition, the seller must aggregate the lease with other 
obligations of the lessee; and
    (2) The lease subject to the recourse agreement must be considered 
an asset 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 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.


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

    The board of each institution engaged in lease underwriting must 
adopt a written policy (or policies). Management, at the direction of 
the board, must develop procedures that reflect lease practices that 
control risk and comply with all applicable laws and regulations. Any 
leasing activity must comply with the lending policies and loan 
underwriting requirements in Sec. 614.4150 of this chapter. An 
institution engaged in the making, buying, or syndicating of leases 
also must adopt written policies and procedures that address the 
additional risks associated with leasing. Written policies and 
procedures must 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.

    Each institution must 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 that is consistent 
with current or planned leasing programs.


Sec. 616.6600  Leasing limit.

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


Sec. 616.6700  Stock purchase requirements.

    (a) Each System institution, except the Farm Credit Leasing 
Services Corporation, making an equipment lease under titles II or III 
of the Act must require the lessee to buy or own at least one share of 
stock or one participation certificate in the institution making the 
lease, in accordance with its bylaws.
    (b) The disclosure requirements of Sec. 615.5250(a) and (b) of this 
chapter apply to stock (or participation certificates) bought as a 
condition for obtaining a lease.


Sec. 616.6800  Disclosure requirements.

    (a) Each System institution must give to each lessee a copy of all 
lease documents signed by the lessee within a reasonable time following 
lease closing.
    (b) Each System institution must make its decision on a lease 
application as soon as possible and provide prompt written notice of 
its decision to the applicant.

PART 618--GENERAL PROVISIONS

    18. 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--[Removed and Reserved]

    19. Subpart C, consisting of Sec. Sec. 618.8050 and 618.8060, is 
removed and reserved.

Subpart J--Internal Controls


Sec. 618.8440  [Amended]

    20. Section 618.8440 is amended by removing the reference ``or 
(d)'' in paragraph (b)(6).

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

    21. 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]

    22. 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: June 18, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-16149 Filed 6-25-99; 8:45 am]
BILLING CODE 6705-01-P