[Federal Register Volume 65, Number 53 (Friday, March 17, 2000)]
[Proposed Rules]
[Pages 14491-14494]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6568]


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FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB98


Loan Policies and Operations; Loans to Designated Parties

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), through the FCA Board, 
issues a proposed rule amending its regulations on the approval of 
loans to designated parties (Farm Credit System (System) ``insiders'' 
and those FCA and Farm Credit System Insurance Corporation (FCSIC) 
employees who may legally borrow from the System). The purpose of our 
proposal is to provide greater flexibility for banks and associations 
to approve loans to designated parties. The proposed rule also makes 
technical changes to conform to the Farm Credit Act of 1971, as 
amended. The existing regulations require a funding bank to approve all 
loans that it and its associations make to designated parties. The 
proposed amendment would give an association the option to let its own 
board of directors (or a committee of the board),

[[Page 14492]]

or in some situations its own management, approve these loans. This 
amendment would benefit banks and associations because it provides 
clear guidelines and streamlined procedures for approving loans to 
designated parties.

DATES: Please send your comments to us by April 17, 2000.

ADDRESSES: You may send comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of our Web 
site at ``www.fca.gov.'' You may also send 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 by fax to (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:
Eric Howard, Senior Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 
883-4444,
    or
Jennifer Cohn, Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.

SUPPLEMENTARY INFORMATION:  

I. Objectives

    The objectives of our proposed amendment are to:
     Provide greater flexibility for banks and associations to 
approve loans to designated parties (System ``insiders'' and those FCA 
and FCSIC employees who may legally borrow from the System);
     Keep adequate controls on loans that banks and 
associations make to designated parties; and
     Make our regulations easier to understand and use.

II. Background

A. Withdrawn Direct Final Rule

    Sections 614.4450, 614.4460, and 614.4470 of our regulations 
require a funding bank to approve all loans that it and its 
associations make to designated parties. On August 9, 1999, we 
published a direct final rule with opportunity to comment.\1\ This 
direct final rule would have, in relevant part, repealed two of these 
regulations and amended the third. The revision would have allowed a 
bank or association to make a loan to a designated party with the 
approval of its own board of directors. Under direct final rulemaking, 
a rule becomes effective without further proceedings unless we receive 
significant adverse comment.
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    \1\ See 64 FR 43046.
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    One association provided a significant adverse comment on the 
revision. Four other associations also provided comments on the 
revision. Because of these comments, we withdrew the portion of the 
direct final rule on loans to designated parties on October 14, 
1999.\2\
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    \1\ See 64 FR 55621.
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B. Comments on Direct Final Rule

    All five commenters objected to our direct final rule's requirement 
that the board of directors of a bank or association must approve all 
loans made to designated parties. Four commenters stated that we should 
allow an association board of directors to delegate approval of loans 
to designated parties to management, with post review by the board. One 
commenter stated that we should allow an association board of directors 
to delegate approval of loans under a certain dollar amount to 
association staff, with post review by management. The commenter 
further suggested that management preapprove loans over that dollar 
amount.
    The commenters provided five main reasons for their concern. Their 
comments and our responses are as follows:
    First Comment: Directors do not have the expertise to make credit 
decisions; this is a task that professional lending staff should 
perform.
    Response: We believe directors, who are elected by their 
shareholders to represent them in conducting the business of their 
banks and associations, are qualified to make decisions on loans to 
designated parties. We remind directors that, as we explain in our 
publication entitled The Director's Role: Farm Credit System 
Institutions,\3\ they are ultimately responsible for all decisions 
their banks and associations make. In making these decisions, directors 
may want to consult with the professional lending staff at their banks 
and associations, as well as with other credit experts.
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    \3\ Farm Credit Administration, The Director's Role: Farm Credit 
System Institutions (Aug. 1997).
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    Second Comment: Directors may be biased in reviewing and analyzing 
audit results if they have made the credit decisions.
    Response: Part 612 of our regulations requires directors to remain 
impartial in carrying out their duties. We expect that directors will 
review and analyze audit results on their credit decisions in an 
unbiased manner.
    Third Comment: It may be difficult for the lending staff to remain 
independent and responsible to the board if they disagree with the 
board's credit decision.
    Response: Boards of directors have the ultimate responsibility for 
conducting the affairs of the banks and associations they are elected 
to serve. Boards hire management and staff to conduct day-to-day 
operations. Management and boards must work together as teams to ensure 
that banks and associations meet the needs of their borrowers and 
satisfy safety and soundness concerns.
    Fourth Comment: Directors may find it difficult to ``pass 
judgment'' on other directors.
    Response: We agree that some directors may find it difficult to 
make decisions on the loans of other directors. We believe, however, 
that management may find it even more difficult to make such decisions. 
Because directors are ultimately responsible for the affairs of their 
bank or association, we believe it is more appropriate for them to 
consider and act on the credit requests of other directors. If 
directors feel unable to make an unbiased decision in a particular 
situation, they always have the choice of recusing themselves from that 
particular decision.
    Fifth Comment: Directors do not want other directors to have access 
to their financial information.
    Response: Section 612.2140(b) of our regulations prohibits 
directors from divulging or making use of any information they learn as 
directors. In addition, Sec. 612.2135(b) requires directors to 
``exercise diligence and good judgment in carrying out their duties.'' 
We believe, therefore, that our regulations sufficiently address the 
misuse of financial information.

III. The Proposed Regulation

    When we withdrew the portion of the direct final rule on loans to 
designated parties, we said that we would continue with this rulemaking 
at a later date. We now propose an amended rule governing loans to 
designated parties. In developing this proposed rule, we considered 
carefully all the comments that we received.
    Our proposed regulation would provide greater flexibility for you 
\4\ to approve loans to designated parties, while keeping adequate 
controls on

[[Page 14493]]

these loans. The proposed regulation would continue to allow you to 
make loans to designated parties with bank approval, but it would also 
let an association's board of directors, and in some situations its own 
management, approve such loans. Because we are proposing the regulation 
in plain language, we believe it will be easier to understand and carry 
out.
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    \4\ As part of our objective to use plain language in our 
regulations, we use the word ``you'' to refer to banks and 
associations in this preamble and the proposed regulation.
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    The proposal would delete all references to district boards because 
the Agricultural Credit Technical Corrections Act of 1988 \5\ abolished 
these boards. The proposal would also repeal Sec. 614.4450, which 
provides ``the authority for loan approval is vested in the Farm Credit 
banks and associations.'' More specific regulations providing for 
System lending authorities make this provision unnecessary.\6\
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    \5\ Pub. L. No. 100-399, 102 Stat. 1003 (Aug. 17, 1988).
    \6\ See 12 CFR part 614, Subpart A--Lending Authorities.
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A. Section 614.4450--Definitions Used in the Proposed Regulation

    We provide definitions of three key terms used in the proposed 
regulation. As part of our goal to use plain language in our 
regulations, we use the word ``you'' in the text of the proposed rule. 
Accordingly, we define ``you'' as a bank or association.
    We define the term ``designated parties'' by providing a list of 
these parties. We updated this list from the existing Secs. 614.4460 
and 614.4470. The list includes bank and association ``insiders'' as 
well as certain employees of FCA and FCSIC.\7\
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    \7\ Our proposed regulation refers explicitly to the 
Supplemental Standards of Ethical Conduct regulations that we and 
FCSIC enacted in 1995. These regulations, at 5 CFR parts 4101 and 
4001, respectively, specifically prohibit most FCA and FCSIC 
employees from borrowing from you. For example, FCA and FCSIC Board 
members, examiners, procurement personnel, and all employees over a 
certain civil service grade level cannot legally borrow from you.
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    We define the term ``loan'' broadly. ``Loan'' means:
     The total of all loans and undisbursed commitments from 
you to a designated party; plus
     The total of all loans and undisbursed commitments from 
you to any other borrower if the designated party has a significant 
interest in the loan, proceeds or collateral.

B. Section 614.4460--Policy for Approval of Loans to Designated Parties

    The proposed rule would require you to adopt a policy addressing 
the approval of loans to designated parties. Your policy must describe 
the procedures, as set forth in the proposed rule, you will follow in 
making these loans.
    Depending on the size of the loan, you may choose any one of three 
procedures for making loans to designated parties. The first procedure 
allows your board of directors (or a committee of your board) to 
approve loans that you make to designated parties. The second procedure 
permits the existing practice of allowing the funding bank to approve a 
loan made by an association. Finally, the third procedure permits your 
board of directors to delegate approval of loans of $25,000 or less to 
designated parties to your management. Your board of directors must 
post review all loans to designated parties that management approves.
    We continue to believe that management should not approve loans 
over $25,000 to designated parties. Because of their size, these loans 
have greater risk potential for banks and associations. Requiring board 
or funding bank preapproval of these credit decisions will help ensure 
the approval decision is independent, objective, and free from any real 
or perceived conflicts of interest. The commenters contended that 
association boards may be uncomfortable with their own members 
approving loans to designated parties. If this is the case, association 
boards have the option of continuing to have decisions on loans to 
designated parties made by their funding banks.
    Because loans of $25,000 or less are relatively smaller, they 
create less potential risk for the banks and associations that make 
them. We believe our proposal will help to reduce the administrative 
burden of making loans of $25,000 or less to designated parties.\8\
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    \8\ This proposed $25,000 threshold is consistent with the 
``insider lending'' regulations of the Office of the Comptroller of 
the Currency and the Federal Reserve System. See 12 CFR Parts 31 and 
215, respectively.
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List of Subjects in 12 CFR Part 614

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

    For the reasons stated in the preamble, we propose to amend part 
614 of 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 continues to read as 
follows:

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 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.
    2. Revise subpart M to read as follows:
Subpart M--Approval of Loans to Designated Parties
Sec.
614.4450   What definitions are used in this subpart?
614.4460   What approval policy must you adopt to make loans to 
designated parties?

Subpart M--Approval of Loans to Designated Parties


Sec. 614.4450  What definitions are used in this subpart?

    (a) You means a Farm Credit bank or association.
    (b) Designated parties means:
    (1) Farm Credit Administration employees allowed to borrow from you 
under 5 CFR 4101.104;
    (2) Farm Credit System Insurance Corporation employees allowed to 
borrow from you under 5 CFR 4001.104;
    (3) Your directors and employees;
    (4) Directors and employees of another bank or association under a 
joint management agreement with you;
    (5) Directors and employees of your funding bank if you are an 
association;
    (6) Cooperatives and other legal entities if any of their 
directors, officers, partners, or employees are also members of your 
board of directors; and
    (7) Other borrowers if any of the parties identified in this 
paragraph are:
    (i) Recipients of the loan proceeds;
    (ii) Stockholders or other equity owners of the borrowers who have 
significant interests in the loan funds or collateral; or
    (iii) Endorsers, guarantors or comakers on the credit.
    (c) Loan or loans means:
    (1) The total of all loans and undisbursed commitments from you to 
a designated party; plus
    (2) The total of all loans and undisbursed commitments from you to 
any other borrower if the designated party is:
    (i) A recipient of the loan proceeds;
    (ii) A stockholder or other equity owner of the borrower who has 
significant interests in the loan funds or collateral; or

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    (iii) An endorser, guarantor or comaker on the credit.


Sec. 614.4460  What approval policy must you adopt to make loans to 
designated parties?

    You must adopt an approval policy to make loans to designated 
parties. Your policy must set forth the procedures you will follow in 
approving loans to designated parties. Depending on the size of the 
loan, you may choose from any of the following approval procedures:
    (a) If you are a bank or association, your board of directors (or a 
committee of your board) may approve loans to designated parties;
    (b) If you are an association, your funding bank may approve loans 
to designated parties; or
    (c) If you are a bank or association, your board of directors may 
delegate to your management approval for loans of $25,000 or less to 
designated parties, with post review by your board of directors.

    Dated: March 13, 2000.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 00-6568 Filed 3-16-00; 8:45 am]
BILLING CODE 6705-01-P