[Federal Register Volume 65, Number 77 (Thursday, April 20, 2000)]
[Proposed Rules]
[Pages 21151-21154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9849]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, and 618

RIN 3052-AB96


Loan Policies and Operations; Funding and Fiscal Affairs, Loan 
Policies and Operations, and Funding Operations; General Provisions; 
OFI Lending

AGENCY:  Farm Credit Administration (FCA).

[[Page 21152]]


ACTION:  Advance notice of proposed rulemaking (ANPRM).

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SUMMARY:  The FCA is considering whether to revise its regulations 
governing how Farm Credit System (System) banks lend to other financing 
institutions (OFIs). OFIs include commercial banks, savings 
institutions, credit unions, trust companies, agricultural credit 
corporations, and other agricultural and aquatic lenders. This ANPRM 
asks you to comment on the appropriate risk weighting of System bank 
loans to OFIs, the public availability of the identities of OFIs, 
cross-district funding of OFIs, and ways to improve System banks' 
funding of OFIs.

DATES:  You may send us comments by June 19, 2000.

ADDRESSES:  Send us your 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 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 by facsimile transmission 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:

Dennis K. Carpenter, Senior Policy Analyst, Office of Policy and 
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TDD (703) 883-4444,
      or
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 
883-4444.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this ANPRM is to seek comment on whether we should 
revise FCA's regulations to improve and better promote OFI access to 
System funding. Through this ANPRM, we seek comment on issues related 
to:
     Revising System banks' capitalization requirements for 
loans to OFIs;
     Permitting disclosure of OFI corporate identities;
     Removing geographical impediments to OFIs' obtaining 
System bank funding; and
     Identifying other impediments to System bank funding of 
OFIs.
    This ANPRM is another step in supporting the FCA Board's Philosophy 
Statement of July 14, 1998, in which we explained our goal to give 
farmers and ranchers greater access to credit.

II. Background

    The Farm Credit Act of 1971, as amended (1971 Act),\1\ authorizes 
Farm Credit Banks (FCBs) and agricultural credit banks (ACBs) 
(collectively, System banks) to fund and discount short- and 
intermediate-term loans for certain non-System lenders. The 1971 Act 
refers to these non-System lenders as other financing institutions, or 
OFIs.\2\ Under the 1971 Act, OFIs include:
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    \1\ 12 U.S.C. 2001 et seq.
    \2\ 12 U.S.C. 2020(b).
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     National and State banks;
     Trust companies;
     Agricultural credit corporations;
     Incorporated livestock loan companies;
     Savings institutions;
     Credit unions;
     Any association of agricultural producers making loans to 
farmers and ranchers; and
     Any corporation making loans to producers or harvesters of 
aquatic products.
    Section 1.7(b) of the 1971 Act \3\ enables OFIs to get funding from 
FCBs or ACBs for any loan that a production credit association (PCA) 
could make under section 2.4 \4\ of the 1971 Act. PCA loans are short-
and intermediate-term loans with maturities ranging up to 10 years (15 
years to producers or harvesters of aquatic products). Only eligible 
farmers, ranchers, aquatic producers and harvesters, processing and 
marketing operators, farm-related businesses, and rural homeowners can 
get these loans.
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    \3\ 12 U.S.C. 2015(b).
    \4\ 12 U.S.C. 2075.
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    The OFI discount and lending authorities of System banks help to 
fulfill the banks' mission to finance agriculture, aquaculture, and 
other named rural needs. Congress first granted OFI lending authorities 
to System banks in 1923 and 1930, in the predecessor legislation to the 
1971 Act.
    Legislative history reveals that Congress originally granted OFIs 
discount privileges at System banks because operating credit for 
farmers and ranchers was scarce. Since then, Congress has continued to 
respond to the changing needs of agricultural producers and other rural 
residents for affordable short-and intermediate-term credit. Over the 
decades, Congress has updated the authorities of System banks to fund 
and aid both System and non-System lenders. As our Philosophy Statement 
on competition provides and as directed by provisions of the 1971 Act, 
we continue to explore ways of making competitive credit available 
through more avenues to farmers, ranchers, and other eligible 
borrowers.
    In the early 1980s, both the number of OFIs and the volume of 
business they do with System banks peaked and subsequently declined and 
have since remained significantly low. In 1997, to expand OFIs' access 
to System bank funding and discounting, we amended our regulations to 
remove many OFI eligibility limits not required by the 1971 Act.\5\ We 
also required a System bank's assessment of total charges for an OFI 
loan to be comparable to the charges the bank imposes on its direct 
lender System institutions. In addition, to improve safety and 
soundness, those amendments also required all OFI loans to be full-
recourse loans.
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    \5\ See 63 FR 36541 (July 7, 1998).
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III. Philosophy Statement

    Among other things, our 1998 Philosophy Statement on competition 
communicates our desire for the System to more fully serve the credit 
needs of agricultural producers and other rural borrowers, as Congress 
intended, including short-and intermediate-term credit. The System 
banks' relationship with OFIs is important for meeting these needs. To 
support the bank and OFI relationship, we continue to identify ways to 
improve OFIs' access to System funding. After reviewing our regulatory 
requirements, we have decided to consider the following changes:
    (1) Revising the level of capital System banks must hold against 
their loans to OFIs based on certain risk characteristics;
    (2) Permitting disclosure of the names of entities that have an OFI 
relationship with a System bank; and
    (3) Removing impediments to setting up an OFI relationship outside 
a System bank's territorial boundaries.
    We believe that revising these requirements may spur development of 
more OFI relationships and, thus, provide added avenues of credit 
available to farmers and ranchers.
    We recognize that reducing the risk weighting on OFI loans could 
reduce capital available to support the risk in the bank's assets. 
However, if the risk is properly assessed, such adjustment to the risk 
weighting should not pose a safety and soundness concern. Furthermore, 
we believe an approach to capital requirements of OFIs that is more 
consistent with those of System associations is appropriate.

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    In this ANPRM, we seek comments from all interested parties to aid 
us in developing proposed regulations that increase opportunities for 
OFI lending to the extent allowed by the Act and within appropriate 
safety and soundness boundaries. We also ask for your help in 
identifying other impediments to System bank funding of OFIs.

A. Risk-Weighting Requirements of Capital

1. Current Basis for Risk-Weighting Requirements
    Subparts H and K of part 615 of FCA regulations impose risk-based 
capital requirements on System banks. We adopted risk-weighting 
categories for System bank assets as part of the 1988 regulatory 
capital revisions required by the Agricultural Credit Act of 1987. The 
categories are similar to the risk-weighting categories from the 1988 
International Basle Accord, whose principles the Federal banking 
regulators have also adopted.
    Under our regulations, a System bank's loan to an OFI receives a 
risk weighting of 100 percent.\6\ This means that, for a System bank to 
meet its minimum 7-percent permanent capital requirement on a loan to 
an OFI, it would need to hold a minimum of $7.00 in capital against 
each $100 of the loan to the OFI ($100  x  100 percent  x  7 percent). 
By contrast, a loan to an affiliated System association receives a risk 
weighting of 20 percent.\7\ This translates to the bank's holding a 
minimum of $1.40 in capital for each $100 of loan to the association 
($100  x  20 percent  x  7 percent).
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    \6\ 12 CFR 615.5210(f)(2)(iv)(C).
    \7\ 12 CFR 615.5210(f)(2)(ii)(I).
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    The FCA's decision to risk-weight a loan to an affiliated System 
institution at 20 percent was based on several general characteristics 
that serve to lower the risk of that category of loans. They are:
     GFA Requirements. The association must enter a general 
financing agreement (GFA) with its bank, under which the association 
must meet the bank's lending and loan underwriting standards.\8\
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    \8\ 12 CFR 614.4120 and 614.4125.
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     Pledge of Collateral. The association typically pledges 
all its assets as collateral for the loan from the bank, and the bank 
is usually the association's only source of funding.
     Bank Supervision. System banks, under the 1971 Act and 
related FCA regulations, have supervisory authority over certain 
aspects of System association operations.
     FCA Examination and Regulation. Our examination of System 
associations ensures that we are aware of any creditworthiness or other 
concerns at an early stage and can take corrective action. Under our 
statutory authority, we can take supervisory and enforcement actions 
against System associations when the need arises.\9\
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    \9\ 12 U.S.C. 2261-2274.
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     FCA Capital Rules. We prescribe capital standards that 
System associations must meet, to ensure the associations have enough 
capital to operate safely and soundly.\10\
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    \10\ 12 U.S.C. 2154, 2154a: 12 CFR part 615, subparts H through 
M.
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2. Comparison of OFI Funding Characteristics
    System bank funding relationships with OFIs have some, but not all, 
of the risk-reducing features of System bank loans to System 
associations. They are:
     GFA Requirement. A System bank must have the same type of 
GFA with an OFI that it has with a System association.\11\
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    \11\ 12 CFR 614.4120, 614.4130, and 614.4560(a)(1).
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     Pledge of Collateral. Although some OFIs use System banks 
as their sole source of funding and pledge all assets to the loan, more 
typically an OFI has multiple sources of funding and does not pledge 
all assets as collateral to the System bank. Nevertheless, FCA 
regulations require a System bank to take as collateral all notes, 
drafts, and other obligations it funds or discounts for an OFI, and the 
OFI must endorse each obligation with full recourse or an unconditional 
guarantee. The bank must also require the OFI to provide extra 
collateral or other credit enhancements when needed.\12\
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    \12\ 12 CFR 614.4570.
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     Bank Supervision. The 1971 Act and our regulations do not 
give System banks supervisory authority over OFIs.
     FCA Examination and Regulation. The law does not require 
us to examine OFIs, but the 1971 Act and regulations enable us either 
to examine OFIs or to have access to other regulators' examination 
reports. The 1971 Act allows us to examine all OFIs, except federally 
regulated financial institutions, and allows Federal agencies to give 
us all reports and other information they have on the condition of any 
OFI.\13\ In addition, under the 1971 Act and our regulations, each OFI 
that is a State-chartered bank, trust company, or savings institution 
must authorize its State regulator to give us examination reports. Each 
OFI that is not a depository institution must consent in writing to be 
examined by us.\14\ However, we do not have general authority to 
regulate the activities of OFIs (other than the funding relationship 
with the System bank) or to take supervisory or enforcement actions 
against OFIs.
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    \13\ 12 U.S.C. 2254(a), 2255, 2257.
    \14\ 12 U.S.C. 2256; 12 CFR 614.4560(e).
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     FCA Capital Rules. We do not impose capital requirements 
on OFIs. However, the 1971 Act does limit OFI funding and discounting 
to OFIs whose debt is less than 10 times their paid-in and unimpaired 
capital and surplus, or a lesser amount if allowed by the laws of the 
OFI's jurisdiction.\15\ In addition, some OFIs, such as commercial 
banks and savings institutions, have capital requirements that are 
similar to our requirements for System institutions.
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    \15\ 12 U.S.C. 2015(b)(3).
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3. Risk-Weighting Options
    We have several choices for revising the risk weighting of loans to 
OFIs. If we decide that OFI loans, as a class, have a lower risk than 
other assets in the 100-percent risk-weighting category, we can lower 
the risk weighting uniformly on all OFI loans.
    Another alternative is to place OFI loans in different risk-
weighting categories to reflect differences in the type of OFI. Loans 
to OFIs that are regularly examined and have capital requirements 
similar to our capital rules, such as commercial banks, might qualify 
for a lower risk weighting. Other OFIs that are unregulated and do not 
have capital requirements similar to our capital rules might have a 
higher risk weighting.
    Yet another choice would be to lower the risk weighting on loans to 
OFIs that meet certain risk mitigation criteria. For example, a 
proposed June 1999 revision to the Basle Accord seeks to reassess the 
risk weightings currently assigned to assets.\16\ The proposed revision 
would place a new emphasis on using risk mitigation techniques and 
differentiating risk exposures. To mitigate risk on an OFI loan, and 
thus lower the risk weighting, the OFI could pledge additional security 
in the form of readily marketable, highly liquid securities (such as 
AAA-or AA-rated securities). Another risk mitigation technique would be 
for a System bank to analyze an OFI's capital and financial condition 
and to require the OFI to meet and maintain certain capital standards, 
through terms of their GFA.
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    \16\ Information about the Basle Accord proposals is at the Web 
site for the Bank for International Settlements, www.bis.org.

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B. Disclosure of Names of OFIs

    The FCA's regulations on releasing information \17\ currently 
prohibit System institutions from disclosing information about 
borrowers and stockholders. Also, the FCA has routinely kept 
confidential the names of borrowers that we have obtained during 
examinations. However, we have never interpreted these prohibitions as 
preventing release of the names of PCAs (or other System associations) 
that, like OFIs, borrow from a System bank but are not retail 
borrowers. In fact, this information is widely known because each 
System bank issues publicly available financial statements identifying 
its PCAs and other affiliated associations.
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    \17\ 12 CFR part 618, subpart G.
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    The reasons for protecting the identity of retail borrowers, who 
are mostly individual consumers such as farmers and ranchers or rural 
homeowners, may not be present for OFIs.\18\ Keeping the identities of 
retail borrowers confidential shields them from unwanted marketing 
solicitations or publicity involving their personal financial business. 
It is unlikely that publicly identifying OFIs would have these effects. 
On the contrary, disclosing the names of lenders with OFI relationships 
could benefit OFIs because it could make prospective retail borrowers 
aware of these added sources of credit.
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    \18\ We note that the financial privacy protections of the 
recently enacted Gramm-Leach-Bliley Act, Pub. L. 106-102 (Nov. 12, 
1999), protect only financial institution customers that are 
``consumers''--that is, individuals.
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    In this light, we are considering a requirement to disclose the 
names of entities that have OFI relationships with System banks. We are 
interested in receiving your comments and recommendations on the 
conditions under which to release the information. We note that we are 
not considering the release of any information about OFIs except the 
name of the business and other identifying information such as the type 
of agricultural credit the OFI offers.

C. Cross-District Lending

    In July 1998, we amended the regulations to authorize a System bank 
to lend to an OFI whose headquarters are outside of the bank's 
territory or a majority of whose loan volume is outside of the bank's 
territory.\19\ The final OFI regulations specifically revised 
Sec. 614.4550 to allow:
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    \19\ See 63 FR 36541 (July 7, 1998).
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    (1) FCBs and ACBs to provide funding to any OFI applicant that 
maintains its headquarters in the funding bank's chartered territory, 
or has more than 50 percent of its outstanding eligible loan volume in 
the funding bank's chartered territory; and
    (2) OFIs to apply to any other FCB or ACB if the original FCB or 
ACB denies or otherwise fails to approve an OFI's funding request 
within 60 days of receipt of a ``completed application'' as defined by 
12 CFR 202.2(f).
    In addition, an FCB or ACB may grant its consent for an OFI to seek 
financing from another System bank. The regulation also provides that 
no OFI will be required to terminate its existing funding or discount 
relationship with an FCB or ACB if, at a subsequent time, an OFI 
relocates its headquarters to the chartered territory of another System 
bank or the loan volume in the relevant territory falls below 50 
percent.
    The 1998 amendments gave new flexibility to OFIs for choosing a 
System bank for establishing a funding relationship. But we retained 
some restrictions because, at the time, System associations were 
restricted in their ability to seek financing from other System banks. 
However, the Board's subsequent Philosophy Statement supports broader 
funding access for borrowers and lending institutions. Therefore, given 
our continued interest to explore different alternatives that provide 
greater access to System funding, we are seeking comment on possible 
ways to provide greater flexibility to OFIs setting up funding 
relationships with System banks in different districts.

IV. Questions

    In this ANPRM, we seek your comments on the following:
    1. If we lower the risk weighting of capital to be held by System 
banks for all types of loans to OFIs, what risk-weighting category 
would be appropriate? Please provide your analysis of the level of risk 
weighting that you recommend.
    2. How should we address the variety of possible OFI types and OFI 
relationships:
    a. Would it be more appropriate to lower the risk weighting on OFI 
loans on a case-by-case basis, based on underwriting criteria for 
various risk categories? Why or why not? What underwriting criteria 
should we require System banks to establish for the various levels of 
risk weighting?
    b. Should we consider the use of risk mitigation techniques (such 
as a pledge of added security), or differentiate between direct retail 
credit risk exposure and wholesale credit risk exposure? Why or why 
not? Please recommend how we should address risk mitigation techniques 
in our regulations.
    c. What is the appropriate level of risk weighting on loans to OFIs 
that meet risk mitigation criteria? Please provide your recommendations 
and analysis.
    3. Should we allow or require System banks to release the names of 
OFIs on request? Are there any drawbacks for the System bank, the OFI, 
or the OFI's customers, if the identities of OFIs are released? Do you 
believe any limits on the release of such information are necessary? 
Please provide your recommendations and associated explanation.
    4. Should new regulations continue the territorial limits for OFIs' 
funding access to System banks as addressed in existing Sec. 614.4550? 
If not, what if any factors should limit an OFI's choice of System 
bank? Please provide your recommendations and explanation.
    5. Are there other regulatory changes we could make or alternatives 
not addressed above that we should consider to improve a System bank's 
ability to serve an OFI and its agricultural customers? Please provide 
your recommendations and explanation for such alternatives.

    Dated: April 13, 2000.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 00-9849 Filed 4-19-00; 8:45 am]
BILLING CODE 6705-01-P