[Federal Register Volume 65, Number 144 (Wednesday, July 26, 2000)]
[Proposed Rules]
[Pages 45931-45934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18873]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 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.
 
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  Federal Register / Vol. 65, No. 144 / Wednesday, July 26, 2000 / 
Proposed Rules  

[[Page 45931]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 619

RIN 3052-AB93


Loan Policies and Operations; Definitions; Loan Purchases and 
Sales

AGENCY: Farm Credit Administration (FCA).

ACTION: Proposed rule.

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SUMMARY: We propose revisions to our regulations on loan participations 
to allow Farm Credit System (System or FCS) institutions greater 
flexibility to buy loan participations from non-System lenders under 
certain conditions. We propose to remove the existing 10-percent 
retention requirement when loan servicing remains with a non-System 
seller. We also propose removing two restrictive definitions of ``loan 
participation'' in order to enable System institutions to use their 
full statutory authority for loan participations. Also, we are 
proposing technical and clarifying changes related to System 
institutions' participation authorities.

DATES: You may send us comments by September 25, 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
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:

I. Objective

    The objective of this proposed rule is to increase the availability 
and efficiency of providing agricultural credit by providing greater 
flexibility for System institutions to engage in loan participations 
with other System institutions and non-System lenders. We expect that 
the proposed rule will promote more cooperative alliances and business 
ventures with commercial banks and other lenders.
    This proposed rule is part of our efforts to carry out the Board's 
Philosophy Statement of July 14, 1998. Added regulatory flexibility 
should increase the efficient flow of funds to agriculture and rural 
America while helping ensure the continued availability of adequate and 
competitive agricultural credit. The proposed changes should also 
contribute to diversification of the portfolios of individual System 
institutions and non-System lenders, enabling them to better withstand 
stress conditions in agriculture.

II. Summary

    The proposed rule would enable FCS institutions to use existing 
statutory authorities to support rural America through loan 
participation agreements with System and non-System lenders. The Farm 
Credit Act of 1971, as amended (Act) does not define the terms 
``participate'' or ``participation,'' other than in a special 
definition contained in section 3.1(11)(B)(iv) of the Act. We have 
broad authority to define terms used in the Act, and used our authority 
to provide a general regulatory definition of the term ``loan 
participation'' in present Secs. 614.4325(a)(4) and 619.9195. However, 
the two regulatory definitions contained in Secs. 614.4325(a)(4) and 
619.9195 are more restrictive than the Act requires. The proposed rule 
would remove these restrictive definitions and enable System 
institutions to use their full statutory authority for loan 
participations with System and non-System lenders.
    Other Federal bank regulators have, over the past several years, 
effectively defined loan participations to include 100-percent 
interests in loans. In addition, the Board of Governors of the Federal 
Reserve System, the Federal Deposit Insurance Corporation, the Office 
of the Comptroller of the Currency (OCC), and the Office of Thrift 
Supervision adopted an interagency statement providing guidance for 
100-percent participations.\1\ We propose removing our restrictive 
definitions to ensure that System institutions have the flexibility to 
interpret their loan participation authorities in the context of 
current banking practices. Therefore, we propose removing the existing 
regulatory definitions of ``loan participation'' contained in parts 614 
and 619. We do not propose any change in the regulatory definition of 
``participate'' and ``participation'' in Sec. 613.3300(a), which 
reflects the definition contained in section 3.1(11)(B)(iv) of the Act, 
pertaining to the ``similar entity'' participation authorities.
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    \1\ ``Interagency Statement on Sales of 10% Loan 
Participations'' (April 10, 1997).]
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    In addition, we propose removing a 10-percent retention requirement 
that applies to System institutions buying participations from non-FCS 
institutions when the seller keeps the servicing rights of the loans. 
Finally, we propose clarifying the authorities for participation 
agreements between the Federal Agricultural Mortgage Corporation 
(Farmer Mac) and other FCS institutions or other lenders.

III. Revised Definitions of Participations

    The Act does not provide a specific definition of a loan 
participation other than that contained in section 3.1(11)(B)(iv), 
concerning ``similar entity'' participations. Nevertheless, we 
previously provided more narrow regulatory definitions than required by 
the statute.
    Our prior view was that a loan participation had to be a 
``fractional'' undivided interest, something less than 100 percent.\2\ 
On review of the statutory provisions on participations, we have 
concluded that the Act does not require this result. Section 1.5 of the 
Act

[[Page 45932]]

provides that Farm Credit Banks, ``subject to regulation by the Farm 
Credit Administration, shall have power to . . . make, participate in, 
and discount loans'' and may ``participate with'' other financial 
institutions in loans authorized under the Act. There are no 
limitations on the percentage of a loan in which a bank may 
participate. Similarly, sections 2.2 and 3.1 of the Act provide, 
respectively, that a production credit association ``may make and 
participate in loans'' and a bank for cooperatives may ``participate in 
loans,'' subject to regulation by the FCA. Nowhere does the Act provide 
that a participation interest must be less than 100 percent.
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    \2\ We expressed this position in the preamble of the proposed 
Lending Authorities regulations of January 1991 (56 FR 2452, Jan. 
23, 1991).
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    Therefore, we are proposing to remove the regulatory definitions of 
loan participation in Secs. 614.4325(a)(4) and 619.9195 to provide more 
flexibility to System institutions to make better use of existing 
statutory participation authorities. With this proposed rule we 
recognize the banking industry's understanding of loan participations 
as including all or some portion of a loan.
    In 1984 the OCC issued a banking circular \3\ that provides that 
loan participations can include 100 percent of a loan. The OCC issued 
its banking circular to address safety and soundness concerns 
associated with loan purchases and participations. In the circular, the 
OCC described a loan participation as an arrangement in which a bank 
makes a loan to a borrower and then sells all or a portion of that loan 
to a purchasing bank. The circular distinguished a participation from a 
multi-bank loan transaction (syndicated loan).
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    \3\ OCC-BC-181 ``Purchases of Loans in Whole or in Part 
Participations'' (August 2, 1984).
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    The other Federal banking regulators issued an interagency 
statement on sales of 100-percent participations on April 10, 1997. The 
interagency statement discussed the features of 100-percent loan 
participations in light of a 1992 court decision \4\ that concluded 
that such participations did not involve the sale of securities under 
federal securities laws. The interagency statement also identified and 
discussed related safety and soundness concerns such as heightened 
legal, reputation, and compliance risks.
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    \4\ Banco Espanol De Credito v. Security Pacific National Bank, 
973 F.2d 51 (2nd Cir. 1992).
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    The OCC's banking circular contained loan participation guidelines 
addressing safety and soundness concerns. We have adopted similar 
guidelines, including the requirement that a buying participant 
exercise an independent credit judgment as part of our general 
regulatory guidance for loan purchases and participations.

IV. Proposal Removes 10-Percent Retention Requirement

    Section 614.4330(b) generally requires that any non-System lender 
that sells a loan participation to a System institution but continues 
to service the loan must retain at least 10 percent of the principal 
amount of the loan, or the seller's legal lending limit, whichever is 
less. We imposed this regulatory requirement to ensure the non-System 
seller and servicer would maintain appropriate controls for loans sold 
to System participants.
    Because of changes in the financial markets, the System's growing 
experience with loan participations, and to enable FCS institutions to 
effectively use their existing statutory participation authorities, we 
now propose removing this retention requirement. This change will 
facilitate the use of 100-percent participations and allow the 
participation agreement to provide for loan servicing. However, 
compensating management controls will be needed to mitigate possible 
increased risk the added flexibility offers.

V. Characteristics of Typical Participations and Loan Purchases

A. Participations and Loan Purchases

    Participations are commonly used when a lender makes a loan and 
then wishes to sell all of or a portion of the loan. In a 
participation, the originating lender typically sets up the lending 
relationship with the borrower and obtains the promissory note, loan 
agreement and supporting security documents in its name. The 
participating lender receives an interest in the loan and its 
collateral through a loan participation agreement and participation 
certificate.
    In contrast, in a typical loan purchase, the buyer, through the 
purchase agreement, is assigned all rights included in the legal 
documents, security instruments, and rights to collateral. The buyer 
assumes the legal lender relationship with the borrower and arranges 
loan repayment, servicing, and as necessary collection, either directly 
with the borrower or contractually through an agent.
    In typical loan participations all documentation for the loan is 
between the borrower and the originating lender, and the originating 
lender has the sole contact with the borrower. The borrower and 
participant have no direct relationship and there is no contract 
between the two parties. Therefore, the participant normally must rely 
on the seller to enforce the terms of the documents between the 
originating lender and the borrower.

B. Advantages of Participations

    Some of the principal advantages of participations are:
     Lending limit relief for the seller,
     Increased liquidity for the seller,
     Reduced concentration risk for both the buyer and seller 
through greater portfolio diversification,
     Increased fee income opportunities,
     Access to external credit expertise and new and diverse 
markets,
     Improved capital adequacy management for both the buyer 
and seller, and
     Better use of the buyer's excess funds.

C. Controlling Risk of Participations

    There are risk control issues that can arise with loan 
participations. Some of these are typical of any credit arrangement. 
However, expanding the definition of a loan participation to include 
100-percent participations can increase certain types of risks if not 
controlled and managed appropriately.
    Therefore, we believe that System institutions should take extra 
care in developing the policies and procedures for their participation 
programs if they intend to buy 100-percent participations. An 
institution's policies and procedures and participation agreements 
should, at a minimum, address the following risks:
    1. Credit risk--The participant depends on the originating lender 
to obtain, develop, and evaluate the relevant information about the 
borrower and the structure of the credit.
    2. Legal risk--The originating lender typically prepares the 
documentation for the loan and perfects any security interests. The 
participant generally has a share of the rights of the originating 
lender. If deficiencies exist, the participant's rights may be limited.
    3. Administrative risk--Typically, the participant must rely on the 
originating lender to (a) service, monitor, and control the credit 
relationship with the borrower, (b) provide information about the 
borrower, and (c) remit payments received from the borrower. However, 
all of the aforementioned administrative actions must be addressed in 
the participation agreement as well as the parties' duties and 
responsibilities.
    A participant's administrative risk increases when the originating 
lender has no direct financial interest in the loan. The proposed 
removal of the 10-percent retention requirement increases this risk. 
The participation agreement should specifically address whether the

[[Page 45933]]

seller has the ability, and under what circumstances, to transfer or 
sell the note or agreement to a third party without concurrence by the 
participant.

D. Managing Portfolio Risk

    Our current regulations require each System institution involved in 
loan participation activities to develop and implement policies and 
procedures for such programs, including establishing appropriate 
portfolio limits to control portfolio risk.
    While participations offer a number of advantages to an 
institution's portfolio (especially as risk diversification tools) they 
also carry additional risks not common to a normal borrower/lender 
relationship. We believe policy direction from a System institution's 
board of directors becomes even more important with these proposed 
changes. Portfolio limitations should be reviewed by the institution's 
board to ensure loan participations are appropriately integrated into 
the institution's overall business plan and risk management strategies.

VI. Farmer Mac Related Participation Authorities

    In response to a question raised by Farmer Mac,\5\ we propose a 
change in the authorities contained in part 614, subpart A, of the 
regulations. The Act provides that banks and associations can enter 
into participation arrangements with other System institutions, which 
by definition includes Farmer Mac. However, our present regulations do 
not reflect this fact. Farmer Mac was given authority to buy, sell, 
hold, or assign loans after the present regulations were written. 
Therefore, we propose to revise the authority regulations in part 614, 
subpart A, to clarify the loan participation authorities of System 
banks and associations and Farmer Mac.
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    \5\ Farmer Mac, in a letter dated October 26, 1999, requested 
that we modify our regulations to recognize Farmer Mac authority to 
sell loan participations to System Institutions.
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VII. Technical and Conforming Changes

    We are also proposing certain technical and conforming changes to 
the regulations.

List of Subjects

12 CFR Part 614

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

12 CFR Part 619

    Agriculture, Banks, Banking, Rural areas.

    For the reasons stated in the preamble, we propose to amend parts 
614 and 619 of chapter VI, title 12 of the Code of Federal Regulations 
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.

Subpart A--Lending Authorities

    2. Amend Sec. 614.4000 as follows:
    a. Remove the word ``and'' at the end of paragraph (d)(1);
    b. Remove the ``.'' and add ``; and'' at the end of paragraph 
(d)(2); and
    c. Add paragraph (d)(3) to read as follows:


Sec. 614.4000  Farm Credit Banks.

* * * * *
    (d)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
* * * * *
    3. Amend Sec. 614.4010 as follows:
    a. Remove the word ``and'' at the end of paragraph (e)(1);
    b. Remove the ``.'' and add ``; and'' at the end of paragraph 
(e)(2); and
    c. Add paragraph (e)(3) to read as follows:


Sec. 614.4010  Agricultural credit banks.

* * * * *
    (e)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
* * * * *
    4. Amend Sec. 614.4020 as follows:
    a. Remove the ``.'' and add ``; and'' at the end of paragraph 
(b)(2); and
    b. Add paragraph (b)(3) to read as follows:


Sec. 614.4020  Banks for cooperatives.

* * * * *
    (b)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
    5. Amend Sec. 614.4030 as follows:
    a. Remove the word ``and'' at the end of paragraph (b)(1);
    b. Remove the ``.'' and add ``; and'' at the end of paragraph 
(b)(2); and
    c. Add paragraph (b)(3) to read as follows:


Sec. 614.4030  Federal land credit associations.

* * * * *
    (b)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
* * * * *
    6. Amend Sec. 614.4040 as follows:
    a. Remove the word ``and'' at the end of paragraph (b)(1);
    b. Remove the ``.'' and add ``; and'' at the end of paragraph 
(b)(2); and
    c. Add paragraph (b)(3) to read as follows:


Sec. 614.4040  Production credit associations.

* * * * *
    (b)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
* * * * *
    7. Amend Sec. 614.4050 as follows:
    a. Remove the word ``and'' at the end of paragraph (c)(1);
    b. Remove the ``.'' and add ``; and'' at the end of paragraph 
(c)(2); and
    c. Add paragraph (c)(3) to read as follows:


Sec. 614.4050  Agricultural credit associations.

* * * * *
    (c)(3) The Federal Agricultural Mortgage Corporation to the extent 
provided in Sec. 614.4055.
* * * * *
    8. Add a new Sec. 614.4055 to read as follows:


Sec. 614.4055  Federal Agricultural Mortgage Corporation loan 
participations.

    Subject to the requirements of subpart H of this part 614:
    (a) Any Farm Credit System bank or direct lender association may 
buy from, and sell to, the Federal Agricultural Mortgage Corporation, 
participation interests in ``qualified loans.''
    (b) The Federal Agricultural Mortgage Corporation may buy from, and 
sell to, any Farm Credit System bank or direct lender association, or 
lender that is not a Farm Credit System institution, participation 
interests in ``qualified loans.''
    (c) For purposes of this section, ``qualified loans'' means 
qualified loans as defined in section 8.0(9) of the Act.

Subpart H--Loan Purchases and Sales

    9. Amend Sec. 614.4325 by:
    a. Removing paragraph (a)(4);

[[Page 45934]]

    b. Redesignating paragraphs (a)(5), (a)(6), and (a)(7) as 
paragraphs (a)(4), (a)(5), and (a)(6), respectively; and revising newly 
designated paragraph (a)(4) to read as follows:


Sec. 614.4325  Purchase and sale of interests in loans.

* * * * *
    (a)(4) Participating institution means an institution that 
purchases a participation interest in a loan originated by another 
lender.
* * * * *


Sec. 614.4330  [Amended]

    10. Amend Sec. 614.4330 as follows:
    a. Remove the words ``an undivided'' and add in their place the 
words ``a participation'' in paragraph (a)(9); and
    b. Remove paragraph (b) and redesignate existing paragraph (c) as 
paragraph (b).

Subpart J--Lending and Leasing Limits


Sec. 614.4358  [Amended]

    11. Amend Sec. 614.4358 as follows:
    a. Remove paragraph (b)(4)(i); and
    b. Redesignate paragraphs (b)(4)(ii) and (b)(4)(iii) as paragraphs 
(b)(4)(i) and (b)(4)(ii), respectively.

PART 619--DEFINITIONS

    12. The authority citation for part 619 continues to read as 
follows:

    Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6, 
7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243, 
2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).


Sec. 619.9195  [Removed and Reserved]

    13. Remove and reserve Sec. 619.9195.

    Dated: July 20, 2000.
Kelly Mikel Williams,
Secretary, Farm Credit Administration Board.
[FR Doc. 00-18873 Filed 7-25-00; 8:45 am]
BILLING CODE 6705-01-P