[Federal Register Volume 68, Number 23 (Tuesday, February 4, 2003)]
[Proposed Rules]
[Pages 5587-5595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-2401]


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 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. 68, No. 23 / Tuesday, February 4, 2003 / 
Proposed Rules  

[[Page 5587]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 612, 614, and 617

RIN 3052-AC04


Organization; Standards of Conduct and Referral of Known or 
Suspected Criminal Violations; Loan Policies and Operations; Borrower 
Rights; Effective Interest Rate Disclosure

AGENCY: Farm Credit Administration (FCA).

ACTION: Proposed rule.

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SUMMARY: The FCA (agency, we, or our) proposes to amend its regulations 
governing disclosure of effective interest rates (EIR) and related 
information on loans. The proposed rule clarifies the current rule as 
to when and how qualified lenders must disclose the EIR and other loan 
information to borrowers; when and how the cost of Farm Credit System 
(FCS or System) borrower stock must be disclosed to borrowers; and how 
loan origination charges and other loan information must be disclosed 
to borrowers. The proposal requires lenders to use a discounted cash 
flow method in determining the EIR to provide meaningful disclosures to 
borrowers. However, it does not prescribe detailed calculation 
procedures. To make the regulations easier to understand and use by 
borrowers, lenders, and other users, we have rewritten the existing 
regulations in part 614, subpart K, Disclosure of Loan Information, in 
a question-and-answer format and moved them to a new part 617.

DATES: Please send your comments to the FCA by March 6, 2003.

ADDRESSES: You may send comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of FCA's Web 
site, ``http://www.fca.gov.'' You may also send comments to Thomas G. 
McKenzie, Director, Regulation and Policy Division, Office of Policy 
and Analysis, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090 or by facsimile to (703) 734-5784. You may 
review copies of all comments we receive at our office in McLean, 
Virginia.

FOR FURTHER INFORMATION CONTACT: 

Tong-Ching Chang, Senior Policy Analyst, Office of Policy and Analysis, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498; TTY 
(703) 883-4434;
     or
Howard Rubin, Senior Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The objectives of our proposal are to:
    [sbull] Ensure that borrowers receive meaningful and timely 
disclosure of the EIR and related information on loans;
    [sbull] Promote consistency in the method used to determine the 
EIR; and
    [sbull] Make the regulations easy to understand and use by 
borrowers, lenders, and other users.

II. Background

    Section 4.13(a) of the Farm Credit Act of 1971, as amended (Act), 
requires the FCA to enact regulations requiring ``qualified lenders'' 
\1\ to provide borrowers, not later than the time of loan closing, with 
meaningful and timely disclosure of:
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    \1\ ``Qualified lenders'' include System lenders (except for a 
bank for cooperatives) and non-System lenders (other financing 
institutions (OFIs)) for loans made with funding from a Farm Credit 
bank. See 12 U.S.C. 2202a(a)(6).
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    [sbull] The current rate of interest on the loan;
    [sbull] The amount and frequency of interest rate adjustments and 
the factors that the lender may take into account in adjusting rates 
for adjustable or variable rate loans;
    [sbull] The effect of any loan origination charges or purchases of 
stock or participation certificates on the rate of interest on the 
loan;
    [sbull] A statement indicating that stock purchased is at risk; and
    [sbull] A statement indicating the various types of loan options 
available to borrowers.
    The requirements of section 4.13 of the Act are applicable to all 
loans made by ``qualified lenders'' not subject to the Truth in Lending 
Act (TILA).\2\
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    \2\ 15 U.S.C. 1601 et seq. TILA applies to consumer loans and 
specifically exempts agricultural loans.
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    Under section 4.13(a) of the Act, qualified lenders must give 
borrowers notice of any change in the interest rate applicable to a 
borrower's loan within a ``reasonable time'' after the change. In 
addition, section 4.13(b) of the Act requires qualified lenders that 
offer more than one rate of interest to borrowers to: (1) Provide, upon 
borrower request, a review of the loan to determine if the proper rate 
has been established; (2) explain to the borrower, in writing, the 
basis for the rate charged; and (3) explain to the borrower, in 
writing, how the credit status of the borrower may be improved to 
receive a lower interest rate on the loan.
    Current FCA regulations implement the disclosure requirements of 
the Act, but contain limited guidance on several key issues. 
Additionally, when the statute on EIR disclosure went into effect in 
the 1980s, borrower stock requirements were generally 5 to 10 percent 
of the loan amount. Disclosure has varied more in recent years because 
FCS institutions have established a variety of stockholder 
capitalization and stock retirement policies. Current System borrower 
stock purchase requirements range from the minimum (the lesser of 2 
percent or $1,000) to various higher amounts. Perhaps more 
significantly, the capitalization requirements are applied not only on 
a per loan basis, but also on a per borrower basis. With the multiple 
stock purchase requirements, new loan programs, and varied 
methodologies for calculation of effective interest rates, compliance 
with current EIR disclosure regulations has become more challenging and 
has led to inconsistent disclosure among qualified lenders.
    In August 1998, FCA issued a notice soliciting comments from the 
public to identify regulations and policies that are ineffective or 
impose a burden on the System.\3\ We received comments requesting that 
changes be made to our regulations on the EIR disclosure. In a letter 
to the FCA dated May 17, 2000, the Farm Credit Council (FCC) 
consolidated input from each Farm Credit district and requested that 
more changes to our borrower rights regulations be made. We considered 
all

[[Page 5588]]

comments received on EIR disclosure in developing these proposed 
amendments and will address changes to other borrower rights 
regulations in a separate rulemaking.
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    \3\ See 63 FR 44176, August 18, 1998.
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    This proposed rule, however, does not address comments on 
electronic or Web-based compliance with borrower rights regulations. 
These issues are subject to FCA's E-commerce rule.\4\ System 
institutions should interpret the terms used in this part broadly to 
permit electronic transmission, communications, records, and 
submissions in business, consumer, or commercial transactions, unless 
otherwise prohibited.
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    \4\ See 67 FR 16627, April 8, 2002.
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III. Section-by-Section Analysis

    To make our regulations easier to understand and use by borrowers, 
lenders, and other users, we have rewritten the existing regulations in 
part 614, subpart K, Disclosure of Loan Information, in a question-and-
answer format and moved them to a new part 617. The existing part 617, 
Referral of Known or Suspected Criminal Violations, will be moved to 
part 612, Standards of Conduct, in a new subpart B, and redesignated as 
Sec. Sec.  612.2300 through 612.2303.
    In the section-by-section analysis below, we explain our proposed 
amendments to the current EIR disclosure regulations. We also address 
comments received pertinent to loan information and EIR disclosures.

Subpart A--General

Section 617.7000--Definitions
    Proposed Sec.  617.7000 defines ``effective interest rate'' 
generally as a measure of the cost of credit that, expressed as an 
annual percentage rate, shows the effect of borrower stock or 
participation certificates purchased and loan origination charges on 
the stated interest rate of a loan. The new definition would replace 
the current definition of EIR in Sec.  614.4366(b). Proposed Sec.  
617.7125 explains how a qualified lender should determine the effective 
interest rate.
    In addition, the proposed amendments reword the definitions of 
``adjustable rate loan'' and ``interest rate'' in plain language. We 
also propose to eliminate the existing definitions of ``fixed rate 
loan,'' ``loan origination charges,'' and ``standard adjustments 
factors'' because: (1) The term ``fixed rate loan'' is not used in the 
proposed rule; (2) the term ``loan origination charges'' is addressed 
separately in proposed Sec.  617.7115; and (3) a qualified lender would 
disclose ``the specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan'' under 
proposed Sec.  617.7130(b)(5); thus, eliminating the need for these 
definitions. The two existing definitions for ``loan'' and ``qualified 
lender'' are reworded slightly but we did not intend to make any 
substantive change.

Subpart B--Disclosure of Effective Interest Rates

Section 617.7100--Who Must Make and Who Is Entitled To Receive an 
Effective Interest Rate Disclosure?
    Proposed Sec.  617.7100(a) states a basic requirement of section 
4.13 of the Act, that a qualified lender is required to provide an 
effective interest rate disclosure to borrowers for all loans not 
subject to TILA. Paragraph (a) would replace current Sec.  614.4365.
    In its letter requesting regulatory relief, the FCC generally 
recommended that we amend the current rule to allow a single notice be 
sent when a borrower has multiple loans that close on the same day. The 
FCC also suggested that amendments allow a lender to apply a notice 
given in connection with a loan closing to any future indebtedness by 
the borrower. The Act requires that an EIR disclosure be made for 
``all'' loans. Because each loan is a separate legal obligation and 
carries its own interest rate and specific terms and conditions, we 
believe that each loan requires a separate disclosure. However, 
separate disclosures of multiple loans closed simultaneously may be 
included in the same notice to the borrower.
    Paragraph (b) provides what a lender must do when there is more 
than one borrower obligated on a loan. Current Sec.  614.4367(d) allows 
the lender to satisfy the disclosure requirements by providing the 
disclosure to any one of the primary obligors on the loan. The proposed 
rule will give borrowers the opportunity to designate, in writing, the 
person they wish to receive the disclosures. If the borrowers do not 
designate a particular recipient, the lender must provide the 
disclosures to at least one borrower primarily liable for repayment of 
the loan. FCA believes that allowing borrowers, and not just the 
lender, to designate who will receive the disclosures is more in 
keeping with the intent of the ``borrower rights'' provisions of the 
Act and will not be burdensome to the lender.
Section 617.7105--When Must a Qualified Lender Disclose the Effective 
Interest Rate to a Borrower?
    Section 4.13 of the Act requires EIR disclosure not later than the 
time of loan closing for all covered loans. This rule is easy to apply 
for new customers, and proposed paragraph (a) contains this general 
directive for prospective borrowers.
    However, the question of when a new EIR disclosure is required to 
be made to an existing borrower--for example when the borrower 
``renews'' or ``refinances'' a loan--has met with varied 
interpretations under FCA's current regulations. FCC suggests amending 
the regulatory definition of ``loan'' to include ``any renewal or 
refinancing of such a loan, but not including any interest rate 
conversion, reamortization, or other loan servicing action that does 
not result in a new obligation between a borrower and a qualified 
lender.'' In general, FCA agrees with the substance of this suggestion. 
However, rather than change our definition of ``loan'' (which is taken 
directly from the Act), we instead propose revising the criteria that 
establish the circumstances in which EIR disclosure is necessary. 
Paragraph (b), therefore, provides that a qualified lender must make a 
new EIR disclosure to existing borrowers on or before the date the 
borrower:
    (1) Executes a new promissory note or other comparable evidence of 
indebtedness;
    (2) Purchases additional stock as a condition of obtaining new 
funds from the qualified lender; or
    (3) Pays an additional loan origination charge to the qualified 
lender as a condition of obtaining new funds.
    As the FCC points out, a new note (or other comparable document)--
ordinarily executed for a renewal or a refinancing--creates a new, 
binding legal obligation and therefore must be treated as a new 
``loan'' for disclosure purposes. While ``reamortization'' may not 
require a new disclosure if none of the above conditions is met, any 
new interest rate on the reamortized loan must be disclosed under the 
subsequent disclosure requirements of proposed Sec.  617.7135.
    Section 4.13(a)(3) of the Act also requires qualified lenders to 
disclose the effect of ``any'' purchases of stock or participation 
certificates or loan origination charges. As a result, new disclosure 
must be made any time a borrower is required to buy stock or pay 
additional loan origination charges in connection with a lending 
transaction,

[[Page 5589]]

whether under an existing or new promissory note.
    Paragraph (b)(2) of proposed Sec.  617.7105 is intended to clarify 
that no new disclosure is required for additional advances made under 
an open-end line of credit or similar preexisting arrangement unless 
one of the three aforementioned conditions occurs. For these types of 
loans, normally only one EIR disclosure--at the time of loan closing--
is required.
Section 617.7110--How Should a Qualified Lender Disclose the Cost of 
Borrower Stock or Participation Certificates?
    The Act and current FCA regulations require a qualified lender to 
disclose the effect of any purchases of stock or participation 
certificates on the effective rate of interest on a loan. Where the 
lender has a per loan stock purchase requirement, this rule is 
straightforward to apply. However, many System lenders have adopted per 
member, rather than per loan, stock purchase requirements. This raises 
the issue of whether previously purchased stock must be included in the 
EIR for new loans to existing borrowers/stockholders.
    Historically, we have advised institutions that stock must be 
included in the EIR disclosure because stock was generally issued on a 
per loan basis. After reviewing current stock issuance practices, we 
have concluded that the Act does not require a qualified lender to 
include the cost of previously purchased stock in the EIR calculation 
for new loans. Amounts previously paid to a lender in connection with 
an earlier, separate loan transaction are not properly included in the 
EIR calculation as ``interest'' on a subsequent loan because the 
borrower is not paying that amount to the lender and the lender is not 
receiving that amount from the borrower in connection with the new 
``loan.''
    Furthermore, shares of stock in a corporation, such as an FCS 
lending institution, are personal property, constituting an asset of 
the owner. Therefore, we believe FCS borrower stock should not be 
treated as a continuing liability or cost to a borrower. Section 
4.13(a)(5) of the Act requires that borrowers be informed that they are 
purchasing an at-risk equity investment in the System institution. We 
believe that treating the stock purchase as a continuing cost to the 
borrower (by continuing to include it in EIR calculations) is at odds 
with the nature of an at-risk equity investment and confuses the 
meaning of the section 4.13(a)(5) required disclosure.
    We have incorporated this new guidance into the proposed rule by 
providing that the cost of borrower stock must be included in the EIR 
calculation only at the time the stock is purchased in connection with 
a loan transaction, whether purchased with cash, included in a 
promissory note, or otherwise paid. For subsequent loans made to 
existing borrowers, only the cost of new stock, if any, purchased in 
connection with the transaction must be included in the EIR 
calculation.
Section 617.7115--How Should a Qualified Lender Disclose Loan 
Origination and Other Charges?
    The Act and current FCA regulations require qualified lenders to 
disclose the effect of ``any loan origination charges'' on the 
``effective rate of interest'' on a loan. However, the Act does not 
define ``loan origination charges,'' and FCA's current regulatory 
definition (in Sec.  614.4366(f)) does not clearly state which charges 
should and which should not be included in the EIR calculation. In 
adopting the current definition of ``loan origination charges,'' FCA 
looked, in part, to similar terms used in Federal Reserve Board 
regulations implementing TILA (Regulation Z).
    The FCC commented that it did not seem likely that Congress 
intended System institutions to consider or include in their EIR 
calculations all or most of the charges listed in Regulation Z and that 
FCA has not explicitly incorporated Regulation Z's ``Charges excluded 
from the finance charge'' (12 CFR 226.4(c)). The FCC suggests that 
since TILA, by its terms, does not apply to agricultural loans, FCA 
should not look to Regulation Z for guidance in determining what 
constitutes ``loan origination charges'' under the Act. FCC recommends 
defining loan origination charges to include ``stock, participation 
certificates, and fees paid in lieu of interest (points, origination 
fees, etc.).'' The FCC further states that this would be ``a clearer, 
more concise, less burdensome definition that would comport with the 
relevant requirements of the Act, especially in view of the fact that 
no other lender is required to give an effective interest rate 
disclosure when it makes an agricultural loan.''
    We generally agree with FCC's comments. First, Congress provided, 
in section 4.13 of the Act, that the EIR disclosure is for loans not 
subject to TILA. Congress also specifically excluded agricultural loans 
from TILA requirements because it believed that consumer disclosures 
were not appropriate.\5\ Therefore, while Regulation Z may provide some 
background guidance, we believe it is not appropriate to graft TILA and 
Regulation Z definitions or requirements onto Farm Credit Act EIR 
disclosure requirements.
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    \5\ See S. Rep. 96-338, at 24 (1980), reprinted in 1980 
U.S.C.C.A.N. 259
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    Second, we agree that only origination fees, points, and similar 
charges paid to a lender by the borrower should be considered 
``interest'' charges and be included in the EIR calculation. However, 
we also believe that all costs a borrower is required to pay in order 
to obtain a loan from a qualified lender should be disclosed in some 
fashion in order to satisfy the intent of section 4.13 of the Act. 
Therefore, proposed Sec.  617.7115 provides guidance on which loan 
charges must be included in the EIR calculation and which charges must 
be disclosed separately.
    Paragraph (a) is intended to replace and clarify the current 
definition of ``loan origination charges'' found in Sec.  614.4366(f). 
It requires that any one-time charge paid by a borrower to a qualified 
lender in consideration for making a loan be included in the EIR 
calculation as a loan origination charge. Loan origination charges 
include, but are not limited to, loan origination fees, application 
fees, and conversion fees charged by the lender. Loan origination 
charges also include any payments made by a borrower to a qualified 
lender to reduce the interest rate that would otherwise be charged, 
including any charges designated as ``points.''
    Ordinarily, any general administrative or processing fee charged by 
a lender to recover the lender's operating costs constitutes added 
lending costs to borrowers that must be included in the loan 
origination charges under paragraph (a). However, loan origination 
charges should not include any general fee collected by a lender on 
behalf of third parties or other fees charged by the lender for 
specific services rendered to borrowers.
    We added paragraph (b) to provide that all other payments that a 
borrower is required to make to obtain a loan, but not included in the 
loan origination charges described in paragraph (a) in the EIR 
calculation, must be disclosed separately at the time of loan closing. 
These include, but are not limited to, real or personal property taxes, 
guarantee fees, or insurance premiums paid by borrowers to third 
parties, and appraisal fees paid either to the lender or to a third 
party.
    We believe only charges that could reasonably be defined as 
``interest''

[[Page 5590]]

received by the lender in exchange for making the loan should be 
included in the EIR calculation. Having fewer items included in the EIR 
more clearly demonstrates the effect of stock and origination charges 
paid to the qualified lender and reduces artificial inflation of the 
EIR. We also believe that separate disclosure of charges not included 
in the EIR calculation, consisting of a list of the actual cost of 
other items, is more meaningful to borrowers than including them in the 
EIR calculation.
Section 617.7120--How Should a Qualified Lender Present the Disclosures 
to a Borrower?
    Paragraph (a) requires a qualified lender to disclose the effective 
interest rate and other required information clearly and conspicuously 
in writing, in a form that is easy to read and understand and that may 
be kept by the borrower. Paragraph (b) further provides that the 
required disclosures cannot be combined with any information not 
directly related to the information required by proposed Sec. Sec.  
617.7130 and 617.7135. These standards are intended to provide 
reasonable assurance that qualified lenders provide user-friendly, 
meaningful disclosures to borrowers. We also propose to eliminate the 
model forms contained in the Appendix to 12 CFR 614.4367 of the current 
regulations to permit lenders to tailor their disclosures to a variety 
of loan types.
Section 617.7125--How Should a Qualified Lender Determine the Effective 
Interest Rate?
    Current FCA regulations provide direction as to the general 
requirements of EIR disclosures; they do not, however, prescribe a 
specific formula or methodology for calculation of an effective 
interest rate. The absence of a definitive methodology for calculating 
an effective interest rate has led to the use of different approaches--
ranging from simplistic to a more complex discounted cash flow method.
    Proposed Sec.  617.7125 provides that a qualified lender must 
calculate the effective interest rate on a loan using a discounted cash 
flow method showing the effect of the time value of money in 
determining the EIR. Further, the proposed rule provides that, for all 
loans, the cash flow stream used for calculating the effective interest 
rate of a loan must include: (1) Principal and interest; (2) the cost 
of stock or participation certificates that a borrower is required to 
purchase in connection with the loan; and (3) loan origination charges 
described in Sec.  617.7115(a).
    The discounted cash flow method required by proposed Sec.  617.7125 
is conceptually similar to the formula prescribed in Regulation Z for 
determination of the annual percentage rate (APR) on loans subject to 
TILA. While loan charge components differ between the EIR required by 
the Act and the APR required by Regulation Z, we believe requiring the 
disclosure of an EIR determined under a widely used method for 
analyzing the cost of credit would provide more meaningful information 
to borrowers.
    As discussed earlier, we believe it is not appropriate to graft 
TILA or Regulation Z requirements onto the Act's EIR disclosure 
requirements. Consequently, the proposed rule does not impose, on 
qualified lenders, a formula or specific procedures for calculating the 
EIR. Instead, we propose that all qualified lenders establish policies 
and procedures for calculating the EIR and use a standard methodology 
(the discounted cash flow method) for determining required EIR 
disclosures to borrowers.
    Paragraph (c) requires lenders to establish policies and procedures 
for disclosing the effect of the cost of borrower stock and loan 
origination charges on the interest rate of a loan. Qualified lenders 
will also be required to establish policies and procedures for 
determining the major assumptions used in calculating the EIR, such as 
for calculating the EIR for adjustable rate loans, revolving or open-
end lines of credit, or other loans where key terms may vary or may not 
be fixed. Qualified lenders may not, however, assume retirement of 
stock in calculating the EIR disclosed to borrowers because the Act 
provides that borrower stock is ``at risk'' and a qualified lender 
cannot guarantee stock retirement. Qualified lenders, may, however, 
provide supplemental disclosures to borrowers to demonstrate the effect 
of potential stock retirements so long as the additional disclosures 
are not misleading.
    In considering the best way to achieve consistent, accurate, and 
meaningful EIR disclosures, the FCA considered common practices in the 
financial services industry for similar disclosures. Regulation Z for 
consumer credit provides detailed requirements for uniform APR 
calculations that essentially use a discounted cash flow method. 
Because the discounted cash flow method for calculating an EIR 
explicitly and routinely weighs the time value of money, we believe it 
produces the most accurate reflection of a loan's cost.
    Although the discounted cash flow method involves somewhat complex 
mathematical computations, the FCA does not believe a requirement to 
use this method would cause undue burden to lenders. A survey of 
System-lender disclosures we conducted in the spring of 2002 indicated 
that a substantial majority (more than 80 percent) of FCS lenders have 
already incorporated discounted cash flows in their EIR calculations. 
In addition, a variety of computer-based tools for calculating 
effective interest rates are readily available in the market place at a 
reasonable cost.
    FCA believes that the complexity of agricultural lending requires a 
more flexible disclosure approach than provided for under Regulation Z. 
Therefore, rather than prescribing the exact form and content of 
disclosure, the proposed rule requires qualified lenders to disclose 
the EIR and other loan information to borrowers in a form that is easy 
to read and understand and that the borrower may keep, as long as 
disclosures are made clearly and conspicuously in writing. However, as 
discussed above, qualified lenders must establish written policies and 
procedures regarding disclosure of the EIR and loan information to 
borrowers and apply the policies and procedures consistently. Each 
qualified lender must also maintain adequate documentation showing how 
the lender calculated and disclosed the EIR on each loan.
    When a single borrower closes on multiple loans simultaneously and 
the borrower is required to purchase stock and pay loan origination 
charges on a per borrower basis, a qualified lender must retain 
documentation evidencing specific procedures used for assigning costs 
among the loans in determining the EIR for each particular loan.
    To illustrate the determination of an EIR based on discounted cash 
flows, we have included two examples in Part IV of this preamble.
Section 617.7130--What Initial Disclosures Must a Qualified Lender Make 
to a Borrower?
    (a) Required disclosures-in general--To ensure that all essential 
elements of a loan are disclosed, the information required by existing 
Sec.  614.4367(a)(1), (3), (4), and (5) are incorporated in proposed 
Sec.  617.7130(a). Qualified lenders must disclose the following in 
writing:
    (1) The interest rate on the loan;
    (2) The effective interest rate of the loan;
    (3) The amount of stock or participation certificates that a 
borrower is required to purchase in connection with the loan and 
included in the calculation of the effective interest rate of the loan;

[[Page 5591]]

    (4) All loan origination charges included in the effective interest 
rate;
    (5) All other charges not included as loan origination charges in 
the effective interest rate calculation that borrowers are required to 
pay to obtain a loan;
    (6) That stock or participation certificates that borrowers are 
required to purchase are at risk and may only be retired at the 
discretion of the board of the institution; and
    (7) The various types of loan options available to borrowers, with 
an explanation of the terms and borrower rights that apply to each type 
of loan.
    The information required above is intended to reflect the actual 
loan for which the disclosure is being provided. The qualified lender 
may, at its discretion, include additional disclosures or examples--
including illustrations of the impact on the effective interest rate of 
any change in borrower stock ownership--so long as such disclosures are 
not misleading.
    The FCC contended in its comment letter that existing Sec.  
614.4367(a)(3), which requires the computation of EIR to be made on a 
transaction-specific basis, goes beyond the requirement of section 
4.13(a)(3) of the Act. The FCC believes that the statutory requirement 
could be satisfied by using a representative example based on a generic 
transaction and recommended that FCA allow disclosure through the use 
of a standard example.
    As indicated in prior rulemakings, we disagree with this approach 
and believe that in order for borrower disclosure to be ``meaningful,'' 
as is required by statute, the disclosure should take into account the 
specific loan for which the disclosure is being provided. The EIR 
disclosed should be derived from the interest rate and related charges 
applicable to the loan being made to the borrower. However, for 
adjustable or revolving loans where the terms and conditions are not 
fixed or are subject to change, a disclosure of the EIR based on the 
terms and conditions known at the inception of the loan, coupled with 
representative examples showing the effect of changes in any of the 
cost elements of the loan, e.g., borrower stock, loan origination 
charges, or interest rate, on the EIR would be appropriate under the 
circumstances.
    (b) Adjustable rate loans--Information required by current Sec.  
614.4367(a)(2) is incorporated in proposed Sec.  617.7130. Qualified 
lenders must disclose to borrowers at the inception of adjustable rate 
loans:
    (1) The circumstances under which the rate can be adjusted;
    (2) How much the rate can be adjusted at any one time and how much 
the rate can be adjusted during the term of the loan;
    (3) How often the rate can be adjusted;
    (4) Any limitations on the amount or frequency of adjustments; and
    (5) The specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan.
    Paragraph (b)(5) was added to replace the current definition of 
``standard adjustments factors'' in Sec.  614.4366(h), which includes 
those factors typically taken into consideration by a qualified lender 
in adjusting the interest rate on loans, such as a lender's cost of 
funds, operating expenses, provision for loan losses, changes in 
retained earnings, etc.
Section 617.7135--What Subsequent Disclosures Must a Qualified Lender 
Make to a Borrower?
    (a) Notice of interest rate change--Section 4.13(a)(4) of the Act 
requires qualified lenders to provide notice to borrowers of ``any 
change in the interest rate applicable to the borrower's loan'' within 
a ``reasonable time after'' the effective date of increase or decrease. 
Current Sec.  614.4367(b)(3) requires notice to be made within 10 days 
after the effective date of the rate change. For loans with interest 
rates directly tied to a widely publicized external index, the notice 
may be made within 30 days after the effective date of the rate change.
    The FCC recommends that the period in which disclosure must be made 
should be the same for all loans, regardless of any tie to an external 
index, in order to ``simplify the disclosure process for System 
institutions.'' However, under the current regulation, a System lender 
may choose to make disclosure for all adjustable rate loans within 10 
days of the effective date of a change. Therefore, no regulatory change 
is necessary to achieve this recommendation. Additionally, when we 
adopted the 10- and 30-day rule in 1996, we said that the ``need to 
provide timely information to borrowers outweighed the regulatory 
burden that a 10-day post-notice may entail.'' We continue to believe 
that a longer notice period is not appropriate for ``administered rate 
loans'' (adjustable rate loans not tied to a widely published external 
index), thus we retain the 10-day requirement in the proposed rule at 
Sec.  617.7135(a)(3).
    The FCC also recommends that ``where an interest rate is based on a 
widely publicized external index plus a spread, disclosure of a change 
of rate should not be required merely when the index changes but should 
be required only when the change in rate is caused by a change in the 
spread.'' In support, FCC notes that: (1) Borrowers receive notice in 
their original contract of what the index is and when the rate can 
change; (2) borrowers can easily find changes in the index through 
readily available sources; (3) anticipated changes in an external index 
(as opposed to unanticipated changes in the spread) would not have much 
impact on a borrower's decision to refinance with another lender; and 
(4) when an external index changes, there is no change to the 
borrower's contract rate of interest (index plus spread).
    However, we believe eliminating the notice of interest changes for 
index rate loans is not appropriate. The Act requires notice of ``any 
change in the interest rate applicable to the borrower's loan.'' While 
the contract rate (index plus spread) may not have changed, it is clear 
that when the index changes, the rate of interest the borrower pays on 
the loan has changed. There is nothing in the legislative history of 
the Act to suggest that Congress intended to exempt index rate loans 
from the disclosure requirement. Furthermore, we believe it is 
important to remind borrowers that interest rate changes will affect 
their payment amounts.
    We propose to extend the deadline to provide notice on loans 
directly tied to a widely publicized index from 30 to 45 days. This 
would allow lenders that provide monthly billing or account statements 
sufficient time to include the notice of change with the regular 
mailing. The notice could also be satisfied by providing the required 
disclosure to borrowers in any form of correspondence, such as a 
newsletter.
    We considered revising the rule to allow qualified lenders to send 
notice with the borrower's next regularly scheduled billing or account 
statement. However, for annual, semiannual, or quarterly payment loans, 
it could result in some borrowers not receiving notice of interest rate 
change for a considerable time period. We did not believe that would 
constitute ``reasonable'' notice for those borrowers and would result 
in significantly disparate treatment for borrowers depending on their 
payment schedule.
    We consider the nationally published commercial bank Prime Rate and 
the London Interbank Offered Rate (LIBOR) to be the primary examples of 
widely publicized external indexes. Other rates may also qualify, but 
the qualified lender must ensure that the rate is published in a source 
readily available to its borrowers. The 45-day rule applies only for 
changes in the index itself; if the lender changes the spread, a 10-day 
post-notice is required.

[[Page 5592]]

    We do not propose to materially alter the required content of the 
notice. Current and proposed rules require notice of the new interest 
rate and the effective date of the new rate. In the only change, we 
eliminated the reference to ``standard adjustments factors'' and now 
propose that lenders directly disclose ``the factors used to adjust the 
interest rate on the loan,'' e.g., spread, index averages, etc., in the 
notice.
    (b) Notice of increase in stock purchase requirement--Current Sec.  
614.4367(c) requires that each qualified lender ``that takes any action 
which changes the amount of stock or participation certificates which 
borrowers are required to own and that modifies the effective interest 
rate'' send a notice to borrowers at least 10 days before the effective 
date of the action. The FCC recommends that the 10-day prior notice be 
changed to a 30-day post-notice, stating that when there is a stock 
reduction, the requirement is burdensome to the lender (requiring two 
mailings, one notice and one forwarding the stock retirement proceeds) 
and does not materially benefit the borrower (who would not normally 
decide to refinance because of a stock and effective interest rate 
reduction).
    We agree with FCC that prior notice of a decrease in required stock 
ownership does not provide any meaningful benefit to borrowers. We also 
believe that the Act does not require a notice for a decrease in stock 
ownership requirement. Therefore, the proposed rule does not require 
any notice for a decrease in stock ownership.
    However, we believe that the Act requires a lender to make a new 
EIR disclosure if it increases a borrower's stock purchase requirement 
because of the need to show the effect of any ``purchases'' of stock on 
the EIR. Ten-day (10-day) prior notice of such a change is necessary to 
give a borrower the opportunity to refinance using a meaningful 
comparison of interest rates. Therefore, the proposed rule retains the 
10-day prior notice requirement for any required increase in stock 
ownership and includes the same basic information requirements as the 
current regulation. This obligation should not create a burden on 
System lenders since a stock increase is typically applicable to 
borrowers of new loans rather than applied retroactively to existing 
borrowers.

Subpart C--Disclosure of Differential Interest Rates

Section 617.7200--What Disclosures Must a Qualified Lender Make to a 
Borrower on Loans Offered With More Than One Rate of Interest?
    Under the Act, qualified lenders that offer loans with differential 
interest rates must disclose additional information to borrowers at the 
request of a borrower of a loan. This requirement was implemented by 
existing Sec.  614.4368, which requires a lender to inform borrowers of 
their rights when the lender offers more than one rate of interest to 
borrowers. We rearranged the existing regulation and moved it to the 
proposed Sec.  617.7200 without changes in substance.

IV. Calculation of the Effective Interest Rate Using a Discounted Cash 
Flow Method

    To illustrate how discounted cash flows can be used in determining 
a loan's effective interest rate, we developed the following examples 
using computer spreadsheet software based on a given set of assumptions 
to determine the cash flow stream in the calculation.
    We assumed that the borrower's stock is not retired either as the 
loan is paid down or at maturity. We also assumed the future cash flow 
stream consists of a series of annual equal payments for calculation of 
the effective interest rate.
    The amount of a lender's loan disbursement to the borrower is the 
loan amount reduced by the borrower's payments for borrower stock and 
loan origination charges, regardless of the form of the payments. 
However, depending on how the borrower stock and loan origination 
charges are paid by the borrower in a loan transaction, the amount of 
the promissory note to be used for calculation of the EIR may be 
different.
    The following examples demonstrate a loan transaction with two 
different loan disbursement scenarios: Consider a 10-year, $100,000 
loan with a stated interest rate of 9 percent and equal annual payments 
until maturity. The loan has a $1,000 stock purchase requirement (the 
lesser of $1,000 or 2 percent of the loan amount) and a $200 loan 
origination charge. In Example A, we have assumed that the borrower has 
paid for the stock and fees at the time the loan is disbursed. As a 
result, the borrower takes a $100,000 loan but only receives loan 
proceeds of $98,800 ($100,000 loan minus $1,200 stock and loan 
origination fee). In example B, we have assumed the borrower has rolled 
the cost of the stock and loan origination fee into the promissory 
note. In order to receive loan proceeds of $100,000, the borrower needs 
to take $101,200 loan.

 Example A.--Loan Proceeds of $98,800 to Borrower With a Promissory Note
                               of $100,000
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Loan proceeds to borrower..................  $98,800
Stock purchase.............................  $1,000
Origination fee............................  $200
Promissory note............................  $100,000
Interest rate..............................  9.00%
Term of loan...............................  10 years
Annual payment.............................  $15,582
Effective interest rate....................  9.2752%
------------------------------------------------------------------------

    The initial cash flow we used in determining the EIR includes: (1) 
The principal of the loan; (2) the amount of stock a borrower is 
required to purchase; and (3) the amount of loan origination charges a 
borrower is required to pay.
    In computing the effective interest rate, the first step is to 
determine the cash flow stream for the loan to maturity. The first in 
the series of cash flows is the loan disbursement or the loan proceeds 
to the borrower. In Example A, the amount of loan disbursement to the 
borrower is determined by taking the gross loan amount of $100,000 
minus the stock purchase of $1,000 and the loan origination fee of $200 
for a total of $98,800. Thus, the borrower's legal obligation is 
$100,000, but the borrower only has the use of $98,800--this is the 
present value from which the effective interest rate on the loan is 
derived.
    The remainder of the cash flow stream consists of the annual 
payments on the loan to maturity. Microsoft Excel's \6\ Payment (PMT) 
function was used to calculate the constant payment based on the amount 
of loan to be repaid (i.e., $100,000), the interest rate (9 percent), 
and the number of payments in the loan term (10). The amount of annual 
level payments derived from these given factors is $15,582.
---------------------------------------------------------------------------

    \6\ We used Microsoft Excel application software to develop 
these examples. However, the same results can be achieved using 
other commercially available software.
---------------------------------------------------------------------------

    Once the cash flow stream has been determined, Excel's Internal 
Rate of Return (IRR) function is used to calculate the loan's effective 
interest rate. The effective interest rate for the loan derived from 
the IRR function is 9.2752 percent \7\ (based on the initial cash 
outflow of $98,800 and a future cash inflow stream consisting of 10 
level

[[Page 5593]]

payments in the amount of $15,582 each year). The IRR reflects the 
effective interest rate of a loan consisting of disbursements (negative 
values for cash outflows) and loan payments of principal and interest 
(positive values for cash inflows) that occur at regular intervals.
---------------------------------------------------------------------------

    \7\ For illustration purposes, the EIR is expressed in four 
decimal points in our examples. However, the EIR may be expressed 
with two or more decimal points based on the size, term, and common 
industry practice for similar loans.

Example B.--Loan Proceeds of $100,000 to Borrower With a Promissory Note
                               of $101,200
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Loan proceeds to borrower..................  $100,000
Stock purchase.............................  1,000
Origination fee............................  200
Promissory note............................  101,200
Interest rate..............................  9.00%
Term of loan...............................  10 years
Annual payment.............................  $15,769
Effective interest rate....................  9.2719%
------------------------------------------------------------------------

    In Example B, the initial cash flow of the loan to be used in the 
IRR function for calculating the effective interest rate is the 
$100,000 loan proceeds to the borrower. The amount of total loan 
obligation used for determination of the annual payment and the amount 
of annual payments derived from the PMT function are $101,200 ($100,000 
+ $1,000 + $200) and $15,769, respectively. The effective interest rate 
in this case is 9.2719 percent.
    In addition to the EIR disclosure, a qualified lender may include 
supplemental disclosures of the effective interest rate using the 
assumption that borrower stock will be retired upon repayment of the 
loan or as the loan is paid down. The qualified lender must explain the 
purpose of the supplemental disclosure and that stock or participation 
certificates that borrowers are required to purchase are at risk and 
may only be retired at the discretion of the board of the institution.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects

12 CFR Part 611

    Agriculture, Banks, banking, Rural areas.

12 CFR Part 612

    Agriculture, Banks, banking, Conflict of interests, Rural areas.

12 CFR Part 614

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

12 CFR Part 617

    Banks, banking, Criminal referrals, Criminal transactions, 
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.

    For the reasons stated in the preamble, parts 611, 612, 614 and 617 
of chapter VI, title 12 of the Code of Federal Regulations are proposed 
to be amended as follows:

PART 611--ORGANIZATION

    1. The authority citation for part 611 continues to read as 
follows:

    Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 
4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm 
Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 
2203, 2208, 2209, 2243, 2244, 2252, 2278a-9, 2278b-6, 2279a-2279f-1, 
2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 
1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and 
1004.

Subpart P--Termination of System Institution Status

    2. Amend Sec.  611.1223(d)(6) by revising the second sentence to 
read as follows:


Sec.  611.1223  Information statement--contents.

* * * * *
    (d) * * *
    (6) * * * You must explain the effect termination will have on 
borrower rights granted in the Act and part 617 of this chapter.
* * * * *
    3. Amend Sec.  611.1290 by revising the second sentence to read as 
follows:


Sec.  611.1290  Continuation of borrower rights.

    * * * Institutions that become other financing institutions on 
termination must comply with the applicable borrower rights provisions 
in the Act and part 617 of this chapter.

PART 612--STANDARDS OF CONDUCT AND REFERRAL OF KNOWN OR SUSPECTED 
CRIMINAL VIOLATIONS

    4. The authority citation for part 612 continues to read as 
follows:

    Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12 
U.S.C. 2243, 2252, 2254).

    5. Revise the heading of part 612 to read as set forth above.
    6. Redesignate Sec. Sec.  612.2130 through 612.2270 as subpart A 
and add a heading for subpart A to read as follows:

Subpart A--Standards of Conduct

PART 614--LOAN POLICIES AND OPERATIONS

    7. 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, 
4.13B, 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, 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 K--[Removed]

    8. Remove subpart K, consisting of Sec. Sec.  614.4365 through 
614.4368.

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing 
of Other Financing Institutions

    9. Revise Sec.  614.4560(d) to read as follows:


Sec.  614.4560  Requirements for OFI funding relationships.

* * * * *
    (d) The borrower rights requirements in part C of title IV of the 
Act, and section 4.36 of the Act, and the regulations in part 617 of 
this chapter shall apply to all loans that an OFI funds or discounts 
through a Farm Credit Bank or agricultural credit bank, unless such 
loans are subject to the Truth in Lending Act, 15 U.S.C. 1601 et seq.
* * * * *

PART 617--REFERRAL OF KNOWN OR SUSPECTED CRIMINAL VIOLATIONS

    10. The authority citation for part 617 continues to read as 
follows:

    Authority: Secs. 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 
2243, 2252).

[[Page 5594]]

PART 617--[REMOVED]


Sec. Sec.  617.1--617.4  [Redesignated as Sec. Sec.  612.2300--
612.2303]

    11. Redesignate Sec. Sec.  617.1 through 617.4 as new Sec. Sec.  
612.2300 through 612.2303.
    12. Remove part 617.
    13. Redesignate newly designated Sec. Sec.  612.2300--612.2303 as 
subpart B and add a heading for subpart B to read as follows:

Subpart B--Referral of Known or Suspected Criminal Violations


Sec.  612.2300  [Amended]

    14. Amend newly designated Sec.  612.2300 by removing the reference 
``Sec.  617.2'' each place it appears and add in its place, the 
reference ``Sec.  612.2301'' in paragraphs (a), (c), and (e).
    15. Add a new part 617 to read as follows:

PART 617--BORROWER RIGHTS

Subpart A--General
Sec.
617.7000 Definitions.
Subpart B--Disclosure of Effective Interest Rates
617.7100 Who must make and who is entitled to receive an effective 
interest rate disclosure?
617.7105 When must a qualified lender disclose the effective 
interest rate to a borrower?
617.7110 How should a qualified lender disclose the cost of borrower 
stock or participation certificates?
617.7115 How should a qualified lender disclose loan origination and 
other charges?
617.7120 How should a qualified lender present the disclosures to a 
borrower?
617.7125 How should a qualified lender determine the effective 
interest rate?
617.7130 What initial disclosures must a qualified lender make to a 
borrower?
617.7135 What subsequent disclosures must a qualified lender make to 
a borrower?
Subpart C--Disclosure of Differential Interest Rates
617.7200 What disclosures must a qualified lender make to a borrower 
on loans offered with more than one rate of interest?

    Authority: Secs. 4.13, 5.9, 5.17 of the Farm Credit Act (12 
U.S.C. 2199, 2243, 2252(a)(9)).

Subpart A--General


Sec.  617.7000  Definitions.

    For purposes of this part, the following terms apply:
    Adjustable rate loan means a loan where the interest rate payable 
over the term of the loan may change. This includes adjustable rate, 
variable rate or other similarly designated loans.
    Effective interest rate means a measure of the cost of credit, 
expressed as an annual percentage rate, that shows the effect of the 
following costs, if any, on the interest rate on a loan charged by a 
qualified lender to a borrower:
    (1) The amount of any stock or participation certificates that a 
borrower is required to buy to obtain the loan; and
    (2) Any loan origination charges paid by a borrower to a qualified 
lender to obtain the loan.
    Interest rate means the stated contract rate of interest.
    Loan means an extension of credit made to a farmer, rancher, or 
producer or harvester of aquatic products, for any agricultural or 
aquatic purpose and other credit needs of the borrower, including 
financing for basic processing and marketing that directly relates to 
the borrower's operations and those of other eligible farmers, 
ranchers, and producers or harvesters of aquatic products.
    Qualified lender means:
    (1) A System institution, except a bank for cooperatives, that 
makes loans as defined in this section; and
    (2) Each bank, institution, corporation, company, credit union, and 
association described in section 1.7(b)(1)(B) of the Act (commonly 
referred to as an other financing institution), but only with respect 
to loans discounted or pledged under section 1.7(b)(1).

Subpart B--Disclosure of Effective Interest Rates


Sec.  617.7100  Who must make and who is entitled to receive an 
effective interest rate disclosure?

    (a) A qualified lender must make the disclosures required by 
subparts B and C of this part to borrowers for all loans not subject to 
the Truth in Lending Act.
    (b) For a single loan involving more than one borrower, a qualified 
lender is required to provide only one set of disclosures to borrowers. 
All borrowers may designate, in writing, one person who will receive 
the effective interest rate disclosure. If the borrowers do not 
designate a particular recipient, the lender may provide the disclosure 
to at least one of the borrowers who is primarily liable for repayment 
of the loan.


Sec.  617.7105  When must a qualified lender disclose the effective 
interest rate to a borrower?

    (a) Disclosure to prospective borrowers. A qualified lender must 
provide written effective interest rate disclosure for each loan no 
later than the time of loan closing.
    (b) Disclosure to existing borrowers. (1) A qualified lender must 
provide a new effective interest rate disclosure to an existing 
borrower on or before the date:
    (i) The borrower executes a new promissory note or other comparable 
evidence of indebtedness;
    (ii) The borrower purchases additional stock as a condition of 
obtaining new funds from the qualified lender; or
    (iii) The borrower pays an additional loan origination charge to 
the qualified lender as a condition of obtaining new funds.
    (2) A qualified lender is not required to provide a new effective 
interest rate disclosure when it advances new funds to an existing 
borrower if none of the conditions of paragraph (b)(1) of this section 
apply and the advance is made pursuant to a preexisting contract that 
specifically provides for future advances.


Sec.  617.7110  How should a qualified lender disclose the cost of 
borrower stock or participation certificates?

    The cost of borrower stock must be included in the effective 
interest rate calculation at the time the stock is purchased in 
connection with a loan transaction. For subsequent loans to existing 
borrowers, only the cost of new stock, if any, purchased in connection 
with a new loan or advance of new funds must be included in the 
effective interest rate calculation for the transaction.


Sec.  617.7115  How should a qualified lender disclose loan origination 
and other charges?

    (a) Any one-time charge paid by a borrower to a qualified lender in 
consideration for making a loan must be included in the effective 
interest rate as a loan origination charge. These include, but are not 
limited to, loan origination fees, application fees, and conversion 
fees. Loan origination charges also include any payments made by a 
borrower to a qualified lender to reduce the interest rate that would 
otherwise be charged, including any charges designated as ``points.''
    (b) All other payments of fees not included in the loan origination 
charges described in paragraph (a) of this section that borrowers are 
required to make to obtain a loan must be disclosed separately at the 
time of loan closing. These include, but are not limited to, fees paid 
to the lender or a third party to obtain an appraisal, and any taxes, 
guarantee fees, or insurance premiums paid by borrowers to third 
parties.

[[Page 5595]]

Sec.  617.7120  How should a qualified lender present the disclosures 
to a borrower?

    A qualified lender must:
    (a) Disclose the effective interest rate and other information 
required by subparts B and C of this part clearly and conspicuously in 
writing, in a form that is easy to read and understand and that the 
borrower may keep; and
    (b) Not combine the disclosures with any information not directly 
related to the information required by Sec. Sec.  617.7130 and 
617.7135.


Sec.  617.7125  How should a qualified lender determine the effective 
interest rate?

    (a) A qualified lender must calculate the effective interest rate 
on a loan using the discounted cash flow method showing the effect of 
the time value of money.
    (b) For all loans, the cash flow stream used for calculating the 
effective interest rate of a loan must include:
    (1) Principal and interest;
    (2) The cost of stock or participation certificates that a borrower 
is required to purchase in connection with the loan; and
    (3) Loan origination charges described in Sec.  617.7115(a).
    (c) A qualified lender must establish policies and procedures for 
EIR disclosures that clearly show the effect of the cost of borrower 
stock and loan origination charges on the interest rate of a loan. A 
qualified lender must also establish policies and procedures for 
determining major assumptions used in calculating the effective 
interest rate, e.g., criteria on how the cost of borrower stock and 
loan origination charges are assigned or allocated among multiple loans 
obtained by a borrower simultaneously.


Sec.  617.7130  What initial disclosures must a qualified lender make 
to a borrower?

    (a) Required disclosures--in general. A qualified lender must 
disclose in writing:
    (1) The interest rate on the loan;
    (2) The effective interest rate of the loan;
    (3) The amount of stock or participation certificates that a 
borrower is required to purchase in connection with the loan and 
included in the calculation of the effective interest rate of the loan;
    (4) All loan origination charges included in the effective interest 
rate;
    (5) All other charges not included as loan origination charges in 
the effective interest rate calculation that borrowers are required to 
pay to obtain a loan;
    (6) That stock or participation certificates that borrowers are 
required to purchase are at risk and may only be retired at the 
discretion of the board of the institution; and
    (7) The various types of loan options available to borrowers, with 
an explanation of the terms and borrower rights that apply to each type 
of loan.
    (b) Adjustable rate loans. A lender must provide the following 
information for adjustable rate loans in addition to the requirements 
of paragraph (a) of this section:
    (1) The circumstances under which the rate can be adjusted;
    (2) How much the rate can be adjusted at any one time and how much 
the rate can be adjusted during the term of the loan;
    (3) How often the rate can be adjusted;
    (4) Any limitations on the amount or frequency of adjustments; and
    (5) The specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan.


Sec.  617.7135  What subsequent disclosures must a qualified lender 
make to a borrower?

    (a) Notice of interest rate change. (1) A qualified lender must 
provide written notice to a borrower of any change in interest rate on 
the borrower's existing loan, containing the following information:
    (i) The new interest rate on the loan;
    (ii) The date on which the new rate is effective; and
    (iii) The factors used to adjust the interest rate on the loan.
    (2) If the borrower's interest rate is directly tied to a widely 
publicized external index, a qualified lender must provide written 
notice to the borrower of the rate change within forty-five (45) days 
after the effective date of the change.
    (3) If the borrower's interest rate is not directly tied to a 
widely publicized external index, a qualified lender must send written 
notice to the borrower of the rate change within ten (10) days after 
the effective date of the change.
    (b) Notice of increase in stock purchase requirement. If a 
qualified lender increases the amount of stock or participation 
certificates a borrower must own during the term of a loan, the lender 
must send a written notice to borrower at least ten (10) days prior to 
the effective date of the increase. The notice must state:
    (1) The new effective interest rate on the outstanding balance for 
the remaining term of the borrower's loan;
    (2) The date on which the new rate is effective; and
    (3) The reason for the increase in the borrower stock purchase 
requirement.

Subpart C--Disclosure of Differential Interest Rates


Sec.  617.7200  What disclosures must a qualified lender make to a 
borrower on loans offered with more than one rate of interest?

    A qualified lender that offers more than one rate of interest to 
borrowers must notify each borrower of the right to request a review of 
the interest rate charged on his or her loan no later than the time of 
loan closing. At the request of a borrower, the lender must:
    (a) Provide a review of the loan to determine if the proper 
interest rate has been established;
    (b) Explain to the borrower in writing the basis for the interest 
rate charged; and
    (c) Explain to the borrower in writing how the credit status of the 
borrower may be improved to receive a lower interest rate on the loan.

    Dated: January 29, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-2401 Filed 2-3-03; 8:45 am]
BILLING CODE 6705-01-P