[Federal Register Volume 68, Number 98 (Wednesday, May 21, 2003)]
[Proposed Rules]
[Pages 27757-27760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12631]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 613, 614, and 618

RIN 3052-AC06


Eligibility and Scope of Financing; Loan Policies and Operations; 
General Provisions; Credit and Related Services

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, our) proposes to 
amend regulations governing domestic and international lending, certain 
intra-Farm Credit System (FCS or System) agreements concerning similar 
entity participation transactions, provisions of general financing 
agreements, and related services. We are proposing amendments to 
conform our regulations to recent changes in the Farm Credit Act of 
1971, as amended (Act), to address comments we received requesting that 
the FCA reduce regulatory burden, ensure compliance with the Act, and 
clarify certain regulations.

DATES: Please send your comments to the FCA by June 20, 2003.

ADDRESSES: You may send comments by electronic mail to ``[email protected],'' through the Pending Regulations section of FCA's Web 
site, ``http://www.fca.gov,'' or through the government-wide ``http://www.regulations.gov'' portal. You may also send comments to Robert E. 
Donnelly, Acting 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: 

Dale Aultman, Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498; TTY (703) 
883-4434; or
James Morris, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The primary objectives of our proposal are to conform our 
regulations to recent statutory amendments and to reduce regulatory 
burden imposed on System institutions, while ensuring compliance with 
the Act and FCA regulations. We expect our amendments to improve the 
flow of credit to System customers, make similar entity participation 
transactions less burdensome, and help ensure compliance with the Act 
and FCA regulations.

II. Background

    We are proposing these amendments for three reasons: (1) To address 
comments we received in response to our request that the public 
identify ways we could reduce regulatory burden;\1\ (2) to conform our 
regulations to the Act, as amended by the Farm Security and Rural 
Investment Act (Pub. L. 107-171) (2002 Farm Bill or FSRIA); and (3) to 
help ensure that FCS association lending complies with the Act and our 
regulations.
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    \1\ On August 18, 1998, we published a document in the Federal 
Register inviting the public to identify existing FCA regulations 
and policies that impose unnecessary burdens on the System. See 63 
FR 44176.
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A. Reducing Regulatory Burden

    In response to our regulatory burden solicitation discussed above, 
CoBank, ACB (CoBank), requested that we address several issues 
concerning regulations governing title III banks.
1. Domestic Title III Lending
    CoBank requested that we amend Sec.  613.3100 that pertains to 
eligibility and scope of financing for domestic borrowers because Sec.  
613.3100(c)(1) appears to prohibit loans to subsidiaries of 
subsidiaries of certain eligible borrowers. Because the Act does not 
prohibit financing subsidiaries or other entities in which an eligible 
utility or an eligible cooperative has an ownership interest, we 
propose to clarify our regulations to permit a title III bank to 
provide limited financing to such entities. The financing provided 
shall not exceed the percentage of ownership attributable to the 
eligible cooperative or utility, multiplied by the value of the total 
assets of such entity.
    In addition, CoBank asked that we amend Sec.  613.3100(c)(2) to 
clarify that it authorizes financing activities broader than those 
permitted under the Rural Electrification Act. The legislative history 
of the Farm Credit Act of 1971, as amended, clearly demonstrates that 
Congress intended for banks for cooperatives (BCs) and agricultural 
credit banks (ACBs) to provide financing for ``non act'' purposes.\2\ 
This legislative history is discussed in the preamble proposing the 
existing rule. See 61 FR 42092, August 13, 1996. We propose amending 
this section to clarify that a subsidiary that is eligible to borrow 
under Sec.  613.3100(c)(1)(iii) may also obtain financing for energy-
related or public utility-related purposes that cannot be financed by 
the lenders referred to in Sec.  613.3100(c)(1)(ii). Operation of a 
licensed cable television utility is one example of such purpose.
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    \2\ ``Non act'' purpose means a purpose that is ineligible for 
financing by the Rural Utilities Service (RUS) or the Rural 
Telephone Bank (RTB) as described in paragraph Sec.  
613.3100(c)(1)(ii).
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    Since the legislative history of the relevant language of section 
3.8 of the Act indicates that the permissible ``non act'' purposes 
usually involve providing of communication services such as cable 
television facilities and cellular radio facilities, the permissible 
purposes do not appear to be restricted to cable television or 
communication services.

[[Page 27758]]

However, because title III generally authorizes lending to those that 
provide energy or utility services, it is reasonable to interpret 
section 3.8 of the Act to authorize financing for ``non act'' purposes, 
provided they are energy-related or public utility-related.
2. Related Services
    CoBank also requested that we clarify that it is able to provide 
the same related services as Farm Credit Banks (FCBs) and BCs. We 
amended Sec. Sec.  618.8000 and 618.8005 to clarify that CoBank has the 
same authority to provide related services under title I of the Act as 
FCBs and the same authorities to provide related services under title 
III of the Act as BCs.

B. Conforming FCA Regulations To Reflect Recent Amendments to the Act

    Enactment of the FSRIA amended the Act with respect to:
    (1) International lending by BCs, and (2) similar entity 
transactions.
1. International Lending
    FSRIA amended section 3.7 of the Act to authorize a bank operating 
under title III of the Act to finance certain international 
transactions involving ``agricultural supplies.'' This section formerly 
authorized a bank operating under title III of the Act to finance 
certain transactions involving ``farm supplies.'' After the amendment 
of section 3.7, CoBank can finance certain transactions involving 
``agricultural supplies,'' which is statutorily defined to include a 
farm supply, agriculture-related processing equipment, agriculture-
related machinery, and other capital goods related to the storage or 
handling of agricultural commodities or products. Because of this 
amendment, the definition of ``farm supplies'' in part 613 no longer 
defines the limit of CoBank's authority. The proposed rule makes 
conforming changes to part 613 to add a definition of ``agricultural 
supply.''
2. Similar Entity Participations
    FSRIA also amended sections 3.1(11)(B) and 4.18A of the Act so that 
one type of FCS institution no longer needs approval from another type 
of FCS institution when it participates with a non-FCS lender in 
certain loans to a similar entity.\3\ These amendments to the Act have 
eliminated the statutory basis for some approvals required by existing 
FCA regulations.
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    \3\ ``Similar entity'' means a party that is ineligible for a 
loan from a Farm Credit bank or association, but has operations that 
are functionally similar to the activities of eligible borrowers in 
that a majority of its income is derived from, or a majority of its 
assets are invested in, the conduct of activities that are performed 
by eligible borrowers.
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    However, the FSRIA did not amend the requirement in section 3.1 for 
approval to finance certain similar entities having System loan 
commitments or who are System customers. The proposed regulation would 
codify the remaining approval requirement. We note that System 
institutions may enter into agreements on such terms and conditions as 
they choose, including, where appropriate, annual agreements.

C. Ensure Loan Making Complies With the Act and Regulations

    During examinations of some System institutions, we have identified 
loans that fail to comply with various requirements of the Act and our 
regulations. The Act provides FCA broad authorities and remedies with 
respect to such ``ineligible'' loans. For example, FCA may require a 
direct lender association to divest itself of the loan or cure the 
ineligibility. In appropriate cases, FCA may use its cease and desist 
or civil money penalty authorities. However, a review of general 
financing agreements (GFAs) between FCBs and the ACB and their direct 
lender associations has revealed that, while most GFAs address 
ineligible loans in some fashion, they do not all expressly prohibit 
funding ineligible loans.
    Without in any way limiting FCA's other authorities or remedies 
under the Act, the proposed regulations mandate that the GFA between 
the funding bank and the direct lender association expressly require 
that the calculation of financing available be based solely on loans 
that comply with the Act and FCA regulations.

III. Section-by-Section Analysis

Subpart B--Financing for Banks Operating Under Title III of the Farm 
Credit Act

Sections 613.3100(b)(2)(ii) and 613.3100(c)(1)(v)--Domestic Lending
    We propose to clarify that a bank operating under title III may 
finance a subsidiary or other entity in which eligible cooperatives or 
certain eligible utilities have an ownership interest. Proposed Sec.  
613.3100(b)(2)(ii) permits a title III bank to provide limited 
financing to a subsidiary or other entity in which an eligible 
cooperative has an ownership interest. Proposed Sec.  613.3100(c)(1)(v) 
permits a title III bank to provide limited financing to a subsidiary 
or other entity in which certain eligible utilities have an ownership 
interest. If the eligible cooperative or eligible utility owns less 
than 50 percent of the entity, then the financing provided may not 
exceed the percentage of ownership attributable to the eligible 
cooperative or utility, multiplied by the value of the total assets of 
such entity.
Section 613.3100(c)(2)--Purposes for Financing Electric and 
Telecommunication Utilities
    We propose to clarify that a BC or ACB may provide financing for 
subsidiaries of cooperatives or other entities that are eligible under 
Sec.  613.3100(c)(1)(ii) for energy-related or public utility-related 
purposes even if such purposes would be ineligible for financing by the 
RUS or the RTB. Section 3.8(b)(1)(A) of the Act authorizes BCs and ACBs 
to finance rural utilities that are eligible to borrow from the RUS or 
RTB, and their subsidiaries. Although the Rural Electrification Act 
prohibits the RUS or RTB from financing the activities of certain 
subsidiaries, section 3.8(b)(1)(A) of the Act expressly authorizes a BC 
or ACB to extend credit to the same subsidiaries. As FCA discussed in 
its preamble when the present Sec.  613.3100 was proposed in 1996, the 
legislative history makes it clear the present language of section 3.8 
of the Act was intended to authorize title III banks to finance 
activities that are ineligible for RUS or RTB loans. See 61 FR 42092, 
August 13, 1996. Because the present language of Sec.  613.3100(c)(2) 
could be narrowly read to limit such financing to subsidiaries that 
``operate a licensed cable television utility,'' FCA is now proposing 
an amendment to clarify that banks operating under title III may 
provide such financing for any energy-related or public utility-related 
purpose. We believe it is important for the System to be able to 
finance these operations that provide valuable services to rural 
consumers and essential revenues for rural utility systems.
Section 613.3200--International Lending
    We propose to conform our regulations to recent changes in section 
3.7 of the Act made by FSRIA that authorize a bank operating under 
title III of the Act to finance certain international transactions 
involving ``agricultural supplies.'' We propose to amend Sec.  
613.3200(a) by adding a definition of ``agricultural supply.'' The 
proposed definition of ``agricultural supply'' in Sec.  613.3200(a)(1) 
includes a farm supply, agriculture-related processing equipment, 
agriculture-related machinery, and other capital

[[Page 27759]]

goods related to the storage or handling of agricultural commodities or 
products. The term ``farm supply,'' which is included in the new 
definition of ``agricultural supply,'' is defined in Sec.  
613.3200(a)(2).

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A 
of the Act

Section 613.3300--Participations and Other Interests in Loans to 
Similar Entities
    We propose to amend our regulations to conform them to changes the 
2002 Farm Bill made in sections 3.1(11)(B) and 4.18A of the Act 
regarding similar entity transactions. Because of these changes, FCS 
institutions are no longer required to obtain the approvals now 
required by present Sec.  613.3300(d). Although the FSRIA removed the 
statutory provisions that were the basis of the Sec.  613.3300(d) 
approval requirements, it did not remove the statutory requirement that 
a bank operating under title III not participate in a loan to a similar 
entity under section 3.1 if the similar entity has a loan or loan 
commitment outstanding with an FCB or association, unless agreed to by 
the FCB or association. Therefore, while we propose deleting present 
Sec.  613.3100(d) to reflect the elimination of other statutory 
approval requirements, we propose adding a new section to reflect this 
statutory requirement. Proposed Sec.  613.3100(d) requires a bank 
operating under title III to obtain the agreement of an FCB or 
association in order to participate in a loan to a similar entity under 
section 3.1 if the similar entity has a loan, or a loan commitment 
outstanding, with the FCB or association. System institutions may 
structure the terms and conditions of the agreement to accommodate 
their specific situations. For example, they may grant approvals on an 
annual basis allowing similar entity participations in their chartered 
territory.

Subpart C--Bank/Association Lending Relationship

Section 614.4125--Funding and Discount Relationships Between Farm 
Credit Banks or Agricultural Credit Banks and Direct Lender 
Associations
    Direct lender associations may not make or hold any loan that does 
not comply with the Act and FCA regulations, including, without 
limitation, part 613. We propose to amend Sec.  614.4125(a) to mandate 
that each GFA require that the calculation of financing available be 
based solely on loans that are in compliance. Without limiting FCA's 
other authorities or remedies, proposed Sec.  614.4125(a) would 
expressly state that if financing under a GFA is based on a loan that 
FCA determines does not comply with the Act and these regulations, then 
the financing available must be recalculated without that loan. We 
emphasize that the remedies described in this section do not limit our 
other authorities or remedies under the Act.

Subpart A--Related Services

Section 618.8000--Definitions and Section 618.8005--Eligibility
    We propose to amend Sec. Sec.  618.8000(b) and 618.8005(c) to 
clarify that ACBs have the same authority to offer related services 
under title III of the Act as BCs, and the same authority to offer 
related services under title I of the Act as FCBs. Proposed Sec.  
618.8000(b) deletes the phrase, ``that is appropriate to the 
recipient's on-farm, aquatic, or cooperative operations'' in order to 
eliminate any possible confusion about limitations on related services 
offerings under title III. Similarly, proposed Sec.  618.8005(c) 
deletes the phrase, ``appropriate to cooperative operations.''
    In addition, proposed Sec.  618.8005(a) adds the phrase 
``appropriate to on-farm and aquatic operations'' to the existing 
paragraph, in order to reflect the statutory limitation on related 
services offered under title I.

IV. 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 613

    Advertising, Aged, Agriculture, Banks, banking, Civil rights, 
Credit, Fair housing, Marital status discrimination, Religious 
discrimination, Rural areas, Sex discrimination, Signs and symbols.

12 CFR Part 614

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

12 CFR Part 618

    Agriculture, Archives and records, Banks, banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

    For the reasons stated in the preamble, parts 613, 614, and 618 of 
chapter VI, title 12 of the Code of Federal Regulations, are proposed 
to be amended as follows:

PART 613--ELIGIBILITY AND SCOPE OF FINANCING

    1. The authority citation for part 613 continues to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1, 
3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27, 5.9, 5.17 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075, 
2093, 2122, 2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).

Subpart B--Financing for Banks Operating Under Title III of the 
Farm Credit Act

    2. Amend Sec.  613.3100 by revising paragraphs (b)(2)(ii), 
(c)(1)(v), and (c)(2) to read as follows:


Sec.  613.3100  Domestic lending.

    (b) * * *
* * * * *
    (2) * * *
* * * * *
    (ii) Any legal entity in which an eligible cooperative (or a 
subsidiary or other entity in which an eligible cooperative has an 
ownership interest) has an ownership interest, provided that if the 
percentage of ownership attributable to the eligible cooperative is 
less than 50 percent, financing may not exceed the percentage of 
ownership attributable to the eligible cooperative multiplied by the 
value of the total assets of such entity; or
* * * * *
    (c) * * *
* * * * *
    (1) * * *
* * * * *
    (v) Any legal entity in which an eligible utility under paragraph 
(c)(1)(ii) of this section (or a subsidiary or other entity in which an 
eligible utility under paragraph (c)(1)(ii) has an ownership interest) 
has an ownership interest, provided that if the percentage of ownership 
attributable to the eligible utility is less than 50 percent, financing 
may not exceed the percentage of ownership attributable to the eligible 
utility multiplied by the value of the total assets of such entity.
    (2) Purposes for financing. A bank for cooperatives or agricultural 
credit bank may extend credit to entities that are

[[Page 27760]]

eligible to borrow under paragraph (c)(1) of this section in order to 
provide electric or telecommunication services in a rural area. A 
subsidiary that is eligible to borrow under paragraph (c)(1)(iii) of 
this section may also obtain financing from a bank for cooperatives or 
agricultural credit bank for energy-related or public utility-related 
purposes that cannot be financed by the lenders referred to in 
paragraph (c)(1)(ii), including, without limitation, financing to 
operate a licensed cable television utility.
* * * * *
    3. Amend Sec.  613.3200 to read as follows:
    a. Revise paragraph (a); and
    b. Remove the words ``farm supplies'' and add in their place, the 
words ``agricultural supplies'' each place they appear in paragraphs 
(b) introductory text, (c) introductory text, and (c)(1).


Sec.  613.3200  International lending.

    (a) Definitions. For the purpose of this section only the following 
definitions apply:
    (1) Agricultural supply includes:
    (i) A farm supply; and
    (ii) Agriculture-related processing equipment, agriculture-related 
machinery, and other capital goods related to the storage or handling 
of agricultural commodities or products.
    (2) Farm supply refers to an input that is used in a farming or 
ranching operation.
* * * * *

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 
4.18A of the Act

    4. Revise Sec.  613.3300(d) to read as follows:


Sec.  613.3300  Participations and other interests in loans to similar 
entities.

* * * * *
    (d) Approval by other Farm Credit System institutions. A bank for 
cooperatives or agricultural credit bank may not participate in a loan 
to a similar entity under title III of the Act if the similar entity 
has a loan or loan commitment outstanding with a Farm Credit Bank or an 
association chartered under the Act, unless agreed to by the Farm 
Credit Bank or association.

PART 614--LOAN POLICIES AND OPERATIONS

    5. 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, 
4.13B, 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 C--Bank/Association Lending Relationship

    6. Amend Sec.  614.4125(a) by adding a second sentence to read as 
follows:


Sec.  614.4125  Funding and discount relationships between Farm Credit 
Banks or agricultural credit banks and direct lender associations.

    (a) * * * Each general financing agreement must require that the 
amount of financing available to a direct lender association be based 
solely on loans that comply with the Act and these regulations. If 
financing under a general financing agreement is based on a loan that 
FCA determines does not comply with the Act and these regulations, then 
the amount of financing available must be reduced by the amount of the 
ineligible loan.
* * * * *

PART 618--GENERAL PROVISIONS

    7. The authority citation for part 618 continues to read as 
follows:

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 
2200, 2211, 2218, 2243, 2244, 2252).

Subpart A--Related Services

    8. Amend Sec.  618.8000(b) by revising the first sentence to read 
as follows:


Sec.  618.8000  Definitions.

* * * * *
    (b) Related service means any service or type of activity provided 
by a System bank or association that is appropriate to the recipient's 
operations, including control of related financial matters. * * *
* * * * *


Sec.  618.8005  [Amended]

    9. Amend Sec.  618.8005 by:
    a. Adding the phrase ``appropriate to on-farm and aquatic 
operations'' after the word ``services'' in paragraph (a); and
    b. Removing the phrase ``appropriate to cooperative operations of'' 
and adding in its place, the word ``to'' in paragraph (c).

    Dated: May 15, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-12631 Filed 5-20-03; 8:45 am]
BILLING CODE 6705-01-P