[Federal Register Volume 68, Number 154 (Monday, August 11, 2003)]
[Proposed Rules]
[Pages 47502-47513]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20360]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 615

RIN 3052-AB96


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

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, agency, us, or we) 
proposes to amend its regulations governing other financing 
institutions (OFIs) and investments in Farmers' notes so it would be 
easier for Farm Credit System (FCS, Farm Credit, or System) 
institutions and non-System lenders to work together in providing 
affordable credit to agriculture and rural America. In addition, the 
proposed rule would remove provisions in the existing OFI and Farmers' 
notes regulations that: Impede the flow of credit; are not required by 
law; or do not enhance safe and sound operations. The FCA also proposes 
related amendments to its capital regulations.

DATES: You may send us comments by October 10, 2003.

ADDRESSES: Send us your comments by electronic mail to [email protected], through the Pending Regulations section of our Web site 
at www.fca.gov, or through the government-wide Web site, 
www.regulations.gov. You may also submit your comments in writing to S. 
Robert Coleman, Director, Regulation and Policy Division, Office of 
Policy and Analysis, Farm Credit Administration, 1501 Farm Credit 
Drive, McLean, VA 22102-5090, or by facsimile transmission to (703) 
734-5785. You may review copies of all comments we receive in the 
Office of Policy and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Dennis Carpenter, Senior Policy Analyst, Office of Policy and Analysis, 
Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 
22102-5090, (703) 883-4498, TTY (703) 883-4434,

 or

Richard A. Katz, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090, (703) 883-4020, TTY (703) 883-4020.




SUPPLEMENTARY INFORMATION:

[[Page 47503]]

I. Background

    This proposed rule is intended to make affordable credit more 
available to agriculture and rural America by increasing cooperation 
between System and non-System lenders. This rulemaking began on April 
20, 2000, with an advance notice of proposed rulemaking (ANPRM) that 
asked the public questions about ways to improve the funding and 
discount relationship between Farm Credit banks and OFIs. See 65 FR 
21151. FCA staff subsequently conducted telephone and field interviews 
with interested parties. On August 3, 2001, we held a public meeting in 
Des Moines, Iowa, where interested parties offered suggestions on how 
we could facilitate greater cooperation between System and non-System 
lenders in providing credit to agriculture and rural America. The 
public meeting addressed both the OFI program and other arrangements 
where the FCS and non-System lenders could help each other in extending 
credit to farmers, ranchers, and other eligible borrowers in rural 
America.
    Many of the comments and suggestions that we received from the 
ANPRM, interviews, and at the public meeting are incorporated in this 
proposed rule, which would revise both our OFI and Farmers' notes 
regulations. This preamble also explains other actions that we are 
taking to facilitate greater cooperation between System and non-System 
lenders that will ultimately benefit agriculture and other eligible 
rural residents. OFIs and Farmers' notes are two separate and distinct 
programs that arise under different provisions of the Farm Credit Act 
of 1971, as amended (Act). In the first program, Farm Credit Banks 
(FCBs) and the agricultural credit bank (ACB) (collectively Farm Credit 
banks) fund and discount short- and intermediate-term loans that OFIs 
make to eligible farmers, ranchers, aquatic producers and harvesters, 
farm-related businesses, and non-farm rural homeowners. The Farmers' 
notes program currently authorizes certain FCS associations to invest 
in notes, contracts, and other obligations that eligible farmers and 
ranchers enter into with suppliers. Changes to the OFI and Farmers' 
notes regulations require conforming amendments to our capital 
regulations.
    This rule complements other efforts by the FCA to increase the flow 
of credit to agriculture and rural America by promoting greater 
cooperation between FCS and non-System lenders. System banks and 
associations have many different powers that enable them to act as a 
funding source for a wide array of credit products that non-System 
lenders offer their customers. For example, Farm Credit banks fund and 
discount short- and intermediate-term loans that OFIs make to eligible 
borrowers. Separately, Farm Credit banks and associations can provide 
non-System lenders with long-term funding, in addition to short- and 
intermediate-term funding, by buying participations up to 100 percent 
of the principal amount of the loan. Syndications are another method 
that FCS institutions use to help non-System institutions extend 
credit, particularly to larger borrowers. As part of its effort to 
promote partnering arrangements between FCS and non-System lenders, the 
FCA is currently exploring methods for the System's use of syndications 
originated by non-System lenders. Today, the FCA is proposing 
substantial revisions to its Farmers' notes regulations, which if 
adopted, will expand this program to more non-System lenders, and allow 
all FCS associations to invest, for the first time, in both long- and 
short-term loans between these other lenders and eligible farmers and 
ranchers.
    These different authorities give the FCS many powers to meet the 
varied funding needs of a wide variety of non-System lenders that 
finance agriculture. These authorities allow non-System lenders to 
access any one or a combination of FCS funding programs, depending on 
individual needs. The System fulfills its mission to finance 
agriculture and other specified credit needs in rural America by 
serving as a steady source of funding and liquidity for other lenders. 
This should result in lower credit costs and more credit options for 
farmers, ranchers, aquatic producers and harvesters, and other eligible 
rural residents.

II. Other Financing Institutions

A. History of OFIs

    Farm Credit banks have discounted production agricultural loans for 
OFIs since 1923.\1\ Since 1930, Farm Credit banks also have made 
secured loans and advances directly to OFIs.\2\ Thus, OFIs could borrow 
from, and discount production agricultural loans with, Farm Credit 
banks before Congress created production credit associations (PCAs) as 
an alternative source of financing the operating needs of farmers and 
ranchers.\3\ Since 1980, the Act has authorized Farm Credit banks to 
fund and discount for OFIs any loan that PCAs could make. As a result, 
OFI loans to eligible processing and marketing, farm-related 
businesses, and non-farm rural homeowners may also be funded or 
discounted by a Farm Credit bank.
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    \1\ See The Agricultural Credits Act of 1923, Pub. L. 503, 42 
Stat. 1454 (March 4, 1923).
    \2\ See Federal Farm Loan Act Amendments, Pub. L. 439, 46 Stat. 
816 (June 26, 1930).
    \3\ See Farm Credit Act of 1933, Pub. L. 75-73D, title II, 48 
Stat. 257, 259 (June 16, 1933).
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    The legislative history of the various Farm Credit Acts reveals 
that the primary purpose of the OFI program is to address the scarcity 
of operating credit for farmers and ranchers.\4\ Over the years, 
Congress has responded to the changing credit needs of farmers, 
ranchers, and other rural residents by expanding the lending authority 
of the FCS, and giving Farm Credit banks more authority to fund 
OFIs.\5\ These statutory changes have ensured that the FCS could 
continue as a source of affordable and reliable credit to agriculture 
and rural America on both a wholesale and retail level.
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    \4\ See H. R. Rep. No. 1712, 67th Cong., 1st. Sess. (February 
25, 1923), p. 17; H.R. Rep. No. 96-1287, 96th Cong., 2nd Sess. 
(September 4, 1980), p.21.
    \5\ From 1923 until 1988, OFIs funded and discounted short- and 
intermediate-term loans with the former Federal Intermediate Credit 
Banks. Section 410 of the Agricultural Credit Act of 1987 (1987 Act) 
created the FCBs through the mandatory merger of the Federal Land 
Bank and the Federal Intermediate Credit Bank in each Farm Credit 
district. See Pub. L. 100-233, section 410, 101 Stat. 1568, 1637 
(January 6, 1988). Section 7.0 of the Act authorizes FCBs to merge 
with banks for cooperatives to form an ACB. According to section 7.2 
of the Act, an ACB has all of the powers and obligations of its 
constituent banks.
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    OFIs, historically, have established funding or discount 
relationships with Farm Credit banks when the cost of FCS funds is 
significantly lower than other funding sources. The OFI program reached 
its peak in the 1970s and early 1980, when market interest rates were 
at historically high levels. In 1982, approximately 300 OFIs borrowed 
approximately $914 million from various Farm Credit banks. By December 
31, 2002, Farm Credit banks lent only $291 million to 31 OFIs.
    Much of the decline in the OFI program can be attributed to the 
farm crisis of the mid and late 1980s. Declining land values and 
commodity prices meant that many farmers were unable to repay their 
loans, which caused the FCS to experience significant financial stress 
between 1984 and 1989. During this time, many OFIs terminated their 
funding and discount relationships with Farm Credit banks for a variety 
of reasons. One reason for the decline of the OFI program was that Farm 
Credit banks were in a weakened financial position and, therefore, 
could no longer offer OFIs competitive rates. Additionally, the merger 
or consolidation among many commercial bank OFIs improved their 
liquidity and

[[Page 47504]]

resulted in lower-cost funding for their agricultural loans.
    The FCS has regained its financial strength over the past decade. 
As a result, FCBs and the ACB are once again in a strong financial 
position to fulfill their statutory mission of increasing the 
availability of affordable and dependable credit for agriculture and 
other rural credit needs by assisting both FCS associations and non-
System lenders, including OFIs. The FCA has consistently promoted 
various efforts to improve cooperation among System and non-System 
lenders so agriculture and rural America will always have adequate 
credit. In this context, we propose regulatory amendments that will 
provide OFIs with greater access to the funding and discount services 
of Farm Credit banks within the confines of the Act.

B. The Act and OFIs

    Currently, section 1.7(b)(1) of the Act authorizes Farm Credit 
banks to offer funding, discounting, and other similar financial 
services to OFIs so they can make short- and intermediate-term loans to 
eligible agricultural and aquatic producers, farm-related business, and 
rural homeowners. Section 1.7(b)(1)(B) of the Act allows national 
banks, State banks, trust companies, agricultural credit corporations, 
incorporated livestock loan companies, certain agricultural credit 
cooperatives, and corporations that lend to aquatic producers and 
harvesters to become OFIs. Section 1.7(b)(4) requires the FCA to enact 
regulations that assure that loans, discounts, and other similar 
financial assistance from Farm Credit banks are available on a 
reasonable basis to any OFI that:
    1. Is significantly involved in lending for agricultural or aquatic 
purposes;
    2. Demonstrates a continuing need for supplementary sources of 
funds to meet the credit requirements of its agricultural or aquatic 
borrowers;
    3. Has limited access to national or regional capital markets; and
    4. Does not use its relationship with its Farm Credit bank to 
extend credit to persons and for purposes that are not authorized by 
title II of the Act.

C. FCA's Rulemaking Efforts

    This proposed rule is designed to help restore the vitality of the 
OFI program by making it easier for OFIs to obtain funding from Farm 
Credit banks. Between 1996 and 1998, the FCA conducted a rulemaking 
that overhauled the OFI regulations by removing numerous regulatory 
requirements that were not required by law, or did not promote safety 
and soundness.\6\ The express purpose of our earlier rulemaking was to 
``substantially expand access to System funding so OFIs can provide 
more short- and intermediate-term credit to parties who are eligible to 
borrow under sections 2.4(a) and (b) of the Act.'' \7\
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    \6\ See 61 FR 24907 (May 17, 1996); 62 FR 38223 (July 17, 1997); 
63 FR 36541 (July 7, 1998).
    \7\ See 63 FR 36541 (July 7, 1998).
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    After the earlier rulemaking concluded, Farm Credit banks and OFIs 
brought to our attention other problems that impeded OFI access to 
System funding. In response to these concerns, the FCA started this 
rulemaking in April 2000. The ANPRM sought input on the following 
issues:
    1. The appropriate risk weighting of Farm Credit bank loans to 
OFIs;
    2. Removing regulatory restrictions on funding OFIs located in the 
chartered territory of another Farm Credit bank;
    3. Public disclosure of the identities of OFIs; and
    4. Other ways to improve the ability of Farm Credit banks to fund 
OFIs.
    The FCA received 37 comment letters in response to the ANPRM. Of 
this total, comments were received from six Farm Credit banks and 
associations, 18 commercial banks, and four non-bank entities. Nine (9) 
banking trade associations also submitted comments on behalf of their 
members. Most commenters favored: (1) Lowering the risk weighting on 
most System bank loans to OFIs; (2) removing territorial restrictions 
on FCS bank loans to OFIs; and (3) disclosing the identity of OFIs. The 
commenters also offered us helpful suggestions for improving the 
funding and discounting relationship between OFIs and their System 
funding banks. We will discuss these comments in greater detail below 
when we explain how the proposed rule addresses specific issues.
    The responses to the ANPRM indicated that we needed more public 
input, not only on OFIs, but also on other approaches that would enable 
the FCS to provide funding to non-System lenders that finance 
agriculture and other specified needs in rural America. The FCA gained 
additional information and advice about these issues in the summer of 
2001, when staff conducted telephone and field interviews with all Farm 
Credit banks, an FCS association, and three OFIs in Wisconsin, and 
Oklahoma. These field interviews were supplemented by telephone 
interviews with other lenders. In all interviews, the staff asked the 
questions that we originally raised in the ANPRM and sought additional 
information about the hurdles that existing and potential OFIs faced in 
their relationships with FCS funding banks.
    The FCA Board also decided to solicit additional guidance from 
interested parties by convening a public meeting in Des Moines, Iowa, 
on August 3, 2001. Fifteen (15) representatives from Farm Credit banks 
and associations, trade associations, commercial banks, OFIs, 
investment bankers, and farm groups presented testimony at or as 
follow-up to the public meeting. In addition to discussing the OFI 
program, commenters at the public meeting also asked the FCA to explore 
other arrangements where non-System lenders that do not qualify as OFIs 
could obtain credit services from both Farm Credit banks and 
associations. The comments that we received from the ANPRM, field and 
telephone interviews, and the public meeting, helped us develop the 
rule that we propose today.

D. Regulatory Issues

    As we explained earlier, the purpose of this rule is to make it 
easier for OFIs to obtain funding from Farm Credit banks for their 
short- and intermediate-term loans to agricultural and aquatic 
producers, farm-related business, and rural homeowners. Improving OFI 
access to the funding and discount services of Farm Credit banks could 
make affordable credit more available to farmers, ranchers, and other 
eligible borrowers. Farm Credit banks fulfill their missions as a 
Government-sponsored enterprise by enhancing the liquidity of OFIs, 
thereby lowering the cost of funding agriculture.
    Commenters identified several regulatory issues pertaining to the 
OFI program. The FCA proposes to address some of the issues by amending 
the OFI regulations. In other cases, the FCA will explain how the 
commenters' concerns are addressed by the existing regulations, which 
means that a regulatory amendment is unnecessary.
1. Assured Access
    Section 1.7(b)(4)(B)(i) of the Act requires FCA regulations to 
assure that the funding and discount services of Farm Credit banks are 
available on a reasonable basis to any OFI that is significantly 
involved in lending for agricultural and aquatic purposes. Currently, 
Sec.  614.4540(b)(1) \8\ states that Farm Credit banks must ``fund, 
discount, or provide other similar financial assistance to any 
creditworthy OFI that * * * maintains at least 15 percent of its loan 
volume at a seasonal peak in loans and leases to farmers,

[[Page 47505]]

ranchers, aquatic producers and harvesters.'' Section 1.7(b) of the Act 
and Sec.  614.4540 of the regulations allow OFIs that do not meet this 
15-percent threshold to fund and discount their short- and 
intermediate-term loans at Farm Credit banks, but they are not assured 
access if credit becomes scarce.
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    \8\ See 46 FR 51886 (October 22, 1981).
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    Several commercial bank and System commenters believe that this 15-
percent threshold is too onerous, and they asked the FCA to reduce or 
eliminate it. These commenters erroneously claim that the requirement 
that agricultural loans always comprise 15 percent of an OFI's loan 
portfolio discourages potential OFIs and deters existing OFIs from 
depending on Farm Credit banks as their primary source of agricultural 
funding. The FCA seeks to dispel the misconception that Sec.  
614.4540(b)(1) requires OFIs to always maintain at least 15 percent of 
their loan portfolio in farm loans in order to maintain assured access. 
Instead, this regulation requires such OFIs to maintain at least 15 
percent of their volume at a seasonal peak in farm loans and leases.
    At this time, the FCA does not propose to change the 15-percent 
threshold as the factor that determines whether an OFI is significantly 
involved in agricultural lending, and thus assured access to funding 
from a System bank. In reaching this decision, the FCA examined how two 
of the other Federal bank regulatory agencies determine if a bank 
engages in substantial agricultural lending. The FCA's research 
revealed that the Federal Deposit Insurance Corporation (FDIC) 
classifies banks as agricultural banks if at least 25 percent of their 
loans are to farmers or ranchers. The Board of Governors of the Federal 
Reserve System (Federal Reserve Board) classifies a bank as 
agricultural if its ratio of farm loans to total loans exceeds the 
unweighted average of the average of all banks on a given date. Based 
on this formula, the Federal Reserve Board most recently classified 
banks as agricultural banks if farm loans comprise at least 14.97 
percent of their loan portfolios. Thus, the standard that the FCA uses 
to determine if a non-System lender is substantially involved in 
agricultural lending is significantly more permissive than the FDIC's 
benchmark and comparable to the measure used by the Federal Reserve 
Board.
    The current regulatory threshold also seems to strike a fair 
balance between the needs of small rural lenders and larger 
institutions. Agricultural loans usually comprise a larger percentage 
of the loan assets of small rural lenders. However, larger institutions 
may extend more overall credit, in dollar terms, to farmers, although 
agricultural loans are a much smaller percentage of their loan 
portfolios. Additionally, Sec.  614.4540(b)(1) continues to forbid Farm 
Credit banks from including the loan volume of an OFI's parent, 
affiliates, or subsidiaries in determining compliance with this 15-
percent threshold. In practice, most lenders establish a separate OFI 
affiliate to access System bank funding and, therefore, the 15-percent 
threshold should not be onerous to OFIs. As noted earlier, failure to 
meet the 15-percent threshold does not prohibit FCS bank funding to 
creditworthy OFIs unless credit is scarce.
    Because the FCA wants to make the OFI program more attractive to 
eligible agricultural lenders, we invite your comments on alternatives 
that reasonably demonstrate that an OFI is significantly involved in 
agricultural lending, as section 1.7(b)(4)(B)(i) of the Act requires.
2. Place of Discount
    Non-System lenders and many Farm Credit banks have long considered 
place of discount restrictions as a major reason why the OFI program 
has not been widely used by commercial banks and other agricultural 
lenders. Historically, OFIs borrowed from the Farm Credit bank that 
serves the territory where such OFIs maintain their headquarters or 
makes the most of their loans. As a result, OFIs have maintained a 
funding or discount relationship with a System bank that is owned and 
controlled by their competitors.
    In 1998, the FCA sought to remedy this problem by adopting Sec.  
614.4550, which established new place-of-discount rules for OFIs. Under 
this regulation, every OFI must apply first to the Farm Credit bank 
that serves the territory where the OFI operates. If the bank denies 
funding, or otherwise fails to approve a completed application within 
60 days, the OFI may apply to any other FCB or the ACB. Additionally, 
the regulation allows a Farm Credit bank to consent to another System 
bank funding or discounting loans for an OFI.
    We received 28 comments about place of discount in response to the 
ANRPM, and another five comments about this issue during the interviews 
and public meeting. Specifically, we received comments on this issue 
from 12 commercial banks and seven commercial bank trade associations. 
Additionally, six Farm Credit banks and one FCS association commented 
on this issue. All commercial bank and bank trade association 
commenters, five Farm Credit banks, and the one FCS association favored 
repealing regulatory restrictions on place of discount so OFIs could 
choose their System funding bank. One Farm Credit bank opposed 
repealing Sec.  614.4550, so FCS associations would not be placed at a 
competitive disadvantage.
    In response to these comments, the FCA proposes allowing OFIs to 
apply for funding and discount services from any FCS bank. However, the 
proposed rule will require a Farm Credit bank to notify another System 
bank in writing within five (5) business days of receiving an 
application from an OFI that maintains its headquarters or has more 
than 50 percent of its loan volume in the territory of the other Farm 
Credit bank. This notice will give the bank in whose territory the OFI 
is located ample opportunity to contact the applicants and offer them 
funding and discount services. Under the proposed rule, no OFI may 
borrow from two or more Farm Credit banks at the same time. Farm Credit 
banks extend wholesale credit to OFIs, and they hold the OFIs' retail 
loans and other collateral as security. Allowing two or more Farm 
Credit banks to simultaneously fund the same OFI could pose safety and 
soundness risks to the funding banks if the OFI experienced financial 
stress and disputes arose over collateral pledged.
    Our new regulatory approach would resolve the difficulties that 
often arise when OFIs must borrow from a Farm Credit bank that is owned 
and controlled by their competitors. When Farm Credit banks compete for 
OFI credit, the OFI can lower its funding costs, which it can then pass 
on to its agricultural borrowers. Additionally, this approach frees 
Farm Credit banks from potential association pressure not to lend to 
their competitors. If a Farm Credit bank is concerned about another 
System bank funding OFIs in its territory, written notice gives it 
ample opportunity to seek the relationship with the OFI.
3. Borrower Rights
    Section 4.14A(a)(6)(B) of the Act expressly requires OFIs to adhere 
to borrower rights, ``but only with respect to loans discounted or 
pledged under section 1.7(b)(1).'' The borrower rights that apply to 
loans that OFIs discount or pledge with a Farm Credit bank are: (1) 
Effective Interest Rate (EIR) disclosures; (2) notice of adverse credit 
decision; (3) the right to appeal adverse credit decisions to the 
lender's credit review committee; (4) receiving copies of certain 
documents; and (5) the right to restructure distressed loans. Existing 
Sec.  614.4560(d) implements section 4.14A(a)(6)(B) of the Act by 
requiring OFIs to comply with borrower rights on

[[Page 47506]]

those loans that Farm Credit banks fund or discount.
    During this rulemaking, the FCA received numerous comments from 
existing and potential OFIs and a Farm Credit bank that borrower rights 
are a significant disincentive to the success of this program. Borrower 
rights are a statutory requirement for OFIs; therefore, the FCA cannot 
repeal Sec.  614.4560(d).
    Recently, a Farm Credit bank and some of its affiliated OFIs asked 
the FCA to reconsider its interpretation of section 4.14A(a)(6)(B) of 
the Act. The FCB and its OFIs interpret section 4.14A(a)(6)(B) to mean 
that borrower rights apply to OFI loans only during the time they are 
actually pledged as collateral to the funding bank. Under this 
interpretation, OFI loans would be exempt from most borrower rights 
requirements because many of these rights apply before or after the 
time an OFI's loans are actually pledged to the FCB or ACB. Examples of 
borrower rights that usually apply before an OFI actually pledges loans 
to a Farm Credit bank are: (1) Most EIR disclosures; (2) written notice 
that the borrower's credit application has been denied; and (3) appeals 
of adverse credit decisions to the lender's credit review committee. An 
example of a right that applies when a loan is no longer pledged to a 
System bank is the right of borrowers under section 4.14A of the Act to 
restructure distressed loans. Borrowers usually seek to restructure a 
distressed loan after the Farm Credit bank instructs the OFI to remove 
it from collateral. Under the suggested interpretation, section 4.13A 
of the Act would be the only borrower rights provision of the Act that 
would always apply to OFI borrowers. This provision enables System and 
OFI borrowers to obtain copies of: (1) All loan documents they sign or 
deliver; (2) loan appraisals on their assets that the lender uses in 
making credit decisions; and (3) the lender's articles of incorporation 
and bylaws.
    The FCB and its affiliated OFIs advocate an interpretation of 
section 4.14A(a)(6)(B) of the Act that emphasizes the timing of certain 
events over how an OFI loan is funded. However, our analysis leads us 
to conclude that Congress intended section 4.14A(a)(6)(B) of the Act to 
apply whenever an OFI uses a Farm Credit bank rather than another 
source (such as deposits or other lines of credit) to fund the 
borrower's loan. Originally, the provisions of the Act that govern EIR 
disclosures, written notice of credit denials, and appeal of adverse 
credit decisions only applied to Farm Credit banks and associations 
that operate under title I or II of the Act. The 1987 Act amended these 
statutory provisions so these rights and protections would also apply 
to OFI borrowers.\9\ The 1987 Act also added section 4.14A to the Act 
so that farmers, ranchers, and aquatic producers and harvesters \10\ 
who borrowed from either the FCS or an OFI would have the right to 
restructure distressed loans.\11\ These statutory amendments clearly 
demonstrate that Congress intended to grant OFI borrowers whose loans 
were funded by a Farm Credit bank all of the rights and protections 
described above, regardless of when certain events occurred.
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    \9\ Pub. L. 100-233, Sections 103, 104, 105, and 106, 101 Stat. 
1568, 1579-81 (January 6, 1988).
    \10\ Borrower rights do not apply to loans that are subject to 
the Truth-in-Lending Act, 15 U.S.C. 1601 et seq. The Truth-in-
Lending Act applies to consumer credit. Non-farm rural home loans 
and consumer loans to farmers are subject to the Truth-in-Lending 
Act, not the borrower rights provisions of the Act. See Act, 
Sec. Sec.  4.13 and 4.14A(a)(5). Also, borrower rights do not apply 
to loans that the ACB makes under title III of the Act. See Act 
Sec. Sec.  4.14A(a)(6)(A).
    \11\ Pub. L. 100-233, Sections 102, 101 Stat 1568, 1574 (January 
6, 1988).
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    The FCB and its OFIs believe that Congress's use of the word 
``pledged'' in section 4.14A(a)(6)(B) indicates that borrower rights 
apply only during the period of time when an OFI loan serves as 
collateral for the Farm Credit bank loan. However, they are reading the 
word ``pledged'' out of context with the rest of the statute. Section 
4.14A(a)(6) refers to ``loans discounted or pledged under section 
1.7(b)(1)'' of the Act. However, section 1.7(b)(1) of the Act describes 
the services that Farm Credit banks are authorized to provide certain 
FCS associations and OFIs, not the timing of when such associations and 
OFIs pledge collateral to the bank. Therefore, the term ``pledged'' in 
section 4.14A(a)(6)(B) covers those loans that a Farm Credit bank funds 
under its authority in section 1.7(b)(1), not the time when such loans 
are pledged.
    For these reasons, OFIs must comply with borrower rights on all 
loans that they fund or discount through a Farm Credit bank. Borrower 
rights, however, do not apply to loans that an OFI funds through other 
sources. Thus, OFIs that always use the funding or discounting services 
of a Farm Credit bank to make all of its short- and intermediate-term 
agricultural and aquatic loans must comply with all borrower rights 
requirements.
    Some flexibility may exist, however, for those OFIs that actually 
use several sources of funding, including Farm Credit banks, to make 
loans to farmers, ranchers, and aquatic producers and harvesters. In 
some cases, an OFI genuinely may not know how it will fund a particular 
borrower's loans until after closing. In such cases, an OFI may decide 
not to give the borrower an EIR disclosure, written notification about 
the denial of credit, or the right to appeal the credit denial to a 
credit review committee because the OFI plans to use deposits or 
another line of credit to fund the borrower's loan. If the OFI 
subsequently decides to draw on its credit line with its Farm Credit 
bank to fund this loan, borrower rights would apply to all future 
actions on this loan. For example, a borrower who did not receive an 
EIR disclosure at closing would be entitled to an EIR disclosure at a 
later date if the OFI funds or discounts the loan with the Farm Credit 
bank and then adjusts the borrower's interest rate. The OFI must also 
give the borrower written notice and the right to appeal adverse credit 
actions to a credit review committee once it funds or discounts a 
seasoned loan with a Farm Credit bank. OFIs must also honor the rights 
of borrowers to restructure distressed loans even if the Farm Credit 
bank removed such loans from collateral after their credit quality 
declined. Once a Farm Credit bank funds or discounts a loan, borrower 
rights attach to it for the duration of the loan. This is the same 
approach that the FCA follows for loans that FCS institutions sell to 
non-System lenders.\12\
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    \12\ 12 CFR 614.4336.
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    The FCA proposes a technical correction to Sec.  614.4560(d). 
Currently, this provision erroneously states that section 4.36 of the 
Act applies to all loans that an OFI funds or discounts through an FCB 
or ACB. In fact, the plain language in section 4.36 of the Act states 
that the right of first refusal applies only to the borrowers of FCS 
institutions that operate under title I or II of the Act. As a result, 
OFIs are subject to some, but not all, of the regulations in subpart N 
of part 614. Accordingly, the FCA proposes to omit the reference to 
section 4.36 from Sec.  614.4560(d) and to further amend this 
regulatory provision so it refers to Sec. Sec.  614.4516, 614.4517, 
614.4518, and 614.4519, which are the only regulations in subpart N of 
part 614 that apply to OFIs.\13\
---------------------------------------------------------------------------

    \13\ The FCA recently proposed to move all borrower rights 
regulations to part 617. See 68 FR 5587, February 4, 2003. If the 
FCA adopts this change the final OFI rule will revise the cross-
references to borrower rights regulations in Sec.  614.4560(d).
---------------------------------------------------------------------------

4. Equitable Treatment
    In 1998, the FCA adopted Sec.  614.4590, which requires Farm Credit 
banks to treat OFIs and FCS associations

[[Page 47507]]

equitably. More specifically, Sec.  614.4590(a) states that Farm Credit 
banks must apply comparable and objective loan underwriting standards 
and pricing requirements to both OFIs and FCS associations. Under Sec.  
614.4590(b), the total charges that a System bank assesses its OFIs 
must be comparable to the total charges it imposes on its affiliated 
associations. This regulation also states that any variation between 
the overall funding costs that OFIs and FCS associations are charged by 
the same funding bank must result from differences in credit risk and 
administrative costs to the FCB or ACB.
    Many responses to the ANPRM and several speakers at the public 
meeting expressed the view that Farm Credit banks do not treat OFIs 
equitably with FCS associations, which own and control each System 
bank. According to these commenters, the perception of unfair treatment 
discourages potential OFIs from establishing a funding and discount 
relationship with an FCB or ACB. Many commenters informed us that 
existing OFIs often feel that Farm Credit banks favor the associations.
    Many commercial bank commenters suggested that our regulations 
should mandate equal, rather than equitable, treatment of OFIs and FCS 
associations. These commenters believe that the disparity of treatment 
is especially evident in the price of funding that Farm Credit banks 
charge their OFIs and FCS associations. Several commenters want us to 
require Farm Credit banks to disclose to OFIs exactly how they price 
their loans to both OFIs and FCS associations. Several commercial bank 
trade associations asked the FCA to require Farm Credit banks to 
identify the specific components that make up their cost of funds to 
OFIs and the amount of these components in terms of basis points. 
Commercial banks and their trade associations also requested that the 
FCA enact regulations that expressly prohibit Farm Credit banks from 
charging OFIs fees that are not charged to FCS associations. Some 
commenters asked the FCA to require Farm Credit banks to pay dividends 
or patronage to OFIs.
    The FCA sought to address many of these concerns in the rulemaking 
that ended in 1998 by adopting Sec.  614.4590, which requires Farm 
Credit banks to treat OFIs and FCS associations equitably. The FCA 
notes that the OFI program has not significantly expanded since 1998, 
but many of the same complaints about disparate treatment by Farm 
Credit banks of OFIs and FCS associations have surfaced once again. The 
FCA has decided to address these concerns by proposing amendments to 
Sec.  614.4590 that would strengthen regulatory requirements concerning 
equitable treatment.
    Fundamental differences between OFIs and direct lender associations 
mean that regulations can only require Farm Credit banks to treat OFIs 
and FCS direct lender associations equitably, but not equally. The 
following are some of the fundamental differences between these two 
types of financial institutions that preclude identical treatment:
    [sbull] OFIs have access to several funding sources whereas direct 
lender associations do not.
    [sbull] FCS associations have invested significant amounts of 
capital in the funding bank, while most OFIs have not.
    [sbull] A direct lender association pledges all of its loans to the 
Farm Credit bank, whereas OFIs do not.
    [sbull] FCS associations are members of a cooperative credit system 
that shares gains and losses, whereas OFIs have limited exposure to 
such losses.
    [sbull] Administrative costs for funding a direct lender 
association and an OFI differ because OFIs are not required to maintain 
a long-term commitment with a System funding bank.
    These fundamental differences mean that OFIs expose Farm Credit 
banks to different credit risks and administrative costs than direct 
lender associations. As a result, some disparity in cost of funds that 
an FCB or ACB charges FCS associations and OFIs may be justified. For 
this reason, Sec.  614.4590 requires that Farm Credit banks treat OFIs 
comparably, but not identically, to FCS associations in pricing loans. 
In fact, Sec.  614.4590(b) states that the total charges that an FCB or 
ACB assesses an OFI through capitalization requirements, interest 
rates, and fees shall be comparable to the charges that the same Farm 
Credit bank imposes on its direct lender associations. This regulation 
also specifies that any variation in the overall funding costs that the 
same FCS funding bank charges OFIs and direct lender associations must 
be attributed to differences in credit risk and administrative costs to 
the bank.
    The current regulation, however, does not require Farm Credit banks 
to explain and justify variations in the cost of funds to existing OFIs 
and OFI applicants. As a result, it is difficult to ascertain whether 
Farm Credit banks are pricing credit comparably for OFIs and FCS 
associations, as Sec.  614.4590(b) requires. Commercial bank commenters 
have repeatedly asked the FCA to resolve this problem by requiring Farm 
Credit banks to disclose to OFIs how they price funding for both OFIs 
and associations. In 1998, we reasoned that disclosing such pricing 
information was unnecessary because the regulation did not compel Farm 
Credit banks to charge identical rates to OFIs and System 
associations.\14\ The comments that we received during this rulemaking 
have persuaded us to propose a change on this issue. Disclosing pricing 
information will make the OFI program more transparent and address 
concerns by existing and potential OFIs that they are not treated 
fairly. The FCA hopes that this change will attract more agricultural 
lenders to this program and, therefore, make affordable credit more 
available for farmers, ranchers, and other eligible rural residents.
---------------------------------------------------------------------------

    \14\ See 63 FR 35541 (July 7, 1998).
---------------------------------------------------------------------------

    The FCA plans to achieve this objective by proposing to add two new 
provisions to Sec.  614.4590. Proposed Sec.  614.4590(c) would require 
each FCB or ACB to provide any OFI or OFI applicant, upon request, a 
copy of its policies, procedures, loan underwriting standards, and 
pricing guidelines for OFIs. This provision would also specify that the 
pricing guidelines must identify the specific components that make up 
the cost of funds for OFIs and the amount of these components in basis 
points. We believe this requirement is consistent with the information 
that is available to the associations, and is analogous to EIR 
disclosures that associations provide to retail borrowers.
    Proposed Sec.  614.4590(d) would require each FCB or ACB to explain 
in writing the reasons for any variation in the overall funding costs 
it charges OFIs and FCS associations if such information is requested 
by an OFI or OFI applicant. This provision would require a Farm Credit 
bank to compare the costs that it charges OFIs and FCS associations as 
groups or, if possible, variations between groups of OFIs and FCS 
associations that are of a similar size. However, proposed Sec.  
614.4590(d) would expressly prohibit System funding banks from 
disclosing financial or confidential information about individual FCS 
associations. Such information is confidential and proprietary 
information affecting the bank and its other customers and, therefore, 
it cannot be disclosed to OFIs.
    The FCA also proposes a conforming amendment to Sec.  614.4540(c) 
that would require each FCB or ACB to establish objective policies, 
procedures, pricing guidelines, and loan underwriting standards for 
determining the creditworthiness of each OFI applicant. Currently, 
Sec.  614.4540(c) does not mention procedures or pricing guidelines.

[[Page 47508]]

    The proposed rule does not require Farm Credit banks to pay 
dividends or patronage to their OFIs. It is not appropriate in this 
instance for FCA regulations to impose business practices on FCS 
institutions in the absence of a compelling safety and soundness 
reason.
    The proposed amendments to Sec.  614.4590 should ensure that Farm 
Credit banks treat their OFIs and associations equitably. If 
information that a Farm Credit bank discloses about how it prices 
funding for OFIs and FCS associations continues to raise concerns about 
equitable treatment, an OFI or OFI applicant could pursue this matter 
with the FCA Ombudsman.
5. Ombudsman
    Many commercial banks and their trade associations asked us to 
appoint an Ombudsman to assist OFI applicants and existing OFIs in 
establishing and maintaining good relations with System funding banks. 
On February 25, 2003, the FCA Board established the Office of the 
Ombudsman. According to the public announcement, ``The Office of the 
Ombudsman will be an effective, neutral and confidential resource and 
liaison for the public.'' Addressing the concerns of OFIs will be one 
of many duties of the Office of the Ombudsman. More information about 
how the Ombudsman will assist existing and potential OFIs will be 
forthcoming.
6. Disclosure of OFI Identities
    In the ANPRM, we asked you whether we should amend our regulations 
so Farm Credit banks could disclose the identities of the OFIs that 
they fund. Our current regulations on releasing information prohibit 
FCS institutions from releasing information about their borrowers and 
stockholders to the public.\15\ However, these prohibitions apply only 
to retail borrowers, such as farmers, ranchers, aquatic producers and 
harvesters, and rural homeowners. We have never interpreted these 
regulations as prohibiting the release of names of FCS associations 
that borrow from Farm Credit banks. In fact, information about the 
identities of FCS associations is widely available because it is 
contained in financial statements that Farm Credit banks release to the 
public.
---------------------------------------------------------------------------

    \15\ 12 CFR part 618, subpart G.
---------------------------------------------------------------------------

    The ANPRM explained why we believe that the reasons for protecting 
the identity of retail borrowers do not apply to financial institutions 
that fund and discount loans with a Farm Credit bank. Retail borrowers 
often are individual consumers, and keeping their identities 
confidential shields them from unwanted marketing solicitations or 
publicity involving their personal financial business. In contrast, 
OFIs could benefit from the disclosure of their identity because it 
could make prospective retail borrowers aware of other credit options.
    We received 33 comments about the disclosure of OFI identities. 
Twenty-five (25) comments on this issue came from commercial banks or 
their trade associations; two comments were received from a non-bank 
entity and an OFI, while six comments came from Farm Credit banks and 
associations. Reaction was mixed, and neither commercial banks nor 
System institutions took unified positions on this issue. Most 
commenters believe that there is no valid justification to prohibit or 
otherwise restrict Farm Credit banks from disclosing the names of their 
OFIs. These commenters assert that disseminating this information 
promotes the OFI program and informs farmers, ranchers, and rural 
homeowners of their other credit options. These commenters also believe 
that the FCA regulations should treat FCS associations and OFIs the 
same when it comes to disclosing their identities to the public. 
However, other commenters opposed the disclosure of identifying 
information about OFIs to the public. These commenters believe that 
requiring such disclosures are an unwarranted intrusion by the FCA into 
private business transactions. Other commenters expressed the view that 
OFIs should advertise for customers if they want to expand market 
penetration, rather than relying on Farm Credit banks to inform 
potential borrowers of their other credit options. Some commenters 
suggested a compromise that would allow Farm Credit banks to disclose 
only the identities of OFIs that consent.
    The FCA proposes a new rule, Sec.  614.4595, which would allow Farm 
Credit banks to disclose to the public the names, addresses, telephone 
numbers, and Internet Web site addresses of those OFIs that consent in 
writing. The proposed regulation also requires each Farm Credit bank to 
adopt policies and procedures for: (1) Obtaining and maintaining the 
consent of its OFIs; and (2) disclosing this information to the public. 
Similarly, the financial statements of Farm Credit banks should 
disclose the identity of an OFI only with its consent. The FCA believes 
that this regulatory approach empowers each OFI to make the decision 
whether disclosure of its name, address, telephone number, and Web site 
address to the public is in its best interest.
7. Associations Acting as Farm Credit Bank Agents
    Both System and non-System commenters suggested that FCS 
associations could serve as an effective conduit for funding OFIs. 
These commenters pointed out that associations often have established 
relationships with local OFIs and other commercial lenders. In many 
cases, FCS associations and existing and potential OFIs already have 
entered into joint financing arrangements for common borrowers.
    The Act allows only Farm Credit banks that operate under title I of 
the Act, not FCS associations, to establish funding and discount 
relationships with OFIs. However, section 1.5(18) of the Act allows a 
Farm Credit bank to delegate to associations such functions as the bank 
deems appropriate. Similarly, section 2.2(19) of the Act allows a 
direct lender association to perform functions delegated to it by its 
funding bank. We believe that this authority allows FCS associations to 
act as point-of-contact or servicing agents for the Farm Credit bank in 
its lending relationship with its OFIs.
    While associations could not directly fund OFIs, they could help 
make this program more successful by acting as intermediaries or 
servicing agents on loans from the Farm Credit banks to OFIs. Such 
arrangements could help promote new, and support existing, local 
relationships between the associations and potential and existing OFIs. 
Origination and servicing fees earned by the associations as agents for 
the banks can also serve to increase the associations' earnings 
potential. Such arrangements could also serve to reduce the servicing 
costs for smaller OFIs. A precedent for this approach is that FCS 
associations acted as servicing agents on loans that the former 
regional banks for cooperatives made to small, local, farmer 
cooperatives. In this capacity, FCS associations provided efficient and 
effective loan administration for the banks on loans they could have 
made themselves.
    Agreements between the parties can establish these arrangements 
and, therefore, no new regulation is necessary. The FCA Board supports 
associations serving as agents for the Farm Credit banks in 
establishing and maintaining funding relationships between Farm Credit 
banks and existing or new OFIs.

[[Page 47509]]

8. ``Similar Financial Assistance'' for OFIs
    Section 1.7(b)(1) of the Act expressly authorizes Farm Credit banks 
to ``extend other similar financial assistance'' to both OFIs and FCS 
associations that extend short- and intermediate-term credit to their 
customers. Several commenters asked us to clarify exactly what 
constitutes ``similar financial assistance.'' Similar financial 
assistance includes lease financing, the issuance of guarantees, surety 
bonds, and the issuance of standby letters of credit. These all are 
services that Farm Credit banks routinely provide to their direct 
lender associations and; therefore, they are also acceptable forms of 
financial assistance that Farm Credit banks may offer their OFIs. Our 
explanation is consistent with guidance that we previously offered Farm 
Credit banks on this issue. At this time, no regulatory amendment is 
necessary to clarify the meaning of ``similar financial assistance'' in 
section 1.7(b)(1) of the Act.
9. Establishment of OFI Lending Limits
    In 1998, former Sec.  614.4565 was repealed, which imposed a 
lending limit on the amount of credit that any OFI could extend to a 
single credit risk with FCS funds. At the time, we acknowledged that 
certain OFIs would remain subject to lending limits that their primary 
regulator imposes under applicable Federal or state law. The preamble 
to the final rule stated that we expect each Farm Credit bank to 
prudently manage risk exposures to concentrations in OFI loan 
portfolios through underwriting standards and the general financing 
agreements (GFAs) executed with the OFIs.\16\
    After the FCA repealed former Sec.  614.4565, some Farm Credit 
banks considered imposing a lending limit on both FCS associations and 
OFIs that is lower than the lending limit that: (1) Section 614.4353 
establishes for System direct lender associations; and (2) Federal or 
state laws place on depository institutions. During this rulemaking, 
two commenters asked us to enact a new regulation that would forbid 
Farm Credit banks from imposing a lending limit on OFIs that is lower 
than the limit established by applicable Federal or state law. The FCA 
declines this request because it is inconsistent with safety and 
soundness. Each Farm Credit bank may establish, by underwriting 
standards and GFAs, limits on its exposure to concentrations in the 
loan portfolios of both FCS associations and OFIs that are more 
stringent than lending limits imposed by statute or regulation, as long 
as it does not favor FCS associations over OFIs.
---------------------------------------------------------------------------

    \16\ See 63 FR 36541, 36545 (July 7, 1998).
---------------------------------------------------------------------------

10. Eligible Collateral Pledged To Support an OFI's Discounting 
Arrangements With a Farm Credit Bank
    Currently, Sec.  614.4570 requires a secured lending relationship 
between each Farm Credit bank and every OFI. Under Sec.  
614.4570(b)(2), each FCB or ACB must perfect its security interest in 
any and all obligations and the proceeds thereunder that the OFI 
pledges as collateral, in accordance with applicable state law. 
Additionally, Sec.  614.4570(c) allows each FCB and ACB to require its 
OFIs to pledge supplemental collateral to support the lending 
relationship.
    These commenters asked the FCA to amend Sec.  614.4570(b) so OFIs 
could pledge long-term agricultural mortgage loans as primary 
collateral to their FCS funding bank. According to the commenters, this 
approach would provide OFIs with an additional source of funding for 
agricultural mortgages.
    The FCA denies this request because it is incompatible with section 
1.7(b) of the Act, which requires OFIs to use funds from a Farm Credit 
bank only for the purpose of extending short- and intermediate-term 
credit to eligible borrowers for authorized purposes under section 
2.4(a) and (b) of the Act. OFIs may, however, pledge agricultural 
mortgages to Farm Credit banks as supplemental, but not primary, 
collateral under Sec.  614.4570(c).
    Section 614.4570(c) requires each FCB and the ACB to develop 
policies and loan underwriting standards that establish uniform and 
objective requirements for determining the need and amount of 
supplemental collateral or other credit enhancements that each OFI must 
pledge to its System funding bank as a condition for obtaining credit. 
The amount, type, and quality of supplemental collateral or other 
credit enhancements specified by such policies and procedures must be 
proportional to the level of risk that the OFI poses to the System 
funding bank. Provisions in the GFA or the security agreement govern 
collateral pledged by each OFI to its System funding bank.
11. Improving the Relationship Between Farm Credit Banks and OFIs
    Several commenters offered various suggestions for improving the 
relationship between Farm Credit banks and prospective and existing 
OFIs. These suggestions are confidence-building measures that will 
attract more OFIs to rely on Farm Credit banks as a source of funding 
and liquidity. These ideas could improve relations between existing 
OFIs and their funding banks and encourage prospective OFIs to 
establish funding and discount relationships with Farm Credit banks.
    New regulations or policies promulgated by the FCA are not required 
to implement these ideas for improving the OFI program. Instead, these 
suggestions request Farm Credit banks to take the initiative and reach 
out to existing and prospective OFIs. The FCA uses this opportunity to 
convey the commenters' ideas to Farm Credit banks and provide them with 
guidance about measures that could make this program more appealing to 
OFIs. The FCA encourages Farm Credit banks to develop internal programs 
and initiatives that:
    a. Establish outreach programs for contacting prospective OFIs and 
providing them with information about the bank's services;
    b. Routinely publish updated information about its products and 
services for OFIs, and its underwriting standards, funding terms and 
conditions, and pricing guidelines for OFI loans;
    c. Allow OFI representatives to observe meetings of the bank's 
board of directors;
    d. Promote better communication through roundtable discussions, 
focus groups, and public discussions that bring OFIs, associations, and 
other interested parties together to discuss issues of mutual interest;
    e. Work with OFIs to identify and remove administrative barriers 
that hinder OFI access;
    f. Allow FCS associations to act as intermediaries and servicing 
agents on extensions of credit from the funding bank to OFIs, as 
discussed earlier; and
    g. Identify best practices for OFIs.
    The FCA is strongly committed to the success of the OFI program. 
OFIs are an important component of the mission of Farm Credit banks to 
finance agriculture. By adopting the internal programs and initiatives 
described above, Farm Credit banks can attract more OFIs to rely on the 
FCS as a source for funding and liquidity which, in turn, will provide 
eligible farmers, ranchers, aquatic producers and harvesters, farm-
related businesses, and rural homeowners with more plentiful and 
affordable credit, as Congress intended. The FCA may provide additional 
guidance to Farm Credit banks about improving the OFI program through 
bookletters, informational memoranda, and the Office of the Ombudsman.

[[Page 47510]]

E. Statutory Issues

    Many FCS and non-System commenters identified other factors that 
they view as impediments to the success of the OFI program. Several 
commenters believe that OFIs should be able to fund or discount long-
term mortgage loans on agricultural land and rural homes with Farm 
Credit banks. Other commenters observed that OFIs cannot hold voting 
stock in their System funding banks and; therefore, they are not 
represented on the banks' boards of directors. One commenter opposed 
the prohibition on Farm Credit banks extending additional credit to 
OFIs when the aggregate of their liabilities exceeds ten times their 
paid-in and unimpaired capital and surplus. Several commenters 
expressed the view that the OFI program should be modeled after the 
Federal Home Loan Bank System. These restrictions on the OFI program 
are imposed by the Act, not FCA regulations.

III. Investments in Farmers' Notes

    Our public meeting notice asked interested parties for input on 
both OFIs and ``other types of partnering relationships between System 
and non-System lending institutions that would increase the 
availability of funds to agriculture and rural America.'' See 66 FR 
35428 (July 5, 2001). At the public meeting, many commenters encouraged 
us to promote other arrangements, in addition to the OFI program, that 
make it easier for Farm Credit banks and associations to provide 
funding and liquidity to non-System financial institutions and 
merchants that extend credit to agriculture. Many commenters expressed 
their desire for more flexible and informal arrangements between FCS 
and non-System institutions.
    The FCA is exploring a variety of different options that could 
improve cooperation between FCS and non-System lenders that, in turn, 
would increase the flow of credit to agriculture and rural America. For 
example, we are currently reviewing the regulatory treatment of loan 
syndications. Future rulemakings may suggest other regulatory 
approaches for enhancing partnering arrangements between FCS and non-
System lenders.
    Our efforts in this rulemaking focus on the Farmers' notes program. 
The FCA originally approved this program in 1966. The purpose of the 
Farmers' notes program is to provide liquidity to private dealers and 
cooperatives that sell farm machinery, supplies, equipment, home 
appliances, and other items of a capital nature to eligible farmers and 
ranchers. The Farmers' notes regulation, Sec.  615.5172, allows PCAs 
and agricultural credit associations to purchase, as investments, 
notes, conditional sale contracts, and obligations that evidence the 
sale of the items, described above to farmers and ranchers.
    The authority to purchase Farmers' notes derives from section 
2.2(10) of the Act, which permits certain associations to invest their 
funds as may be approved by their funding bank under FCA regulations. 
Because Farmers' notes are investments, the regulation places a 
portfolio cap of 15 percent and a concentration limit of 50 percent of 
capital and surplus on association investments in Farmers' notes. 
Additionally, Sec.  615.5172(d) requires participating dealers and 
cooperatives to endorse Farmers' notes that they sell to these 
associations with full recourse. The full recourse requirement is 
designed as a credit enhancement, which is consistent with the 
treatment of Farmers' notes as investments. Finally, the existing 
regulation requires associations to contact those notemakers who meet 
their credit underwriting standards, and encourage them to become FCS 
borrowers.
    The Farmers' notes regulation has become outmoded. The FCA proposes 
substantial revisions to Sec.  615.5172 that should reinvigorate this 
program. The proposed revisions should enable this program to evolve as 
agricultural credit markets continually change, so that FCS 
associations can help non-System lenders meet the credit needs of 
farmers. However, the purpose of this program remains the same, namely 
that FCS associations will continue to provide funding and liquidity to 
other agricultural creditors.
    The FCA proposes four major changes to the Farmers' notes 
regulation so that this program will be more responsive to the needs of 
other creditors and their customers. First, all entities that routinely 
extend agricultural or aquatic credit in the normal course of their 
business may participate in this program. In the past, this program was 
restricted to private dealers and cooperatives. Now, merchants and all 
types of creditors will be able to sell Farmers' notes to FCS 
associations. Second, the FCA proposes to expand this program to long-
term loans. Third, all FCS direct lenders may now invest in Farmers' 
notes, whereas this program was previously limited to FCS associations 
that had only short- and intermediate-term lending authorities. Fourth, 
FCS associations will be allowed to invest in notes from aquatic 
producers and harvesters and farm-related businesses. All these 
proposed changes are reflected in proposed Sec.  615.5172(a) and (b).
    Other provisions of the proposed rule ensure that FCS direct lender 
associations continue to treat Farmers' notes as investments. Several 
provisions of the proposed rule contain various requirements that are 
designed to enhance the credit quality of Farmers' notes. For example, 
proposed Sec.  615.5172(b) reaffirms that FCS associations may invest 
in Farmers' notes that are secured by specified collateral that the 
underlying debtor pledges to creditors. The FCA also proposes to retain 
the 15-percent portfolio cap and the 50-percent concentration limit in 
Sec.  615.5172(c). All proposed revisions to Sec.  615.5172(c) would 
either conform this provision to amendments in Sec.  615.5172(a) and 
(b) or are stylistic changes that enhance the clarity of this 
regulation. Current Sec.  615.5172(d) requires the seller to endorse 
all Farmers' notes with full recourse. The FCA proposes to update this 
requirement by allowing other types of credit enhancements, such as 
guarantees, insurance, reserves of cash or marketable securities, 
subordinated interests, or a combination of such credit enhancements 
that would adequately cover the principal amount of the association's 
investment in Farmers' notes.
    The purpose of the portfolio cap, the concentration limit, and the 
credit enhancements in proposed Sec.  615.5172(d) is to ensure that 
Farmers' notes are treated as investments. FCS associations are credit 
cooperatives, and the portfolio cap and concentration limit ensure that 
most assets in association portfolios are loans to members. The full 
recourse requirement and the other credit enhancements in Sec.  
615.5172(d) lessens the credit risk that FCS associations assume from 
Farmers' notes.
    The FCA proposes to delete the provision in Sec.  615.5172 that 
currently requires associations to contact the farmers or ranchers who 
are indebted on these Farmers' notes, and encourage them to become FCS 
borrowers. This requirement may be an impediment to the success of the 
Farmers' notes program. Other creditors may be reluctant to sell 
Farmers' notes to FCS associations as long as the regulation requires 
such associations to lure away their customers.
    The proposed revisions to the Farmers' notes regulation would give 
the System a greater role in providing funding and liquidity to those 
who extend credit to agriculture during the normal course of business. 
The Farmers' notes program complements the OFI

[[Page 47511]]

program. Farm Credit banks provide funding and liquidity to OFIs, 
whereas FCS direct lender associations provide these services through 
the Farmers' notes program. In both programs, the FCS acts as a source 
of funding and liquidity to agricultural creditors who need these 
services so they can meet the credit needs of their customers. As a 
result, the System fulfills its mission to finance agriculture and 
related activities in rural America, as Congress intended. From the 
FCA's perspective, agriculture benefits when System and non-System 
lenders cooperate to make affordable credit more available for farmers, 
ranchers, aquatic producers and harvesters, farm-related businesses, 
and rural homeowners.

IV. Capital Risk Weighting

    We have previously interpreted our regulations as requiring funding 
banks to risk weight loans to OFIs at 100 percent. In contrast, 
existing Sec.  615.5210(f)(2)(ii)(I) allows Farm Credit banks to risk 
weight loans to System associations at 20 percent. This means Farm 
Credit banks currently hold more capital (at a minimum) for loans to 
OFIs than loans to System associations, which in many cases have 
similar structures and financial conditions as OFIs.
    The ANPRM acknowledged that many OFIs, particularly commercial 
banks or their affiliates might pose no greater risk to their FCS 
funding bank than System associations. However, unregulated non-bank 
OFIs could expose their System funding bank to greater risk than FCS 
associations and regulated OFIs. The preamble to the ANPRM explained, 
in detail, the risk-reducing features of FCS associations that 
justified a 20-percent risk weighting.\17\
---------------------------------------------------------------------------

    \17\ See 65 FR 21151 (April 20, 2000).
---------------------------------------------------------------------------

    Furthermore, as the preamble to the ANPRM observed, the risk-
weighting categories in the FCA's capital regulations are patterned 
after the risk-weighting categories in the 1988 Basel Accord, which the 
other Federal bank regulatory agencies adopted and applied to all 
depository institutions. As a result, many, but not all, OFIs have the 
same risk-reducing features as FCS associations. The ANPRM asked 
several questions about whether and how we should amend our capital 
regulations to address the risk weighting of OFI loans by Farm Credit 
banks.
    We received 38 comments on this issue during the ANPRM comment 
period and as part of the public meeting testimony from 28 commercial 
banks, two non-bank entities and OFIs, five Farm Credit banks, and two 
associations. The overwhelming majority of the commenters supported the 
concept of differentiating the risk weighting of OFI loans based on the 
structure and risk-mitigating characteristics of the OFIs. Under this 
approach, OFIs that are Federal- or state-regulated depository 
institutions or their affiliates would be risk-weighted at 20 percent, 
while unregulated non-bank OFIs might be risk weighted at a higher 
percentage. One unregulated OFI opposed any change to the risk 
weighting of OFI loans by Farm Credit banks. Three commenters, 
including two FCBs, suggested that Farm Credit banks apply the same 
risk weight to all OFI and FCS association loans.
    The FCA proposes amendments to Sec.  615.5210 that would permit 
Farm Credit banks to risk weight their loans to OFIs that are Federal- 
or state-regulated depository institutions, or their affiliates, at 20 
percent. Under this proposal, Farm Credit banks would continue to risk 
weight loans to OFIs that are unregulated, or exhibit a higher risk 
profile at either 50 or 100 percent, depending on certain factors, 
which are explained below. Although we received no comments about how 
to risk weight Farmers' notes, the proposed rule would establish 
similar risk weights for these investments.
    The proposed rule would establish a 20-percent risk weighting for 
OFIs or Farmers' notes sold by entities that are either: (1) An 
equivalent to an OECD \18\ bank (Federal- or state-regulated depository 
institution); (2) subsidiaries of OECD equivalent banks or bank holding 
companies and carry full guarantees from such parent entities; or (3) 
an institution that carries one of the three highest ratings from a 
nationally recognized statistical rating organization (NRSRO).\19\
---------------------------------------------------------------------------

    \18\ OECD means the group of countries that are full members of 
the Organization for Economic Cooperation and Development, 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund's 
General Arrangement to Borrow, excluding any country that has 
rescheduled its external sovereign debt within the previous 5 years. 
For purposes of United States banking operations, all Federally 
regulated depository institutions are considered the equivalent of 
OECD banks.
    \19\ Nationally recognized statistical rating organization means 
an entity recognized by the Division of Market Regulation of the 
Securities and Exchange Commission (or any successor Division) 
(Commission) as a nationally recognized statistical rating 
organization for various purposes, including the Commission's 
uniform net capital requirements for brokers and dealers.
---------------------------------------------------------------------------

    Additional criteria for a 20-percent risk weighting is that the 
obligation must have full recourse or another form of credit 
enhancement. Under Sec.  614.4570(a), OFIs must pledge full recourse on 
all loans they fund or discount with a Farm Credit bank. Proposed Sec.  
615.5172(d) requires full recourse or another form of credit 
enhancement for Farmers' notes as described in the proposed rule.
    Proposed Sec.  615.5210 would establish a 50-percent risk weighting 
for OFIs or Farmers' notes sold by entities that: (1) Are not OECD 
banks but otherwise meet similar capital and operational standards; and 
(2) carry an investment grade or higher NRSRO rating. Again, full 
recourse or another appropriate credit enhancement is a condition for 
the 50-percent risk weighting. The proposed rule establishes a 100-
percent risk weighting for all OFIs and Farmers' notes that do not 
qualify for the 20-percent or 50-percent risk weight categories.
    Applying lower risk weightings for OFIs that are considered less 
risky would allow the FCBs to hold less capital to support such loans. 
This approach is consistent with the direction from the proposed Basel 
Accord revisions, which are currently under consideration. Lowering the 
capital requirements for OFI loans will lower the operating costs of 
the OFI program to Farm Credit banks, which in turn should lower the 
cost of funds to OFIs and ultimately reduce interest rates charged to 
OFI borrowers. These outcomes would advance the System's public mission 
to provide affordable credit on a consistent basis to agriculture and 
rural America. Greater flexibility for the risk weighting of OFI loans 
should provide the Farm Credit banks additional incentives to expand 
their lending to both existing and new OFIs.

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 614

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

[[Page 47512]]

12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, parts 614 and 615, chapter 
VI, title 12 of the Code of Federal Regulations are proposed to be 
amended 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 P--Farm Credit Bank and Agricultural Credit Bank Financing 
of Other Financing Institutions

    2. Revise Sec.  614.4540(c) to read as follows: Sec.  614.4540 
Other financing institution access to Farm Credit Banks and 
agricultural credit banks for funding, discount, and other similar 
financial assistance.
* * * * *
    (c) Underwriting standards. Each Farm Credit Bank and agricultural 
credit bank shall establish objective policies, procedures, pricing 
guidelines, and loan underwriting standards for determining the 
creditworthiness of each OFI applicant. A copy of such policies and 
guidelines shall be made available, upon request to each OFI and OFI 
applicant.
* * * * *
    3. Revise Sec.  614.4550 to read as follows:


Sec.  614.4550  Place of discount.

    A Farm Credit Bank or agricultural credit bank may provide funding, 
discounting, or other similar financial assistance to any OFI 
applicant. However, a Farm Credit Bank or agricultural credit bank 
cannot fund, discount, or extend other similar financial assistance to 
an OFI that maintains its headquarters, or has more than 50 percent of 
its outstanding loan volume to eligible borrowers who conduct 
agricultural or aquatic operations in the chartered territory of 
another Farm Credit bank unless it notifies such bank in writing within 
five (5) business days of receiving the OFI's application for 
financing. Two or more Farm Credit banks cannot simultaneously fund the 
same OFI.
    4. 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 the regulations in subparts K, L, and Sec. Sec.  614.4516, 
614.4517, 614.4518, and 614.4519 of subpart N of part 614 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.
* * * * *
    5. Amend Sec.  614.4590 by adding new paragraphs (c) and (d) to 
read as follows:


Sec.  614.4590  Equitable treatment of OFIs and Farm Credit System 
associations.

* * * * *
    (c) Upon request, each Farm Credit Bank or agricultural credit bank 
must provide each OFI and OFI applicant a copy of its policies, 
procedures, loan underwriting standards, and pricing guidelines for 
OFIs. The pricing guidelines must identify the specific components that 
make up the cost of funds for OFIs and the amount of these components 
in basis points.
    (d) Upon request of any OFI or OFI applicant, each Farm Credit Bank 
or agricultural credit bank must explain in writing the reasons for any 
variation in the overall funding costs it charges to OFIs and direct 
lender associations. The written explanation must compare the cost of 
funds that the Farm Credit Bank or agricultural credit bank charges the 
aggregate of its OFIs and affiliated direct lender associations. When 
possible, the written explanation shall compare the costs of funding 
that the bank charges several OFIs and FCS associations that are 
similar in size. However, the Farm Credit Bank or agricultural credit 
bank must not disclose financial or confidential information about any 
individual FCS association.
    6. Amend part 614, subpart P by adding a new Sec.  614.4595 to read 
as follows:


Sec.  614.4595  Public disclosure about OFIs.

    A Farm Credit Bank or agricultural credit bank may disclose to 
members of the public the name, address, telephone number, and Internet 
Web site address of any affiliated OFI only if such OFI, through a duly 
authorized officer, consents in writing. Each Farm Credit Bank and 
agricultural credit bank must adopt policies and procedures for 
obtaining and maintaining the consent of its OFIs and for disclosing 
this information to the public.

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

    7. The authority citation for part 615 continues to read as 
follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of 
Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart F--Property, Transfers of Capital, and Other Investments

    8. Revise Sec.  615.5172 to read as follows:


Sec.  615.5172  Investments by associations in Farmers' notes.

    (a) In accordance with policies prescribed by the board of 
directors of the Farm Credit Bank or agricultural credit bank that 
funds it and each direct lender association, each direct lender 
association may invest in notes, sales contracts, and other similar 
obligations (hereafter Farmers' notes) that eligible farmers, ranchers, 
producers and harvesters of aquatic products, and farm-related 
businesses give to entities that routinely extend credit in the normal 
course of their business.
    (b) Farmers' notes must be secured by:
    (1) Collateral of a capital nature that eligible farmers, ranchers, 
producers and harvesters of aquatic products use in their agricultural 
or aquatic operations or for their household needs;
    (2) Collateral of a capital nature that eligible farm-related 
businesses use in providing farm-related services to eligible farmers 
and ranchers.
    (c) The total amount that an association may invest in Farmers' 
notes, at any one time, must not exceed 15 percent of the balance of 
its loans outstanding at the close of the association's preceding 
fiscal year. In addition, the total amount that an association may 
carry as investments in Farmers' notes originated by any one selling 
entity must not exceed 50

[[Page 47513]]

percent of the association's capital and surplus.
    (d) All Farmers' notes in which an association invests shall have 
at least one or a combination of the following credit enhancements:
    (1) The selling entity must endorse these Farmers' notes with full 
recourse;
    (2) A guarantee by a creditworthy third party covers the full 
principal amount of the Farmers' note;
    (3) Acceptable insurance covers the principal amount of each 
Farmers' note;
    (4) The selling entity or a third party maintains a reserve of cash 
or marketable securities in an amount that equals or exceeds 10 percent 
of the principal amount of each Farmers' note;
    (5) The selling entity or a third party holds a subordinated 
interest that equals or exceeds 10 percent of the principal amount of 
each Farmers' note; or
    (6) The entire principal amount of the Farmers' notes is covered by 
a combination of credit enhancements listed in this section.

Subpart H--Capital Adequacy

    9. Amend Sec.  615.5210 by adding new paragraphs (f)(2)(ii)(M) and 
(N); (f)(2)(iii)(C); and (f)(2)(iv)(E) and (F) to read as follows:


Sec.  615.5210  Computation of the permanent capital ratio.

* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (M) Claims on other financing institutions provided that:
    (1) The other financing institution qualifies as an OECD bank or it 
is owned and controlled by an OECD bank that guarantees the claim, or
    (2) The other financing institution has a rating in one of the 
highest three investment-grade rating categories from a NRSRO or the 
claim is guaranteed by a parent company with such a rating, and
    (3) The other financing institution has endorsed all obligations it 
pledges to its funding Farm Credit bank with full recourse.
    (N) Investments in Farmers' notes that:
    (1) Provide the Farm Credit System direct lender association full 
recourse against a seller or has other acceptable credit enhancements 
specified in Sec.  615.5172(d), and
    (2) Are guaranteed by an OECD bank or other institution that 
qualifies for a 20-percent risk weight under this section, or
    (3) Are sold by entities that:
    (i) Are rated in one of the highest three investment-grade rating 
categories from a NRSRO or the investment is guaranteed by a parent 
company with such a rating. If the entity has more than one NRSRO 
rating the lowest rating shall apply.
    (ii) Maintain capital to total assets of at least 9 percent.
    (iii) * * *
    (C) Claims on other financing institutions that:
    (1) Are not covered by the provisions of paragraph (f)(2)(ii)(M) of 
this section, but otherwise meet similar capital, risk identification 
and control, and operational standards, or
    (2) Carry an investment-grade or higher NRSRO rating, and
    (3) The other financing institution has endorsed all obligations to 
its Farm Credit funding bank with full recourse.
    (D) Investments in Farmers' notes that:
    (1) Provide the Farm Credit System direct lender association full 
recourse against a seller or has other acceptable credit enhancements 
specified in Sec.  615.5172(d), and
    (2) The seller is not covered by the provisions of paragraph N (20-
percent risk weight), but otherwise meets similar capital, risk 
identification and control, and operational standards, or
    (3) The credit provider carries an investment-grade or higher NRSRO 
rating.
    (iv) * * *
    (E) Claims on other financing institutions that do not otherwise 
qualify for a lower risk weight category under this section.
    (F) Investments in Farmers' notes that do not otherwise qualify for 
a lower risk weight under this section.
* * * * *

    Dated: August 6, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-20360 Filed 8-8-03; 8:45 am]
BILLING CODE 6705-01-P