[Federal Register Volume 68, Number 178 (Monday, September 15, 2003)]
[Proposed Rules]
[Pages 53915-53925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23421]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 620, 630

RIN 3052-AC07


Loan Policies and Operations; Disclosure to Shareholders; 
Disclosure to Investors in Systemwide and Consolidated Bank Debt 
Obligations of the Farm Credit System

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA or agency) proposes to 
amend its regulations governing the Farm Credit System's (System) 
mission to provide sound and constructive credit and services to young, 
beginning, and small farmers and ranchers, and producers or harvesters 
of aquatic products (YBS farmers and ranchers or YBS). Additionally, 
the agency proposes to amend the System's disclosure to shareholders 
and investors to include reporting on its service to YBS farmers and 
ranchers.

DATES: You may send us comments by November 14, 2003.

ADDRESSES: Send us your comments by electronic mail to ``[email protected]'' or through the Pending Regulations section of our Web 
site, ``www.fca.gov'' or through the government-wide 
``www.regulations.gov'' portal. You may also send written comments to 
Robert Coleman, Director, Regulation and Policy Division, Office of 
Policy and Analysis, Farm Credit Administration, 1501 Farm Credit 
Drive, McLean, Virginia 22102-5090, or by facsimile transmission to 
(703) 734-5784. You

[[Page 53916]]

may review copies of all comments we receive at our office in McLean, 
Virginia.

FOR FURTHER INFORMATION CONTACT:

Robert E. Donnelly, Senior Policy Analyst, Office of Policy and 
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TTY (703) 883-4434,
     or
Wendy R. Laguarda, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4020.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of the FCA's proposed rule is to ensure the System 
provides sound and constructive credit and services \1\ to YBS farmers 
and ranchers.\2\ To accomplish this objective, the agency proposes to 
amend existing regulations to provide:
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    \1\ The term ``services'' includes leases and related services 
to YBS farmers and ranchers.
    \2\ The Farm Credit Act of 1971 (1971 Act) gave the production 
credit associations and the banks for cooperatives the authority to 
finance ``producers or harvesters of aquatic products'' in addition 
to financing ``farmers and ranchers.'' The 1980 amendments to the 
1971 Act gave the Federal land banks expanded authority to finance 
``producers or harvesters of aquatic products'' and put such 
producers and harvesters on the same footing as ``farmers and 
ranchers.'' Thus, in accordance with the amendments to the 1971 Act, 
whenever we refer to ``YBS farmers and ranchers'' or ``YBS 
borrowers'' in this proposed rule, we are including ``producers or 
harvesters of aquatic products.''
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    1. Clear, meaningful, and results-oriented guidelines for System 
YBS policies and programs; and
    2. Enhanced reporting and disclosure to the public on the System's 
performance and compliance with its statutory YBS mission (YBS mission 
or mission).
    Through these amendments, the public will be able to measure the 
System's performance in fulfilling its YBS mission.

II. Background

    The FCA's mission is to ensure the System provides a dependable 
source of credit and related services to agriculture and rural America 
as authorized by Congress. The System has a special public purpose 
concerning YBS farmers and ranchers. Since 1980, Congress has required 
the System to prepare programs for furnishing sound and constructive 
credit and services to YBS farmers and ranchers. Specifically, section 
4.19(a) of the Farm Credit Act of 1971, as amended (Act) states:

    Under policies of the district Farm Credit Bank board, each 
Federal land bank association and production credit association 
shall prepare a program for furnishing sound and constructive credit 
and related services to young, beginning, and small farmers and 
ranchers. Such programs shall assure that such credit and services 
are available in coordination with other units of the Farm Credit 
System serving the territory and with other governmental and private 
sources of credit. Each program shall be subject to review and 
approval by the supervising bank.

    YBS farmers and ranchers, like all those in agriculture today, face 
a wide range of challenges, including access to capital and credit; the 
impact of rising costs on profitability; urbanization and the 
availability of resources like land, water and labor; globalization; 
and competition from larger or more established farms. While all 
agricultural producers face these challenges, the hurdles that YBS 
farmers and ranchers face are often greater. The System's YBS mission 
is important to enable start-up farmers and ranchers to make a 
successful entry into agricultural production. The YBS mission is also 
critical to facilitate the transfer of agricultural operations from one 
generation to the next. For all these reasons, the agency is committed 
to ensuring that the System fulfills this important public purpose 
mission.

A. FCA's Focus on YBS Lending

    In 1998, the FCA Board adopted a policy statement that called for a 
renewed commitment by the System to YBS lending; provided guiding 
principles for enhanced service to YBS farmers and ranchers; and 
revised definitions for ``young,'' ``beginning,'' and ``small'' farmers 
and ranchers.\3\ To implement the policy statement, the FCA also issued 
a bookletter that included the revised YBS definitions and YBS 
reporting procedures.\4\ The revised reporting procedures were fully 
phased in by January 1, 2001. FCA requires the System to submit each 
year a report detailing its YBS program components.
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    \3\ FCA-PS-75, Farm Credit System Service to Young, Beginning, 
and Small Farmers and Ranchers, effective December 10, 1998, 
available on the FCA Web site, www.fca.govder Legal Info., FCA 
Handbook).
    \4\ FCA BL-040, Policy and Reporting Changes for Young, 
Beginning, and Small Farmers and Ranchers Programs, issued December 
11, 1998, available on the FCA Web site, www.fca.gov (under Legal 
Info., FCA Handbook).
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    Since 1999, YBS lending programs have been a ``focus area'' of 
agency examinations where, among other factors, the agency has looked 
at System institutions' YBS board policies and procedures; YBS credit 
enhancement programs and underwriting standards; YBS program 
coordination with Federal, state, System or other credit sources; 
demographic studies; marketing, advertising, and other outreach 
programs; and the quality of YBS reporting to System institutions' 
boards and FCA.
    In addition to this examination focus area, for the past 2 years, 
the FCA Board and staff have increased their focus on the System's 
mission to serve YBS farmers and ranchers. The agency, for example, 
recognized several System associations for their exemplary YBS 
programs.\5\
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    \5\ See remarks by the Honorable Michael M. Reyna before the 
19th and 20th Annual Farm Credit Council meetings, January 22, 2002, 
and January 20, 2003, respectively, available on the FCA Web site, 
www.fca.gov (under About FCA, FCA Board, Testimony, Statements and 
Speeches).
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B. Report by the General Accounting Office

    On March 8, 2002, the General Accounting Office (GAO) issued a 
report on the FCA's oversight of the System's mission to serve YBS 
farmers and ranchers.\6\ The GAO, after conducting a review that began 
in July 2001, recommended that the agency strengthen its oversight role 
of the System's YBS lending, promote YBS compliance, and highlight the 
System's efforts to provide services to YBS farmers and ranchers by:
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    \6\ Farm Credit Administration: Oversight of Special Mission to 
Serve Young, Beginning, and Small Farmers Needs to be Improved (GAO-
02-3040, available on the GAO Web site, www.gao.gov/cgi-bin/getrpt?GAO-02-304.
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    1. Promulgating a regulation that outlines specific activities and 
standards that constitute an acceptable program to implement the YBS 
statutory requirement;
    2. Ensuring that examiners follow the guidance and complete the 
appropriate examination procedures related to YBS and adequately 
document the work performed and conclusions drawn during examinations; 
and
    3. Publicly disclosing the results of the examinations for YBS 
compliance for individual System associations.
    In its response to Congress, the FCA noted its commitment to 
address the issues raised in the GAO report.

C. FCA Gathers Public Input

    The FCA values public input and has therefore sought public comment 
early in the rulemaking process in various ways. First, the agency 
sought public input through an advance notice of proposed rulemaking 
(ANPRM) seeking suggestions on possible YBS regulatory approaches and 
policy initiatives.\7\ In response to the ANPRM, the agency received 65 
comment letters on the

[[Page 53917]]

subject. Commenters included the Farm Credit Council (Council), System 
institutions, the American Bankers Association (ABA), the Independent 
Community Bankers of America (ICBA), and other associations or trade 
groups involved in agriculture such as the Sustainable Agriculture 
Coalition and the National Corn Growers Association. Second, the FCA 
held a public meeting on November 13, 2002, in Kansas City, Missouri, 
to hear about ways to enhance the System's service to YBS farmers and 
ranchers. The agency heard from 24 different speakers at this public 
meeting, including small farmers, agricultural lenders, farm advocates, 
representatives of the academic community, and government officials.
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    \7\ See 67 FR 59479, Sept. 23, 2002.
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III. Responses to Comments Received

    The comment letters and testimony reflect a multitude of opinions 
on the issue of whether the agency should provide more guidance to the 
System on YBS policies and programs. Generally speaking, the comments 
can be divided into two categories--those that oppose the issuance of a 
revised YBS regulation and those that support additional regulatory 
requirements.

A. Comments Advocating No Additional YBS Regulatory Requirements

    Many commenters advocated that a revised regulation governing YBS 
lending is unnecessary because the System is already successfully 
fulfilling its YBS mission--a mission, they point out, that is only 
part of the System's overall purpose to serve all of American 
agriculture. These commenters noted that a revised regulation would not 
be based in law; would be unduly burdensome and costly; would not 
result in more YBS lending; and would be inconsistent with the agency's 
limited oversight of the YBS mission as set forth in section 4.19 of 
the Act.
    We do not agree with the assertion by some commenters that a 
revised regulation would be inconsistent with section 4.19 of the Act. 
The agency has clear statutory authority to promulgate regulations to 
implement section 4.19 of the Act. The agency's general rulemaking 
authority under section 5.17(a)(9) of the Act authorizes FCA to 
``prescribe rules and regulations necessary or appropriate'' for 
carrying out the Act. In fact, since 1980, when Congress first added 
section 4.19 to the Act, the agency has had regulatory and policy 
guidance on the System's YBS mission to supplement the Act's general 
YBS requirements for System banks and direct lender associations. We 
continue to believe a YBS regulation and other supplemental guidance is 
necessary and appropriate for the System's achievement of its YBS 
mission and for the agency's effective oversight of the System in 
carrying out this mission. Moreover, a significant number of 
requirements in this proposed rule are similar to current agency YBS 
policy guidance and reporting requirements. Therefore, we do not 
believe the proposed rule creates significant additional burdens or 
costs for the System in fulfilling its YBS mission. Finally, we believe 
that this proposed rule will help the System achieve even greater 
results in fulfilling its YBS mission.
    Many of these same commenters noted that each System direct lender 
association understands the needs of the YBS farmers and ranchers in 
its territory. Such commenters advocated, therefore, that it is more 
appropriate for each direct lender association, rather than the agency, 
to develop its own YBS policies and programs. For this reason, many of 
these commenters opposed a YBS regulation that would include specific 
YBS targets or other quantitative guidelines, as well as special credit 
treatment for loans to YBS borrowers. Some commenters claimed that such 
YBS targets or other quantitative guidelines would limit an 
association's ability to develop its own unique YBS programs. In 
addition, other commenters noted that, because the risk-bearing 
capacity of each direct lender association is different, one uniform 
approach for YBS lending would not be reasonable.
    The proposed rule does not prescribe a ``one size fits all'' YBS 
program for all System associations. Instead, the agency gives each 
direct lender association the flexibility to design its own program 
tailored to the needs of the YBS farmers and ranchers in its territory. 
However, the proposed rule provides more results-oriented direction for 
System direct lender associations by setting forth minimum components 
that must be included in their YBS programs. Such minimum components 
will help ensure that System associations are making every effort 
possible to achieve their YBS mission. The proposed rule also promotes 
more transparency in YBS reporting, ensuring that the public is well 
informed of the System's commitment to, and efforts in, fulfilling its 
YBS mission.
    Finally, the commenters noted that the agency can use its 
enforcement powers rather than its regulatory authority to ensure the 
System serves eligible YBS farmers and ranchers. Promulgating a 
proposed rule, which requires notice and comment procedures, will 
enhance the agency's ability to use its enforcement tools to ensure 
that the System is fulfilling its YBS mission.

B. Comments Advocating Additional YBS Regulatory Requirements

    In contrast to the foregoing comments, a significant number of 
commenters noted a need for more regulatory direction on YBS credit and 
services. These commenters suggest the System is not fulfilling its 
public purpose as a Government-sponsored enterprise (GSE) because it is 
not adequately providing credit and services to YBS farmers and 
ranchers. Many of these commenters noted that serving the needs of YBS 
farmers and ranchers is crucial for the future of American agriculture.
    The agency believes the System's YBS mission is important, not only 
to the System in its public purpose role as a GSE, but also in its 
mission as a provider of sound, constructive, and dependable credit and 
services to all of American agriculture. In the agency's effort to 
ensure that the System remains focused on its important YBS mission, 
the proposed rule provides enhanced requirements for YBS policies and 
programs.
    Many of these same commenters also noted that section 4.19 of the 
Act, which requires the System to submit YBS reports to the agency, is 
clear evidence that the agency has the authority to oversee and 
regulate the System's YBS mission. Many of these commenters 
recommended, therefore, that the agency issue a detailed rule to 
improve the System's YBS service, data collection, and disclosure. 
These commenters suggested that the agency adopt a ``hard target'' 
system that would require strict performance and reporting guidelines 
and impose penalties when such guidelines were not met.
    We agree with these commenters that section 4.19 of the Act, as 
well as the agency's general rulemaking authority in section 
5.17(a)(9), gives FCA the authority to oversee and regulate the 
System's YBS mission. The proposed rule sets forth minimum components 
for effective YBS policies and programs. Included in these components 
are requirements for direct lender associations to establish 
quantitative targets and qualitative goals within their risk-bearing 
capacities. The proposed rule also requires such targets and goals to 
be incorporated into an association's operational and strategic 
business plan. Incorporating these components into regulatory 
requirements will enhance the agency's ability to enforce each direct 
lender association's establishment of YBS targets and goals. The 
proposed rule also creates increased transparency

[[Page 53918]]

to the public by enhancing the System's reporting of YBS results.
    Some commenters noted that the costs and risks associated with 
entrance into agriculture are prohibitive. These commenters also noted 
that the demographic data confirms that the pool of potential YBS 
borrowers continues to shrink. Therefore, many of these commenters 
recommended that a proposed rule require the System to provide special 
credit treatment to YBS borrowers. The agency recognizes that YBS 
farmers and ranchers often fall into a category of borrowers that have 
low equity, limited cash flow, and little, if any, managerial and 
business planning experience. The agency believes it is important for 
the System to recognize the special needs of YBS farmers and ranchers 
and to make every effort to provide special credit programs and 
services for this group. However, the agency believes that each direct 
lender association must decide for itself, within its risk-bearing 
capacity, how best to meet the needs of the YBS farmers and ranchers in 
its territory. This is a business judgment that should be exercised by 
each association rather than the regulator. In meeting the special 
credit needs of YBS farmers and ranchers and maintaining sound credit 
management practices, the proposed rule suggests that associations can 
make use of fee waivers, specialized loan underwriting standards, loan 
guarantees, or loan participation programs.
    Finally, several of these commenters suggested that a proposed YBS 
rule include provisions that would prohibit the System from engaging in 
predatory pricing or financing credit needs not closely related to 
agriculture.\8\ Sections 1.8(b) and 2.4(c)(2) of the Act provide that 
``it shall be the objective'' of System lenders to set interest rates 
and other charges ``at the lowest reasonable cost \9\ on a sound 
business basis'' taking into consideration the lender's cost of funds, 
necessary reserves, and the cost of providing services to its members. 
Through our examination process, the agency evaluates whether interest 
rates charged are consistent with law, regulations, sound business 
practices, and the institution's loan policies. In addition, the agency 
ensures that interest rates charged are sufficient to cover the 
institution's costs and adequately capitalize the institution, while 
maintaining safety and soundness. With YBS farmers and ranchers facing 
multiple economic challenges, the agency believes it is important for 
this group of potential borrowers to have access to credit at 
competitive rates. Moreover, the System is fulfilling its public 
purpose under the Act when it provides interest rates at the lowest 
reasonable cost on a sound business basis.
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    \8\ The commenter does not define the term ``predatory pricing'' 
and this term is not used in the Act. The agency notes there is no 
uniform national law that defines what is meant by predatory pricing 
and such a term is open to widely differing interpretations.
    \9\ The word ``cost'' is used in the singular only in section 
2.4(c)(2) of the Act.
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C. YBS Services and Coordination

    Commenters offered suggestions on how to enhance services and 
coordination with other System institutions and other governmental and 
private sources of credit for YBS farmers and ranchers. Many commenters 
suggested that System institutions take greater advantage of Farm 
Service Agency loan guarantees, aggie bonds, and other risk-pooling 
programs as a means of providing credit to YBS borrowers while reducing 
exposure to risk. Other commenters noted the System is currently doing 
a good job coordinating with these programs and no further guidance on 
this issue is needed. Many of these same commenters supported 
collaborative efforts among System institutions, government agencies, 
non-profit organizations, and other lenders as a means of reaching and 
serving YBS borrowers. These commenters also suggested that outreach 
efforts include partnerships with sustainable agriculture and 
alternative agriculture production programs. Several commenters 
emphasized the need for outreach programs designed to connect YBS 
farmers and ranchers with existing lending and support programs. Many 
commenters also noted the System could do a better job of advertising 
its services and credit programs to YBS farmers and ranchers. Several 
commenters also recommended that the System better facilitate 
intergenerational transfers where land or farm equipment is passed from 
retiring farmers or ranchers to YBS farmers or ranchers. Several of 
these same commenters recommended that the System establish mentoring 
programs to connect seasoned farmers and ranchers with young or 
beginning farmers and ranchers.
    Section 4.19 of the Act requires System direct lender associations 
to develop YBS programs that assure that credit and services to YBS 
farmers and ranchers are available in coordination with other System 
institutions and other governmental and private sources of credit. In 
accordance with the Act, the agency believes the System should be 
making every effort possible to ensure that its YBS credit and service 
programs are made in coordination with others. To this end, we have 
included in the proposed rule a YBS program component that requires 
each direct lender association to establish qualitative YBS goals. Such 
goals include offering directly, or in coordination with others, credit 
programs and services and undertaking outreach efforts, including 
educational programs and advertising campaigns.
    One commenter recommended that the agency prevent System 
institutions from distributing patronage refunds until some of the 
System's profits are used to fund special low interest programs to YBS 
farmers and ranchers. Congress established the System as a cooperative 
structure in which System borrowers are also the owners. The agency 
believes it would be contrary to Congressional intent to prevent a 
System institution, operating safely and soundly, from exercising a 
fundamental principle of cooperatives, namely the distribution of 
patronage dividends.
    Another commenter suggested the agency create an Affordable Farming 
Program modeled after the Affordable Housing Program of the Federal 
Home Loan Bank System. The program suggested by the commenter is 
required by the Federal Home Loan Bank Act. There is no authority under 
the Act for the agency to require the System to establish a similar 
program. Absent such statutory authority, the agency believes this idea 
is best left to the consideration of System institutions using their 
sound business judgment.
    Another commenter noted the need for more educational programs for 
socially disadvantaged farmers and ranchers, particularly, women 
farmers and ranchers. Section 1.1(a) of the Act declares the policy of 
Congress that System institutions improve the income and well being of 
American farmers and ranchers. Although the Act does not contain 
explicit provisions for the System to serve socially disadvantaged or 
minority farmers, the System's mission is to serve all American farmers 
and ranchers. Moreover, service to YBS farmers and ranchers often 
includes service to socially disadvantaged and minority farmers and 
ranchers. Thus, the results-oriented direction in this proposed rule 
should also enhance the System's service to socially disadvantaged and 
minority farmers and ranchers.
    Finally, some commenters noted that FCA should articulate a strong 
policy on the System's YBS mission and do a better job of recognizing 
strong YBS programs. The FCA believes that

[[Page 53919]]

through this proposed rule and previous guidance on YBS policies and 
programs, the agency has articulated its strong commitment to ensuring 
that the System fulfills its YBS mission. In addition, the proposed 
rule requires each direct lender association to articulate its YBS 
policy by including it in a mission statement, which is now a required 
component of each association's YBS program. For the past two years, 
the agency also has recognized those System associations with exemplary 
YBS programs in order to highlight successful efforts and provide model 
programs for other System institutions to emulate.

D. Measuring the System's YBS Performance

    In response to how the agency should measure the System's YBS 
performance, a significant number of commenters indicated that 
nationwide performance measures would be inappropriate, unworkable, and 
ineffective; that Congress did not authorize the agency to establish 
YBS performance measures; and that no YBS performance system is 
necessary because the agency already collects adequate information to 
measure the System's performance. Several commenters advocated that the 
agency establish a formal rating program for the System's YBS 
performance to measure not only each direct lender association's 
performance against the YBS demographics in its territory, but also how 
well each association's YBS performance compares to other System 
associations.
    The agency believes it is important to measure the System's YBS 
performance. The proposed rule provides the public with a complete and 
accurate picture of the System's YBS performance through enhanced 
reporting requirements. The reporting requirements will provide the 
public with an understanding of each association's YBS performance as 
compared to the YBS demographics in its territory. The agency believes 
the reporting requirements will provide a sound understanding of each 
direct lender association's YBS performance.
    In addition to the enhanced YBS reporting requirements for the 
System, the agency will also complete a rating for each direct lender 
association's overall YBS program. The YBS program performance rating 
will be based on a review of the direct lender association's YBS 
program components, as discussed in the proposed rule. The examination 
of an association's YBS program will be the result of an enhanced 
examination assessment and will normally be completed during regular 
safety and soundness examination activities. The FCA's rating will 
identify the association's YBS program performance as either ``Pass'' 
or ``Fail.'' The FCA Board will publicly disclose the results of the 
System's YBS compliance.
    Finally, many commenters noted problems with measuring the System's 
YBS performance based on the YBS demographic data available to the 
System, including the limited applicability and accuracy of the data. 
Many commenters also noted the prohibitive costs associated with 
conducting independent YBS demographic studies. Other commenters noted 
that a conflict of interest exists if System institutions are allowed 
to conduct their own demographic studies. Still other commenters 
suggested that System institutions hire independent researchers to 
study the YBS demographics of their lending territories.
    One of the minimum components for YBS programs set forth in the 
proposed rule requires that each direct lender association develop 
quantitative targets based on the YBS demographic data in its 
territory. The agency recognizes that YBS demographic data available to 
the System has limitations. The agency also recognizes that it could be 
costly and burdensome for System associations to conduct their own 
studies, or hire an independent source to complete such studies, when 
reasonably reliable census data exists. In recognition of these 
limitations, the proposed rule permits direct lender associations to 
use existing YBS demographic data to establish quantitative targets for 
their YBS lending as long as they can support that such data is 
reasonably reliable. In addition to demographic data reliability, it is 
just as important for direct lender associations to ensure that their 
quantitative targets reasonably reflect the YBS demographics in their 
territory and to be able to explain any inconsistencies between the YBS 
demographics in their territory and their association's YBS data. For 
example, if the demographic is based on the number of potential YBS 
borrowers in the territory and an association's quantitative target is 
based on some variation of loans, an association must disclose this 
difference when reporting its YBS data.

E. Reporting and Disclosure of YBS Performance

    A significant group of commenters stated that current reporting and 
disclosure requirements are adequate with no additional changes needed. 
Many of these commenters pointed out that information on the System's 
YBS performance is already available to the public through the FCA's 
annual report. Many of these commenters also believe that FCA lacks 
authority to require more reporting and disclosure than what is already 
set forth in section 4.19 of the Act.\10\ Many of these commenters also 
noted that YBS disclosure by individual direct lender associations 
would be misleading to the public because of territorial differences. 
Several commenters argued that additional reporting would only serve to 
increase costs that would be passed on to the borrower with no positive 
effect on YBS lending. Finally, several commenters expressed concern 
over the possibility of publicly disclosing individual examination 
reports on YBS performance.
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    \10\ Section 4.19(b) of the Act sets forth YBS reporting 
requirements for Farm Credit System banks and associations. 
Specifically, section 4.19(b) provides: The Farm Credit Bank for 
each district shall annually obtain from associations under its 
supervision reports of activities under programs developed pursuant 
to subsection (a) of this section and progress toward program 
objectives. On the basis of such reports, the bank shall provide to 
the FCA an annual report summarizing the operations and achievements 
in its district under such programs.
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    Another group of commenters noted that increased YBS reporting and 
disclosure would be beneficial. These commenters articulated that 
increased reporting and disclosure would apply pressure on System 
institutions to enhance their YBS lending. Specifically, many of these 
commenters suggested that YBS reporting be included in the System's 
annual reports to shareholders. Other commenters noted that the 
System's status as a GSE compels more reporting and public disclosure 
of the System's YBS performance. These same commenters suggested that 
YBS examination results be published in each direct lender 
association's annual reports.
    The agency believes enhanced YBS reporting and disclosure would be 
beneficial to the public and the System. Additional reporting and 
disclosure would help the System focus on its YBS performance to better 
fulfill its YBS mission. In turn, additional YBS reporting and 
disclosure will give the public a better understanding of the System's 
YBS performance. The agency has authority to require, in its oversight 
and regulatory role, the reporting and disclosure we believe necessary 
for the System's fulfillment of its YBS mission. Further, we do not 
believe the enhanced reporting requirements in the proposed rule add 
significant burdens or costs to System banks or direct lender 
associations.
    The proposed rule requires each direct lender association to 
report, in its

[[Page 53920]]

annual report to shareholders, on each component of its YBS program. As 
many commenters recommended, the proposed rule also requires both 
System banks and direct lender associations to include YBS performance 
results in their annual reports to shareholders. The proposed rule also 
requires System banks to include, in their annual reports to investors, 
consolidated, quantitative YBS performance results for their affiliated 
direct lender associations.
    Finally, some commenters expressed concern over disclosing 
individual examination reports on YBS performance. We believe it is not 
necessary to disclose confidential examination report information. We 
believe the additional transparency provided by the enhanced reporting 
and disclosure requirements in the proposed rule will give the public a 
sound understanding of the System's YBS performance results and will 
therefore preclude the need for disclosing FCA examination reports on 
System YBS performance.

F. YBS Data Collection Issues

    In response to whether the agency should count the number of YBS 
borrowers or loans, many commenters expressed a preference for counting 
loans while others expressed a preference for counting borrowers. Many 
other commenters said the issue of consistency in data collection was a 
key issue rather than whether the agency counts YBS loans or borrowers. 
Other commenters stated the System should not be allowed to inflate its 
YBS numbers by allowing the same loan to be counted separately in each 
applicable YBS category.
    In 1998, the agency announced it would collect YBS data from the 
System based on the number of loans that benefit ``young,'' 
``beginning,'' or ``small'' farmers and ranchers rather than the number 
of borrowers. This change was consistent with the new definitions the 
agency developed in 1998, which captured more complete information on 
loans to partners and family members and thus made it more difficult to 
track borrowers. The agency believes, along with many of the 
commenters, that the key issue in YBS data collection is consistency. 
We believe the reasons for changing our data collection procedures from 
borrowers to loans in 1998 are still valid, making it unnecessary to 
change our approach once again.
    In 1998, the agency also changed how the System should categorize 
loans to YBS borrowers. The agency previously required reporting a YBS 
borrower in one of four mutually exclusive categories: Young borrowers; 
beginning borrowers; small borrowers; and borrowers that met at least 
two of the definitions. The agency now requires System banks and direct 
lender associations to report a loan in each applicable YBS category. 
If a loan is made to a borrower who is young, beginning, and small, it 
is reported in each category. This practice is consistent with other 
GSE mission-related reporting, such as Fannie Mae and Freddie Mac 
reports on their annual housing goals.\11\
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    \11\ The annual housing goals are established and supervised by 
the Department of Housing and Urban Development, Fannie Mae's and 
Freddie Mac's mission regulator.
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    In the agency's annual Performance and Accountability Report, the 
information on the System's YBS lending explicitly states that YBS 
categories are not mutually exclusive and therefore each category 
cannot be added together for a total number of System YBS loans. We 
believe that this method of categorizing and counting the System's YBS 
loans provides the most accurate and complete picture of how the System 
institutions are fulfilling their YBS mission. We also believe that 
this method is consistent with the intent of Congress to report on the 
System's service to each category of YBS farmers and ranchers.

G. Definitions

    Many of the commenters expressed concerns about the current agency 
definitions for ``young,'' ``beginning,'' and ``small'' farmers and 
ranchers. Several commenters recommended tightening the parameters on 
YBS definitions. These commenters suggested that FCA reduce the 
``beginning'' farmer definition from the current 10 years to 5 years.
    Current agency definitions for ``young,'' ``beginning,'' and 
``small'' farmers and ranchers are set forth in 1998 FCA guidance.\12\ 
The guidance defines ``young'' as a farmer, rancher, or producer or 
harvester of aquatic products who is age 35 or younger as of the loan 
transaction date. The current guidance is a change from the previous 
definition of ``less than 35 years old.'' The current definition 
remains similar to the United States Department of Agriculture's 
National Agricultural Statistics Service Census of Agriculture (USDA 
Census of Agriculture), which defines a ``young'' farmer as being less 
than 35 years old.
---------------------------------------------------------------------------

    \12\ See supra note 4.
---------------------------------------------------------------------------

    The current guidance defines ``beginning'' as a farmer, rancher, or 
producer or harvester of aquatic products who has 10 years or less 
farming or ranching experience as of the loan transaction date. Before 
1998, the definition of beginning had been a ``farmer, rancher and 
producer or harvester of aquatic products means one who is in the 
process of establishing an agricultural operation and who has not 
assumed the full control and risk of such an operation for longer than 
5 years.'' The current definition of ``10 years or less'' is consistent 
with section 343 of the Consolidated Farm and Rural Development Act, as 
amended, which defines, in part, a ``qualified beginning farmer or 
rancher'' as an applicant ``who has not operated a farm or ranch, or 
who has operated a farm or ranch for not more than 10 years.'' \13\
---------------------------------------------------------------------------

    \13\ 7 U.S.C. 1991.
---------------------------------------------------------------------------

    Several commenters also recommended that FCA reduce the small 
farmer definition from $250,000 in gross annual sales to something 
less, such as $100,000 in gross annual sales. The guidance defines 
``small'' as a farmer, rancher, or producer or harvester of aquatic 
products who normally generates less than $250,000 in annual gross 
sales of agricultural or aquatic products. Before 1998, the definition 
of small was one who has ``sustained gross sales from agricultural or 
aquatic production and a net worth as prescribed by the FCA.'' The 
agency's current definition of ``small'' is significantly more 
conservative than the definitions used by other Federal financial 
regulatory agencies for Community Reinvestment Act \14\ reporting of 
small farmer loans. The Small Business Administration considers most 
agricultural production enterprises as ``small'' if their annual 
receipts do not exceed $750,000.\15\ Commercial banks and savings 
associations use thresholds of $1,000,000 for annual sales and a loan 
size of less than $500,000 for small loans.\16\ The National Commission 
on Small Farms \17\ (Commission) recommended that the United States 
Department of Agriculture (USDA) focus its programs on farm operations 
that generate less than $250,000 in annual gross agricultural sales. 
The Commission believed such a level of income represents small farm 
operators and, after expenses, is equivalent to the net disposable 
income that the average non-farm family receives. As these various 
definitions indicate, there is no

[[Page 53921]]

uniform description of a small farm. The agency adopted the most 
conservative of these thresholds, $250,000 in annual gross agricultural 
sales.
---------------------------------------------------------------------------

    \14\ See, for example, 12 CFR 25.42(h)(1)(iv).
    \15\ See section 3(a)(1) of the Small Business Act, Pub. L. 85-
536, as amended.
    \16\ Depository lenders report on loans to small farm operators 
as part of their compliance with the Community Reinvestment Act.
    \17\ USDA, A Report to the USDA National Commission on Small 
Farms, January 1998.
---------------------------------------------------------------------------

    Several commenters recommended that FCA exclude loans that are 
$5,000 or less from any YBS reporting. The agency's current definitions 
for YBS farmers and ranchers include all loans, even those that fall 
under a de minimis loan amount, such as $5,000. We do not believe a de 
minimis exclusion would provide an accurate and complete picture of the 
System's YBS lending.
    One commenter recommended making ``small'' the umbrella category 
for ``young'' and ``beginning'' farmers and ranchers. This commenter 
also recommended creating a category for ``small'' loans to farmers and 
ranchers who are not ``young'' or ``beginning.'' Section 4.19 of the 
Act requires that the System have programs for ``young,'' 
``beginning,'' and ``small'' farmers and ranchers. The agency has 
interpreted this statutory provision as requiring System policies, 
programs, and reporting to be based on these three distinct YBS 
categories. The agency believes that changing these categories by 
making any one of them the umbrella for other categories, as suggested 
by the commenter, would be inconsistent with Congressional intent. 
Moreover, the agency's current ``small'' category already captures 
small farmers and ranchers who are not ``young'' and ``beginning.'' 
Therefore, to rearrange the categories, as suggested by the commenter, 
would be unnecessarily burdensome and not more useful.
    One commenter noted the inconsistency between the FCA and the USDA 
definitions for certain categories of YBS borrowers. The agency has 
considered a variety of data, including USDA benchmarks, in developing 
what it believes to be YBS definitions most appropriate for the 
System's mission.
    A few commenters noted that a borrower should have a ``material 
stake'' in the agricultural operation before he or she can be counted 
in one of the YBS categories. The current definitions for young and 
beginning farmers and ranchers apply to individuals who benefit from 
System loans. Loans to sole proprietors and partners qualify for 
reporting purposes if a young or beginning borrower is obligated on the 
loan. Loans to a closely held legal entity qualify for reporting 
purposes if a young or beginning borrower has an ownership interest in 
the entity. The current definitions do not require that a young or 
beginning borrower have a material stake in the agricultural operation. 
We believe a material stake requirement is inconsistent with the 
purpose of YBS lending, which is to provide credit and services to 
those borrowers who are just getting started in agriculture and often 
have a low equity position, thereby precluding their ability to have a 
``material stake'' in an agricultural operation.
    Finally, one commenter noted that System institutions do not 
consistently apply YBS definitions. The agency's 1998 guidance for YBS 
reporting provided a phase-in period for the new definitions, which 
required compliance by January 2001. During this transition period, 
System institutions may have adopted different implementation dates for 
their reporting changes. The agency annually reviews and provides 
instructions to each System direct lender association for its YBS 
reporting to ensure that it is both accurate and complete. In addition, 
FCA examiners evaluate and test the direct lender associations' 
internal controls to verify whether the designation of YBS farmers and 
ranchers is correct, the accuracy of the direct lender associations' 
databases, and the quality of reporting to association boards and FCA.
    In summary, the agency believes the current YBS definitions reflect 
the changes in agriculture occurring over the years and provide the 
most accurate picture of the System's service to YBS farmers and 
ranchers. The definitions for YBS categories are not included in the 
proposed rule, but continue to remain in agency guidance set forth in 
an agency bookletter (1998 BL-040).

H. Other Authorities To Enhance YBS Lending

    A significant number of commenters offered suggestions on ways to 
improve credit and services to YBS farmers and ranchers in lieu of 
issuing a revised YBS regulation. These suggestions included:
    1. Reviving the national charter issue to eliminate territorial 
restrictions and thereby improve competition, availability, and access 
to credit to YBS farmers and ranchers;
    2. Removing the existing scope of lending restrictions limiting 
lending to less than full-time farmers so that part-time farmers have 
more access to credit;
    3. Removing restrictions on rural home loan lending;
    4. Authorizing System institutions to make investments in rural 
America;
    5. Expanding the System's lending authority to include lending to 
businesses located in rural areas; and
    6. Enhancing the System's lending to other financing institutions. 
One commenter opposed any initiatives that would expand the System's 
lending authorities.
    The proposed rule focuses only on System YBS policies and programs. 
The agency's regulatory performance plan (which is available on the 
agency's Web site) includes many of the topics raised by the 
commenters. As the regulatory performance plan indicates, many of these 
topics may be addressed in separate agency rulemakings.

IV. Regulatory Approach

    As discussed above, the agency received contrasting comments on 
whether further guidance is necessary to strengthen the System's 
mission to provide sound and constructive credit and services to YBS 
farmers and ranchers. After reviewing the comment letters and public 
testimony, the agency is proposing a regulation that balances the needs 
for additional direction while allowing System direct lender 
associations the flexibility to design YBS programs unique to the needs 
of their territories and within their risk-bearing capacities.
    The proposed rule outlines the minimum components that must be a 
part of each direct lender association's YBS program. Thus, it is 
responsive to the GAO report recommendation for a regulation that 
``outlines specific activities and standards that constitute an 
acceptable program to implement the YBS statutory requirement.''
    GAO also recommended publicly disclosing the results of the 
examinations for YBS compliance for individual System associations. The 
Federal financial regulatory agencies, including the FCA, have a 
longstanding policy of keeping examination results confidential to 
everyone other than the board of directors of the affected 
institution.\18\ The purposes of this policy are to protect financial 
institutions by withholding reports that contain candid evaluations of 
their stability and to promote cooperation and communication between 
the institution and examiners.
---------------------------------------------------------------------------

    \18\ An exemption under the Freedom of Information Act permits 
the agency to withhold from the public any agency record ``contained 
in or related to examination, operating, or condition reports 
prepared by, on behalf of, or for the use of an agency responsible 
for the regulation or supervision of financial institutions.'' See 5 
U.S.C. 552(b)(8).
---------------------------------------------------------------------------

    We believe the proposed rule meets the intent of the GAO 
recommendation for improved public disclosure of the System's YBS 
performance results. The agency will assign a rating for each direct 
lender association's overall YBS program. The rating will identify the 
association's YBS program performance as either ``Pass'' or ``Fail.'' 
The FCA Board will publicly disclose the results

[[Page 53922]]

of the System's YBS compliance. The proposed rule also requires System 
banks and direct lender associations to discuss their YBS programs and 
results in their annual reports to shareholders and investors. We 
believe these reporting and disclosure requirements will create more 
meaningful and transparent disclosure of the System's YBS program 
results than would the reporting of YBS examination results. Moreover, 
we believe such reporting and disclosure requirements will provide an 
added incentive to System banks and direct lender associations to focus 
on and enhance their YBS policies and programs.
    Finally, the GAO recommended more consistent and complete YBS 
examination procedures. In response to this recommendation, FCA has 
made numerous changes to improve the YBS examination process. Such 
changes included implementing additional controls to provide assurance 
that examiners are fully completing the comprehensive YBS examination 
procedures. Before the GAO review, examiners had been completing YBS 
examination procedures using a ``risk-based'' approach, focusing 
attention on those areas deemed to be significant to that particular 
institution. Shortly after receiving the GAO report, the ``risk-based'' 
approach was discontinued and comprehensive scope examinations became 
mandatory in all association examinations, with full documentation of 
work performed and conclusions drawn. Senior examiners are now required 
to provide close supervision of the YBS examination program, and 
quality assurance examiners review the work completed and certify that 
the examiners followed all applicable guidance. After reviewing the 
agency's progress in this area, the GAO concluded that our corrective 
action plan satisfies the recommendation contained in the report 
regarding YBS examination activities.
    The agency proposes to revise its YBS regulation by removing the 
current rule in its entirety and replacing it with the proposed rule 
discussed below.

V. Section-by-Section Analysis

Section 614.4165(a)--Definitions

    We have added a definition section to clarify that the term 
``credit'' includes all loans and interests in participations made by 
System banks and direct lender associations operating under title I or 
II of the Act. This section also clarifies that the term ``services'' 
as used in section 4.19(a) of the Act includes all leases made under 
title I or II authorities and all related services made by System banks 
and direct lender associations operating under title I or II of the 
Act.

Section 614.4165(b)--Farm Credit Bank Policies

    This section implements certain provisions of section 4.19 of the 
Act, which require each:
    1. Direct lender association to adopt a YBS program under the 
polices of its funding \19\ Farm Credit bank board;
---------------------------------------------------------------------------

    \19\ Although section 4.19 of the Act refers to ``district'' and 
``supervising'' Farm Credit bank, we use the term ``funding'' bank, 
which we believe more appropriately reflects the current 
relationship between a Farm Credit bank and its affiliated direct 
lender associations.
---------------------------------------------------------------------------

    2. Direct lender association to coordinate with other System 
institutions in its territory, and other Governmental and private 
sources of credit in extending credit and services to YBS farmers and 
ranchers;
    3. Direct lender association to report annually on its YBS programs 
and performance results to its funding bank; and
    4. Farm Credit bank to report annually to the FCA, summarizing the 
YBS program operations and achievements of its affiliated direct lender 
associations.
    Direct lender associations have gained more autonomy from their 
funding banks since 1980, when section 4.19 of the Act was added. In 
recognizing this autonomy, we are proposing that the Farm Credit bank 
policies be kept to a minimum. Instead, the proposed rule focuses on 
ensuring that the direct lender associations establish YBS programs 
that fulfill the provisions of section 4.19 of the Act.

Section 614.4165(c)--Direct Lender Association YBS Programs

    This section sets forth the minimum components that each direct 
lender association must include in its YBS program. This section allows 
each direct lender association to design a YBS program unique to the 
needs of the YBS farmers and ranchers in its territory. Setting forth 
minimum components for YBS programs conveys FCA's expectations for 
specific activities and standards that constitute an acceptable YBS 
program.
    The first component of this section requires each direct lender 
association to develop a mission statement for its YBS program. The 
exercise of developing a mission statement will compel each direct 
lender association to focus on the objectives of its YBS program and 
the steps it must take to accomplish such objectives.
    The second and third components of this section require each direct 
lender association to develop annual quantitative targets and 
qualitative goals to be incorporated into its operational and strategic 
business plan. Although the proposed regulation provides several 
suggestions on how to establish quantitative targets, these are 
suggestions only and are not mandatory. Each direct lender association 
has the flexibility to establish quantitative targets that best fit the 
needs of its territory. These targets must be established for each 
category of YBS borrowers. We note that no matter how direct lender 
associations establish their quantitative targets, the agency will 
continue to require annual YBS reports on loan volume and numbers.
    The proposed rule requires that quantitative targets reasonably 
relate to the demographic data in each direct lender association's 
territory. We realize, based on the comments received, that the 
demographic data available to the System is not a perfect 
representation of the potential pool of eligible YBS borrowers in each 
direct lender association's territory. However, demographic data 
available from the Census of Agriculture, for example, is suitable as 
long as the direct lender association makes a reasonable effort to 
determine the reliability of the data. Moreover, quantitative targets 
must reasonably reflect the YBS demographics in each direct lender 
association's territory.
    The quantitative targets and qualitative goals outlined in the 
proposed rule are similar to current FCA policy and reporting 
requirements for System YBS programs. Therefore, we do not believe 
these components impose significant new burdens for System direct 
lender associations.
    The fourth component of this section requires each direct lender 
association to have methods to ensure that it conducts its YBS program 
in a safe and sound manner and within its risk-bearing capacity. It is 
possible that YBS farmers and ranchers pose a higher credit risk than 
other System borrowers. However, through the use of loan 
participations, capital pooling, guarantors such as the Farm Service 
Agency and state organizations that address specific YBS lending needs, 
a direct lender association can better manage its risk and increase 
opportunities for its YBS borrowers. The use of credit enhancements is 
one method to manage risk while providing more opportunities.

Section 614.4165(d)--YBS Advisory Committee

    Under this section, each direct lender association may establish 
and maintain an advisory committee comprised of

[[Page 53923]]

young, beginning, and small farmers and ranchers. We believe a YBS 
advisory committee could help each association determine the credit and 
services needs of YBS farmers and ranchers in the association's 
territory. Similarly, this committee could serve as the association's 
conduit to the YBS community and other agricultural interest groups and 
lending sources serving the needs of YBS farmers and ranchers. For 
example, an advisory committee could reach out to the YBS community to 
inform such potential borrowers of the association's credit and 
services programs designed to serve YBS farmers and ranchers. For these 
reasons, we believe this committee will be extremely helpful to System 
associations.

Section 614.4165(e)--Review and Approval of YBS Programs

    This section implements section 4.19(a) of the Act, which requires 
each YBS program to be subject to review and approval by the funding 
bank. We recognize that because System associations are now all direct 
lenders, their relationship with their funding banks has significantly 
changed since 1980, when section 4.19 was added to the Act. Direct 
lender associations have been increasingly more responsible for their 
own programs and operations. Accordingly, we have limited each funding 
bank's review and approval of YBS programs to whether or not the YBS 
programs are complete and include the necessary components required in 
the proposed rule.

Section 614.4165(f)--YBS Program and the Operational and Strategic 
Business Plan

    This paragraph requires direct lender associations to include their 
YBS quantitative targets and qualitative goals in their operational and 
strategic business plan. The annual targets and goals will establish 
the steps by which the association hopes to reach its longer-term YBS 
program objectives as identified in its operational and strategic 
business plan.

Section 614.4165(g)--YBS Program Internal Controls

    Proper oversight and control of a YBS program will help ensure that 
the program is managed effectively and will contribute to its overall 
success. Therefore, we believe comprehensive and detailed internal 
controls are a critical component of a YBS program. These internal 
controls include establishing clear lines of responsibility for YBS 
program implementation, YBS performance results, and YBS quarterly 
reporting. Regular and reliable reporting to the board of directors 
helps the association to assess the strengths and weaknesses of its YBS 
program. The quarterly reporting requirement in the proposed rule will 
provide the board of directors an opportunity to assess its YBS program 
and consider any necessary changes or adjustments to its program 
components.

Section 620.5(n)--Contents of the Annual Report to Shareholders

    A significant number of commenters noted how successfully the 
System is fulfilling its YBS mission. However, many commenters also 
noted that the System could do a better job of sharing its YBS mission 
accomplishments with the public. Therefore, the proposed rule includes 
a requirement for each direct lender association and Farm Credit bank 
to report on its YBS mission accomplishments in its annual report to 
shareholders. The reporting information required in the proposed rule 
is not significantly different than the information solicited by the 
agency each year from each direct lender association through its 
funding bank. Therefore, the agency believes this reporting requirement 
will not be significantly burdensome or costly to the System.
    Reporting requirements for the direct lender associations are more 
detailed than the Farm Credit bank disclosure requirements. Each direct 
lender association must provide a description of its YBS program, 
including a status report on each program component as set forth in 
Sec.  614.4165(c), and the definitions of ``young,'' ``beginning,'' and 
``small'' farmers and ranchers. Each direct lender association must 
also describe the YBS demographics in its territory and the source of 
its demographic data as well as any differences between this data and 
the association's YBS data. For example, if an association uses the 
USDA Census of Agriculture to report on the demographics of its 
territory, it must cite this source. Furthermore, if there are 
differences between the demographic data and the YBS data being 
collected by the association, the differences must be explained in the 
report. For instance, the USDA Census of Agriculture reports on number 
of farmers and ranchers, whereas System associations report on the 
number of loans.
    In addition, each association must discuss any other information 
necessary for a comprehensive understanding of the association's YBS 
program and its results. For example, the association may need to 
describe the choice of services that it offers to its YBS farmers and 
ranchers. The association may also need to discuss any significant 
changes in quantitative targets or qualitative goals between reporting 
periods.
    Section 4.19(b) of the Act requires each Farm Credit bank to 
summarize the YBS operations and achievements for all its affiliated 
direct lender associations and report such information to the agency. 
The proposed rule requires each Farm Credit bank to include such 
information in its annual report to shareholders. Specifically, the 
proposed rule requires the banks to include in its annual report to 
shareholders a summary report of the quantitative YBS data from its 
affiliated direct lender associations. The annual report to 
shareholders must also include the definitions of ``young,'' 
``beginning,'' and ``small'' farmers and ranchers. We note that the 
proposed rule requires each Farm Credit bank to report on quantitative 
data only. However, a narrative report may be necessary for an ample 
understanding of the YBS mission results.
    We believe reporting to shareholders and the public will create 
more transparent disclosure of the System's YBS mission accomplishment. 
Such transparency will underscore the importance of the YBS mission to 
the System, not only in its role as a provider of sound, constructive, 
and dependable credit to all of American agriculture, but also in its 
public purpose role as a GSE.
    To increase the transparency of the System's YBS disclosure, we 
would encourage all System banks and direct lender associations to 
provide Web site access to their annual reports to shareholders. We 
note that much of the YBS information currently reported to the agency 
by System banks and associations is available on our Web site.

Section 630.20--Contents of the Annual Report to Investors

    In order to strive for more transparency in the System's 
fulfillment of its YBS mission, the proposed rule requires Farm Credit 
banks to include, in their annual report to investors, a report on 
consolidated YBS lending data of their affiliated direct lender 
associations. The annual report to investors must also include the 
definitions of ``young,'' ``beginning,'' and ``small'' farmers and 
ranchers.

VI. 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

[[Page 53924]]

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

12 CFR Part 620

    Accounting, Agriculture, Banks, banking, Reporting and 
recordkeeping requirements, Rural areas.

12 CFR Part 630

    Accounting, Agriculture, Banks, banking, Organization and functions 
(Government agencies), Reporting and recordkeeping requirements, Rural 
areas.

    For the reasons stated in the preamble, parts 614, 620, and 630, 
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 D--General Loan Policies for Banks and Associations

    2. Section 614.4165 is revised to read as follows:


Sec.  614.4165  Young, beginning, and small farmers and ranchers.

    (a) Definitions.
    (1) For purposes of this subpart, the term ``credit'' includes:
    (i) Loans made to farmers and ranchers and producers or harvesters 
of aquatic products under titles I or II of the Act; and
    (ii) Interests in participations made to farmers and ranchers and 
producers or harvesters of aquatic products under titles I or II of the 
Act.
    (2) For purposes of this subpart, the term ``services'' includes:
    (i) Leases made to farmers and ranchers and producers or harvesters 
of aquatic products under titles I or II of the Act; and
    (ii) Related services to farmers and ranchers and producers or 
harvesters of aquatic products under titles I or II of the Act.
    (b) Farm Credit bank policies. Each Farm Credit Bank and 
Agricultural Credit Bank must adopt written policies that direct:
    (1) The board of each affiliated direct lender association to 
establish a program to provide sound and constructive credit and 
services to young, beginning, and small farmers and ranchers and 
producers or harvesters of aquatic products (YBS farmers and ranchers 
or YBS). The terms ``bona fide farmer or rancher,'' and ``producer or 
harvester of aquatic products'' are defined in Sec.  613.3000 of this 
chapter.
    (2) Each affiliated direct lender association to include in its YBS 
farmers and ranchers program provisions ensuring coordination with 
other Farm Credit System institutions in the territory and other 
governmental and private sources of credit.
    (3) Each affiliated direct lender association to provide, annually, 
a complete and accurate YBS farmers and ranchers operations and 
achievements report to its funding bank.
    (4) The bank to provide the Farm Credit Administration a complete 
and accurate annual report summarizing the YBS program operations and 
achievements of its affiliated direct lender associations.
    (c) Direct lender association YBS programs. The board of directors 
of each direct lender association must establish a program to provide 
sound and constructive credit and services to YBS farmers and ranchers 
in its territory. Such a program must include the following minimum 
components:
    (1) A mission statement describing program objectives and specific 
means for achieving such objectives.
    (2) Annual quantitative targets for credit to YBS farmers and 
ranchers that are based on reasonably reliable demographic data and 
that reasonably reflect the YBS demographics in the lending territory. 
Such targets may include:
    (i) Loan volume and loan number goals for ``young,'' ``beginning,'' 
and ``small'' farmers and ranchers in the territory;
    (ii) Percentage goals representative of the demographics for 
``young,'' ``beginning,'' and ``small'' farmers and ranchers in the 
territory;
    (iii) Percentage goals for loans made to new borrowers qualifying 
as ``young,'' ``beginning,'' and ``small'' farmers and ranchers in the 
territory;
    (iv) Goals for capital committed to loans made to ``young,'' 
``beginning,'' and ``small'' farmers and ranchers in the territory.
    (3) Annual qualitative YBS goals that must include efforts to:
    (i) Offer related services, either directly or in coordination with 
others that are responsive to the needs of the ``young,'' 
``beginning,'' and ``small'' farmers and ranchers in the territory;
    (ii) Take full advantage of opportunities for coordinating credit 
and services offered among other Farm Credit System institutions in the 
territory and other Governmental and private sources of credit who 
offer credit and services to those who qualify as ``young,'' 
``beginning,'' and ``small'' farmers and ranchers;
    (iii) Implement effective outreach programs to attract YBS farmers 
and ranchers, which may include advertising campaigns, and educational, 
credit and services programs beneficial to ``young,'' ``beginning,'' 
and ``small'' farmers and ranchers in the territory.
    (4) Methods to ensure that credit and services offered to YBS 
farmers and ranchers are provided in a safe and sound manner and within 
a direct lender association's risk-bearing capacity. Such methods could 
include customized loan underwriting standards, loan guarantee 
programs, fee waiver programs, or other credit enhancement programs.
    (d) YBS Advisory Committee. The YBS program of each direct lender 
association may include an advisory committee comprised of ``young,'' 
``beginning,'' and ``small'' farmers and ranchers to provide views on 
how the credit and services of the direct lender association could best 
serve YBS farmers and ranchers.
    (e) Review and approval of YBS programs. The YBS program of each 
direct lender association is subject to the review and approval of its 
funding bank. However, the funding bank's review and approval is 
limited to a determination that the YBS program contains all required 
components as set forth in paragraph (c) of this section. Any 
conclusion by the bank that a YBS program is incomplete must be 
communicated to the direct lender association in writing.

[[Page 53925]]

    (f) YBS program and the operational and strategic business plan. 
Targets and goals outlined in paragraphs (c)(2) and (c)(3) of this 
section must be included in each direct lender association's 
operational and strategic business plan for at least the succeeding 3 
years (as set forth in Sec.  618.8440 of this chapter).
    (g) YBS program internal controls. Each direct lender association 
must have internal controls that establish clear lines of 
responsibility for YBS program implementation, YBS performance results, 
and YBS quarterly reporting to the association's board of directors.

PART 620--DISCLOSURE TO SHAREHOLDERS

    3. The authority citation for part 620 continues to read as 
follows:

    Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12 
U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101 
Stat. 1568, 1656.

Subpart B--Annual Report to Shareholders

    4. Amend Sec.  620.5 by adding a new paragraph (n) to read as 
follows:


Sec.  620.5  Contents of the annual report to shareholders.

* * * * *
    (n) Credit and services to young, beginning, and small farmers and 
ranchers and producers or harvesters of aquatic products.
    (1) Each direct lender association must describe the YBS 
demographics in its territory and the source of the demographic data. 
If there are differences in the methods by which the demographic and 
YBS data are presented, these differences must be described.
    (2) Each direct lender association must provide a description of 
its YBS program, including a status report on each program component as 
set forth in Sec.  614.4165(c) of this chapter and the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers. The 
discussion must provide such other information necessary for a 
comprehensive understanding of the direct lender association's YBS 
program and its results.
    (3) Each Farm Credit bank must include a summary report of the 
quantitative YBS data from its affiliated direct lender associations as 
described in the Farm Credit Administration's instructions for the 
annual YBS yearend report. The report must include the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers. A 
narrative report may be necessary for an ample understanding of the YBS 
mission results.

PART 630--DISCLOSURE TO INVESTORS IN SYSTEMWIDE AND CONSOLIDATED 
BANK DEBT OBLIGATIONS OF THE FARM CREDIT SYSTEM

    5. The authority citation for part 630 continues to read as 
follows:

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

Subpart B--Annual Report to Investors

    6. Amend Sec.  630.20 by adding a new paragraph (p) to read as 
follows:


Sec.  630.20  Contents of the annual report to investors.

* * * * *
    (p) Credit and Services to young, beginning, and small farmers and 
ranchers and producers or harvesters of aquatic products. The Farm 
Credit banks must include a report on consolidated YBS lending data of 
their affiliated associations. The report must include the definitions 
of ``young,'' ``beginning,'' and ``small'' farmers and ranchers. A 
narrative report may be necessary for an ample understanding of the YBS 
mission results.

    Dated: September 10, 2003.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 03-23421 Filed 9-12-03; 8:45 am]
BILLING CODE 6705-01-P