[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8407-8412]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3888]


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FARM CREDIT ADMINISTRATION

RIN 3052-AC13


Loan Policies and Operations; Loan Syndication Transactions

AGENCY: Farm Credit Administration.

ACTION: Final notice.

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SUMMARY: The Farm Credit Administration (FCA or agency) provides, in 
this notice, the guidance that the Farm Credit System (FCS or System) 
requested about the regulatory treatment of syndicated loans to 
eligible borrowers. This notice also reaffirms FCA's longstanding 
interpretation that syndicated loans to eligible borrowers come within 
System banks' and associations' lending powers, not their loan 
participation authorities.

FOR FURTHER INFORMATION CONTACT: Dennis K. Carpenter, Senior Policy 
Analyst, Office of Policy and Analysis, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-4434; or
    Richard A. Katz, Senior Attorney, Office of General Counsel, Farm 
Credit

[[Page 8408]]

Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.

SUPPLEMENTARY INFORMATION:

I. Brief Overview

    System banks and associations engage in loan syndication 
transactions for eligible borrowers under their direct lending 
authorities. Therefore, syndications to eligible borrowers are subject 
to all statutory and regulatory requirements that apply to direct 
loans. Eligible borrowers must purchase and hold the voting stock of 
FCS lenders that are parties to the syndication. Borrower rights and 
territorial consent requirements apply when lenders operating under 
title I or II of the Farm Credit Act of 1971, as amended, (Act) take 
part in syndications made to eligible borrowers. All System lenders 
that engage in loan syndication transactions must maintain a first-lien 
position on borrower stock, and all FCS associations operating under 
title I of the Act must hold a first lien on real estate pledged as 
collateral. Farm Credit banks operating under title I of the Act cannot 
enter directly into loan syndications after they have transferred their 
direct lending authority to their affiliated associations. Finally, no 
System bank or association has authority to purchase assignments in 
loan syndications from non-System lenders.

II. Background

A. Distinctions Between Participations and Syndications

    Many different types of arrangements enable lenders to work 
together in multi-lender transactions. Participations and syndications 
are two separate and distinct examples of multi-lender transactions. 
The essential distinguishing factor between the two is the legal 
relationships among the parties.
    Loan participations involve two separate legal relationships. The 
first relationship is between the borrower and loan originator (lead 
lender), and the second relationship is between the lead lender and the 
participating lenders. In a loan participation, only the lead lender 
signs a loan agreement with, and receives a promissory note from, the 
borrower. Participating lenders must look only to the lead lender for 
satisfaction of their claims because they have no contractual 
relationship with the borrower.
    In syndications, the borrower signs a loan agreement with multiple 
creditors, each of whom has a direct contractual relationship with the 
borrower. Usually, each creditor in a syndicated loan transaction 
receives its own promissory note from the borrower. Loan agreements 
usually allow the original loan syndicators to sell both assignments 
and participations in their portion of the credit to other lenders. 
Thereafter, a purchaser of an assignment has a direct contractual 
relationship with the borrower.

B. The FCA's Historical Position on Participations and Syndications

    The FCA has consistently viewed syndications as loans under the 
System's direct lending authority, not as participations. In 1991, the 
preamble to a reproposed rule on loan participations and other 
interests in loans stated:

    The reproposed regulations do not address loan syndications, 
whereby a borrower has a direct contractual relationship with more 
than one lender but the loan negotiations with the borrower are 
coordinated under the auspices of a lead bank(s). Such loans can be 
made through the exercise of the institution's direct lending 
authority provided * * * other statutory and regulatory requirements 
* * * are met.

(Emphasis added). See 56 FR 2452 (Jan. 23, 1991).

    Two more recent rulemakings reaffirmed that a System institution's 
participation interest in a loan made by another lender does not result 
in a direct contractual relationship with the borrower. The rulemakings 
also recognized three factors that demonstrate that a participation 
cannot be interpreted as a direct loan. In a participation, (1) There 
is no contractual relationship between the borrower and participating 
lenders, (2) only the lead lender extends credit directly to the 
borrower, and (3) the lead lender is the only lender of record on all 
loan documents. The FCA relied in part on these principles in 2000 when 
it repealed several regulations that required out-of-territory consent 
for loan participations that FCS lenders buy from non-System 
lenders,\1\ and in 2002, when it authorized FCS banks and associations 
to buy 100-percent participations from non-System lenders.\2\
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    \1\ See 65 FR 24101 (Apr. 25, 2000).
    \2\ See 67 FR 1282 (Jan. 10, 2002).
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C. The System's Petition and the FCA's Request for Input From the 
Public

    Syndicated loans are emerging as a more common method of financing 
large agricultural operations. As a result, the System has asked the 
FCA to change its approach to syndications so FCS banks and 
associations would have greater flexibility to engage in such 
transactions. A May 16, 2002 letter from the Farm Credit Council (FCC) 
to the Chairman of the FCA stated that the agency's position places the 
System at a competitive disadvantage with commercial lenders for 
syndicated credits because (1) Associations must comply with borrower 
rights requirements and obtain consent for out-of-territory loans, (2) 
the agricultural credit bank (ACB) and associations must sell voting 
stock to borrowers, and (3) all FCS institutions must maintain the 
first-lien position on voting stock and, in certain cases, long-term 
mortgage real estate pledged as collateral. The FCC also stated that as 
long as these requirements apply, commercial banks that organize and 
comprise a majority of lenders taking part in syndications would 
probably exclude System institutions from most transactions. Borrower 
rights, borrower stock, and territorial consent are not standard 
practices in loan syndication transactions because they only apply to 
the FCS. As a result, the FCC asserted that these requirements are 
obstacles that block the System from assuming a meaningful role in 
syndications to eligible borrowers.
    The FCC attached a position paper and legal analysis to its letter, 
which advocated the System's view that loan syndications are the 
functional equivalent of loan participations because a System 
institution (1) Acquires only a small fraction of the overall credit to 
the borrower, and (2) cannot unilaterally make major credit decisions 
about the loan.
    As a result of the System's request, the FCA Board decided to 
solicit comments from the public about the regulatory treatment of 
syndications. On January 17, 2003, the FCA published a notice (See 68 
FR 2540) in the Federal Register that asked the public to answer the 
following questions:
    1. What is the proper regulatory treatment of loan syndications?
    2. Assuming syndication transactions are within the System's loan-
making authority, should the FCA consider regulatory changes that allow 
(a) Borrowers to waive borrower rights in syndication transactions, and 
(b) associations to take part in syndications to eligible borrowers who 
are located in the chartered territories of other associations without 
consent?
    3. If the FCA would choose to recommend statutory changes to 
Congress regarding the System's authority to engage in various types of 
multi-lender transactions with non-System lenders, what specifically 
should the FCA include in its recommendation?

[[Page 8409]]

    The initial comment period expired on February 18, 2003. At the 
request of the FCC, the FCA reopened the comment period on February 25, 
2003 for 60 additional days.\3\ The FCA subsequently extended the 
comment period twice, each time for an additional 60 days, as members 
of the public requested.\4\ The comment period closed on August 19, 
2003.
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    \3\ See 68 FR 8764 (Feb. 25, 2003).
    \4\ See 68 FR 19538 (Apr. 21, 2003); 68 FR 37824 (Jun. 25, 
2003).
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D. Comments Received

    The FCA received 152 comment letters from System and non-System 
lenders and other interested parties. Fifty-six (56) letters came from 
System banks and associations that asked the FCA to change its 
interpretation and, in the future, treat syndications to eligible 
borrowers as loan participations. Additionally, 10 commercial lenders 
supported continued System involvement in loan syndication 
transactions. The FCA received 86 comment letters from commercial 
banks, their trade associations, and members of the general public that 
favor retaining the current interpretation. These commenters opposed 
any regulatory changes. Both System and non-System commenters opposed 
the FCA asking Congress for new legislation on syndications.
    The commenters who favor changing the FCA's current interpretation 
advised the FCA that:
    1. The trend in the markets is away from traditional participations 
and toward syndications;
    2. Syndications resemble participations because each party only has 
a fractional interest in the entire credit and, in contrast to direct 
loans, no party can unilaterally make major credit decisions;
    3. Borrower rights, borrower stock, first-lien position, and 
territorial consent requirements deter commercial lenders from inviting 
System institutions to take part in loan syndications, and
    4. Because the FCA has broad discretion in how it interprets the 
Act, and is entitled to judicial deference, the FCA should extend the 
definition of ``participation'' in the similar entity provisions of the 
Act to syndications for eligible borrowers.
    The commenters who favor retaining FCA's current interpretation 
asked the FCA to consider that:
    1. The law on this issue is settled, and the markets distinguish 
syndications from participations and, therefore, the FCA's current 
interpretation is correct;
    2. Syndications are credits to large borrowers, whereas the System 
should focus on young, beginning, and small farmers and ranchers and 
other borrowers that are more closely involved in production 
agriculture;
    3. Congress gave borrower rights to farmers who borrow from the 
System, and the FCA should protect those rights, and
    4. A new interpretation that would exempt System associations from 
territorial consent revives the national charter initiative and 
encourages the associations to ``cherry pick'' large credits.

III. Review of Loan Syndications for Eligible Borrowers

    After reviewing input from the public and conducting a thorough 
legal review of the Act, its legislative history, and external sources, 
the FCA reaffirms that syndications and assignments of interests in 
syndicated loans do not fall within the statutory authority of FCS 
banks and associations to participate in loans made by non-System 
lenders to eligible borrowers. Under the Act, syndicated loans to 
eligible borrowers are part of the System's direct lending authority. 
For this reason, regulations that implement the Act and other guidance 
from the FCA will continue to require System banks and associations to 
(1) Treat syndications to eligible borrowers as direct loans, and (2) 
comply with all statutory and regulatory requirements that apply to 
direct loans.

A. The Rules of Statutory Construction

    In interpreting the provisions of the Act that govern the System's 
direct lending and participation authorities, the FCA is guided by the 
rules of statutory construction that Federal courts use when they 
review an agency's interpretation of the statute it administers. A 
reviewing court examines the language and design of the whole statute 
to determine whether or not Congress clearly expressed its intent about 
the question at hand. If Congress' intent is clear, the inquiry ends, 
and the unambiguously expressed intent of Congress is enforced. If the 
applicable provisions of the statute are silent or ambiguous, the 
agency's interpretation is entitled to judicial deference as long as it 
is not arbitrary, capricious, or manifestly contrary to the statute. 
The agency's reasonable interpretation of the statute is entitled to 
judicial deference even if the reviewing court would not have 
necessarily adopted the agency's position had it decided the issue. See 
Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 
U.S. 837, 842-43 (1984).

B. The Text and Structure of the Act

    In determining whether or not a statute is ambiguous, its 
provisions ``must be read in their context and with a view to their 
place in the overall statutory scheme.'' \5\ In other words, all the 
parts of a statute must fit into a ``harmonious whole,'' \6\ and one 
provision cannot be interpreted in a way that negates another provision 
of the same statute. Furthermore, the words of a statute must be 
interpreted according to their ``ordinary, contemporary, common 
meaning,'' \7\ unless Congress clearly expressed a different intent.
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    \5\ FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 133 
(2000) (citing Davis v. Mich. Dept. of Treas., 489 U.S. 803, 809 
(1989)).
    \6\ Id. (citing FTC v. Mandel Bros, Inc., 359 U.S. 386, 389 
(1959)).
    \7\ Pioneer Investment Service Co. v. Brunswick Associates Ltd. 
Partnership, 507 U.S. 380, 388 (1993).
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    An examination of the text, structure, and history of the Act 
indicates that Congress was not silent or ambiguous about this issue. 
After applying these judicial rules of statutory construction to the 
Act, the FCA reaffirms that syndicated loans to eligible borrowers are 
part of the System's direct lending authority and do not fall within 
the System's participation authority.
1. Definition of Participation and Syndication
    As the rules of statutory construction require, the FCA examines 
the ``ordinary, contemporary, common meaning'' of the terms in 
question. ``Participate'' and ``participation'' is clearly different 
from the meaning of ``syndications.'' Moreover, defining 
``participate'' or ``participation'' to include syndications would 
contradict the commonly understood meaning of these terms in the 
financial, business, and legal communities. For example, a banking law 
journal described the differences between participations and 
syndications as follows:

    Multiple lender transactions generally fall into two categories: 
loan participations and loan syndications. The first category, loan 
participations, involved transactions where a lead or originating 
lender sells a part of or all of a loan to one or more purchasers. 
Participation, thus, can be defined as a third party's acquisition 
of a specified percentage of a prearranged loan.
* * * * *
    The second type of multi-lender transaction, loan syndications, 
involve two or more lenders who make a loan(s) to a borrower under a 
common loan agreement. Each lender is a syndicate member. Unlike 
participations, the borrower has direct relationships with each of 
the lenders. Thus,

[[Page 8410]]

each syndicate member is in direct privity of contract with the 
borrower.\8\
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    \8\ N.C. Banking Institute 169, 172 (April 1999). See also, 
Office of the Comptroller of the Currency Economic and Policy 
Analysis Working Paper, ``Recent Trends in Bank Loan Syndications 
Evidence for 1995 to 1999'' (December 2000) and ``Banks and Loan 
Sales,'' 35 Journal of Monetary Economics 389, 394 (1995).

    Case law \9\ and guidance from other Federal banking regulators 
\10\ also distinguish between syndications and participations. A 
passage in Bank of the West v. The Valley National Bank of Arizona,\11\ 
which cited Circular 181 of the Office of the Comptroller of the 
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Currency, states:

    \9\ In re Okura & Co., 249 B.R. 596, 608 (Bankr. S.D.N.Y., 
2000); Bank of the West v. The Valley Nat'l Bank of Arizona, 41 F. 
3d 471, 473 (9th Cir, 1994); Banco Espanol de Credito v. Security 
Pacific National Bank, 763 F. Supp. 36, 43 (S.D.N.Y., 1991) aff'd 73 
F.2d 51 (2nd Cir. 1992), cert. denied 509 U.S. 903 (1993); Hibernia 
Nat. Bank v. Federal Deposit Ins. Corp., 733 F.2d 1403, 1407 (10th 
Cir. 1984); McVay v. Western Plains Corp., 823 F.2d 1395 (10th Cir. 
1987).
    \10\ Office of the Comptroller of the Currency Banking Circular, 
OCC-BC-181 (Aug. 2, 1984).
    \11\ Supra at 41 F. 3d 471, 473 (9th Cir, 1994).
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    A loan participation, as distinguished from a multibank loan 
transaction (syndicated loan), is an arrangement in which a bank 
makes a loan to a borrower and then sells all or a portion of the 
loan to a purchasing bank. All documentation of the loan is drafted 
in the name of the selling bank.

In re Okura & Co stated that a loan participation ``involves two 
independent, bilateral relationships: the first between the borrower 
and the lead bank and the second between the lead bank and the 
participants.'' \12\ The same passage notes, ``As a general rule, the 
participants do not have privity of contract with underlying borrower * 
* *. In a syndication agreement, the banks jointly lend money.'' \13\
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    \12\ Supra at 249 B.R. 596, 608 (Bankr. S.D.N.Y., 2000).
    \13\ Id. Citations omitted.
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    A System bank, citing a law review article,\14\ stated 
participations and syndications are treated the same under securities 
laws. However, Federal securities statutes and regulations of the 
Securities and Exchange Commission do not, as the commenter implies, 
define ``syndications'' to mean ``participations.'' The point of the 
article is not that syndications and participations are the same, but 
that neither are generally considered securities. Furthermore, the same 
section of text cited by the commenter as supporting its view, actually 
supports the opposite view, namely that syndications are a form of 
direct lending. The text describes the attributes of a syndication as 
follows, ``[e]ach bank is a party to the syndicated loan agreement, is 
in privity of contract with the borrower, and receives its own note and 
security interest in the collateral.'' \15\ In summary, the commonly 
accepted definition and legal effect of a syndication transaction 
clearly bring it within the System's loan-making authority and not its 
participation authority.
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    \14\ See ``The Status of Note Participations Under the Federal 
Securities Acts,'' 8 Harv. J.L & Pub. Pol'y 465, 468-69 & n. 18 
(1985).
    \15\ Id.
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2. Similar Entity Authority
    Several System commenters asked the FCA to apply the definition of 
``participate'' and ``participation'' in the similar entity provisions 
of the Act to syndications and assignments for eligible borrowers. Many 
of these commenters stated that section 3.1(11)(B)(iii) of the Act 
demonstrates Congress' intent to treat syndications and participations 
identically for all multi-lender transactions that System banks and 
associations engage in. Some System commenters found it inconceivable 
that Congress intended to exempt syndications for ineligible similar 
entities from borrower rights, borrower stock, territorial consent, and 
first-lien requirements, while imposing these same obligations on 
syndications for eligible borrowers.
    The FCA responds that the plain language of section 3.1(11)(B)(iii) 
of the Act explicitly applies this definition to similar entities, not 
extensions of credit to eligible borrowers. Sections 3.1(11)(B) and 
4.18A of the Act authorize FCS lenders to ``participate'' in loans to 
similar entities, which are not eligible for System loans, but are 
functionally similar to eligible borrowers. Sections 3.1(11)(b)(iii) 
and 4.18A(a)(1) of the Act, which were added by the Farm Credit System 
Agricultural Export and Risk Management Act (1994 Act),\16\ expressly 
define ``participate'' and ``participation'' for similar entity 
transactions to include syndications and assignments.\17\ In contrast, 
sections 1.5(12)(C), 2.2(13) and 3.1(11)(A) of the Act, which authorize 
FCS banks and associations to participate in loans to eligible 
borrowers, do not define ``participations'' to include syndications and 
assignments.\18\ As explained above, the rules of statutory 
construction require that the various provisions of the Act be ``read 
in their context and with a view to their place in the overall 
statutory scheme'' so they fit into a ``harmonious whole.'' Examination 
of the structure of the Act demonstrates that Congress established two 
different statutory schemes for participations to (1) Eligible 
borrowers, and (2) similar entities. Congress did not amend the 
provisions of sections 1.5, 2.2, and 3.1 of the Act, which govern loan 
participations for eligible borrowers, in 1994 when it added the new 
definition of ``participate'' and ``participation'' for similar 
entities to section 3.1(11)(B)(iv) of the Act. Therefore, it is clear 
that the 1994 Act did not authorize System banks and associations to 
engage in syndication transactions for eligible borrowers under their 
loan participation authorities.
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    \16\ See Pub. L. 103-376, Section 2, 108 Stat. 3797 (Oct. 19, 
1994).
    \17\ Section 3.1(11)(b)(iii) of the Act states, ``as used in 
this subparagraph, the term `participate' or `participation' refers 
to multilender transactions, including syndications, assignments, 
loan participations, subparticipations or other forms of the 
purchase, sale or transfer or interests in loans, other extensions 
of credit, or other technical and financial assistance.'' Section 
4.18A(a)(1) incorporates this definition by reference into the 
statutory provision that authorized banks and associations operating 
under titles I and II of the Act to ``participate'' in similar-
entity transactions.
    \18\ Certain statutory restrictions that only apply to similar 
entity authority may explain why Congress chose a more flexible 
definition of ``participation'' and ``participate'' for similar 
entity transactions. First, the total amount of participations any 
FCS lender has outstanding to a single similar entity cannot, in 
most cases, exceed 10 percent of its total capital. Second, the 
participation interest(s) that one or more FCS lender holds in the 
same similar entity transaction cannot equal or exceed 50 percent of 
the principal amount of the loan. Third, the total amount of 
outstanding similar entity participations held by an FCS lender 
cannot equal or exceed 15 percent of its total outstanding assets at 
the end of the preceding fiscal year.
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C. Legislative History

    The Farm Credit Act of 1971 granted production credit associations 
(PCAs) and banks for cooperatives authority to participate in loans 
with non-System lenders in 1971,\19\ while the Farm Credit Act 
Amendments of 1980 \20\ (1980 Act) gave System mortgage lenders similar 
authority. The legislative history to the 1980 Act confirms that 
Congress believed that a participation interest does not entail a 
contractual relationship between a borrower and a participating lender.
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    \19\ See Pub. L. 92-181, 85 Stat. 583 (Dec. 10, 1971).
    \20\ See Pub. L. 24-184, 94 Stat. 3437 (Dec. 24, 1980).
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    Prior to 1980, it was not clear whether a PCA was required to issue 
stock to a borrower when the PCA participated in a loan that a non-
System lender made. The legislative history to the 1980 Act stated 
``[t]he requirement that farmers or aquatic borrowers purchase stock in 
the association served to impede or complicate PCA-other lender 
participations. It caused the association to become a visible party in 
transactions in which the commercial lender was the

[[Page 8411]]

lead institution.''\21\ (Emphasis added). In order to resolve any 
confusion and to remove the PCA as a ``visible party,'' the 1980 Act 
allowed PCAs to satisfy the stock requirement by issuing stock to the 
non-System lender instead of the borrower. If a participation 
transaction entailed a direct contractual relationship between a PCA 
and a borrower, the PCA would have been a ``visible party,'' whether or 
not it issued stock to the borrower. However, Congress chose to resolve 
this problem by changing the stock requirement. Therefore, it is clear 
that Congress did not believe that a participation transaction resulted 
in a direct contractual relationship between a PCA and a borrower.
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    \21\ See H.R. 96-1287, 96th Cong. 2d. Sess., (Sept. 4, 1980), p. 
25.
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    After 1980, Congress did not substantively revise the provisions of 
the Act that govern the System's authorities to participate in loans to 
eligible borrowers but, as noted earlier, it added a new statutory 
definition of ``participate'' and ``participation'' for similar entity 
transactions in 1994. A System commenter cited two passages in the 
legislative history to the 1994 Act to support its view that 
syndications to eligible borrowers are within the System's loan 
participation authority.
    In the first passage, a Senator stated that the new definition of 
``participations'' for similar entity authority would ``[c]larify the 
System's current authority to participate in loans * * * permitting the 
System to take part in syndications * * *.'' \22\ According to the 
commenter, this statement indicates that the Senator believed that the 
System already had authority to engage in syndications to eligible 
borrowers. However, this interpretation would be inconsistent with the 
actual text of the Act and the 1994 amendments thereto.\23\ The 1994 
amendments did not change the System's existing participation 
authority. Rather, it clarified the existing similar entity authority 
for title III lending and added similar entity authority for titles I 
and II.\24\
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    \22\ July 19, 1994 Cong. Rec. at S9252 (Statement of Sen. 
Lugar); Oct. 5, 1994 Cong. Rec. at 14236.
    \23\ United States Supreme Court cases do not give much credence 
to ``post-enactment'' statements by a bill's sponsor or a member of 
the committee that reports out a bill. In Chrysler v. Brown, 441 
U.S. 281, 331 (1979), the Supreme Court stated, ``The remarks of a 
single legislator, even the sponsor, are not controlling in 
analyzing legislative history.'' In Central Bank of Denver N.A. v. 
First Interstate Bank of Denver, 511 U.S. 164, 185 (1994), the 
Supreme Court opinion stated, ``we have observed on more than one 
occasion that the interpretation given by one Congress (or a 
committee or member thereof) to an earlier statute is of little 
assistance in discerning the meaning of that statute.'' See also 
United States v. United Mine Workers, 330 U.S. 258, 281-82 (1947).
    \24\ Section 502 of the Farm Credit Banks and Associations 
Safety and Soundness Act of 1992 granted title III banks new 
authority to ``participate'' in similar entity loans with non-System 
lenders. See Pub. L. 102-552, Sec.  502, 106 Stat. 4102, 4130 (Oct. 
28, 1992). Two years later, section 5 of the 1994 Act granted 
similar entity authority to title I and II lenders. See Pub. L. 103-
376, Sec.  5, 108 Stat. 3497, 3498 (Oct. 19, 1994). Section 2 of the 
1994 Act added the definition of ``participation'' for similar 
entities to section 3.1(11)(B) of the Act. Id. Sec.  2 at 3497.
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    The second passage that the commenter relies on is an analysis of 
the 1994 legislation that the FCA prepared and submitted to the House 
Agriculture Committee, which was subsequently reprinted in the 
Congressional Record. The FCA's analysis stated the proposed statutory 
definition of ``participations'' for similar entities ``* * * is more 
expansive than the current regulatory definition * * *'' and ``does not 
require an undivided fractional interest in the principal amount of the 
loans (as FCA regulations do) and hence does not require pro rata risk 
sharing.''\25\ The commenter's reliance on this passage is misplaced. 
The FCA's analysis discussed a regulatory, but not a statutory limit on 
loan participations for eligible borrowers. Former Sec.  
614.4325(a)(4), defined a ``participation'' to mean a fractional 
undivided interest in a loan. Because the proposed statutory definition 
was ``more expansive'' than the existing regulatory definition, the FCA 
noted that the Act would not require an undivided fractional interest 
for similar entity transactions. In 2002, the FCA revised Sec.  
614.4325(a)(4) so FCS banks and associations could purchase 
participations that equaled 100 percent of the principal amount of a 
loan to an eligible borrower. However, this change is not relevant to 
the present issue. Regardless of whether syndications are divided or 
undivided interests, they still are direct loans and, therefore, come 
within the System's direct lending authority.
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    \25\ Sept. 29, 1994 Cong. Rec. at H10325.
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IV. Rules that Apply to Syndications for Eligible Borrowers

    The foregoing analysis of the Act, its legislative history, and 
applicable case law, affirm that syndications for eligible borrowers 
come within the System's direct lending authority, not within its loan 
participation authority. As a result, FCS banks and associations that 
are direct lenders may take part in a syndicated loan to an eligible 
borrower as long as they comply with the applicable provisions of the 
Act and FCA regulations that govern lending to eligible borrowers. FCS 
banks that are not direct lenders cannot take part directly in 
syndicated loans to eligible borrowers, and no System lender may 
purchase assignments in syndicated loans to eligible borrowers from 
non-System lenders.

A. System Banks

    System banks that have transferred their long-term mortgage lending 
authority under section 7.6 of the Act to their associations can no 
longer make loans directly to farmers, ranchers, and other eligible 
borrowers. Therefore, these banks cannot directly take part in 
syndicated loans to eligible borrowers. These banks may, however, 
purchase a participation interest in a long-term mortgage syndicated 
loan directly from a non-System lender. Additionally, these banks may 
buy (long-or short-term) participations and other interests in 
syndicated loans directly from other System banks or associations.

B. Assignments

    Assignments in syndications are interests in loans. Sections 
1.5(16), 2.2(11), and 3.1(13)(B) of the Act do not authorize FCS banks 
and associations to buy interests in loans from non-System lenders. 
However, System banks and associations may buy from and sell to each 
other assignments in loans.

C. Borrower Rights

    Borrower rights attach to all agricultural or aquatic loans made 
under title I or II of the Act.\26\ Therefore, System associations that 
take part in syndicated loans to eligible farmers, ranchers, and 
aquatic producers and harvesters must adhere to borrower rights 
requirements.
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    \26\ Section 4.14A(a)(6) exempts title III banks from borrower 
rights requirements.
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    Our earlier notice (See 68 FR 2540, January 17, 2003) asked the 
public whether the FCA should consider regulatory changes that allow a 
borrower to waive borrower rights in syndications. Many System 
commenters replied that borrower rights are an impediment that will 
discourage commercial lenders from inviting FCS lenders into syndicated 
loan transactions. Some of these commenters indicated that many, but 
not all, non-System lenders may be more inclined to invite FCS 
institutions into syndicated transactions if borrowers could waive 
borrower rights. Commercial bank commenters opposed any regulatory 
change that would allow borrowers to waive these rights.
    The FCA believes that borrower rights should only be waived in 
limited

[[Page 8412]]

circumstances. In the future, the FCA may consider whether to initiate 
a rulemaking that would allow waivers of borrower rights in 
syndications for certain sophisticated borrowers.

D. Stock and Membership Requirements

    Section 4.3A of the Act requires all eligible farmers, ranchers, 
aquatic producers and harvesters, and cooperatives, to buy voting stock 
in the FCS institution that lends to them. This voting stock enables 
these borrowers to own, control, and participate in the affairs of 
their System lenders. Under the Act, a minimum stock purchase of $1,000 
or 2 percent of the principal amount of the loan, whichever is less, is 
required. For the reasons explained above, eligible borrowers in 
syndicated loans must buy voting stock in FCS lenders that take part in 
these transactions.

E. Territorial Concurrence Requirements

    An FCA regulation, Sec.  614.4070, prohibits a System institution 
that operates under title I or II of the Act from lending directly to 
any borrower who is located in the chartered territory of another FCS 
lender without its consent. The earlier notice (See 68 FR 2540, January 
17, 2003) asked whether the FCA should consider revising this 
regulation so that out-of-territory syndications to eligible borrowers 
would no longer require consent from other FCS lenders. All commercial 
bank commenters who replied to this question opposed repeal of the 
territorial consent requirement for syndications. These commenters 
expressed concerns that repealing the territorial consent requirements 
for syndications would dilute local control of System associations and 
allow them to operate nationally. The FCA received only a few responses 
to this question from System commenters. These commenters expressed 
concern that territorial concurrence for out-of-territory syndications 
would sharply curtail System involvement in this market. Only one 
System commenter thought that the FCA should consider revising Sec.  
614.4070 if syndications are classified as direct loans. Two other FCS 
commenters deemed changes to the regulation as unnecessary because 
System lenders could resolve the territorial consent issues among 
themselves.
    After considering the views of these commenters, the FCA does not 
plan, at this time, to initiate a rulemaking that would repeal the 
territorial consent requirements for syndications. FCS associations can 
resolve this issue through cross-territory consent agreements.

F. Lien Position Requirements

    Sections 1.14, 2.6, and 3.10(c) of the Act require each Farm Credit 
bank and association to hold a first-lien position on stock, 
participation certificates, and other equity that they issue for the 
payment of any liability owed by the shareholder-member. Separately, 
section 1.10(a)(2) of the Act requires that all System institutions 
operating under title I secure all long-term mortgages with a first 
lien on interests in real estate. For these reasons, FCS banks and 
associations must maintain priority lien positions on membership stock 
and participation certificates, and (when applicable) on real estate 
that cannot be subrogated to any non-System lender.

V. Other Concerns of the Commenters

    A System commenter suggested that the FCA create a special 
regulatory category for syndications and other multi-lender 
transactions if the agency determined that syndications for eligible 
borrowers are not within the System's loan participations authorities. 
Under the commenter's proposal, multi-lender transactions involving a 
direct contractual relationship between the borrower and all the 
creditors would be exempt from borrower stock, borrower rights, 
territorial concurrence, and first-lien requirements if (1) The 
borrower was a customer of a non-System lender, (2) FCS institutions 
held a pro rata interest in the credit, and (3) System lenders could 
not unilaterally make major credit decisions on the loan. The FCA has 
no basis under the Act to exempt syndications, assignments, and other 
multilender transactions (where System lenders enter into a direct 
contractual relationship with an eligible borrower) from the statutory 
and regulatory requirements that apply to loans. For this reason, the 
FCA declines the commenter's request.
    Most commercial banks expressed concern that syndications to large, 
integrated operators would cause System lenders to shift their energies 
away from young, beginning, and small farmers, ranchers and other 
borrowers that are more closely involved in production agriculture. 
However, FCS lenders have legal authority to take part in syndications, 
as explained above. Accordingly, System lenders may enter into 
syndications that extend credit to eligible borrowers that have large, 
integrated operations as long as they comply with all statutory and 
regulatory requirements that apply to direct loans. Section 1.1(b) of 
the Act states that the System's public policy mission is to ``* * * be 
responsive to the credit needs of all types of agricultural producers 
having a basis for credit. * * *'' Thus, the System may serve all 
creditworthy agricultural and aquatic producers.

VI. Compliance with this Guidance

    System institutions that take part in syndicated loans to eligible 
borrowers must comply with all applicable provisions of the Act and 
regulations. From a safety and soundness perspective, each FCS lender 
must understand the risks associated with syndications, and the 
policies of its board must establish methods for measuring and managing 
these risks. The FCA also expects each System lender that takes part in 
syndications to achieve clearly defined risk management and 
diversification objectives. The Office of Examination will continue to 
examine loan syndications to ensure safety and soundness and compliance 
with the Act and regulations.

VII. Legislative Initiative

    The January 17, 2003 notice also sought input from the public about 
whether the FCA should seek legislative changes regarding the System's 
authority to engage in various types of multi-lender transactions with 
non-System lenders. The notice asked what specific statutory changes 
the FCA should seek if it chose to recommend new legislation to 
Congress.
    All System and non-System commenters opposed any legislative 
initiative by the FCA on this issue. At this time, the FCA does not 
plan to propose new legislation to Congress about syndications and 
other multi-lender transactions. However, given the increasing 
importance of syndications in agricultural credit markets, the FCA may 
reconsider its position and pursue legislation that would address this 
matter in the future.

    Dated: February 18, 2004.
James M. Morris,
Acting Secretary, Farm Credit Administration Board.
[FR Doc. 04-3888 Filed 2-23-04; 8:45 am]
BILLING CODE 6705-01-P