[Federal Register Volume 69, Number 61 (Tuesday, March 30, 2004)]
[Rules and Regulations]
[Pages 16460-16471]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6967]


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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: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, agency, we, or our) 
issues this final rule amending our 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, with this final rule, the agency amends 
the System's disclosure to shareholders and investors to include 
reporting on its service to YBS farmers and ranchers.

EFFECTIVE DATE: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.


FOR FURTHER INFORMATION CONTACT: Robert E. Donnelly, Senior Accountant, 
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) 
883-2020.

SUPPLEMENTARY INFORMATION:

I. Objective

    The objective of this rule is to ensure that the System provides 
sound and constructive credit and services \1\ to YBS farmers and 
ranchers.\2\ To accomplish this objective, the rule amends our 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 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 better able to measure 
the

[[Page 16461]]

System's performance in fulfilling its YBS mission.

II. Background

    As discussed in the preamble to the proposed rule (see 68 FR 53915, 
September 15, 2003), section 4.19 of the Farm Credit Act of 1971, as 
amended (Act), requires each System association to prepare a program 
for furnishing sound and constructive credit and related services to 
YBS farmers and ranchers. Congress added this section to the Act in 
1980 to focus the System's attention on the need to have programs for 
such borrowers. Our current YBS regulations restate the YBS 
requirements in the Act. Further interpretation of the Act's YBS 
requirements currently is found in agency policy guidance.\3\
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    \3\ See infra, notes 4 and 5.
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    As stated in our proposed rule, 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. Although all agricultural producers face these 
challenges, the hurdles that YBS farmers and ranchers face are often 
greater. We continue to believe the System's YBS mission is important 
to enable small and start-up farmers and ranchers to make successful 
entries into agricultural production. The System's YBS mission is also 
critical to facilitate the transfer of agricultural operations from one 
generation to the next. For all these reasons, the agency remains 
committed to ensuring that the System fulfills its important public 
purpose mission to YBS farmers and ranchers.
    In the proposed rule, the agency set forth minimum components that 
each System direct lender association must include in its YBS program 
and added requirements to enhance the reporting and disclosure to the 
public of the System's YBS programs, compliance, and performance.
    The content of the proposed rule was an outgrowth of an initiative 
undertaken by the agency to renew the System's commitment to its YBS 
mission. This initiative began in 1998, with the adoption of an FCA 
Board policy statement that provided guiding principles for enhanced 
service to YBS farmers and ranchers.\4\ To implement the policy 
statement, the agency issued a bookletter that included revised YBS 
definitions and YBS reporting procedures.\5\ The revised reporting 
procedures contained in the bookletter require System institutions to 
submit detailed annual reports to the agency on all aspects of their 
YBS programs.
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    \4\ 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, http://www.fca.gov (under Legal 
Info., FCA Handbook).
    \5\ 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, http://www.fca.gov (under 
Legal Info., FCA Handbook).
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    In furtherance of this initiative, in 1999, YBS lending programs 
became a ``focus area'' of agency examinations where, among other 
factors, the agency reviewed 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. Additionally, for the past 3 years, the 
FCA recognized the exemplary YBS programs of several System 
associations.
    In the proposed rule, we also discussed the March 8, 2002, General 
Accounting Office (GAO) report on our oversight of the System's mission 
to serve YBS farmers and ranchers.\6\ The GAO report recommended, in 
part, 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-
02-304), available on the GAO Web site, http://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, 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 the proposed rule we noted that in its response to Congress, the FCA 
expressed its commitment to address the issues raised in the GAO 
report.
    In continuance of our YBS initiative, the agency sought public 
input through an advance notice of proposed rulemaking (ANPRM) \7\ and 
a public meeting held on November 13, 2002, in Kansas City, 
Missouri.\8\ We discussed that our objectives for the ANPRM and public 
meeting were to seek the public's suggestions on possible YBS 
regulatory approaches and policy initiatives and to hear about ways to 
enhance the System's service to YBS farmers and ranchers. The comments, 
in response to the ANPRM and from the testimony at the public meeting, 
reflected a multitude of opinions on the issue of whether the agency 
should provide more guidance to the System on YBS policies and 
programs. The preamble to the proposed rule provided an extensive 
discussion of those comments together with the agency's responses. 
Overall, the comments were generally divided between those that opposed 
the issuance of revisions to the agency's YBS regulation and those that 
supported additional regulatory requirements.
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    \7\ See 67 FR 59479, September 23, 2002.
    \8\ See 67 FR 64320, October 18, 2002.
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III. General Comments Received

    In response to the proposed YBS rule, the agency received 52 
comment letters. Commenters included the Farm Credit Council, System 
institutions, commercial banks, the American Bankers Association, the 
Independent Community Bankers of America, and other associations or 
trade groups involved in agriculture, such as the Sustainable 
Agriculture Coalition and the Farmers' Legal Action Group. Many of 
these commenters included by reference their previous comments in 
response to the ANPRM. In fact, a majority of the comments received in 
response to the proposed rule were identical or similar to the comments 
on the ANPRM and testimony at the public meeting and are addressed in 
our responses to the comments below. The commenters generally can be 
divided into two groups--those that oppose the additional requirements 
in the proposed rule and those that believe the proposed rule should go 
further in delineating YBS program, reporting, and disclosure 
requirements. Our responses to all these commenters are included in 
this section on general comments and in the section-by-section response 
further on in part VI of this preamble.
    A few commenters supported the proposed rule, stating specifically 
that it supports FCA's effort to help YBS farmers and ranchers and that 
the reporting requirements should help improve transparency and 
accountability. The agency agrees that the final YBS rule, which 
provides results-oriented guidelines for YBS policies and programs and 
enhanced reporting and disclosure requirements,

[[Page 16462]]

should ensure that the System continues to remain focused on and 
committed to its YBS mission.
    Many commenters opposed the proposed rule, stating that:
     The requirements would create additional burdens 
and costs for System institutions without providing new tools for 
better servicing YBS farmers and ranchers or increasing the number of 
YBS loans;
     Additional costs resulting from a revised YBS 
rule would be passed on to the farmers and ranchers and is inconsistent 
with congressional directives to eliminate unnecessary and burdensome 
regulations;
     The System, which is tasked with serving all of 
American agriculture, recognizes the importance of and is already 
adequately serving the credit needs of YBS farmers and ranchers; and
     There is no evidence suggesting YBS farmers and 
ranchers are being denied access to credit by the System.

The commenters expressed concern that the proposed rule is the product 
of a GAO report on the agency's oversight of the System's mission to 
serve YBS farmers and ranchers and requested that FCA reconsider the 
issuance of a revised YBS rule, as well as its response to GAO. Many of 
these commenters suggested that, rather than issuing a revised YBS 
rule, the agency should use its enforcement authority to address any 
System shortfalls in meeting the credit needs of YBS borrowers.
    Many of the foregoing comments are similar or identical to comments 
made in response to the ANPRM and the testimony at the public meeting 
on YBS guidance. As we stated previously, section 4.19 of the Act 
requires the System to pay particular attention to the credit and 
related services needs of YBS farmers and ranchers. Congress inserted 
section 4.19 of the Act, in part, as a response to a recognition that 
the family farm was declining in American agriculture at an alarming 
rate. This final rule is not a response to a perception that the System 
does not value or adequately serve YBS borrowers. Rather, the rule is a 
means to ensure that the System remains focused on this very important 
group of potential borrowers so that they can continue to have a future 
in agriculture. Thus, the agency does not believe that a regulation to 
ensure the System meets its YBS statutory mandate is unnecessary.
    Further, we do not believe that this YBS final rule will result in 
significant additional burdens or costs for the System. Many of the 
rule's requirements already exist in current YBS guidance and 
examination and reporting requirements to which the System must 
currently adhere. Although the 2002 GAO report focused attention on the 
agency's oversight role of the System's YBS mission, well before the 
issuance of the report, the agency had taken significant steps to 
direct the System to refocus on its YBS mission. Specifically, in 1998, 
the agency issued a policy statement and bookletter on the YBS mission 
and, in 1999, the agency made YBS a focus area of agency examinations. 
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. As seen by our efforts previous 
to the GAO report, the final rule is not simply a response to GAO, but 
a means to ensure that the System continues to actively and creatively 
seek ways to finance and service the needs of YBS borrowers.
    Finally, FCA has taken a proactive approach to its oversight role 
of the System's YBS mission. By issuing this final rule, we strive to 
ensure that the System will successfully fulfill its YBS mission and 
diminish the need for ensuring mission accomplishment through the use 
of our enforcement authorities. We note, however, that by moving much 
of the current YBS guidance from a policy statement and a bookletter to 
a rule, we are strengthening our ability to more effectively take an 
enforcement action against a System institution for its failure to meet 
its YBS responsibilities should it become necessary.
    A number of commenters suggested the agency eliminate the scope of 
lending restrictions limiting lending to less than full-time farmers so 
that part-time farmers have more access to credit. This issue is 
currently under review as part of a separate agency rulemaking on scope 
and eligibility. However, even if FCA were to remove the scope of 
lending restrictions, a regulation on YBS would still serve to enhance 
the System's fulfillment of its YBS mission.
    One commenter suggested that the removal of territorial 
restrictions would enable some System associations with a strong 
commitment to serving YBS farmers and ranchers to fill a need when a 
neighboring association fails to adequately serve its YBS market. A 
consideration to remove territorial restrictions is not currently 
listed in the agency's regulatory performance plan (available on the 
agency's Web site, http://www.fca.gov). However, with this final rule, 
the agency can better assess the effectiveness of an association's YBS 
program and determine, through the examination process, whether an 
association is adequately serving its YBS market.
    Some commenters suggested that the agency allow the use of System 
subsidiary entities, which, they believe, would make it easier for 
System associations to provide funding for higher risk YBS loans and 
increase lending to YBS borrowers. Efforts to create new corporate 
structures for System institutions have broad implications beyond 
service to YBS farmers and ranchers. Some System institutions have 
approached the agency to discuss their desire to create new entities 
for various purposes, including YBS-related purposes. The agency will 
continue to respond directly to those requests, but believes that the 
issue raised by the commenters goes beyond the scope of this 
rulemaking.
    One commenter recommended that the agency require System 
institutions to expand their YBS programs by adding a fourth category 
for ``socially disadvantaged'' farmers and ranchers. Similarly, another 
commenter recommended that the System gather data about the gender and 
ethnicity of the borrowers they serve to ensure credit is being 
provided equally across such categories. Requiring the System to 
implement either of these recommendations is beyond the agency's 
authority because the Act neither includes a special mission to serve 
``socially disadvantaged'' farmers or ranchers nor a directive to serve 
borrowers of a certain gender or ethnicity. We note, however, that 
these groups are not excluded from the System's overall mission. 
Section 1.1(a) of the Act requires the System to serve all eligible 
American farmers and ranchers. In fact, System YBS programs often 
include service to socially-disadvantaged, women, and minority farmers 
and ranchers, as these groups often comprise either young, beginning, 
or small farmers and ranchers. Thus, the enhanced YBS rule should also 
advance the System's service to these groups of potential borrowers.
    Two commenters stated that the FCA needs to prohibit System 
institutions from engaging in below-market pricing of loans in order to 
avoid ``cherry-picking'' the best borrowers. This same comment was made 
in response to the ANPRM on YBS. At that time, we responded by 
explaining that 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 costs on a sound business 
basis'' taking into consideration the lender's cost of funds,

[[Page 16463]]

necessary reserves, and the cost of providing services to its members. 
Thus, 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. In addition, through the examination process, the 
agency routinely reviews each System institution's loan pricing to 
ensure that interest rates charged to borrowers cover costs and provide 
additional capital to ensure the institution's ongoing safety and 
soundness. Moreover, in our oversight and regulatory role, we ensure 
that the System is providing sound, adequate, and constructive credit 
and related services to all eligible American farmers and ranchers.
    Finally, one commenter suggested that the agency remove any 
suggestions or recommendations from the final rule so that it is clear 
what the rule requires. The agency believes that the requirements in 
the rule are clearly marked by the use of the word ``must.'' One 
section of the rule, namely Sec.  614.4165(c) on direct lender 
association YBS programs, contains suggestions, marked by the use of 
the words ``may'' or ``could.'' The agency deliberately used suggestive 
language in this section to allow a direct lender association maximum 
flexibility in designing a YBS program that best fits the needs of its 
territory and is within its risk-bearing capacity. Thus, although all 
System associations must develop annual quantitative YBS targets, the 
rule offers suggestions only on what such targets might look like. 
Similarly, although direct lender associations YBS programs must 
include annual qualitative YBS goals and methods to ensure that such 
programs are offered in a safe and sound manner and within their risk-
bearing capacity, the way in which associations fulfill these 
components of the program is left up to them. We believe that through 
the use of the words ``must'' and ``may,'' the final rule clearly 
delineates what is required from what is simply suggested as a way of 
meeting a particular program component requirement.
    Another section of the proposed rule, namely Sec.  614.4165(d) on 
advisory committees, is also not a requirement but only a suggested 
activity for an association's YBS program. However, because the 
formation of a YBS advisory committee is a type of outreach activity, 
we have moved this suggestion in the final rule to Sec.  
614.4165(c)(3)(iii) on outreach programs rather than retain it as a 
separate, suggested component. We believe this change in the rule will 
make it clearer that the formation of a YBS advisory committee is a 
suggested activity, rather than a required component, of a YBS program.
    Lastly, one commenter opposed any programs that support YBS farmers 
and ranchers, especially if such programs are financed with taxpayer 
dollars. This commenter appears to be unclear about the purpose of the 
proposed rule and the role of the System. Section 4.19 of the Act 
requires the System to serve the credit and related services needs of 
YBS farmers and ranchers. A regulation on System YBS programs serves to 
support the YBS statutory requirement. Further, we note that, as a 
Government-sponsored enterprise (GSE), the System does not operate with 
taxpayer dollars and so its YBS programs are financed with private 
funds rather than public monies.

IV. Comments on the Pass/Fail Rating

    In the preamble to the proposed rule, the agency discussed its 
intention to assign a ``pass'' or ``fail'' rating to each direct lender 
association's overall YBS program. We further stated that this YBS 
compliance rating would be based on a review of the direct lender 
association's YBS program components during an examination of an 
association. We also mentioned the FCA Board's intention to publicly 
disclose the results of the System's YBS compliance.
    Many commenters raised opposition to the implementation of any kind 
of YBS rating or the disclosure of compliance results to the public. 
These commenters stated that such disclosures would not be useful 
because the circumstances of each association are unique. These same 
commenters expressed further concerns that the agency had not clearly 
set forth the criteria it would use to determine a ``pass'' or ``fail'' 
rating, and therefore the determination of such ratings would be 
arbitrary. The commenters expressed concern that without clear 
criteria, a ``pass'' rating would not provide the public with any 
useful information, while a ``fail'' rating could unfairly damage an 
association's reputation and competitive position. These commenters 
questioned whether such disclosure was appropriate or even authorized 
by Congress, stating further that examination results are, and should 
remain, confidential. Finally, these commenters stated that such 
ratings were unnecessary because of the extensive reporting and 
disclosure requirements in the proposed rule.
    Many other commenters expressed support for rating the YBS programs 
of direct lender associations. In addition, these commenters suggested 
that FCA not only require disclosure of each direct lender 
association's YBS rating, but also disclosure of agency examination 
results of each association's YBS program. These commenters also 
asserted that the agency's YBS ratings should be expanded to be more 
comparable to the ratings other financial institutions are subject to 
under the Community Reinvestment Act (CRA) and the Home Mortgage 
Disclosure Act of 1975 (HMDA). These commenters point out that 
financial institutions subject to CRA and HMDA are required to disclose 
to the public their performance ratings in serving low and moderate 
income households. The commenters note that, under CRA, a financial 
institution's performance is rated as ``outstanding,'' 
``satisfactory,'' ``needs improvement,'' or ``substantial 
noncompliance.'' The commenters stated that since the System is a GSE, 
the agency should impose YBS ratings at least as stringent as CRA 
ratings. Many of these same commenters also suggested that the agency 
make both the YBS rating and examination results of each direct lender 
association available to the public on the agency's Web site, similar 
to the practice of the other Federal financial regulators under CRA. 
Finally, several of the commenters state that many of their 
recommendations are consistent with the issues raised in the GAO 
report.
    Many of these comments are similar, if not identical, to comments 
we received and addressed in response to the ANPRM. The commenters that 
remain opposed to the imposition and disclosure of a YBS compliance 
ratings and those that desire expansions to the ``pass/fail'' ratings 
provide little or no new arguments in support of their positions. The 
agency continues to believe it is important to measure and provide the 
public with a complete and accurate picture of the System's YBS 
compliance and performance. Again, we believe this will be best 
accomplished through disclosure of some form of rating that indicates 
each direct lender association's compliance with the minimum components 
for a YBS program, along with the requirement that each System 
institution report on and publicly disclose its YBS mission results.
    In consideration of the comments on the ``pass/fail'' rating, we 
now want to clarify that the ``pass/fail'' rating is a compliance 
rating only that will simply indicate whether direct lender association 
YBS programs meets the requirements of this rule. In contrast, the 
enhanced YBS reporting and disclosure requirements in the rule will 
reveal the performance results of each association's YBS program. We 
also point out that the ``pass/fail'' rating

[[Page 16464]]

process, which has not been incorporated into the rule itself, is an 
internal examination function that we discuss in this preamble only to 
highlight the direction of FCA concerning its YBS examination efforts.
    The agency is considering what type of examination procedures are 
necessary for evaluating each direct lender association's YBS program 
compliance with the provisions in this rule. Once developed, the YBS 
examination criteria also will be included in the agency's examination 
manual (available on our Web site at http://www.fca.gov).
    The agency continues to believe that some form of disclosure of 
direct lender associations' YBS ratings, combined with the required YBS 
reporting and disclosure requirements in this final rule, will provide 
the public with a sound understanding of each association's YBS 
compliance and performance and will also help the System to better 
fulfill its YBS mission. Furthermore, the agency continues to believe 
that it not only has the authority, but also the responsibility in its 
oversight and regulatory role, to disclose YBS compliance ratings and 
to ensure that the System describes its performance results to the 
public. The agency will continue to assess the most effective way to 
make the YBS ratings available to the public.
    As stated in the preamble to the proposed rule, the agency believes 
it is inappropriate to disclose confidential examination report 
information. In addition, we continue to believe the additional 
transparency provided by the enhanced reporting and disclosure 
requirements in the rule will give the public a sound understanding of 
the System's YBS compliance and performance results and will, 
therefore, preclude the need for disclosing the YBS sections of agency 
examination reports. If the agency determines that an institution's 
reporting and disclosure do not provide a sound understanding of the 
System's YBS compliance and performance results, the agency can remedy 
any shortcomings through its supervisory and enforcement authorities. 
As to the suggestions for implementing disclosures similar to CRA and 
HMDA, we note that the Act does not have the same requirements for YBS 
ratings and disclosure as those set forth in the CRA or HMDA. However, 
we believe that the enhanced rating, reporting, and disclosure 
requirements of this rule fulfill the YBS provisions in the Act and 
will provide effective disclosure to the public on the System's YBS 
programs, as well as mission shortfalls and accomplishments.

V. Comments on YBS Data Collection Issues

    Many commenters once again made suggestions on ways to improve the 
accuracy of the YBS data collected by the agency from System 
institutions. Some commenters suggested the agency ensure that loans to 
father and son operations are counted as YBS loans only when the son is 
actively involved in the farm operation. Under current agency guidance, 
if a son is co-obligated on the father's loan or has an ownership 
interest with his father in the farm operations, the loan can qualify 
as a YBS loan as long as one or more of the YBS definitions is met. We 
believe this criteria is appropriate for counting the loan in any of 
the YBS categories. Requiring a YBS borrower to be actively involved in 
the farming operations is inconsistent with the purpose of YBS lending. 
The purpose of the YBS mission is to permit YBS farmers, who often are 
required to earn off-farm income to maintain their farming operations, 
to get started in agriculture by a variety of means. Thus, we do not 
see where additional criteria to assess a son's actual involvement in 
the farming operations would substantially improve upon the accuracy of 
the YBS data collected by the System or improve upon the System's 
service to YBS farmers and ranchers.
    These commenters also suggested that the agency aggregate loans to 
one borrower to determine whether the borrower is a ``small'' farmer 
and that we add a category for ``part-time'' farmers to the YBS 
categories. Under current agency procedures, our determination of a 
``small'' farmer is based on gross sales of agricultural or aquatic 
products rather than loan volume. As discussed at length in the 
preamble to the proposed rule, we believe the current definitions for 
the YBS categories, which were revised in 1998, properly reflect the 
changes in agriculture over the years and provide the most accurate 
picture of the System's service to YBS farmers and ranchers. Thus, we 
see no benefit to changing our definition of ``small'' farmer.
    Similarly, we see no benefit to adding a separate category for 
part-time farmers. Congress mandated the agency to collect information 
on ``young,'' ``beginning,'' and ``small'' farmers and ranchers. The 
commenters provided no rationale for requiring System institutions to 
distinguish between part-time and full-time farmers in their YBS 
reporting. Moreover, we believe that part-time YBS farmers, who often 
need off-farm income to make ends meet, are just as deserving of YBS 
credit and services as full-time farmers.
    Other commenters reiterated their concern that the System be 
prevented from inflating its YBS numbers by allowing the same loan to 
be counted separately in each applicable YBS category. These commenters 
also expressed a preference for having the System count and report on 
the number of YBS borrowers rather than loans.
    The foregoing comments are similar to comments we addressed in 
response to the ANPRM. We continue to disagree with the implications of 
these comments that the reported YBS information is inaccurate and 
misleading. As explained in the preamble to the proposed rule, the 
practice of reporting a loan in each applicable YBS category is 
consistent with other GSE mission-related reporting, such as the 
Federal National Mortgage Corporation (Fannie Mae) and the Federal Home 
Loan Mortgage Corporation (Freddie Mac) reports on their annual housing 
goals,\9\ as well as with congressional intent to report on the 
System's service to each category of YBS farmers and ranchers. Finally, 
in the agency's Performance and Accountability Report for fiscal year 
2002, the information on the System's YBS lending explicitly states 
that YBS categories are not mutually exclusive. Therefore, one cannot 
add across YBS categories to count total YBS lending.
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    \9\ The annual housing goals are established and supervised by 
the Department of Housing and Urban Development, Fannie Mae's and 
Freddie Mac's regulator.
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    As also explained in our response to the comments received on the 
ANPRM, in 1998, the agency made several changes to the way it collected 
YBS data from the System, including collecting YBS data based on the 
number of YBS loans rather than the number of YBS borrowers. The 
changes were consistent with the new YBS definitions the agency 
developed at that time and were made to capture more complete 
information on the System's extension of credit and services to YBS 
farmers and ranchers. In addition, we believe that the collection of 
loan numbers in combination with loan volume (that is, the average size 
of an institution's YBS loan) provides the public a base for a more 
useful comparison of the System's extension of credit to YBS borrowers. 
The agency continues to believe that the key issue in YBS data 
collection is consistent YBS reporting throughout the System. We 
believe that our current method of categorizing and counting the 
System's YBS loan numbers and loan volume provides the most accurate 
and

[[Page 16465]]

complete picture of the System's YBS mission fulfillment.
    Finally, other commenters suggested that FCA examiners verify the 
accuracy of the YBS data being reported by System institutions. We note 
that data verification, conducted on a sampling basis, is already a 
part of YBS examination procedures.
    The remaining comments discussing the particulars of the proposed 
rule are addressed in the following section of this document.

VI. FCA's Section-by-Section Response to Comments

Section 614.4165(a)--Definitions

    The proposed definition section clarified various terms used in 
section 4.19 of the Act. For instance, this section clarifies that, for 
purposes of this subpart, the term ``credit'' includes all loans and 
interests in participations made by System banks and direct lender 
associations operating under titles I or II of the Act. The term 
``services,'' as used in section 4.19(a) of the Act, includes all 
leases made under titles I or II authorities and all related services 
made by System banks and direct lender associations operating under 
titles I or II of the Act.
    We received only one comment on this section, suggesting that we 
develop a meaningful definition of a small farm or ranch, one that is 
useful in today's market environment and based on input from all 
appropriate entities.
    As mentioned in the preamble to our proposed rule, the agency's 
current definitions for ``young,'' ``beginning,'' and ``small'' farmers 
and ranchers are set forth in 1998 FCA guidance.\10\ 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. We discussed the 
extensive research the agency undertook in arriving at this definition 
of ``small'' farmer and rancher, which included evaluating terms used 
by the United States Department of Agriculture (USDA) and other 
regulatory agencies who collect data on ``small'' farmers and ranchers. 
Thus, we continue to believe the definition for ``small'' farmers and 
ranchers currently in use by the agency is appropriate. For the 
foregoing reasons, we adopt proposed Sec.  614.4165(a) as final without 
change.
---------------------------------------------------------------------------

    \10\ See supra note 5.
---------------------------------------------------------------------------

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 \11\ Farm Credit bank board;
---------------------------------------------------------------------------

    \11\ Although section 4.19 of the Act refers to ``district'' and 
``supervising'' Farm Credit banks, 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.
    Two commenters expressed concern that requiring banks to have 
written policies on their affiliated associations' YBS programs is 
contrary to FCA's recognition that direct lender associations have 
gained more autonomy from their funding banks since 1980, when section 
4.19 was first added to the Act. Notwithstanding the fact that System 
banks have taken a diminished role in overseeing the operations of 
their affiliated direct lender associations, the requirements in this 
section track the requirements of section 4.19 of the Act, which we 
simply are not at liberty to disregard. Therefore, we adopt Sec.  
614.4165(b) as final without change.

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 while at the same 
time allowing each association to design a YBS program unique to its 
territory. At a minimum, when developing a YBS program, each direct 
lender association must:
    1. Develop a YBS program mission statement describing the YBS 
program objectives and specific means of achieving those objectives;
    2. Develop annual quantitative targets for credit to YBS farmers 
and ranchers that are based on an understanding of reasonably reliable 
demographic data for the lending territory;
    3. Develop annual qualitative goals that include efforts to offer 
services that are responsive to the needs of YBS borrowers, take full 
advantage of opportunities for coordinating credit and services with 
other providers of credit, and implement effective outreach programs to 
attract YBS farmers and ranchers; and
    4. Establish methods to ensure that it is conducting its YBS 
program in a safe and sound manner and within its risk-bearing 
capacity.
    Several commenters commended Sec.  614.4165(c) of the proposed rule 
because it allows System associations to take into consideration the 
demographics and economy of their territories along with their risk-
bearing capacities when establishing their YBS programs. Two commenters 
supported the minimum YBS components required by the proposed rule. 
However, many commenters stated that in the Act Congress left the 
design of each association's YBS program up to their respective funding 
banks. These commenters stated that Congress recognized that local 
conditions warrant different approaches and deferred to the wisdom and 
local knowledge of the System bank boards to establish policies to 
guide these programs.
    Since 1980, when section 4.19 was first included in the Act, the 
relationship between the funding banks and their affiliated 
associations has significantly changed, with the associations operating 
much more independently from their funding banks. Although the rule 
retains the statutory directive for associations to establish their YBS 
programs under the policies of their funding banks, in recognition of 
the autonomy with which associations now operate, we have kept the bank 
policies to a minimum, as discussed earlier. Moreover, we agree that 
Congress intended YBS programs to be developed by the System lenders 
who have the most knowledge of their territories. We have, therefore, 
developed this section to allow each direct lender association maximum 
flexibility in creating a YBS program that takes into consideration the 
economy and demographics of its territory, as well as its risk-bearing 
capacity. In so doing, the YBS rule is consistent with congressional 
intent to allow each association to design a YBS program that best fits 
the needs of its lending territory.

Section 614.4165(c)(1)--Mission Statement

    One commenter stated that it is inappropriate and potentially 
confusing for a regulation to require a mission statement that focuses 
only on YBS programs rather than on the System's

[[Page 16466]]

mission to serve all of American agriculture.
    We do not agree with the commenter's concern that a mission 
statement focusing strictly on an association's service to YBS farmers 
and ranchers is inappropriate or confusing. We believe 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. Further, developing a 
mission statement to give direction to an association's YBS program 
does not in any way hinder an association's capacity and responsibility 
to serve all of American agriculture.

Section 614.4165(c)(2)--Quantitative Targets

    Many commenters responded to this section of the proposed rule. One 
commenter suggested that this section be changed to permit System 
associations to consider their financial condition and risk-bearing 
capacity when establishing quantitative targets. In fact, Sec.  
614.4165(c)(4) requires each System association to have methods to 
ensure that it offers credit and related services to YBS borrowers in a 
safe and sound manner and within its risk-bearing capacity. Thus, 
quantitative targets and qualitative goals must be established with 
these safety and soundness factors in mind.
    One commenter pointed out that the agency should understand the 
distinction between loan number goals and borrower number goals, as 
well as new-borrower goals versus new-loan goals. The agency is aware 
of the distinctions of establishing YBS quantitative targets by number 
of loans versus number of borrowers or by number of new loans versus 
new borrowers. However, we have left it to the decision of each direct 
lender association to determine how best to establish its quantitative 
YBS targets. This approach allows an association, for example, to 
establish a quantitative target based on increasing the number of new 
YBS borrowers if it determines that it wants to achieve a greater 
number of YBS borrowers versus YBS loans.
    One commenter supported the requirement that an association 
establish quantitative targets that reasonably reflect the YBS 
demographics in its territory rather than basing such targets on 
nationwide data. However, many other commenters stated that no 
meaningful demographic data exists that is reflective of an 
association's territory and that using the data currently available 
will lead to distortion and faulty analysis of an institution's YBS 
market penetration. Another commenter stated that requiring 
quantitative targets to reasonably relate to demographic data is unduly 
burdensome. Still, another commenter asked the agency to explain 
further what it means when it states that the quantitative targets must 
be based on ``reasonably reliable'' demographic data that ``reasonably 
reflect'' the YBS demographics in the lending territory. This commenter 
believes these terms are too vague.
    A reliable measurement is necessary to ensure that the System is 
adequately fulfilling its YBS public purpose mission. We believe that 
demographic data is necessary for each direct lender association to 
adequately assess its YBS market characteristics, and we note that none 
of the commenters suggested a more viable alternative for assessment. 
Although we recognize that not all available demographic data may be an 
ideal representation of the YBS market in each association's territory, 
we still believe such data is useful and is a reasonable representation 
of the YBS market in a lending territory.
    Further, we do not believe it is burdensome to require that 
quantitative targets be based on demographic data, as there is 
available and easily obtainable data from the United States Department 
of Agriculture's National Agricultural Statistics Service Census of 
Agriculture (USDA Census). We have attempted to make the reliance on 
demographic data less burdensome and costly by not requiring each 
direct lender association, or an independent source, to complete a 
demographic study. Instead, the rule allows for the use of the 
available demographic data as long as an association can explain any 
differences between its YBS quantitative targets and the data it is 
relying upon to establish such targets. Finally, we note that 
associations are free to obtain demographic data from other available 
sources besides the USDA Census, such as state and county demographic 
data or by any other appropriate means.
    We do not believe the phrase ``reasonably reliable'' demographic 
data that ``reasonably reflects'' the YBS demographics in a lending 
territory is vague or lacking in sufficient specificity. The selection 
of these terms employs the ``reasonable person'' standard `` that is, 
whether a reasonable person with knowledge of the relevant facts would 
question an association's reliance on the demographic data or the 
reasonableness of its quantitative targets in light of such data. This 
standard enables associations to draw on their sound business judgment 
and knowledge of their territory in establishing their quantitative 
targets. Hence, even when the demographic data is not an ideal 
representation of an association's YBS market, the reasonable person 
standard allows associations to establish targets in variance of such 
data as long as they can justify the difference. Nevertheless, we have 
revised Sec.  614.4165(c)(2) in the final rule to make it clear that 
each direct lender association's quantitative targets must be based on 
an understanding of how the data relates to the YBS market in the 
association's lending territory, not directly based on the demographic 
data. Since we believe ``reasonably reliable demographic data'' 
encompasses the meaning of the phrase in the proposed rule ``that 
reasonably reflect the YBS demographics'', the latter phrase has been 
removed.
    One commenter suggested that the quantitative targets should 
reflect not only existing demographics, but also more far-reaching 
assessments of the needed changes in the distribution of farm assets to 
achieve a more balanced and diverse structure of agriculture and future 
borrower pools. The commenter suggested that this be accomplished by 
inserting at the end of the first sentence in Sec.  614.4165(c)(2) the 
following: ``and that progressively increase self-employment 
opportunities in agriculture within the lending territory.''
    The System's mission is to serve the credit and related services 
needs of all farmers and ranchers. Although the System is not directly 
responsible for increasing self-employment opportunities in 
agriculture, its mission certainly helps to accomplish this goal by 
making more agricultural credit available. Thus, we believe it is 
unnecessary to add the suggested language to this section.
    A number of commenters were dissatisfied with the rule's approach 
permitting each direct lender association to establish their own 
quantitative targets rather than defining specific targets in the rule 
for the associations. The comments on this issue contained a number of 
suggestions, including that the agency: develop specific targets on the 
number of guaranteed loans made to beginning farmers and ranchers; look 
to the targets of other GSE regulators, such as those required for 
Freddie Mac and Fannie Mae, to help it set specific targets for the 
System associations; and impose penalties when an association fails to 
meet the specific targets.
    The agency has strived throughout this rule to avoid dictating a 
uniform Systemwide approach to fulfilling its YBS mission. Establishing 
specific YBS quantitative targets for all System

[[Page 16467]]

associations would be inconsistent with our approach and impractical 
given the unique demographic and lending environments of each 
association's territory. The agency's examination and enforcement 
authorities will enable us to evaluate the reasonableness of each 
association's quantitative targets and to require adjustments to the 
targets where deemed necessary.

Section 614.4165(c)(3)--Qualitative Goals

    One commenter expressed concern that Sec.  614.4165(c)(3)(i), which 
requires YBS services to be offered in coordination with others, 
interferes with a direct lender association's ability to make its own 
choices on the types of related services it wishes to offer. This 
requirement, to coordinate with others when offering related services, 
is required by section 4.19(a) of the Act. Neither the Act nor this 
rule dictate what type of related services must be offered. However, 
the requirement to coordinate with others ensures that YBS borrowers, a 
group that can especially benefit from related services, will receive 
the help they need in their farming or ranching operations. By offering 
such services in coordination with others, associations may find the 
expertise and the cost-sharing benefits necessary to provide a full 
array of services.
    One commenter suggested we add language to Sec.  614.4165(c)(3)(i) 
and (ii) that specifically includes nongovernmental organizations when 
describing the offering of credit and services in coordination with 
others. We do not believe this language change is necessary because the 
rule, at Sec.  614.4165(c)(3)(ii), requires that each direct lender 
association take full advantage of opportunities for coordinating 
credit and services offered by other Farm Credit System institutions, 
and other governmental and private sources of credit and services. 
Private sources of credit would include nongovernmental organizations, 
as the commenter suggested.
    Another commenter believed that Sec.  614.4165(c)(3)(iii), which 
requires direct lender associations to implement outreach programs, is 
inappropriate and usurps board authority and accountability. The 
commenter further stated that the rule should not prescribe how board 
and management assess customer needs and how they communicate with the 
customers through their marketing efforts. The requirement in the 
proposed rule to implement outreach programs is similar to current FCA 
policy on System YBS programs. The rule does not take any 
responsibility out of the hands of an association's board to oversee 
its YBS outreach efforts nor does it tie management's hands in 
implementing outreach programs. The rule simply states that a minimum 
component of an association's YBS program must include outreach 
programs and suggests types of outreach activities that an association 
might consider. An association board and management are free to pursue 
appropriate outreach activities, including others than those suggested 
in the rule.
    Finally, one commenter suggested that the final rule include goals 
for loan restructuring for YBS borrowers. Direct lender associations 
must provide borrower rights to all of their borrowers.\12\ The 
decision to restructure a distressed loan is a fact-specific one that 
must be made on a case-by-case basis. Setting goals for restructuring 
YBS loans would be contrary to sound lending practices and could 
jeopardize the safe and sound operations of an association.
---------------------------------------------------------------------------

    \12\ On February 10, 2004, the FCA board adopted a final rule 
that revised the borrower rights regulations at Part 614, subpart N 
and redesignated them to Part 617; see 69 FR 10901, March 9, 2004.
---------------------------------------------------------------------------

Section 614.4165(c)(4)--Credit Enhancements and Risk-bearing Capacity

    One commenter suggested that the final rule include special credit 
treatment, special interest rates, and loan participation programs for 
YBS borrowers. Similar to all of the minimum components for a YBS 
program set forth in this rule, this section simply states that YBS 
loans must be offered in a safe and sound manner and within an 
association's risk-bearing capacity. This section of the rule then 
suggests types of credit enhancements that an association can use to 
manage risk while providing more opportunities to its YBS borrowers.
    In all of the minimum components, our approach remains consistent. 
That is, each direct lender association has the flexibility to design a 
YBS program within the rule's minimum requirements. We believe it would 
be inconsistent with our role as a safety and soundness regulator to 
require specific types of credit enhancements. Therefore, although we 
agree with the commenter that special credit treatment, special 
interest rates, and loan participation programs are reasonable types of 
credit enhancements, it is up to each direct lender association to 
determine if sound business practices and its risk-bearing capacity 
would permit it to offer such enhancements.
    One commenter stated that this section's reference to risk-bearing 
capacity will be used by System associations as an excuse not to lend 
to YBS borrowers. System associations must always consider their risk-
bearing capacity when extending credit and services. It is especially 
important to consider risk when extending credit to a potentially less 
financially stable group of borrowers, such as YBS borrowers. 
Nevertheless, associations are still expected to demonstrate that they 
are meeting the credit and services needs of the YBS community in their 
respective territories. The requirements for YBS programs set forth in 
this final rule should enhance System YBS programs and help ensure that 
the System successfully achieves its YBS mission in a safe and sound 
manner.
    For all the foregoing reasons, we are adopting Sec.  614.4165(c) as 
final with only two changes. As we explained above, we have revised 
Sec.  614.4165(c)(2) in the final rule to make it clear that each 
direct lender association's quantitative targets must be based on an 
understanding of how the data relates to the YBS market in the 
association's lending territory, not directly based on the demographic 
data. Since we believe ``reasonably reliable demographic data'' 
encompasses the meaning of the phrase in the proposed rule ``that 
reasonably reflect the YBS demographics'', the latter phrase has been 
removed.
    Further, as explained in the following section, in the final rule 
we are adding the following language to the end of Sec.  
614.4165(c)(3)(iii): ``as well as 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 the credit and services needs of YBS farmers and 
ranchers.''

Section 614.4165(d)--YBS Advisory Committee

    This section of the proposed rule explains that each direct lender 
association could, at its option, establish and maintain an advisory 
committee comprised of young, beginning, and small farmers and 
ranchers. We included this recommendation because we believe a YBS 
advisory committee could help each association determine the credit and 
services needs of YBS farmers and ranchers in its territory. Similarly, 
this committee could serve as the association's conduit to the YBS 
community and other agricultural interest groups and lending sources

[[Page 16468]]

serving the needs of YBS farmers and ranchers.
    One commenter supported the inclusion of this recommendation in the 
final rule and suggested we make the YBS advisory committee a 
requirement of each direct lender association's YBS program rather than 
an option. The commenter also suggested that the membership of the 
advisory committee be expanded to include university and 
nongovernmental organization representatives that work with YBS farmers 
and ranchers. Although we certainly encourage each direct lender 
association to establish an advisory committee as a way of reaching out 
to the YBS community in its territory, we recognize that it may not be 
feasible or cost-effective for every association to create and maintain 
such a committee. Further, given the unique demographics of each direct 
lender association's territory, we think it best to allow each 
association to determine the makeup of its advisory committee 
membership should it choose to create one. Therefore, we have not 
incorporated these suggestions into the final rule.
    As we explained earlier, one commenter expressed concern that the 
use of suggestions and recommendations in the YBS rule left the System 
unclear as to what the rule actually requires. Because the formation of 
an advisory committee is a type of outreach activity, we have moved the 
suggestion of an advisory committee to Sec.  614.4165(c)(3)(iii) of the 
final rule and deleted Sec.  614.4165(d). We believe this change in the 
final rule will make it clearer that the formation of a YBS advisory 
committee is a suggested rather than required component of a YBS 
program.

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

    This section implements section 4.19(a) of the Act, which requires 
each direct lender association's YBS program to be subject to the 
``review and approval'' of its funding bank. One commenter noted that 
there is no benefit to involving the funding banks in monitoring or 
approving the YBS programs of its affiliated direct lender 
associations. We note that the ``review and approval'' language is 
statutory and reflects congressional intent to involve the System 
banks, to some extent, in the YBS programs of their affiliated direct 
lender associations. The agency has no authority to simply disregard 
this congressional directive. Clearly, the System banks and 
associations have a common goal in ensuring that the special direction 
from Congress with regard to YBS farmers and ranchers is accomplished. 
For instance, System banks may want to work with their affiliated 
associations in coordinating credit and service opportunities for the 
YBS community in its district. Thus, we see a benefit in keeping the 
funding banks aware of the YBS programs being conducted by their 
affiliated associations to further ensure the accomplishment of the 
System's YBS mission.
    Contrary to the previous comment, another commenter commended FCA 
for correctly reflecting the evolved relationship between System banks 
and their affiliated direct lender associations by appropriately 
defining the bank's approval requirements of an association's YBS 
program. In narrowly interpreting the ``review and approval'' statutory 
language, the agency does indeed recognize the autonomy gained by 
direct lender associations since the addition of section 4.19 to the 
Act in 1980. For all the foregoing reasons, we redesignate this section 
as Sec.  614.4165(d) and adopt it as final.

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

    This section of the rule requires direct lender associations to 
include their YBS quantitative targets and qualitative goals in their 
operational and strategic business plans. One commenter supported this 
section while another commenter suggested that this section be deleted 
from the final rule. This latter commenter expressed concern that this 
section imposes additional administrative and reporting burdens on 
System institutions while providing no greater flexibility to serve YBS 
farmers and ranchers. We do not find the commenter's concerns 
convincing. This provision is intended to help associations define the 
steps by which they will accomplish their mission to serve YBS 
borrowers and build on their commitment to meeting their YBS targets 
and goals. We do not believe it is overly burdensome to include the YBS 
targets and goals, which associations must already develop, in their 
operational and strategic business plans. Moreover, most associations 
that have been adopting effective business plans under Sec.  618.8440 
of FCA regulations have already been including their YBS program 
projections in such plans. For all the foregoing reasons, we 
redesignate this section as Sec.  614.4165(e) and adopt it as final.

Section 614.4165(g)--YBS Program Internal Controls

    The rule requires that each direct lender association include, as 
part of its YBS program, comprehensive and detailed internal controls. 
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 an association to assess the strengths and 
weaknesses of its YBS program. The quarterly reporting requirement in 
the final rule will provide the board of directors an opportunity to 
assess its association's YBS program and consider any necessary changes 
or adjustments to its program components. Oversight and control of an 
association's YBS program will help ensure that the program is managed 
effectively and will contribute to its overall success. We received no 
comments on this section. Therefore, we redesignate the section as 
Sec.  614.4165(f) and adopt it as final.

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

    The rule requires each direct lender association to include in its 
annual report to shareholders a description of its YBS program, 
including a status report on each program component, as set forth in 
Sec.  614.4165(c) of the proposed rule, as well as the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers. The rule 
also requires that the YBS discussion provide other information 
necessary for a comprehensive understanding of the direct lender 
association's YBS program and its results. In addition, the rule 
requires each Farm Credit bank to include in its annual report to 
shareholders a summary report of just the quantitative YBS data from 
its affiliated direct lender associations as described in FCA's 
instructions for the annual YBS year-end report. The rule also requires 
each Farm Credit bank's annual report to include the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers, as well 
as any other information that may be necessary for an ample 
understanding of the YBS mission results of the affiliated direct 
lender associations in its district.
    Many commenters supported the requirement to include in the annual 
reports of each direct lender association and System bank a discussion 
of YBS program and performance results. A few commenters suggested that 
we require each direct lender association to report YBS program 
activity on an individual institution basis. Other commenters suggested 
that the annual reports be made available to the public, either on the 
banks and associations Web sites and/or on FCA's Web site. The rule 
already requires each direct lender

[[Page 16469]]

association to report on its YBS program activity in its annual report 
to shareholders and in the YBS year-end report to the FCA. We also note 
that many System institutions currently make their annual reports 
available to the public on their Web sites. The System's YBS year-end 
reports, listed by individual associations, are also available on the 
agency's Web site. However, the question of whether FCA should require 
annual reports to be posted on System institution Web sites is an issue 
for consideration beyond the scope of this rulemaking and one that will 
be considered if the agency should decide to revise its disclosure 
regulations at some future time. Finally, the public may request a copy 
of any System institution's annual report from either the individual 
institution or the FCA.
    Several commenters opposed the requirement to include YBS 
information in System institutions' annual reports to shareholders, 
recommending that the annual report requirements be deleted altogether. 
These commenters advocated that the decision to include YBS information 
in an annual report should be left up to each institution's board of 
directors. The commenters also suggested that FCA runs the risk of 
reducing innovation in System YBS program development as direct lender 
associations focus more on meeting the agency's reporting requirements 
than on working with YBS customers. One commenter stated that the 
annual report should not become a replacement document for business 
plans, or measurements for examination purposes, but instead should 
remain a vehicle to report the operating results of the institution. 
The agency is not swayed by these comments to delete any of the 
proposed annual YBS reporting requirements.
    Moreover, we continue to believe reporting to shareholders and the 
public on the YBS mission results will underscore the importance of the 
System's public purpose YBS mission and will result in greater 
transparency to the public on the System's accomplishment of this 
mission.
    One commenter suggested the agency require direct lender 
associations to include in their annual reports a description of 
special credit treatments, special interest rates, and loan 
participation programs available to YBS borrowers. This commenter 
believes the proposed rule did not go far enough in encouraging the use 
of such credit enhancements.
    The rule requires each direct lender association to include in its 
annual report a description of its YBS program, including a status 
report on each program component set forth in Sec.  614.4165(c). 
Establishing qualitative goals is a required component of an 
association's YBS program, which includes credit enhancement programs. 
Thus, we believe the rule already requires associations to describe its 
credit enhancement program goals in its annual report.
    One commenter indicated that it was unclear in the rule whether 
associations will be required to include in their annual reports their 
YBS performance with regards to related services offered to their YBS 
borrowers. The rule clearly requires associations to report on their 
related services offered under their YBS programs. Specifically, Sec.  
620.5(n)(2) of the rule requires a status report on each program 
component as set forth in Sec.  614.4165(c). The offering of related 
services is a program component under Sec.  614.4165(c)(3)(i) of the 
rule. Thus, associations must include in their annual reports to 
shareholders a status report of their efforts to offer related services 
under their YBS programs.
    In contrast to the previous comments, which address the reporting 
and disclosure of YBS information by System institutions, the following 
comments address FCA's role in reporting and disclosing YBS data. 
Several commenters stated that if the proposed rule is made final 
without major revisions to its public disclosure requirements, FCA will 
have failed as a Federal regulator by abrogating its mission to protect 
the public's right to know about how the System is fulfilling its YBS 
mission. The commenters believe the FCA should compile the YBS 
information itself and release it to the public. The FCA disagrees with 
the commenters' statement.
    Under section 4.19(b) of the Act, it is the System associations who 
must report on their YBS activities to the banks and, in turn, the 
banks must submit an annual report to FCA summarizing the YBS 
operations and achievements of their affiliated associations. It is 
clearly the responsibility of the System institutions rather than the 
FCA to report on their YBS operations and achievements. However, in 
addition to System YBS yearend reports, the agency also includes a 
summary of the System's YBS results in our annual performance report 
(these reports are available on FCA's Web site). Finally, as noted 
earlier, the agency is taking steps to disclose future System 
institutions' YBS compliance ratings to the public. The agency believes 
these various YBS reports are more than sufficient to give the public 
an ample understanding of each direct lender association's YBS program 
and related performance results as well as the System's overall YBS 
performance and achievements.
    Finally, several commenters stated that FCA should disclose 
consolidated YBS data for each district rather than require System 
banks to do so in their annual reports to shareholders. The commenters 
assert that there is no basis in the Act for such a reporting 
requirement and that requiring the banks to include in their annual 
reports to shareholders YBS information gathered from their affiliated 
associations imposes an unnecessary burden in light of the fact that 
the associations are the shareholders of their respective funding 
banks.
    The FCA disagrees that there is no basis in the Act for this 
requirement. As previously noted, section 4.19(b) of the Act requires 
System banks to provide FCA with a report summarizing the YBS 
operations and achievements of its affiliated direct lender 
associations. Further, sections 5.17(8) and 5.19(b)(1) of the Act give 
the agency broad authority to establish reporting requirements for 
System institutions so that all parties interested in the operations of 
the System, including shareholders, investors, Congress, and the public 
at large, can assess the System's performance and mission fulfillment 
as a GSE. Further, although the banks acquire their YBS information 
from their affiliated associations, it is still helpful for the 
associations to view, at a glance, how the district as a whole is 
performing its YBS mission. Thus, we believe the inclusion of this YBS 
data in the annual reports of the banks would be helpful to the 
associations. Moreover, we do not believe the consolidated YBS 
reporting requirements are burdensome for the banks. The rule requires 
the System banks to include in their annual reports to shareholders a 
summary report of just the YBS quantitative data from their affiliated 
direct lender associations. This quantitative data must already be 
submitted to the agency in each bank's annual YBS yearend report. Thus, 
it is not significantly more burdensome for the banks to include this 
same data in their annual reports to shareholders. Finally, the agency 
believes it is first and foremost the responsibility of each System 
institution, rather than the FCA, to report information regarding its 
YBS program results.
    For all the foregoing reasons, we adopt proposed Sec.  620.5(n) as 
final without change.

[[Page 16470]]

Section 630.20(p)--Contents of the Annual Report to Investors

    The rule requires the funding banks to include a report on 
consolidated YBS lending data of their affiliated associations in their 
Systemwide annual report to investors and to include the definitions of 
``young,'' ``beginning,'' and ``small'' farmers and ranchers. 
Additionally, the rule requires that the report include any other 
information that may be necessary for ample understanding of the 
System's YBS mission results.
    Several commenters raised concerns about the System banks not 
having enough time to collect and analyze the YBS data for inclusion in 
the report to investors. (This same concern was raised with respect to 
including YBS data in the System banks' and associations' annual 
reports to shareholders.) These commenters raised this concern because 
of anticipated new and shorter timeframes for publishing such reports 
in order to be more responsive to the marketplace. The agency believes 
the impact of adding the YBS data to the report to investors will be 
insignificant compared to all the other data the banks must include in 
this report.
    For all the foregoing reasons, we adopt proposed Sec.  630.20(p) as 
final without change.

VII. 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 rule will not 
have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with 
their affiliated associations and service corporations, 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.


0
For the reasons stated in the preamble, parts 614, 620, and 630, 
chapter VI, title 12 of the Code of Federal Regulations are amended as 
follows:

PART 614--LOAN POLICIES AND OPERATIONS

0
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

0
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 title I or II of the Act; and
    (ii) Interests in participations made to farmers and ranchers and 
producers or harvesters of aquatic products under title 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 title I or II of the Act; and
    (ii) Related services to farmers and ranchers and producers or 
harvesters of aquatic products under title 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 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; and
    (4) The bank to provide the agency 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 an understanding of reasonably reliable 
demographic data for 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; or
    (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 with other System institutions in the territory 
and other governmental and private sources of credit who offer credit 
and services to

[[Page 16471]]

those who qualify as ``young,'' ``beginning,'' and ``small'' farmers 
and ranchers; and
    (iii) Implement effective outreach programs to attract YBS farmers 
and ranchers, which may include the use of advertising campaigns and 
educational credit and services programs beneficial to ``young,'' 
``beginning,'' and ``small'' farmers and ranchers in the territory, as 
well as 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 the 
credit and services needs of YBS farmers and ranchers.
    (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) 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.
    (e) 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).
    (f) 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

0
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

0
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 FCA'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

0
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

0
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: March 23, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-6967 Filed 3-29-04; 8:45 am]
BILLING CODE 6705-01-P