[Federal Register Volume 69, Number 61 (Tuesday, March 30, 2004)]
[Rules and Regulations]
[Pages 16455-16460]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6968]



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  Federal Register / Vol. 69, No. 61 / Tuesday, March 30, 2004 / Rules 
and Regulations  

[[Page 16455]]



FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 617

RIN 3052-AC04


Loan Policies and Operations; Borrower Rights; Effective Interest 
Rate Disclosure

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 its regulations governing disclosure of 
effective interest rates (EIR) and related information on loans. This 
final rule clarifies when and how qualified lenders must disclose the 
EIR and other loan information to borrowers; when and how the cost of 
Farm Credit System (FCS or System) borrower stock must be disclosed to 
borrowers; and how loan origination charges and other loan information 
must be disclosed to borrowers. The final rule requires lenders to use 
a discounted cash flow method in determining the EIR to provide 
meaningful disclosures to borrowers but does not prescribe detailed 
calculation procedures. To make the regulations easy to understand and 
use by borrowers, lenders, and other users, we have rewritten the 
existing regulations in part 614, subpart K, Disclosure of Loan 
Information, in a question-and-answer format and moved them to part 
617, Borrower Rights.

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:

Tong-Ching Chang, Senior Policy Analyst, Office of Policy and Analysis, 
Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498; TTY 
(703) 883-4434;
     or

Howard Rubin, Senior Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Our objectives for this rule are to:
     Ensure that borrowers receive meaningful and 
timely disclosure of the EIR and related information on loans;
     Promote consistency in the method used to 
determine the EIR; and
     Make the regulations easy to understand and use 
by borrowers, lenders, and other users.

II. Background

    As discussed in the preamble to the proposed rule (See 68 FR 5587, 
February 4, 2003), section 4.13(a) of the Farm Credit Act of 1971, as 
amended (Act),\1\ requires the FCA to enact regulations requiring 
``qualified lenders'' \2\ to provide borrowers, not later than the time 
of loan closing, with meaningful and timely disclosure of:
---------------------------------------------------------------------------

    \1\ 12 U.S.C. 2199(a).
    \2\ ``Qualified lenders'' include System lenders (except for a 
bank for cooperatives), and non-System lenders (other financing 
institutions (OFIs)) for loans that OFIs make with funding from a 
Farm Credit bank. See 12 U.S.C. 2202a(a)(6).
---------------------------------------------------------------------------

     The current rate of interest on the loan;
     The amount and frequency of interest rate 
adjustments and the factors that the lender may take into account in 
adjusting rates for adjustable or variable rate loans;
     The effect of any loan origination charges or 
purchases of stock or participation certificates on the rate of 
interest on the loan;
     A statement indicating that stock purchased is 
at risk; and
     A statement indicating the various types of loan 
options available to borrowers.
    The requirements of section 4.13 of the Act are applicable to all 
loans made by ``qualified lenders'' not subject to the Truth in Lending 
Act (TILA).\3\ Under section 4.13(a) of the Act, qualified lenders must 
give borrowers notice of any change in the interest rate applicable to 
a borrower's loan within a ``reasonable time'' after the change. In 
addition, section 4.13(b) of the Act requires qualified lenders that 
offer more than one rate of interest to borrowers, at the request of a 
borrower, to: (1) Provide a review of the loan to determine if the 
proper rate has been established; (2) explain to the borrower, in 
writing, the basis for the interest rate charged; and (3) explain to 
the borrower, in writing, how the credit status of the borrower may be 
improved to receive a lower interest rate on the loan.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 1601, et seq. TILA applies to consumer loans and 
specifically exempts agricultural loans.
---------------------------------------------------------------------------

    Current FCA regulations (initially adopted in 1988) implement the 
disclosure requirements of the Act, but contain limited guidance on 
several key issues. In recent years, new stock purchase requirements, 
new loan programs, and varied methodologies for calculation of 
effective interest rates has meant that compliance with current EIR 
disclosure regulations has become more challenging and led to 
inconsistent disclosure among qualified lenders. This final rule 
rewrites our existing regulations to provide more guidance in a user-
friendly format.
    The final rule is the second component of our current rulemaking on 
borrower rights. This final rule amends part 617, Borrower Rights, 
which was rearranged by the Distressed Loan Restructuring rule adopted 
by the FCA Board on February 10, 2004, and published in the Federal 
Register on March 9, 2004 (See 69 FR 10901). Consequently, part 617 
will contain all regulations on borrower rights after both rules become 
effective.

III. Comments

    We received comments on the proposed rule from the Farm Credit 
Council (Council), two Farm Credit banks, and 10 Farm Credit System 
associations. In general, commenters expressed support for FCA's 
efforts to clarify its EIR rules. However, a number of the comments 
raised general and specific objections to various parts of the proposed 
rule. FCA's responses to these comments are discussed in our section-
by-section analysis below.
    In addition to comments on specific proposals, the Council urged 
FCA, in light of the dramatic change in the nature and extent of System 
stock purchase requirements since the 1980s, to ``evaluate the benefit 
(if any) members receive from these disclosures

[[Page 16456]]

in the context of the costs incurred by the associations in making the 
disclosures and their value to the customers (given the minimal 
purchase requirements).'' Regardless of FCA's view of the benefit of 
EIR disclosures, Congress mandated (in section 4.13 of the Act) that 
qualified lenders make these disclosures. Therefore, FCA has sought, in 
this rule, to make the required statutory disclosures as meaningful as 
possible to borrowers without adding unnecessary regulatory burden to 
qualified lenders.
    After carefully considering the comments, we are adopting the final 
rule as proposed with only one substantive and several technical 
changes. Specifically, we are deleting proposed Sec.  617.7115(b) and 
Sec.  617.7130(a)(5), which would have required qualified lenders to 
separately disclose to borrowers all fees not included in ``loan 
origination charges'' that borrowers are required to pay to obtain a 
loan. Also, we are eliminating the proposed definitions of ``loan'' and 
``qualified lender'' and other changes to the existing parts 611, 612, 
614, and 617 from this rule because they have been implemented by the 
Distressed Loan Restructuring rule.

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

Subpart A--General

Section 617.7000--Definitions

    One association suggested FCA add a definition for ``covered 
loan,'' which would establish a maximum dollar amount for loans subject 
to EIR disclosure regulations. However, section 4.13 of the Act 
requires lenders to make disclosures to borrowers for ``all loans'' not 
subject to TILA. We received no other comments on the definitions. As a 
result, we eliminate the proposed definitions of ``loan'' and 
``qualified lender'' from this rule because they have been implemented 
by the Distressed Loan Restructuring rule and adopt other definitions 
as proposed.

Subpart B--Disclosure of Effective Interest Rates

Section 617.7100--Who Must Make and Who Is Entitled To Receive an 
Effective Interest Rate Disclosure?

    One Farm Credit bank and six of its affiliated associations 
objected to proposed Sec.  617.7100(b), which provides what a lender 
must do when there is more than one borrower obligated on a loan. As 
explained below, we adopt proposed Sec.  617.7100 as final without 
change.
    Current Sec.  614.4367(d) allows the lender to satisfy the 
disclosure requirements by providing the disclosure to any one of the 
primary obligors on the loan. The final rule will give borrowers the 
opportunity to designate, in writing, the person they wish to receive 
the disclosures. If the borrowers do not designate a particular 
recipient, the lender must provide the disclosures to at least one 
borrower primarily liable for repayment of the loan. The objecting 
commenters asserted:
    (1) There is no basis in the Act authorizing this designation;
    (2) The regulation would create an unnecessary burden on System 
lenders, including requiring lenders to prepare and maintain 
documentation of the borrowers' designation choice; and
    (3) In a default situation, a lender may be unable to locate or 
contact the designee and, therefore, the regulation could be raised as 
a legal impediment to a System lender's collection or foreclosure 
actions.
    First, while a strict reading of the Act would require that each 
borrower receive disclosure, we believe that where there is one loan, 
allowing disclosure to one borrower complies with the Act and is less 
burdensome to lenders. We also believe that the proposed rule--giving 
borrowers an opportunity to designate an EIR disclosure recipient--is 
consistent with Congress's intent in creating ``borrower rights'' in 
the Act. Second, we do not believe that the new regulation will be 
unduly burdensome because all it requires is that qualified lenders 
honor the borrowers' written designation request, if one is made. Many 
System associations already allow borrowers to designate an EIR 
disclosure recipient without reported incident or undue burden. Third, 
Sec.  617.7100 applies only to EIR disclosures that are primarily made 
at or before loan closing.
    This rule would not apply to any other notices required by the Act 
or otherwise and therefore has no plausible relationship to a loan 
default situation. When a qualified lender determines that a loan is, 
or has become, distressed, provisions in subpart E of part 617 
regarding distressed loan restructuring apply. Under Sec.  617.7410(d), 
the lender must notify all primary obligors. If the obligors identify 
one party to receive notices, the qualified lender should send the 
original notice to that person and send copies to the other obligors.

Section 617.7105--When Must a Qualified Lender Disclose the Effective 
Interest Rate to a Borrower?

    Section 617.7105 revises the criteria that establish the 
circumstances in which EIR disclosure is necessary. Paragraph (b) of 
this section provides that a qualified lender must provide a new EIR 
disclosure to existing borrowers on or before the date the borrower:
    (1) Executes a new promissory note or other comparable evidence of 
indebtedness;
    (2) Purchases additional stock or participation certificates as a 
condition of obtaining new funds from the qualified lender; or
    (3) Pays an additional loan origination charge to the qualified 
lender as a condition of obtaining new funds.
    The Council commended this clarification and stated that the new 
rule will benefit System institutions. One association requested that 
FCA state in the rule or preamble that no new EIR disclosure is 
required for a ``loan servicing action.'' However, ``loan servicing 
action'' is not defined in the Act or our regulations, and required 
disclosure is not based on whether an action is described as a ``loan 
servicing action.'' Instead, Sec.  617.7105 requires that if any loan 
action does not result in a new note, purchase of new stock, or new 
loan origination charges as a condition of obtaining new funds, no new 
disclosure is required. If it does, new disclosure is required. We 
believe that proposed Sec.  617.7105 provides clarity to qualified 
lenders and adopt it as final.

Section 617.7110--How Should a Qualified Lender Disclose the Cost of 
Borrower Stock or Participation Certificates?

    Section 617.7110 provides that the cost of borrower stock or 
participation certificates must be included in the EIR calculation only 
at the time the stock or participation certificates is purchased in 
connection with a loan transaction, whether purchased with cash, 
included in a promissory note, or otherwise paid. For subsequent loans 
to existing borrowers, only the cost of new stock or participation 
certificates, if any, purchased in connection with the transaction must 
be included in the EIR calculation. We received no comments on this 
proposed provision and adopt it as final.

Section 617.7115--How Should a Qualified Lender Disclose Loan 
Origination and Other Charges?

    Many commenters commended FCA for clarifying in proposed Sec.  
617.7115(a)

[[Page 16457]]

exactly what ``loan origination charges'' must be included in the EIR 
calculation, indicating that the new rule should reduce regulatory 
burden and result in greater accuracy in reflecting the true cost of 
credit to the borrower.
    We received negative comments from a Farm Credit bank and a number 
of associations on proposed Sec.  617.7115(b), which provides that all 
other payments that a borrower is required to make to obtain a loan, 
but not included as a loan origination charge in the EIR calculation, 
must be disclosed separately at the time of loan closing. Objections to 
the proposal included:
    (1) Requiring a separate list of all fees not included as loan 
origination charges in the EIR calculation goes far beyond FCA's 
authority;
    (2) The new rule would mirror TILA and Regulation Z \4\ 
requirements, which are not applicable to agricultural loans;
---------------------------------------------------------------------------

    \4\ Federal Reserve Board regulation that implements TILA.
---------------------------------------------------------------------------

    (3) Developing a new automated form to include these items would be 
costly to implement;
    (4) A lender may have no knowledge of certain amounts a borrower 
pays directly to third parties for items such as taxes or insurance.
    Upon consideration of the comments, we are deleting the proposed 
requirements of Sec. Sec.  617.7115(b) and 617.7130(a)(5).
    Section 4.13(a)(3) of the Act requires qualified lenders to 
disclose the effect of ``loan origination charges'' on the effective 
rate of interest. Proposed Sec.  617.7115(a) identified what ``loan 
origination charges'' must be disclosed for purposes of implementing 
section 4.13(a)(3). The Act does not specifically require disclosure of 
any other fees or costs not constituting ``loan origination charges.'' 
Additionally, as we discussed in the preamble to the proposed rule, 
Congress specifically exempted agricultural loans from TILA coverage 
and its more extensive disclosure requirements. For these reasons, we 
are eliminating proposed paragraph (b) of this section in order to 
avoid adding unnecessary regulatory burden to qualified lenders.
    However, while we are not imposing this additional disclosure as a 
requirement, we continue to believe, as one association commenter 
stated, ``disclosure of such fees at or prior to loan closing is sound 
lending practice.'' This is particularly true for inexperienced 
borrowers, such as beginning farmers. Therefore, we encourage 
additional voluntary disclosure by qualified lenders in loan 
transactions.

Section 617.7120--How Should a Qualified Lender Present the Disclosures 
to a Borrower?

    Proposed Sec.  617.7120 was intended to provide reasonable 
assurance that qualified lenders provide user-friendly, meaningful 
disclosures to borrowers. We received no comments on proposed Sec.  
617.7120 and adopt it as final.

Section 617.7125--How Should a Qualified Lender Determine the Effective 
Interest Rate?

    One association objected to the requirement of Sec.  617.7125(a) 
that the EIR be calculated using a discounted cash flow methodology. 
That association asserted:
    (1) This is an inappropriate TILA-style requirement;
    (2) This will impose an increased burden since there are a variety 
of payment schedules employed to accommodate borrowers' agricultural 
needs and non-FCS lenders do not have such a requirement.
    As we discussed in the preamble to the proposed rule, while the 
proposal is conceptually similar to the formula prescribed in 
Regulation Z for determination of the annual percentage rate (APR) on 
loans subject to TILA, a discounted cash flow is also the standard 
accepted methodology used in the financial services industry as the 
best measurement of the cost of credit over time and to develop loan 
amortization schedules. As we also noted in the proposed rule preamble, 
although the discounted cash flow method involves somewhat complex 
mathematical computations, the FCA does not believe a requirement to 
use this method would cause undue burden to lenders. A survey of System 
lender disclosures we conducted in the spring of 2002 indicated that a 
substantial majority (more than 80 percent) of FCS lenders have already 
incorporated discounted cash flows in their EIR calculations. In 
addition, a variety of computer-based tools for calculating effective 
interest rates are readily available in the market place at a 
reasonable cost.
    Additionally, another association requested that we add a provision 
establishing a tolerance level--similar to the Regulation Z provision--
for the accuracy of the EIR disclosure. Regulation Z provides that an 
annual percentage rate is considered accurate (and the lender is not in 
violation of Regulation Z) if the rate disclosed is within a tolerance 
level. We considered, but rejected, that approach because, unlike 
Regulation Z, our rules provide for flexibility in calculating the EIR. 
FCA believes that the complexity of agricultural lending requires a 
more flexible disclosure approach than provided for under Regulation Z. 
Therefore, instead of a fixed formula mandated by FCA, we provide in 
Sec.  617.7125(c) that lenders must establish policies and procedures 
for disclosing the effect of the cost of borrower stock (or 
participation certificates) and loan origination charges on the 
interest rate of a loan. Qualified lenders will also be required to 
establish policies and procedures for determining the major assumptions 
used in calculating the EIR, such as for calculating the EIR for 
adjustable rate loans, revolving or open-end lines of credit, or other 
loans where key terms may vary or may not be fixed. The rule places 
responsibility on a qualified lender to use due diligence in 
calculating the EIR. Redisclosure would only be necessary if a lender 
made a material error in the original calculation.
    A third association opposed the requirement that the cost of the 
required stock purchase be included as a ``borrowing expense'' with no 
assumption of retirement at loan payoff allowed in the calculation of 
the EIR, stating that the risk of loss of stock is extremely minimal 
and to ``make the assumption that stock will not be recovered is to 
raise unfounded concern on the part of the borrower that such loss is 
anticipated.'' While the commenter may be factually correct in 
asserting that the borrower's risk of loss of stock is minimal, we 
believe the Act requires this result.
    Congress provided in section 4.13(a)(3) of the Act that the 
purchase of borrower stock must be disclosed as a cost of the credit in 
determining the effective rate of interest on a loan. In other parts of 
the Act, Congress further provided that borrower stock is an ``at-
risk'' equity investment. Assumption of stock retirement in the EIR 
calculation is contrary to the at-risk feature of borrower stock. While 
purchase of stock is a prerequisite for obtaining a loan, section 4.3A 
of the Act \5\ precludes automatic retirement of borrower stock upon 
loan payoff. Therefore, a qualified lender cannot explicitly or 
implicitly guarantee or assume stock retirement.
---------------------------------------------------------------------------

    \5\ 12 U.S.C. 2154a.
---------------------------------------------------------------------------

    One association also objected to the requirement of proposed Sec.  
617.7125(c) that qualified lenders must develop policies and procedures 
establishing criteria on how the cost of borrower stock and loan 
origination charges are assigned among multiple loans obtained 
simultaneously. The association asserts that the requirement will be

[[Page 16458]]

burdensome and limits the association's flexibility. However, we 
believe that policies and procedures establishing criteria are 
necessary to ensure fairness and consistency in disclosure to borrowers 
and to prevent misleading information. We continue to believe that the 
proposed rule will allow an association to adopt policies and 
procedures broad enough to allow some discretion and flexibility on a 
case-by-case basis. For all the reasons discussed above, we adopt 
proposed Sec.  617.7125 as final with one conforming change to 
reference Sec.  617.7115 in paragraph (b)(3) of this section.

Section 617.7130--What Initial Disclosures Must a Qualified Lender Make 
to a Borrower?

    As discussed in the preamble to the proposed rule, the Council 
previously stated that existing Sec.  614.4367(a)(3), which requires 
the computation of EIR to be made on a transaction-specific basis, goes 
beyond the requirement of Sec.  4.13(a)(3) of the Act. The Council made 
the same comment about proposed Sec.  617.7130 (which keeps the 
existing requirement), stating that the statutory requirement could be 
satisfied by using a representative example based on a generic 
transaction and recommended that FCA allow disclosure through the use 
of a standard example.
    As we stated in the proposed rule preamble (and in all prior 
rulemakings in this area), we disagree with this approach and believe 
that in order for borrower disclosure to be ``meaningful,'' as is 
required by statute, the disclosure should take into account the 
specific loan for which the disclosure is being provided. The EIR 
disclosed should be derived from the interest rate and related charges 
applicable to the loan being made to the borrower. However, for 
adjustable or revolving loans where the terms and conditions are not 
fixed or are subject to change, a disclosure of the EIR based on the 
terms and conditions known at the inception of the loan, coupled with 
representative examples showing the effect of changes in any of the 
cost elements of the loan, e.g., borrower stock, loan origination 
charges, or interest rate, on the EIR would be appropriate under the 
circumstances. We received no other comments on proposed Sec.  617.7130 
and adopt it as final with only one change to remove proposed paragraph 
(a)(5) of this section in conformance with the change to proposed Sec.  
617.7115.

Section 617.7135--What Subsequent Disclosures Must a Qualified Lender 
Make to a Borrower?

    As discussed in the proposed rule preamble, the Council recommended 
that where an interest rate is based on a widely publicized external 
index plus a spread, disclosure of a change of interest rate should not 
be required when the index changes but should be required only when the 
change in rate is caused by a change in the spread. The Council, a Farm 
Credit bank, and five associations also reiterated this position in 
their comments on proposed rule Sec.  617.7135. However, as we 
discussed in the earlier preamble, we believe eliminating the notice of 
interest rate changes for index rate loans is not appropriate. The Act 
requires notice of ``any change in the interest rate applicable to the 
borrower's loan.''\6\ While the contract rate (index plus spread) may 
not have changed, it is clear that when the index changes, the rate of 
interest the borrower pays on the loan has changed. There is nothing in 
the legislative history of the Act to suggest that Congress intended to 
exempt index rate loans from the disclosure requirement. Furthermore, 
we believe it is important to remind borrowers that interest rate 
changes will affect their payment amounts.
---------------------------------------------------------------------------

    \6\ 12 U.S.C. 2199(a)(4).
---------------------------------------------------------------------------

    In the preamble to the proposed rule, we indicated that any form of 
correspondence to borrowers could satisfy the required written notice, 
including a newsletter. The Council urged FCA to specifically authorize 
that any required disclosure may be made on a System institution's Web 
site or by calling a telephone information line. While sending an e-
mail to an individual borrower (in compliance with any applicable e-
commerce requirement, including the parties' agreement) would satisfy 
the notice requirement of this section, we do not believe posting 
information on a Web site or telephone information line would satisfy 
statutory requirements. The Act requires that qualified lenders provide 
``notice to the borrower'' of a change in the borrower's interest 
rate.\7\ However, a ``widely publicized external index'' does not 
provide notice directly to a borrower, and information available to 
borrowers on the Web or by telephone does not provide such notice. For 
these reasons, we adopt Sec.  617.7135 as final without change.
---------------------------------------------------------------------------

    \7\ 12 U.S.C. 2199(a)(4).
---------------------------------------------------------------------------

Subpart C--Disclosure of Differential Interest Rates

Section 617.7200--What Disclosures Must a Qualified Lender Make to a 
Borrower on Loans Offered With More Than One Rate of Interest?

    We did not receive any comments on this section and adopt it as 
final.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the 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 617

    Banks, banking, Criminal referrals, Criminal transactions, 
Embezzlement, Insider abuse, Investigations, Money laundering, Theft.

0
For the reasons stated in the preamble, parts 614 and 617 of 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, 
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 
of Pub. L. 100-233, 101 Stat. 1568, 1639.

[[Page 16459]]

Subpart K--[Removed]

0
2. Remove subpart K, consisting of Sec. Sec.  614.4365 through 
614.4368.

PART 617--BORROWER RIGHTS

0
3. The authority citation for part 617 continues to read as follows:

    Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200, 
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252(a)(9)).

Subpart A--General

0
4. Amend Sec.  617.7000 by adding the following definitions 
alphabetically to read as follows:


Sec.  617.7000  Definitions.

* * * * *
    Adjustable rate loan means a loan where the interest rate payable 
over the term of the loan may change. This includes adjustable rate, 
variable rate, or other similarly designated loans.
    Effective interest rate means a measure of the cost of credit, 
expressed as an annual percentage rate, that shows the effect of the 
following costs, if any, on the interest rate on a loan charged by a 
qualified lender to a borrower:
    (1) The amount of any stock or participation certificates that a 
borrower is required to buy to obtain the loan; and
    (2) Any loan origination charges paid by a borrower to a qualified 
lender to obtain the loan.
    Interest rate means the stated contract rate of interest.
* * * * *

0
5. Amend part 617 by adding new subparts B and C to read as follows:
Subpart B--Disclosure of Effective Interest Rates
Sec.
617.7100 Who must make and who is entitled to receive an effective 
interest rate disclosure?
617.7105 When must a qualified lender disclose the effective 
interest rate to a borrower?
617.7110 How should a qualified lender disclose the cost of borrower 
stock or participation certificates?
617.7115 How should a qualified lender disclose loan origination 
charges?
617.7120 How should a qualified lender present the disclosures to a 
borrower?
617.7125 How should a qualified lender determine the effective 
interest rate?
617.7130 What initial disclosures must a qualified lender make to a 
borrower?
617.7135 What subsequent disclosures must a qualified lender make to 
a borrower?

Subpart B--Disclosure of Effective Interest Rates


Sec.  617.7100  Who must make and who is entitled to receive an 
effective interest rate disclosure?

    (a) A qualified lender must make the disclosures required by 
subparts B and C of this part to borrowers for all loans not subject to 
the Truth in Lending Act.
    (b) For a single loan involving more than one borrower, a qualified 
lender is required to provide only one set of disclosures to borrowers. 
All borrowers may designate, in writing, one person who will receive 
the effective interest rate disclosure. If the borrowers do not 
designate a particular recipient, the lender may provide the disclosure 
to at least one of the borrowers who is primarily liable for repayment 
of the loan.


Sec.  617.7105  When must a qualified lender disclose the effective 
interest rate to a borrower?

    (a) Disclosure to prospective borrowers. A qualified lender must 
provide written effective interest rate disclosure for each loan no 
later than the time of loan closing.
    (b) Disclosure to existing borrowers.
    (1) A qualified lender must provide a new effective interest rate 
disclosure to an existing borrower on or before the date:
    (i) The borrower executes a new promissory note or other comparable 
evidence of indebtedness;
    (ii) The borrower purchases additional stock or participation 
certificates as a condition of obtaining new funds from the qualified 
lender; or
    (iii) The borrower pays an additional loan origination charge to 
the qualified lender as a condition of obtaining new funds.
    (2) A qualified lender is not required to provide a new effective 
interest rate disclosure when it advances new funds to an existing 
borrower if none of the conditions of paragraph (b)(1) of this section 
apply and the advance is made pursuant to a preexisting contract that 
specifically provides for future advances.


Sec.  617.7110  How should a qualified lender disclose the cost of 
borrower stock or participation certificates?

    The cost of borrower stock or participation certificates must be 
included in the effective interest rate calculation at the time the 
stock or participation certificate is purchased in connection with a 
loan transaction. For subsequent loans to existing borrowers, only the 
cost of new stock or participation certificates, if any, purchased in 
connection with a new loan or advance of new funds must be included in 
the effective interest rate calculation for the transaction.


Sec.  617.7115  How should a qualified lender disclose loan origination 
charges?

    Any one-time charge paid by a borrower to a qualified lender in 
consideration for making a loan must be included in the effective 
interest rate as a loan origination charge. These include, but are not 
limited to, loan origination fees, application fees, and conversion 
fees. Loan origination charges also include any payments made by a 
borrower to a qualified lender to reduce the interest rate that would 
otherwise be charged, including any charges designated as ``points.''


Sec.  617.7120  How should a qualified lender present the disclosures 
to a borrower?

    A qualified lender must:
    (a) Disclose the effective interest rate and other information 
required by subparts B and C of this part clearly and conspicuously in 
writing, in a form that is easy to read and understand and that the 
borrower may keep; and
    (b) Not combine the disclosures with any information not directly 
related to the information required by Sec. Sec.  617.7130 and 
617.7135.


Sec.  617.7125  How should a qualified lender determine the effective 
interest rate?

    (a) A qualified lender must calculate the effective interest rate 
on a loan using the discounted cash flow method showing the effect of 
the time value of money.
    (b) For all loans, the cash flow stream used for calculating the 
effective interest rate of a loan must include:
    (1) Principal and interest;
    (2) The cost of stock or participation certificates that a borrower 
is required to purchase in connection with the loan; and
    (3) Loan origination charges described in Sec.  617.7115.
    (c) A qualified lender must establish policies and procedures for 
EIR disclosures that clearly show the effect of the cost of borrower 
stock (or participation certificates) and loan origination charges on 
the interest rate of a loan. A qualified lender must also establish 
policies and procedures for determining major assumptions used in 
calculating the effective interest rate, e.g., criteria on how the cost 
of borrower stock (or participation certificates) and loan origination 
charges are assigned or allocated among multiple loans obtained by a 
borrower simultaneously.

[[Page 16460]]

Sec.  617.7130  What initial disclosures must a qualified lender make 
to a borrower?

    (a) Required disclosures--in general. A qualified lender must 
disclose in writing:
    (1) The interest rate on the loan;
    (2) The effective interest rate of the loan;
    (3) The amount of stock or participation certificates that a 
borrower is required to purchase in connection with the loan and 
included in the calculation of the effective interest rate of the loan;
    (4) All loan origination charges included in the effective interest 
rate;
    (5) That stock or participation certificates that borrowers are 
required to purchase are at risk and may only be retired at the 
discretion of the board of the institution; and
    (6) The various types of loan options available to borrowers, with 
an explanation of the terms and borrower rights that apply to each type 
of loan.
    (b) Adjustable rate loans. A lender must provide the following 
information for adjustable rate loans in addition to the requirements 
of paragraph (a) of this section:
    (1) The circumstances under which the rate can be adjusted;
    (2) How much the rate can be adjusted at any one time and how much 
the rate can be adjusted during the term of the loan;
    (3) How often the rate can be adjusted;
    (4) Any limitations on the amount or frequency of adjustments; and
    (5) The specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan.


Sec.  617.7135  What subsequent disclosures must a qualified lender 
make to a borrower?

    (a) Notice of interest rate change.
    (1) A qualified lender must provide written notice to a borrower of 
any change in interest rate on the borrower's existing loan, containing 
the following information:
    (i) The new interest rate on the loan;
    (ii) The date on which the new rate is effective; and
    (iii) The factors used to adjust the interest rate on the loan.
    (2) If the borrower's interest rate is directly tied to a widely 
publicized external index, a qualified lender must provide written 
notice to the borrower of the rate change within forty-five (45) days 
after the effective date of the change.
    (3) If the borrower's interest rate is not directly tied to a 
widely publicized external index, a qualified lender must send written 
notice to the borrower of the rate change within ten (10) days after 
the effective date of the change.
    (b) Notice of increase in stock purchase requirement. If a 
qualified lender increases the amount of stock (or participation 
certificates) a borrower must own during the term of a loan, the lender 
must send a written notice to the borrower at least ten (10) days prior 
to the effective date of the increase. The notice must state:
    (1) The new effective interest rate on the outstanding balance for 
the remaining term of the borrower's loan;
    (2) The date on which the new rate is effective; and
    (3) The reason for the increase in the borrower stock (or 
participation certificates) purchase requirement.

Subpart C--Disclosure of Differential Interest Rates

Sec.
617.7200 What disclosures must a qualified lender make to a borrower 
on loans offered with more than one rate of interest?

Subpart C--Disclosure of Differential Interest Rates


Sec.  617.7200  What disclosures must a qualified lender make to a 
borrower on loans offered with more than one rate of interest?

    A qualified lender that offers more than one rate of interest to 
borrowers must notify each borrower of the right to request a review of 
the interest rate charged on his or her loan no later than the time of 
loan closing. At the request of a borrower, the lender must:
    (a) Provide a review of the loan to determine if the proper 
interest rate has been established;
    (b) Explain to the borrower in writing the basis for the interest 
rate charged; and
    (c) Explain to the borrower in writing how the credit status of the 
borrower may be improved to receive a lower interest rate on the loan.

    Dated: March 23, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-6968 Filed 3-29-04; 8:45 am]
BILLING CODE 6705-01-P