[Federal Register Volume 69, Number 102 (Wednesday, May 26, 2004)]
[Rules and Regulations]
[Pages 29852-29863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11849]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 615

RIN 3052-AB96


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, agency, or we) adopts a 
final rule that amends regulations governing other financing 
institutions (OFIs). The purpose of the final rule is to make it easier 
for OFIs to obtain funding for short- and intermediate-term loans to 
farmers, ranchers, aquatic producers, farm-related businesses, and 
rural homeowners through Farm Credit System (FCS, Farm Credit, or 
System) banks. The FCA believes that these

[[Page 29853]]

changes will make credit to agriculture and other eligible borrowers in 
rural America more affordable. The final rule removes unnecessary 
provisions in the existing OFI regulations that: Impede the flow of 
credit; or do not enhance safe and sound operations. The FCA also 
adopts conforming amendments to its capital regulations.

DATES: Effective Date: This regulation will be effective 30 days after 
publication in the Federal Register during which time 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:

Dennis K. Carpenter, Senior Policy Analyst, Office of Policy and 
Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-
4498, TTY (703) 883-4434; or
Richard A. Katz, Senior Attorney, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-2020.

SUPPLEMENTARY INFORMATION:

I. Background

    This rulemaking began on April 20, 2000, with an advance notice of 
proposed rulemaking (ANPRM) that asked all interested parties specific 
questions about the funding and discount relationship between Farm 
Credit banks and OFIs.\1\ FCA staff subsequently conducted telephone 
and field interviews with interested parties. On August 3, 2001, we 
held a public meeting in Des Moines, Iowa, where interested parties 
offered suggestions on how we could facilitate greater cooperation 
between System and non-System lenders in providing credit to 
agriculture and rural America. The public meeting addressed both the 
OFI program and other arrangements where the FCS and non-System lenders 
could help each other in extending credit to farmers, ranchers, and 
other eligible borrowers in rural America.
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    \1\ See 65 FR 21151 (April 20, 2000).
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    Many of the comments and suggestions that we received from the 
ANPRM, interviews, and at the public meeting were incorporated into the 
proposed rule to revise both our OFI and the investment in farmers' 
notes (Farmers' Notes) regulations.\2\ Basically, the proposed OFI rule 
would allow OFIs to establish a funding and discount relationship with 
any one Farm Credit Bank (FCB) or agricultural credit bank (ACB) 
(collectively Farm Credit banks). The proposed rule also would 
strengthen the equitable treatment provisions in the existing 
regulations by requiring a Farm Credit bank, at the request of an OFI 
or OFI applicant; to: (1) Disclose how it prices funds for OFIs; and 
(2) justify any discrepancy in the cost of funding between OFIs and 
associations. Another feature of the proposed rule is that it would 
allow Farm Credit banks to disclose the identity of OFIs with their 
consent. The preamble to the proposed OFI rule clarified the FCA's 
position on borrower rights, and it offered suggestions for improving 
relationships between OFIs and the System, and the role of the FCA 
Ombudsman. The FCA also proposed changes to the Farmers' Notes 
regulation and conforming amendments to its capital regulations 
regarding risk weighting for OFIs and Farmers' Notes.
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    \2\ See 68 FR 47502 (August 11, 2003).
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    The FCA received 111 comment letters on the proposed rule. A total 
of 8 comment letters came from the System; 1 from the Farm Credit 
Council (FCC), 5 from Farm Credit banks, and 2 from associations. Other 
commenters were an agricultural credit cooperative OFI, a Community 
Development Financial Institution (CDFI), the Credit Union National 
Association (CUNA), which is a trade association for credit unions, and 
two individuals. Finally, 98 letters came from commercial bankers, 
including the Independent Community Bankers of America (ICBA) and its 
state-affiliated associations.
    The vast majority of the commenters generally supported the 
proposed OFI rule, but both System and non-System commenters offered 
suggestions and raised concerns about particular issues. Commercial 
banks and their affiliated trade associations opposed the proposed 
Farmers' Notes rule. These commenters asked the FCA to hold a public 
meeting, seek additional public comment, and solicit congressional 
input before adopting a final Farmers' Notes rule. Several FCS and non-
System commenters asked the FCA to revise or clarify certain provisions 
in the proposed capital risk-weighting regulations that applied to 
OFIs.
    We are enacting a final rule on OFIs, which includes conforming 
amendments to the capital regulations concerning the risk weighting of 
System bank loans to OFIs. We are not adopting a final Farmers' Notes 
rule at this time because we are continuing to consider the best 
regulatory approach to this program.

II. Final OFI Rule

    As explained earlier, the purpose of this rule is to make it easier 
for OFIs to obtain funding from Farm Credit banks for their short- and 
intermediate-term loans to agricultural and aquatic producers, farm-
related business, and rural homeowners. Improving OFI access to the 
funding and discount services of Farm Credit banks could make 
affordable credit more available to farmers, ranchers, and other 
eligible borrowers. Farm Credit banks fulfill their missions as a 
Government-sponsored enterprise by enhancing the liquidity of OFIs, 
thereby lowering the cost of funding agriculture.
    The FCA now addresses concerns and suggestions that the commenters 
raised about various issues of the proposed OFI rule.

A. Assured Access (Sec.  615.4540(b)(1))

    Section 1.7(b)(4)(B)(i) of the Farm Credit Act of 1971, as amended 
(Act) requires FCA regulations to assure that the funding and discount 
services of Farm Credit banks are available on a reasonable basis to 
any OFI that is significantly involved in lending for agricultural and 
aquatic purposes. Currently, Sec.  614.4540(b)(1) states that Farm 
Credit banks must ``fund, discount, or provide other similar financial 
assistance to any creditworthy OFI that * * * maintains at least 15 
percent of its loan volume at a seasonal peak in loans and leases to 
farmers, ranchers, aquatic producers and harvesters.'' Section 1.7(b) 
of the Act and Sec.  614.4540 of the regulations allow OFIs that do not 
meet this 15-percent threshold to fund and discount their short- and 
intermediate-term loans at Farm Credit banks, but they are not assured 
access if credit becomes scarce.
    During earlier phases of this rulemaking, some commercial banks and 
System lenders expressed the opinion that the 15-percent threshold was 
too onerous, and they asked the FCA to reduce or eliminate it. Some of 
these commenters mistakenly believed that Sec.  614.4540(b)(1) 
automatically excluded non-System lenders from the OFI program if 
agricultural or aquatic loans did not compromise at least 15 percent of 
their loan portfolios. Although the current regulation assures access 
to creditworthy OFIs that maintain at least 15 percent of their loan 
volume at a seasonal peak in agricultural loans, some commenters 
erroneously thought that it only provided assured access to those OFIs 
that always maintain at least 15 percent of their loan portfolio in 
farm loans. The preamble to the proposed rule dispelled both of these 
misconceptions.\3\
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    \3\ See 68 FR 47502, 47505 (August 11, 2003).
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    The FCA did not propose to change the 15-percent threshold as the 
factor that determines whether an OFI is

[[Page 29854]]

assured access to funding from a Farm Credit bank. The preamble to the 
proposed rule explained that the standard that the FCA uses to 
determine whether a non-System lender is substantially involved in 
agricultural lending is more permissive than the 25-percent benchmark 
that the Federal Deposit Insurance Corporation established for 
nonmember banks that it insures, and is comparable to the measure used 
by the Board of Governors of the Federal Reserve System.\4\ The FCA 
invited comments on alternatives that reasonably demonstrate that an 
OFI is significantly involved in agricultural lending because the 
agency is open to ideas that would make this program more attractive to 
OFIs.
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    \4\ Ibid.
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    The FCA received two comment letters about assured access. Both 
letters came from FCS institutions that support the 15-percent 
threshold as the appropriate standard for determining whether an OFI is 
significantly involved in agricultural lending.
    The final rule retains the 15-percent threshold in existing Sec.  
614.4540(b)(1). The 15-percent threshold strikes a fair balance between 
the needs of small rural lenders and larger institutions. Agricultural 
loans usually comprise a larger percentage of the loan assets of small 
rural lenders. However, larger institutions may extend more overall 
credit, in dollar terms, to farmers, although agricultural loans are a 
much smaller percentage of their loan portfolios.

B. Place of Discount (Sec.  614.4550)

    Non-System lenders and many Farm Credit banks have long considered 
place of discount restrictions as a major reason why the OFI program 
has not been widely used by commercial banks and other agricultural 
lenders. Historically, OFIs borrowed from the Farm Credit bank that 
serves the territory where the OFIs maintain their headquarters or 
makes most of their loans. As a result, OFIs have maintained a funding 
or discount relationship with a System bank that is owned and 
controlled by their competitors.
    In 1998, the FCA sought to remedy this problem by adopting current 
Sec.  614.4550, which established new place of discount rules for OFIs. 
Under this regulation, every OFI must apply first to the Farm Credit 
bank that serves the territory where the OFI operates. If the Farm 
Credit bank denies funding, or otherwise fails to approve a completed 
application within 60 days, the OFI may apply to any other Farm Credit 
bank. Additionally, the regulation allows a Farm Credit bank to consent 
to another System bank funding or discounting loans for an OFI.
    The ANPRM, interviews, and public meeting revealed widespread 
dissatisfaction with the place of discount rule in Sec.  614.4550. 
Except for one Farm Credit bank, all System and non-System commenters 
favored repealing all restrictions on place of discount so OFIs could 
choose their System funding bank. The one Farm Credit bank that opposed 
repealing Sec.  615.4550 was concerned that FCS associations would be 
placed at a competitive disadvantage.
    In response to these comments, the FCA proposed to revise Sec.  
615.4550 so OFIs could fund or discount loans with any FCS bank. The 
FCA reasoned that this approach would free Farm Credit banks from 
potential pressure by associations not to lend to their competitors. 
Another factor that supports the proposed rule is that when Farm Credit 
banks compete for OFI credit, the OFI may be able to obtain a more 
favorable funding cost, which it can then pass on to farmers and 
ranchers.\5\
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    \5\ Ibid.
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    The proposed rule would require a Farm Credit bank to notify 
another System bank in writing within 5 business days of receiving an 
application from an OFI that maintains its headquarters or has more 
than 50 percent of its loan volume in the territory of the other Farm 
Credit bank. The purpose of this notice requirement is to give the bank 
in whose territory the OFI is located ample opportunity to contact the 
applicant and offer it funding and discount services. The proposed rule 
would not allow any OFI to borrow from two or more Farm Credit banks at 
the same time. The preamble to the proposed rule justified this ban on 
safety and soundness grounds.
    The FCA received 100 comments about place of discount. Of this 
total, 92 came from commercial banks or their trade associations, 6 
from System banks and associations, and 1 each from CUNA and the 
agricultural credit cooperative OFI. All commercial bank commenters and 
CUNA supported the FCA's position on place of discount. None of these 
commenters sought any revision to proposed Sec.  614.4550. System 
commenters agreed that an OFI should be allowed to fund or discount 
short-or intermediate-term loans with the Farm Credit bank of its 
choice.
    However, System commenters opposed the 5-day notice requirement in 
the proposed rule. These commenters claim that the notice requirement 
grants too much flexibility to OFIs while imposing unnecessary burdens 
on System banks. One commenter thought that the OFI should bear the 
burden of notifying the local Farm Credit bank that it is taking its 
business elsewhere. Two System commenters stated that the mere receipt 
of a credit application from an OFI located outside its chartered 
territory does not mean that the Farm Credit bank will approve funding. 
Since the FCS bank is unlikely to make a credit decision within 5 days, 
these commenters stated that it should be under no obligation to notify 
the Farm Credit bank that serves the territory where the OFI is 
located.
    System commenters and the agricultural credit cooperative OFI 
opposed the ban on two or more Farm Credit banks simultaneously funding 
the same OFI. Many of these commenters stated that our safety and 
soundness rationale was unpersuasive. These commenters note that many 
OFIs already have multiple sources of funding, and that multilender 
financing of commercial borrowers is commonplace today in credit 
markets. All of these commenters suggest that intercreditor agreements 
among different Farm Credit banks will adequately resolve the FCA's 
safety and soundness concerns about disputes over collateral if the OFI 
fails.
    The FCA adopts final Sec.  614.4550, which enables creditworthy 
OFIs to seek and establish a funding and discount relationship with the 
Farm Credit bank of their choice. Allowing OFIs to choose their System 
funding bank frees them from the problems associated with obtaining 
credit from banks that are owned and controlled by their competitors. 
This approach may lower the funding costs and improve the liquidity of 
OFIs which could, in turn, reduce the cost of credit to farmers, 
ranchers, and other eligible rural residents.
    In response to System commenters, the FCA does not view the 5-day 
notice requirement as a burden on Farm Credit banks. This notice 
requirement ensures that Farm Credit banks communicate with each other 
in providing funding and liquidity to OFIs. Additionally, this 
regulatory requirement enables each Farm Credit bank to consider 
offering funding and discount services to OFIs in its chartered 
territory. The 5-day notice requirement has no relationship to the 
credit approval process at a Farm Credit bank that receives an 
application from an OFI outside its territory. Written notice is 
required within 5 days, regardless of whether the Farm Credit bank has 
considered or acted upon an application received from such OFIs.

[[Page 29855]]

Simply providing written notice to another Farm Credit bank within 5 
days is neither costly nor difficult to any System bank that receives 
applications from OFIs outside its chartered territory.
    The FCA retains the ban on two or more Farm Credit banks 
simultaneously funding the same OFI. Although System arguments against 
this ban have some merit, policy concerns justify the FCA's decision to 
retain it. In retail credit markets, financing by multiple lenders of 
the same borrower and intercreditor agreements are commonplace. 
However, discount banks established by Congress to fulfill a public 
policy mission generally do not engage in such practices. For example, 
two Federal Reserve Banks or two Federal Home Loan Banks do not 
simultaneously fund the same member bank. Generally, each FCS 
association receives all of its funding from one Farm Credit bank. In 
addition, an association cannot seek credit from another System bank 
unless its funding bank consents. Therefore, the ban on two or more 
Farm Credit banks simultaneously funding the same OFI is consistent 
with the FCA's policy of requiring FCS banks to treat their OFIs and 
System associations equitably.
    The agricultural credit cooperative OFI expressed concern about how 
the ban on two FCS banks simultaneously funding the same OFI would 
affect its business. The commenter stated that its parent is an 
agricultural cooperative that borrows from the ACB under title III of 
the Act, while it is an OFI that borrows from a Farm Credit bank and 
sells participations in loans to FCS associations. The FCA clarifies 
that nothing in the proposed or final regulation prevents: (1) OFIs 
from participating in loans with System associations; or (2) any parent 
or affiliate which is an agricultural cooperative from borrowing from 
the ACB under title III of the Act.

C. Borrower Rights (Sec.  614.4560(d))

    Section 4.14A(a)(6)(B) of the Act expressly requires OFIs to adhere 
to borrower rights, ``but only with respect to loans discounted or 
pledged under section 1.7(b)(1).'' The borrower rights that apply to 
loans that OFIs discount or pledge with a Farm Credit bank are: (1) 
Effective Interest Rate (EIR) disclosures; (2) notice of adverse credit 
decision; (3) the right to appeal adverse credit decisions to the 
lender's credit review committee; (4) receiving copies of certain 
documents; and (5) the right to restructure distressed loans. An 
existing regulation, Sec.  614.4560(d), implements section 
4.14A(a)(6)(B) of the Act by requiring OFIs to comply with borrower 
rights on those loans that Farm Credit banks fund or discount.
    During all phases of this rulemaking, System and commercial bank 
commenters have repeatedly advised the FCA that borrower rights are an 
impediment to the success of the OFI program. However, many commenters 
acknowledged that the Act requires OFIs to comply with borrower rights 
requirements. The FCA cannot repeal Sec.  614.4560(d) because it 
implements statutory borrower rights requirements.
    The FCA proposed a technical correction to Sec.  614.4560(d) that 
would remove the reference to section 4.36 of the Act from the 
regulation because the plain language of the statute grants the right 
of first refusal only to borrowers of FCS institutions that operate 
under titles I or II of the Act, not OFIs. One System commenter agreed 
with the technical correction to Sec.  614.4560(d), while all other 
commenters expressed no opinion about this matter. The final rule 
removes the reference to section 4.36 of the Act from Sec.  614.4560(d) 
so that the regulation conforms to the statute.
    The FCA recently moved all borrower rights regulations to part 
617.\6\ For this reason, the FCA revises all of the cross-references in 
final Sec.  614.4560(d) to the borrower rights regulations to reflect 
this change.
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    \6\ See 69 FR 10901 (March 9, 2004).
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    Currently, Sec.  614.4560(d) states that borrower rights apply to 
``all loans that an OFI funds or discounts through a Farm Credit Bank 
or agricultural credit bank * * *'' (Emphasis added). Earlier, a Farm 
Credit bank pointed out that section 4.14A(a)(6)(B) of the Act requires 
an OFI to comply with borrower rights, ``but only with respect to loans 
discounted or pledged under section 1.7(b)(1).'' As a result, this 
System bank asserted that the language in Sec.  614.4560(d) exceeds the 
scope of section 4.14A(a)(6) of the Act. Specifically, the Farm Credit 
bank interpreted section 4.14A(a)(6) of the Act to mean that borrower 
rights apply to OFI loans only during the time that they are actually 
pledged to the funding bank as collateral. Under this interpretation, 
most borrower rights would not apply to OFI loans because many of these 
rights apply before or after the time that these loans are actually 
pledged to the System funding bank. Examples of borrower rights that 
would not apply to OFI loans under this interpretation are: (1) Most 
EIR disclosures; (2) the right to appeal certain adverse credit 
decisions to an OFI's credit review committee; and (3) the right to 
restructure a distressed loan that the OFI has removed from collateral 
at its System funding bank. Under the bank's suggested interpretation 
of the statute, section 4.13A of the Act would be the only borrower 
rights provision of the Act that would always apply to OFI borrowers. 
This provision enables System and OFI borrowers to obtain copies of: 
(1) All loan documents they sign or deliver; (2) loan appraisals on 
their assets that the lender uses in making credit decisions; and (3) 
the lender's articles of incorporation and bylaws.
    The proposed rule retained the provision in Sec.  614.4560(d), 
which states that borrower rights apply to all loans that an OFI funds 
or discounts through a Farm Credit bank. The preamble to the proposed 
rule thoroughly examined and analyzed the text, structure, and 
legislative history of the borrower rights provisions of the Act, and 
it explained in detail why borrower rights apply to all loans that OFIs 
fund through a Farm Credit bank. The discussion in the preamble to the 
proposed rule revealed that Congress intended to grant OFI borrowers 
whose loans are funded by a Farm Credit bank all of these rights and 
protections, even at times when their loans are not actually pledged as 
collateral to the System funding bank.
    Except for one association, which expressed no opinion on this 
matter, all other System commenters opposed the FCA's interpretation of 
the borrower rights provision of the Act. These commenters stated that 
this approach conflicts with the FCA's stated goal of making the OFI 
program more attractive to potential and existing OFIs. Some commenters 
stated that the FCA's position was impractical because neither the 
agency nor the funding bank can enforce compliance with borrower rights 
after an OFI has removed a distressed loan from collateral.
    None of these commenters offered new information or provided any 
legal analysis that would cause the FCA to change its interpretation of 
section 4.14A(a)(6) of the Act. Accordingly, the FCA reaffirms its 
interpretation of section 4.14A(a)(6) that it presented in the preamble 
to the proposed rule. Under section 4.14A(a)(6) of the Act, borrower 
rights apply to all loans that an OFI funds or discounts through a Farm 
Credit bank. The borrower continues to be entitled to borrower rights 
after the OFI removes the loan from collateral. Only a statutory 
amendment could resolve the concerns raised by the commenters.
    The ICBA and its member banks stated that depository institutions 
should not have to comply with borrower rights because they must

[[Page 29856]]

comply with the Community Reinvestment Act (CRA). These commenters 
asked the FCA to treat compliance with the CRA as a substitute to 
compliance with borrower rights requirements.
    The FCA responds that the Act explicitly requires OFIs to comply 
with borrower rights on all loans that they fund or discount through a 
Farm Credit bank, regardless of whether they are also subject to the 
CRA. The purposes, objectives, and compliance mechanism of the CRA are 
separate, distinct, and independent from the borrower rights 
requirements of the Act. The CRA does not provide farmers, ranchers, 
and aquatic producers and harvesters the rights and protections on 
agricultural loans that the Act confers on them. Neither the Act nor 
the CRA authorizes depository institutions to substitute CRA 
requirements for compliance with borrower rights. For this reason, the 
FCA has no authority to grant this request.
    One Farm Credit bank asked the FCA to clarify that borrower rights 
do not apply to loans that an OFI pledges as supplemental collateral. 
Under Sec.  614.4570(c), Farm Credit banks may require an OFI to pledge 
supplemental collateral or provide other credit enhancements that 
support the lending relationship. Farm Credit banks take supplemental 
collateral from their OFIs out of an abundance of caution. However, 
Farm Credit banks do not fund or discount supplemental collateral 
pledged by their OFIs. For this reason, borrower rights would not apply 
to agricultural loans that OFIs pledge to their System funding bank as 
supplemental collateral.

D. Equitable Treatment (Sec.  614.4590)

    An FCA regulation, Sec.  614.4590, requires Farm Credit banks to 
treat OFIs and FCS associations equitably. More specifically, Sec.  
614.4590(a) requires that Farm Credit banks apply comparable and 
objective loan underwriting standards and pricing requirements to both 
OFIs and FCS associations. Under Sec.  614.4590(b), the total charges 
that a System bank assesses its OFIs must be comparable to the total 
charges it imposes on its affiliated associations. Section 614.4590(b) 
additionally requires that any variation between the overall funding 
costs that OFIs and FCS associations are charged by the same funding 
bank must result from differences in credit risk and administrative 
costs to the FCB or ACB.
    Many respondents to the ANPRM and speakers at the public meeting 
told the FCA that Farm Credit banks continue to favor FCS associations 
over OFIs. According to these commenters, this perception of unfair 
treatment deters many agricultural lenders from becoming OFIs, while 
existing OFIs feel that FCS associations always receive preferential 
treatment from System funding banks.
    Commercial bank commenters suggested that our regulations could 
rectify this problem by mandating equal, rather than equitable, 
treatment of OFIs and FCS associations. Because these commenters stated 
that this disparity of treatment was especially evident in the price of 
funding that Farm Credit banks charge their associations and OFIs, they 
asked the FCA to amend Sec.  614.4590 so it requires Farm Credit banks 
to disclose to OFIs exactly how they price their loans to both OFIs and 
FCS associations. These commenters also stated that the FCA should 
require Farm Credit banks to identify the specific components that make 
up their cost of funds to OFIs and the amount of these components in 
terms of basis points. Another suggestion was that Sec.  614.4590 
should be revised so it expressly prohibits Farm Credit banks from 
charging OFIs fees that are not charged to FCS associations. Some 
commercial banks commented that the regulation should require Farm 
Credit banks to pay dividends or patronage to OFIs.
    In response to these comments, the FCA proposed adding two new 
provisions to Sec.  614.4590. Proposed Sec.  614.4590(c) would require 
each FCB or ACB to provide any OFI or OFI applicant, upon request, a 
copy of its policies, procedures, loan underwriting standards, and 
pricing guidelines for OFIs. This provision would also require that the 
pricing guidelines must identify the specific components that make up 
the cost of funds for OFIs and the amount of these components in basis 
points. Proposed Sec.  614.4590(d) would require each FCB or ACB to 
explain in writing the reasons for any variation in the overall funding 
costs it charges OFIs and FCS associations if such information is 
requested by an OFI or OFI applicant. This provision would require a 
Farm Credit bank to compare the costs that it charges OFIs and FCS 
associations as groups or, if possible, variations between groups of 
OFIs and FCS associations that are of a similar size. However, proposed 
Sec.  614.4590(d) would expressly prohibit System funding banks from 
disclosing financial or confidential information about individual FCS 
associations.
    The FCA declined requests to amend Sec.  614.4590 so it would 
require equal, instead of equitable, treatment of FCS associations and 
OFIs. The preamble to the proposed rule listed five fundamental 
differences that distinguish FCS associations from OFIs. The FCA 
reasoned that these fundamental differences preclude Sec.  614.4590 
from mandating equal treatment for associations and OFIs. The preamble 
to the proposed rule also explained that these fundamental differences 
mean that OFIs expose Farm Credit banks to different credit risks and 
administrative costs than direct lender associations. As a result, some 
disparity in cost of funds that an FCB or ACB charges FCS associations 
and OFIs may be justified. The proposed rule did not require Farm 
Credit banks to pay dividends or patronage to their OFIs because the 
FCA found it inappropriate to impose, by regulation, business practices 
on FCS institutions in the absence of a compelling safety and soundness 
reason.\7\
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    \7\ See 68 FR 47502, 47505 (August 11, 2003).
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    In response to the proposed rule, the FCA received comment letters 
on equitable treatment from the FCC, a Farm Credit bank, an 
agricultural credit cooperative OFI, the ICBA and several of its 
commercial bank members. The two System commenters believe that the new 
disclosure requirements in proposed Sec.  614.4590 impose costs and 
burdens on FCS banks that outweigh the benefits to OFIs. The Farm 
Credit bank stated that the revisions to Sec.  614.4590 ``are heavily 
slanted in favor of the OFIs.'' Both System commenters expressed 
concern that Sec.  614.4590 would require Farm Credit banks to disclose 
``proprietary pricing procedures'' and information to OFIs, which could 
now establish a funding or discount relationship with any System bank 
under Sec.  614.4550. Although commercial bank commenters support the 
new disclosure requirements in Sec.  614.4590, they continue to state 
that this regulation should require equal, rather than equitable, 
treatment of associations and OFIs.
    The commercial bank commenters urged the FCA to enact a final rule 
that requires the equal funding costs for FCS associations and OFIs 
because in their view, System institutions ``have easy access to all 
the credit they need'' while OFIs must rely on several funding sources, 
each which is limited. Commercial banks and the agricultural credit 
cooperative OFI asked the FCA to require FCS banks to: (1) Earmark the 
capital contribution of each OFI, and (2) pay patronage and dividends 
to OFIs whenever FCS associations receive such payments.
    After considering these comments, the FCA has decided to enact 
proposed Sec.  614.4590 as a final rule without

[[Page 29857]]

revision. The final rule appropriately balances the interests of Farm 
Credit banks, OFIs, and System associations.
    In response to System concerns, the FCA believes that OFI program 
will become more transparent because final Sec.  614.4590(c) and (d) 
now require Farm Credit banks to disclose pricing information to their 
OFIs. Transparency enables both OFIs and FCA examiners to objectively 
determine whether a Farm Credit bank is treating its associations and 
OFIs equitably. Allowing OFIs to choose their System funding bank while 
simultaneously requiring Farm Credit banks to disclose pricing 
information to OFIs achieves the FCA's objective of making this program 
more attractive to existing and potential OFIs. Disclosing pricing 
information helps OFIs make informed decisions in selecting their 
System funding bank. As a result, the OFI can pass these pricing 
advantages along to farmers, ranchers, and other eligible borrowers. 
Funding and discounting loans for OFIs is part of the public policy 
mission of System banks, which are cooperative institutions that are 
jointly and severally liable for FCS debt. Accordingly, the FCA is not 
persuaded by the commenters' arguments that the regulation gives OFIs 
access to ``proprietary'' pricing information at several different Farm 
Credit banks.
    Commercial bank commenters offered no new information or analysis 
that would persuade the FCA to amend this regulation so it requires 
equal, rather than equitable, treatment of OFIs and FCS associations. 
In fact, the most recent comments from commercial banks reinforce the 
notion that OFIs are fundamentally different than FCS associations. 
Thus, OFIs pose different credit risks to System banks than 
associations which, in turn, could justify the differential in the cost 
of funding charged to the two groups of lenders.
    The FCA declines the request that the final rule require FCS banks 
to: (1) Allocate the capital contribution of each OFI; and (2) pay 
patronage and dividends to OFIs when FCS associations receive similar 
payments. System banks distribute patronage and dividends to their 
shareholders in accordance with their bylaws. FCA regulations do not 
prescribe business practices at System institutions in the absence of 
compelling safety and soundness reasons. However, each System bank must 
factor in capital contributions as well as patronage and dividend 
payments when it prices credit for an OFI. The new regulatory 
disclosure requirements make it easier for the OFIs and other 
interested parties to determine whether Farm Credit banks are pricing 
OFI credit equitably.

E. Ombudsman

    Many commercial banks and their trade associations asked us in 
their response to the ANPRM and during the public meeting to appoint an 
Ombudsman to assist OFI applicants and existing OFIs in establishing 
and maintaining good relations with System funding banks. On February 
25, 2003, the FCA Board established the Office of the Ombudsman. The 
public announcement, which informed the public of the creation of this 
office stated, ``The Office of the Ombudsman will be an effective, 
neutral and confidential resource and liaison for the public.'' One of 
many duties of the Ombudsman is to address the concerns of OFIs and 
facilitate better relationships between them and the FCS. The FCA 
repeated this information in the preamble to the proposed rule.\8\
---------------------------------------------------------------------------

    \8\ Ibid.
---------------------------------------------------------------------------

    The FCC and a System bank stated in their comment letters that the 
sole task of the Ombudsman is to serve as an advocate for OFIs. Since 
System banks pay for the Office of the Ombudsman through assessments 
that the FCA levies on them, these commenters suggest that it would be 
appropriate for these banks to pass the cost along to their OFIs. One 
commenter stated that the FCA has no express statutory authority to 
establish the Ombudsman position.
    The FCA repeats what it said in the public announcement and the 
preamble to the proposed regulation. The FCA emphasizes that the Office 
of the Ombudsman is an effective, neutral and confidential resource and 
liaison for the public. Addressing the concerns of OFIs is only one of 
the Ombudsman's duties.
    Several provisions of title V of the Act grant the FCA power to 
establish the Office of the Ombudsman. Section 5.9 of the Act enables 
our Board to ``provide for the performance of all the powers and duties 
vested in the Farm Credit Administration.'' Section 5.11(b) of the Act 
empowers the Chairman of the FCA to ``appoint such personnel as may be 
necessary to carry out the functions of the Farm Credit 
Administration.'' This section of the Act also states, ``The 
appointment by the Chairman of the heads of major administrative 
divisions under the Board shall be subject to the approval of the 
Board.'' The FCA Board voted to establish this office in order to 
address concerns by members of the public about how the agency or the 
System is carrying out their responsibilities under the Act.
    The FCA would oppose any attempt by System banks to encumber their 
OFIs with the entire cost of the Office of the Ombudsman. Such attempts 
would violate the requirement in Sec.  614.4590 that Farm Credit banks 
treat their associations and OFIs equitably.

F. Disclosure of OFI Identities (Sec.  614.4595)

    The ANPRM asked the public whether FCA regulations should allow 
Farm Credit banks to disclose the identities of the OFIs that they 
fund. Current FCA regulations prohibit FCS institutions from releasing 
information about their retail borrowers and stockholders to the 
public.\9\ However, the FCA never interpreted these regulations as 
prohibiting the release of names of FCS associations that borrow from 
Farm Credit banks.\10\ The preambles to both the ANPRM and the proposed 
rule explained why the FCA believes that the reasons for protecting the 
identity of retail borrowers do not apply to financial institutions 
that fund and discount loans with a Farm Credit bank.\11\ As both 
preambles explained, retail borrowers often are individual consumers, 
and keeping their identities confidential shields them from unwanted 
marketing solicitations or publicity involving their personal financial 
business whereas OFIs could benefit from the disclosure of their 
identity because it could make prospective retail borrowers aware of 
other credit options.
---------------------------------------------------------------------------

    \9\ 12 CFR part 618, subpart G.
    \10\ In fact, information about the identities of FCS 
associations is widely available because it is contained in 
financial statements that Farm Credit banks release to the public.
    \11\ See 65 21151, 21154 (April 20, 2000); 68 FR 47502, 47508 
(August 11, 2003).
---------------------------------------------------------------------------

    In response to ANPRM comments and testimony in the public meeting, 
the FCA proposed a new regulation, Sec.  614.4595 which would allow 
Farm Credit banks to disclose to the public the names, addresses, 
telephone numbers, and Internet Web site addresses of those OFIs that 
consent in writing. The proposed regulation also would require each 
Farm Credit bank to adopt policies and procedures for: (1) Obtaining 
and maintaining the consent of its OFIs; and (2) disclosing this 
information to the public. Financial statements of Farm Credit banks 
should not disclose the identity of an OFI unless it consents. The FCA 
believes that this regulatory approach empowers each OFI to make the 
decision whether disclosure of its name, address, telephone number, and 
Internet Web site address to the public is in its best interest.

[[Page 29858]]

    The FCA received comments about this issue from the FCC, two Farm 
Credit banks, the ICBA, and CUNA. The FCC and a System bank see no need 
for this regulation because they believe that the regulations in 
subpart G of part 618, which govern the release of information about 
System borrowers and shareholders, already permits Farm Credit banks to 
disclose the identity of an OFI that consents. If the FCA adopts a 
final disclosure regulation for OFIs, two System banks suggest preamble 
clarifications and minor edits to the text of Sec.  614.4595. The CUNA 
supports proposed Sec.  614.4595 because it believes that disclosure of 
a credit union's identity will help inform farmers, ranchers, and other 
eligible borrowers about their other credit options and the benefits of 
credit union membership. The ICBA suggests the FCA switch from an 
``opt-in'' to an ``opt-out'' approach in the final rule. Under an 
``opt-out'' approach, each Farm Credit bank would automatically 
disclose an OFI's identity to the public unless the OFI instructed it, 
in writing, not to do so. The ICBA contends that an ``opt-out'' 
approach is consistent with the trend in the law governing disclosure 
of customer information by financial institutions.
    The FCA adopts Sec.  614.4595 as a final rule after slightly 
changing the text of the regulation in response to a comment from a 
System bank. The FCA disagrees with the two System commenters that this 
regulation is unnecessary because the regulations in subpart G of part 
618 already govern releases of information about System borrowers and 
shareholders. As the preambles to the ANPRM and proposed rule explain, 
the regulations in subpart G of part 618 apply only to releasing 
information about retail borrowers. For this reason, a new regulation 
is needed to clarify the authority of System banks to disclose 
information about OFIs.
    The FCA declines the ICBA's request to revise Sec.  615.5495 so 
that the final regulation requires System banks to disclose an OFI's 
identity unless the OFI ``opts-out.'' The FCA believes that the ``opt-
in'' approach in the proposed rule is easier for System banks to 
administer than the ``opt-out'' approach favored by the commenter. 
Requiring an OFI to affirmatively consent, in writing, to the 
disclosure of its identity avoids the misunderstandings and 
miscommunications that are more likely to occur if disclosure happens 
automatically unless or until the OFI takes action to stop it. Also, 
the FCA's ``opt-in'' approach gives OFIs more control and flexibility 
over the decision to allow System funding banks to publicly disclose 
their identity than the ICBA's ``opt-out'' approach. Under the approach 
in Sec.  615.4595, the OFI decides whether to allow its System funding 
bank to disclose its identity to the public, and then it communicates 
its decision to the bank, which honors its decision. In contrast, 
disclosure occurs under the ``opt-out'' approach unless the OFI takes 
action to stop it by a certain deadline.
    Under final Sec.  614.4595, a Farm Credit Bank or agricultural 
credit bank may disclose to members of the public the name, address, 
telephone number, and Internet Web site address of any affiliated OFI 
only if such OFI, through a duly authorized officer, consents in 
writing. Each Farm Credit Bank and agricultural credit bank must adopt 
policies and procedures for requesting, obtaining, and maintaining the 
consent of its OFIs and for disclosing this information to the public.
    The FCA inserted the word ``requesting'' into the final regulation 
Sec.  614.4595 in response to a comment from a Farm Credit bank. The 
commenter suggested that the FCA change the word ``obtaining'' in the 
proposed regulation to ``requesting.'' According to the commenter, a 
System bank should not be accountable for ``obtaining'' consent from an 
OFI. The commenter believes that ``requesting'' the OFI's consent is 
the most the System funding bank can do. After considering this 
comment, the FCA amended the regulation so it requires System banks to 
adopt policies and procedures for ``requesting, obtaining, and 
maintaining'' the consent of its OFIs. This revision enhances the 
clarity and accuracy of the final regulation. A Farm Credit bank must 
request and obtain the OFI's written consent before it can publicly 
disclose the OFI's identity.
    One Farm Credit bank asked the FCA for assurances that Sec.  
614.4595 does not restrict the System bank's right to file financing 
statements or other routine public filings that protect its security 
interest under applicable law. The FCA affirms that the final rule does 
not hinder the right or ability of any System bank to perfect its 
security lien in collateral pledged by its OFIs. This approach is 
similar to other Federal laws that protect the privacy of consumers who 
buy goods and services on credit. Although these laws restrict the 
release of confidential information by the creditor, they do not 
prevent the creditor from filing public documents that enable it to 
collect the debt in event of default.

G. Associations Acting as Farm Credit Bank Agents

    Both System and non-System commenters suggested in their responses 
to the ANPRM and during testimony at the public meeting that FCS 
associations could serve as an effective conduit for funding OFIs. 
These commenters pointed out that associations often have established 
relationships with local OFIs and other commercial lenders. In many 
cases, FCS associations and existing and potential OFIs already have 
entered into joint financing arrangements for common borrowers.
    The FCA stated in the preamble to the proposed rule that the Act 
allows only Farm Credit banks that operate under title I of the Act, 
not FCS associations, to establish funding and discount relationships 
with OFIs. However, the preamble to the proposed rule pointed out that 
section 1.5(18) of the Act allows a Farm Credit bank to delegate to 
associations such functions as the bank deems appropriate while section 
2.2(19) allows a direct lender association to perform functions 
delegated to it by its funding bank. Thus, sections 1.5(18) and 2.2(19) 
of the Act enable FCS associations to act as point-of-contact or 
servicing agents for the Farm Credit bank in its lending relationship 
with its OFIs.\12\
---------------------------------------------------------------------------

    \12\ See 68 FR 47502, 47508 (August 11, 2003).
---------------------------------------------------------------------------

    Allowing FCS associations to act as intermediaries between Farm 
Credit banks and OFIs may make this program more successful and reduce 
tensions between the System and OFIs. In particular, designating 
associations as intermediaries and servicing agents for Farm Credit 
banks on their OFI loans may help diminish the competitive rivalries 
that have historically troubled the relationship between OFIs and 
associations. Farmers and ranchers benefit when FCS associations and 
OFIs work together. Agreements between the parties can establish these 
arrangements and, therefore, no new regulation is necessary.
    The FCA received 2 comment letters about this issue from a Farm 
Credit bank and association. The Farm Credit bank commenter concurred 
that existing statutory authorities are sufficient to support 
associations acting as agents of Farm Credit banks in their 
relationship with OFIs and, therefore, no regulation is necessary. The 
association fully supported allowing associations to act as 
intermediaries for the Farm Credit banks in establishing and servicing 
OFI relationships.

[[Page 29859]]

    The FCA reaffirms that FCS associations have no authority under the 
Act to lend directly to OFIs, but they can act as intermediaries or 
servicing agents on loans from a Farm Credit bank to OFIs.

H. OFI Lending Limits

    In 1998, the FCA repealed former Sec.  614.4565, which imposed a 
lending limit on the amount of credit that any OFI could extend to a 
single credit risk with FCS funds. At the time, we acknowledged that 
certain OFIs would remain subject to lending limits that their primary 
regulator imposes under applicable Federal or state law. The preamble 
to the final rule stated that we expect each Farm Credit bank to 
prudently manage risk exposures to concentrations in OFI loan 
portfolios through underwriting standards and its general financing 
agreement (GFA) with each OFI.\13\
---------------------------------------------------------------------------

    \13\ See 63 FR 36541, 36545 (July 7, 1998).
---------------------------------------------------------------------------

    After the FCA repealed former Sec.  614.4565, some Farm Credit 
banks considered imposing a lending limit on both FCS associations and 
OFIs that is lower than the lending limit that: (1) Sec.  614.4353 
establishes for System direct lender associations; and (2) Federal or 
state laws place on depository institutions. During earlier phases of 
this rulemaking, two non-System commenters asked us to enact a new 
regulation that would forbid Farm Credit banks from imposing a lending 
limit on OFIs that is lower than the limit established by applicable 
Federal or state law. The FCA declined this request because it is 
inconsistent with safety and soundness. The preamble to the proposed 
rule stated that each Farm Credit bank may establish, by underwriting 
standards and the GFA, limits on its exposure to concentrations in the 
loan portfolios of both FCS associations and OFIs that are more 
stringent than lending limits imposed by statute or regulation, as long 
as it does not favor FCS associations over OFIs.\14\
---------------------------------------------------------------------------

    \14\ See 68 FR 47502, 47508 (August 11, 2003).
---------------------------------------------------------------------------

    The FCA received comments on this issue from a Farm Credit bank, 
the ICBA, and 95 commercial banks. The Farm Credit bank supported the 
FCA's position. The ICBA agreed with the FCA that lending limits 
imposed by FCS banks on OFIs should be on the same basis as for FCS 
associations. The ICBA asserted that System banks should not impose 
``unduly restrictive'' lending limits on OFIs, and they should be 
commensurate with limits set by the OFI's parent or primary regulator. 
Several commercial banks continued to urge the FCA to enact a 
regulation that prevents Farm Credit banks from imposing a lending 
limit that is more stringent than the limit established by Federal or 
state law.
    The FCA reaffirms its earlier position that each Farm Credit bank 
may establish, by underwriting standards and GFAs, limits on its 
exposure to concentrations in the loan portfolios of FCS associations 
and OFIs that are more stringent than lending limits imposed by statute 
or regulation. However, System banks would not be treating OFIs 
equitably if they establish lending limits that favor FCS associations 
over OFIs. Additionally, any decision by a Farm Credit bank to 
establish a lending limit that is more stringent than the limit imposed 
on an OFI by applicable Federal or state law, or its corporate parent 
must have a safety and soundness justification. Commercial bank 
commenters have provided no new information or analysis that would 
persuade the FCA to prohibit Farm Credit banks, by regulation, from 
imposing a lending limit on OFIs that is more stringent than the limit 
established by law or the corporate parents of such OFIs. The FCA 
declines this request.

I. Eligible Collateral Pledged To Support an OFI's Discounting 
Arrangements With a Farm Credit Bank (Sec.  614.4570)

    Currently, Sec.  614.4570 requires a secured lending relationship 
between each Farm Credit bank and every OFI. Under Sec.  
614.4570(b)(2), each FCB or ACB must perfect its security interest in 
any and all obligations and the proceeds thereunder that the OFI 
pledges as collateral, in accordance with applicable state law. 
Additionally, Sec.  614.4570(c) allows each FCB and ACB to require its 
OFIs to pledge supplemental collateral to support the lending 
relationship.
    A comment letter from a System bank acknowledged that the Act 
prohibits Farm Credit banks from: (1) Advancing funds for long-term 
real estate mortgages to OFIs; and (2) accepting mortgages as primary 
collateral from OFIs. The commenter opined that the statutory ban on 
System banks funding and discounting agricultural mortgages for OFIs is 
a major impediment to expansion of this program. The commenter then 
asked the FCA to develop regulatory interpretations that would enable 
System banks to overcome this obstacle.
    As acknowledged by the commenter, the Act does not authorize long-
term funding for OFIs. FCA regulations, policies, or interpretations 
must comply with the Act. Therefore, an amendment to the Act is 
necessary to authorize Farm Credit banks to fund or discount 
agricultural mortgage loans that OFIs make to their customers.

J. Improving the Relationship Between Farm Credit Banks and OFIs

    In response to the ANPRM and during the public meeting, several 
System and non-System commenters offered various suggestions for 
improving the relationship between Farm Credit banks and prospective 
and existing OFIs. The commenters' suggestions are confidence-building 
measures that could attract more OFIs to establish funding and discount 
relationships with Farm Credit banks. These suggestions could help 
improve relations between existing OFIs and their funding banks and 
encourage prospective OFIs to establish funding and discount 
relationships with Farm Credit banks.
    The FCA conveyed these ideas to Farm Credit banks by publishing the 
suggestions in the preamble to the proposed rule. These suggestions 
would require Farm Credit banks to take the initiative and reach out to 
existing and prospective OFIs. More specifically, the FCA encouraged 
Farm Credit banks to consider developing internal programs and 
initiatives that:
    1. Establish outreach programs for contacting prospective OFIs and 
providing them with information about the banks' services;
    2. Routinely publish updated information about their products and 
services for OFIs, and their underwriting standards, funding terms and 
conditions, and pricing guidelines for OFI loans;
    3. Allow OFI representatives to observe meetings of the banks' 
board of directors;
    4. Promote better communication through roundtable discussions, 
focus groups, and public discussions that bring OFIs, associations, and 
other interested parties together to discuss issues of mutual interest;
    5. Work with OFIs to identify and remove administrative barriers 
that hinder OFI access;
    6. Allow FCS associations to act as intermediaries and servicing 
agents on extensions of credit from the funding bank to OFIs, as 
discussed earlier; and
    7. Identify best practices for OFIs.
    The FCA published these suggestions in the preamble to the proposed 
rule because we are strongly committed to the success of the OFI 
program. The FCA reasoned that by adopting the internal programs and 
initiatives described above, Farm Credit banks can attract more OFIs 
which, in turn, will provide eligible farmers, ranchers, aquatic 
producers and harvesters, farm-related businesses, and rural

[[Page 29860]]

homeowners with more plentiful and affordable credit, as Congress 
intended. Another passage in the preamble to the proposed rule advised 
the public that the FCA may provide additional guidance to Farm Credit 
banks about improving the OFI program through bookletters, 
informational memoranda, and the Office of the Ombudsman. The preamble 
to the proposed rule informed the public that new regulations may not 
be required to implement these suggestions for improving the OFI 
program.\15\
---------------------------------------------------------------------------

    \15\ Ibid.
---------------------------------------------------------------------------

    The FCA received several comments about this guidance from both FCS 
and non-System commenters. Letters from commercial banks strongly 
supported the recommendations and urged the FCA to encourage Farm 
Credit banks to undertake all of these initiatives so: (1) Their 
relationships with OFIs would improve; and (2) this program would 
become more attractive to non-System agricultural lenders. In contrast, 
System commenters stated that the FCA was interfering in the internal 
business affairs of System banks without any safety or soundness 
justification. These commenters found it unusual for the preamble to 
encourage certain practices at System banks while acknowledging that 
new regulations are unnecessary.
    Four System commenters objected to the suggestion that Farm Credit 
banks invite OFI observers to their board meetings. According to these 
commenters, matters discussed at bank board meetings are confidential 
and only board members and officers attend such meetings. One System 
commenter objected to the suggestion that Farm Credit banks identify 
best management practices for OFIs. From this commenter's perspective, 
OFIs are independent financial institutions that are responsible for 
their own operation, and Farm Credit banks should not attempt to impose 
their own views about best management practices on their OFIs. This 
commenter expressed concern that System banks could be exposed to 
lender liability claims if they prescribed best management practices to 
their OFIs.
    As stated earlier, the FCA is committed to the success of the OFI 
program. Providing funding and liquidity to OFIs is an essential and 
integral part of the public policy mission of System banks to ensure 
that farmers and ranchers always have access to sound, adequate, and 
constructive credit. The FCA offered these seven suggestions in the 
hope that they would encourage System banks to: (1) Reach out to 
potential OFI applicants and existing OFIs; and (2) take the initiative 
in building confidence between OFIs and the System. All of these 
suggestions concentrated on ideas for improving communications between 
the System and non-System agricultural lenders that are, or may become 
OFIs.
    From time to time, the FCA and other regulators offer guidance to 
institutions that they regulate. The suggestions are not mandatory, but 
are guidelines, which pertain to business practices instead of safety 
and soundness or compliance with laws and regulations. System banks may 
consider other approaches that foster strong and healthy relationships 
with OFIs in addition to, or instead of, the ideas that the FCA has 
suggested. If System banks invite OFI observers to their board 
meetings, they should consider appropriate measures that protect the 
confidentiality of information. The FCA emphasizes the importance of 
System banks reaching out to OFIs.

K. CDFIs

    A CDFI urged the FCA to amend the OFI regulations so they 
facilitate System bank lending to CDFIs that primarily serve young, 
beginning, small, and low resource farmers and ranchers. The commenter 
made no specific regulatory recommendations to the FCA with regard to 
CDFIs being designated as OFIs. The commenter did suggest a regulatory 
change to treat CDFIs as the equivalent of Organization for Economic 
Cooperation and Development (OECD) banks \16\ for risk-weighting 
purposes. We address this comment later under section III. Capital Risk 
Weighting of this preamble.
---------------------------------------------------------------------------

    \16\ OECD means the group of countries that are full members of 
the Organization for Economic Cooperation and Development, 
regardless of entry date, as well as countries that have concluded 
special lending arrangements with the International Monetary Fund's 
General Arrangement to Borrow, excluding any country that has 
rescheduled its external sovereign debt within the previous 5 years. 
For purposes of United States banking operations, all federally 
regulated depository institutions are considered the equivalent of 
OECD banks.
---------------------------------------------------------------------------

    CDFIs are private sector financial intermediaries that offer 
financial services to economically distressed communities. These 
institutions provide economically distressed communities with credit, 
capital, and financial services that often are unavailable from other 
financial institutions. The Community Development Financial 
Institutions Fund (CDFI Fund), which is a wholly owned Government 
corporation within the United States Department of the Treasury 
(Treasury), certifies and oversees CDFIs.
    CDFIs attract capital for their operations from both private and 
public sources of funding. The CDFI Fund provides financial and 
technical assistance in the form of grants, loans, equity investments, 
and deposits to competitively selected CDFIs. The private sector also 
provides equity investments and credit to CDFIs. Some CDFIs are 
depository institutions and, therefore, they obtain some funds for 
their operations from deposits as well as credit lines with other 
lenders. CDFIs work in partnership with other financial institutions to 
channel credit and investment into economically distressed communities.
    There are six basic types of CDFIs. Specific language in section 
1.7(b)(1)(B) of the Act determines whether an entity is eligible to 
borrow from a Farm Credit bank as an OFI and would authorize certain 
types of CDFIs as OFIs. Under section 1.7(b)(1)(B) of the Act and Sec.  
614.4540 of FCA regulations, two types of CDFIs, community development 
banks and community development credit unions, could become OFIs that 
fund, discount, or obtain other similar financial assistance from a 
Farm Credit bank in order to extend short- and intermediate-term credit 
to eligible borrowers for authorized purposes pursuant to sections 
1.10(b) and 2.4(a) and (b) of the Act. Since the mission of CDFIs is to 
serve economically distressed segments of the population, those CDFIs 
that become OFIs may use funding, discount services, and other 
financial assistance from a Farm Credit bank to serve young, beginning, 
small, and low resource farmers and ranchers. In addition, the FCA 
encourages Farm Credit banks to work with eligible CDFIs that make 
loans or extend other similar financial assistance to agriculture and 
are interested in establishing an OFI relationship. Because of 
eligibility restrictions in the Act for OFI funding, no other 
amendments to the regulations are allowable.
    Section 4.19(a) of the Act mandates that Farm Credit banks and 
associations have programs for furnishing sound and constructive credit 
and related services to young, beginning, and small (YBS) farmers and 
ranchers. According to the statute, the YBS program of each FCS direct 
lender association must comply with policies prescribed by the board of 
their funding banks. Section 4.19(a) of the Act also states, ``Such 
programs shall assure that such credit and services are available in 
coordination with other units of the Farm Credit System serving the 
territory and with other governmental and private sources of credit.'' 
(Emphasis added.)
    A CDFI that seeks funding, discount services, and other financial 
assistance

[[Page 29861]]

from a Farm Credit bank should consult with the bank about how they can 
work together to provide credit to YBS and low resource farmers and 
ranchers. When feasible, the Farm Credit bank should encourage CDFIs 
and local FCS associations to coordinate their efforts to serve YBS and 
low resource farmers and ranchers.

III. Capital Risk Weighting

A. Background

    As discussed in the preamble to the proposed rule, we have 
interpreted our capital adequacy regulations as requiring Farm Credit 
banks to risk weight loans to OFIs at 100 percent. In contrast, 
existing Sec.  615.5210(f)(2)(ii)(I) allows Farm Credit banks to risk 
weight loans to System associations at 20 percent. This means Farm 
Credit banks currently hold more capital (at a minimum) for loans to 
OFIs than loans to System associations, which in many cases have 
similar structures and financial conditions as OFIs. The preamble to 
the ANPRM explained, in detail, the risk-reducing features of FCS 
associations that justified a 20-percent risk weighting.\17\
---------------------------------------------------------------------------

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

    The FCA acknowledged in the preambles to the ANPRM and the proposed 
rule that many OFIs, particularly commercial banks or their affiliates, 
might pose no greater risk to their FCS funding bank than System 
associations. However, unregulated non-bank OFIs could expose the FCS 
bank to greater risk than FCS associations and regulated OFIs.
    The risk-weighting categories in FCA's capital regulations are 
patterned after the risk-weighting categories in the 1988 Basel Accord, 
which apply to all depository institutions regulated by the other 
Federal bank regulatory agencies. As a result, many, but not all, OFIs 
have the same risk-reducing features as FCS associations.
    The FCA proposed amendments to Sec.  615.5210 that would permit 
Farm Credit banks to risk weight their loans to OFIs that are Federal- 
or state-regulated depository institutions, or their affiliates, at 20 
percent. Under this proposal, Farm Credit banks would continue to risk 
weight loans to OFIs that are unregulated, or exhibit a higher risk 
profile at either 50 or 100 percent, depending on certain factors.
    The proposed rule would establish a 20-percent risk weighting for 
OFIs that are either: (1) An equivalent to an OECD bank (Federal- or 
state-regulated depository institution); (2) subsidiaries of OECD 
equivalent banks or bank holding companies and carry full guarantees 
from such parent entities; or (3) an institution that carries one of 
the three highest ratings from a nationally recognized statistical 
rating organization (NRSRO).\18\ OFIs are required by regulations to 
pledge full recourse on all loans they fund or discount with a Farm 
Credit bank.
---------------------------------------------------------------------------

    \18\ ``Nationally recognized statistical rating organization'' 
means an entity recognized by the Division of Market Regulation of 
the Securities and Exchange Commission (or any successor Division) 
(Commission) as a nationally recognized statistical rating 
organization for various purposes, including the Commission's 
uniform net capital requirements for brokers and dealers.
---------------------------------------------------------------------------

    Proposed Sec.  615.5210 would establish a 50-percent risk weighting 
for OFIs that: (1) Are not OECD banks but otherwise meet similar 
capital and operational standards; and (2) carry an investment grade or 
higher NRSRO rating. The FCA proposed to retain a 100-percent risk 
weighting for all loans to OFIs that do not qualify for the 20-percent 
or 50-percent risk-weight categories.

B. Comments Received

    We received 98 comments on capital risk weighting in response to 
our proposed rule. The comments came from 3 Farm Credit banks, a CDFI, 
an OFI that is affiliated with a group of farmer cooperatives, the 
CUNA, the ICBA, and 91 commercial banks. The majority of the commenters 
supported differentiating the risk weighting of loans to OFIs based on 
the structure and risk-mitigating characteristics of the OFIs.
    The 3 Farm Credit banks generally supported the proposed capital 
risk-weighting rule for OFIs. However, these commenters sought 
clarification of two issues, and they requested two technical changes 
to the regulation. The CUNA supported the rule as proposed, while the 
ICBA and 47 bankers supported equal risk weighting for FCS associations 
and OFIs that are depository institutions or their affiliates. Forty-
four (44) commercial bank commenters supported equal risk-weighting 
treatment for all OFIs and the FCS associations. The CDFI stated that 
the final rule should require Farm Credit banks to risk weight all 
CDFIs at 20 percent. The CDFI also stated that all CDFIs should be 
treated as equivalent to OECD banks because of the CDFIs ``good 
standing'' status with Treasury. The agricultural credit cooperative 
OFI expressed concern that the new regulation will increase the cost of 
funds to OFIs that are risk weighted at 100 percent.
    A Farm Credit bank asked the FCA to clarify whether the three 
highest NRSRO investment ratings (for institutions that are risk 
weighted at 20 percent) include subset designations (e.g., AAA+, AA+, 
or A+). The FCA responds that the regulation refers to the generic 
rating categories, not plus or minus signs that show relative standing 
within each rating category. Under this regulation, for example, a 
rating of ``AA-'' would be within the second highest investment-grade 
ratings by an NRSRO.
    Two Farm Credit banks asked the FCA whether the full recourse 
requirement for OFIs extended to their parents. According to these 
commenters, requiring both the parent and the OFI subsidiary to pledge 
full recourse on the OFI's loan (so the funding bank could risk weight 
it at 20 percent) could become a significant impediment to the growth 
of the OFI program. One of these commenters expressed concern that 
requiring the parent to pledge full recourse to the System funding bank 
clashes with its capital reasons for establishing an OFI subsidiary. 
The FCA replies that the rule requires full recourse from the OFI. 
Generally, the full recourse requirement would not extend to an OFI's 
parent, but the System funding bank could require it to provide such a 
guarantee as a condition for approving the OFI for credit.
    A Farm Credit bank suggested that the final rule allow OFIs that 
are not OECD banks or their affiliates to qualify for a 20-percent risk 
weighting if they receive an investment grade or higher rating from a 
NRSRO. Under the proposed rule, such OFIs do not qualify for a 20-
percent risk weighting unless a NRSRO rates them in one of the three 
highest investment rating categories. However, OFIs that are not OECD 
banks or their affiliates could qualify for a 50-percent risk weighting 
under the proposed rule if they receive an investment-grade rating by a 
NRSRO and they meet the other requirements of this regulation.
    The FCA rejects the commenter's recommendation because it 
eliminates the distinction in the regulation between OFIs that are risk 
weighted at 20 percent and those that are risk weighted at 50 percent. 
NRSRO ratings provide Farm Credit banks with a credible, objective, and 
independent standard for determining risk exposure from an OFI. Each 
risk-weighting category in our regulation is based on the System's 
potential exposures to risk, as well as risk mitigation factors. A 
lower investment rating from a NRSRO means that an OFI (that is not an 
OECD bank or its affiliate) exposes its System

[[Page 29862]]

funding bank to greater risks which, in turn, justifies a 50-percent, 
not a 20-percent, risk weighting. The FCA's approach is consistent with 
the approach taken by the other federal bank regulatory agencies and 
pending revisions to the Basel Accord. For this reason, the final rule 
will require each Farm Credit bank to risk weight OFIs that are not 
OECD banks or their affiliates at 20 percent only if they achieve and 
maintain one of the three highest investment-grade ratings from a 
NRSRO.
    A Farm Credit bank asked the FCA to amend a provision in the 
proposed rule so that an OFI can qualify for a 50-percent risk 
weighting if its loan is guaranteed by a parent that receives an 
investment grade or higher rating from a NRSRO. The rule already allows 
an OFI to qualify for a 20-percent risk weighting if its parent: (1) 
Guarantees the loan; and (2) has one of the three highest NRSRO 
investment-grade ratings. The commenter sought this change so that the 
final rule applies consistent standards for risk weighting OFIs at 
either 20 or 50 percent. The FCA agrees with the commenter and, 
accordingly, the final rule includes this change.
    As discussed earlier, the agricultural credit cooperative OFI 
expressed concern that this regulation will increase the cost of funds 
to OFIs that are risk weighted at 100 percent. The FCA believes that 
this concern has no merit. All OFIs are currently risk weighted at 100 
percent. Lowering the risk weighting of some OFIs based on lower risk 
profiles should not result in increased costs to other OFIs. Although 
the regulation differentiates between OFIs on the basis of risk to the 
funding bank, the FCA does not expect that FCS banks should raise the 
cost of funding that they charge to OFIs that do not fall within the 
20- or 50-percent risk-weighting categories.
    In response to the ICBA and other commercial bank commenters, the 
FCA confirms that the final rule treats FCS associations and OECD banks 
the same for risk-weighting purposes. As discussed earlier, the CDFI 
inquired about the risk weighting of CDFIs that become OFIs. The FCA 
replies that CDFIs as a group are not considered the equivalent of OECD 
banks despite their ``good standing'' status with Treasury. The 
certification criteria imposed on CDFIs by Treasury are mission-based 
rather than safety- and soundness-based and, therefore, do not address 
risk identification and control criteria as required of the OECD banks 
by the federal bank regulatory agencies. Accordingly, it would be 
inconsistent with the agency's safety- and soundness-based regulations 
to automatically equate CDFIs as equivalent to the risk weighting for 
OECD banks. However, CDFIs that are community banks and credit unions 
would probably qualify as OECD banks and, therefore, a Farm Credit bank 
could risk weight discounted CDFI loans at 20 percent.
    Forty-four (44) commercial bank commenters took the position that 
the risk weighting for all OFIs and FCS associations should be the 
same. As explained earlier, not all OFIs pose the same risks to their 
funding banks. Some OFIs are not OECD banks or their affiliates. In 
other cases, nonbank OFIs do not meet the capital, risk identification 
and control, and operational standards that apply to OECD banks, or 
they do not carry an investment-grade rating from a NRSRO. For these 
reasons, not all OFIs should be risk weighted at 20 percent.

C. Final Rule

    The final rule establishes a 20-percent risk weighting for OFIs 
that are either: (1) An equivalent to an OECD bank (Federal-or state-
regulated depository institution); (2) subsidiaries of OECD equivalent 
banks or bank holding companies and carry full guarantees from such 
parent entities; or (3) an institution that carries one of the three 
highest investment-grade ratings from a NRSRO.
    Under final Sec.  615.5210, a 50-percent risk weighting applies to 
OFIs that: (1) Are not OECD banks but otherwise meet similar capital, 
risk identification and control, and operational standards; and (2) 
carry an investment-grade or higher NRSRO rating, or the claim is 
guaranteed by a parent company with such a rating.
    The final rule establishes a 100-percent risk weighting for all OFI 
loans that do not qualify for the 20-percent or 50-percent risk-weight 
categories. OFIs that are well-capitalized and well-managed expose the 
System to less risk. Therefore, FCS institutions need less capital to 
support loans to these OFIs. This approach is consistent with the 
direction from the pending Basel Accord revisions, which are currently 
under consideration.
    Lowering the capital requirements for most OFI loans will lower the 
operating costs of the OFI program to Farm Credit banks. This, in turn, 
should lower the cost of funds to well-capitalized and well-managed 
OFIs. Lower funding costs should enable these OFIs to reduce interest 
rates charged to their borrowers. These results would advance the 
System's public policy mission to provide affordable credit on a 
consistent basis to agriculture and rural America. Greater flexibility 
for the risk weighting of OFI loans should provide the Farm Credit 
banks additional incentives to expand their lending to both existing 
and new OFIs.

IV. 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 final rule will 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not ``small entities'' as defined in the Regulatory 
Flexibility Act.

List of Subjects

12 CFR Part 614

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

12 CFR Part 615

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


0
For the reasons stated in the preamble, parts 614 and 615, 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.

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing 
of Other Financing Institutions

0
2. Revise Sec.  614.4540(c) to read as follows:

[[Page 29863]]

Sec.  614.4540  Other financing institution access to Farm Credit Banks 
and agricultural credit banks for funding, discount, and other similar 
financial assistance.

* * * * *
    (c) Underwriting standards. Each Farm Credit Bank and agricultural 
credit bank shall establish objective policies, procedures, pricing 
guidelines, and loan underwriting standards for determining the 
creditworthiness of each OFI applicant. A copy of such policies, 
procedures, guidelines, and standards shall be made available, upon 
request to each OFI and OFI applicant.
* * * * *

0
3. Revise Sec.  614.4550 to read as follows:


Sec.  614.4550  Place of discount.

    A Farm Credit Bank or agricultural credit bank may provide funding, 
discounting, or other similar financial assistance to any OFI 
applicant. However, a Farm Credit Bank or agricultural credit bank 
cannot fund, discount, or extend other similar financial assistance to 
an OFI that maintains its headquarters, or has more than 50 percent of 
its outstanding loan volume to eligible borrowers who conduct 
agricultural or aquatic operations in the chartered territory of 
another Farm Credit bank unless it notifies such bank in writing within 
five (5) business days of receiving the OFI's application for 
financing. Two or more Farm Credit banks cannot simultaneously fund the 
same OFI.

0
4. Revise Sec.  614.4560(d) to read as follows:


Sec.  614.4560  Requirements for OFI funding relationships.

* * * * *
    (d) The borrower rights requirements in part C of title IV of the 
Act, and the regulations in part 617 of this chapter shall apply to all 
loans that an OFI funds or discounts through a Farm Credit Bank or 
agricultural credit bank, unless such loans are subject to the Truth-
in-Lending Act, 15 U.S.C. 1601 et seq.
* * * * *

0
5. Amend Sec.  614.4590 by adding new paragraphs (c) and (d) to read as 
follows:


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

* * * * *
    (c) Upon request, each Farm Credit Bank or agricultural credit bank 
must provide each OFI and OFI applicant, that has or is seeking to 
establish a funding relationship with the Farm Credit Bank or 
agricultural credit bank, a copy of its policies, procedures, loan 
underwriting standards, and pricing guidelines for OFIs. The pricing 
guidelines must identify the specific components that make up the cost 
of funds for OFIs, and the amount of these components expressed in 
basis points.
    (d) Upon request of any OFI or OFI applicant, that has or is 
seeking to establish a funding relationship with the Farm Credit Bank 
or agricultural credit bank, the bank must explain in writing the 
reasons for any variation in the overall funding costs it charges to 
OFIs and affiliated direct lender associations. The written explanation 
must compare the cost of funds that the Farm Credit Bank or 
agricultural credit bank charges the OFIs and affiliated direct lender 
associations. When possible, the written explanation shall compare the 
costs of funding that the bank charges several OFIs and Farm Credit 
associations that are similar in size. However, the Farm Credit Bank or 
agricultural credit bank must not disclose financial or confidential 
information about any individual Farm Credit association.

Subpart P--[Amended]

0
6. Amend part 614, subpart P by adding a new Sec.  614.4595 to read as 
follows:


Sec.  614.4595  Public disclosure about OFIs.

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

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

0
7. The authority citation for part 615 continues to read as follows:

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

Subpart H--Capital Adequacy

0
8. Amend Sec.  615.5210 by adding new paragraphs (f)(2)(ii)(M); 
(f)(2)(iii)(C); and (f)(2)(iv)(E) to read as follows:


Sec.  615.5210  Computation of the permanent capital ratio.

* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
* * * * *
    (M) Claims on other financing institutions provided that:
    (1) The other financing institution qualifies as an OECD bank or it 
is owned and controlled by an OECD bank that guarantees the claim, or
    (2) The other financing institution has a rating in one of the 
highest three investment-grade rating categories from a NRSRO or the 
claim is guaranteed by a parent company with such a rating, and
    (3) The other financing institution has endorsed all obligations it 
pledges to its funding Farm Credit bank with full recourse.
    (iii) * * *
    (C) Claims on other financing institutions that:
    (1) Are not covered by the provisions of paragraph (f)(2)(ii)(M) of 
this section, but otherwise meet similar capital, risk identification 
and control, and operational standards, or
    (2) Carry an investment-grade or higher NRSRO rating or the claim 
is guaranteed by a parent company with such a rating, and
    (3) The other financing institution has endorsed all obligations it 
pledges to its funding Farm Credit bank with full recourse.
    (iv) * * *
    (E) Claims on other financing institutions that do not otherwise 
qualify for a lower risk-weight category under this section.
* * * * *

    Dated: May 20, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-11849 Filed 5-25-04; 8:45 am]
BILLING CODE 6705-01-P