[Federal Register Volume 69, Number 137 (Monday, July 19, 2004)]
[Rules and Regulations]
[Pages 42853-42855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16318]


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FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB87


Loan Policies and Operations; Participations

AGENCY: Farm Credit Administration.

ACTION: Final rule; response to comment.

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SUMMARY: The Farm Credit Administration (FCA or agency) responds to a 
comment letter on a final rule that repealed regulations that required 
a Farm Credit System (FCS or System) bank or association to provide 
notice or obtain consent before purchasing participations in loans that 
a non-System lender originates in the chartered territory of another 
FCS institution. This response, which is pursuant to an order of the 
United States District Court for the District of Columbia dated April 
8, 2004, supplements the preamble to the final rule that was published 
at 65 FR 24101 on April 25, 2000.

DATES: Effective Date: These regulations became effective on May 25, 
2000. See 65 FR 33743.

FOR FURTHER INFORMATION CONTACT: Alan Markowitz, 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 the General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
2020.

SUPPLEMENTARY INFORMATION:

I. Background

    On November 9, 1998, the FCA proposed repeal of several regulations 
in parts 611, 614, and 618 that required System lenders operating under 
title I or II of the Farm Credit Act of 1971, as amended (Act) to 
provide notice or obtain consent before they could lend, participate in 
loans, or offer related services to borrowers in the chartered 
territory of other FCS lending institutions. See 63 FR 60219. The 
extended comment period closed on May 10, 1999.
    The FCA received more than 270 comment letters from System 
institutions, commercial banks, trade associations, FCS and non-System 
customers, state agricultural commissioners, a statewide council of 
agricultural organizations, a United States senator, and individuals. 
Commercial bank commenters opposed the proposed rule, while the other 
commenters were evenly divided between those supporting and opposing 
the proposal.
    The Farm Credit Bank of Texas (FCBT) and its six affiliated Federal 
land credit associations (FLCAs) \1\ in Alabama, Louisiana, and 
Mississippi, and its two affiliated production credit associations 
(PCAs) in New Mexico sent the FCA a joint comment letter dated May 3, 
1999, opposing the proposed rule. The joint comment letter stated that: 
(1) The FCA lacked statutory authority to enact the proposed rule; (2) 
the proposed rule would conflict with statutory amendments enacted in 
1992; (3) geographic boundaries are an integral part of the System's 
statutory scheme; (4) out-of-territory credit and related services 
would hurt the System and its customers, especially small farmers; and 
(5) the proposed rule would not advance any congressionally mandated 
purpose.
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    \1\ At the time that the FCA received this comment letter, the 
FCBT had not yet transferred direct lending authority to one of 
these FLCAs pursuant to section 7.6 of the Act.
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    The FCA did not repeal those regulations that require notice or 
consent when a System lender operating under title I or II of the Act 
makes direct loans or offers related services outside its chartered 
territory. However, the FCA adopted a final rule on April 25, 2000, 
that repealed the notice and consent requirements only for out-of-
territory loan participations. See 65 FR 24101. As a result, notice and 
consent requirements no longer apply when a System lender purchases 
participations in loans that non-System lenders originate in the 
chartered territory of other FCS institutions.\2\
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    \2\ The final rule does not affect intra-System loan 
participations because the originating FCS lender consents when it 
sells participations in its loans to other FCS institutions.
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    The preamble to the final rule explained that repealing the notice 
and consent requirements for loan participations could help: (1) 
Increase the flow and availability of agricultural credit; (2) improve 
the liquidity of non-System lenders; and (3) diversify geographic and 
industry concentrations in the loan portfolios of Farm Credit banks and 
associations. The preamble also pointed out that the chartered 
territory of an FCS lender does not change when it buys participations 
in loans that non-System lenders originate

[[Page 42854]]

in the territory of other System lenders. Another passage in the 
preamble explained that the final rule does not authorize any FCS 
lender to make loans directly to farmers and ranchers in the chartered 
territory of other System lenders. The following paragraph in the 
preamble to the final rule discussed the comments that the FCA received 
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from the public:

    We received over 270 comment letters on the proposed rule. No 
commenter cited any statutory provision that restricts the authority 
of System banks and associations to participate in loans outside of 
their chartered territory. Only one comment letter mentioned the 
statutory authorities of System institutions to participate in 
loans.

    After the final rule became effective on May 25, 2000, the FCBT and 
the FLCAs that submitted the joint comment letter (plaintiffs) filed 
suit against the FCA in the United States District Court for the 
District of Columbia, seeking a declaration that the final rule was 
invalid.\3\ The plaintiffs claimed the final rule violated the Act and 
a 1992 amendment thereto, and that the FCA failed to comply with the 
procedural requirements of the Administrative Procedure Act (APA) when 
it enacted the final rule.
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    \3\ Two FLCAs that signed the joint comment letter merged before 
litigation.
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    The plaintiffs raised two procedural arguments. First, they claimed 
that the FCA failed to respond to their comments in the preamble to the 
final rule. Their second claim was that the public did not have 
adequate notice that the FCA would only repeal the out-of-territory 
notice and consent requirements for loan participations and, therefore, 
the FCA should have sought additional comment before it enacted the 
final rule.
    On August 21, 2001, the District Court granted the FCA's motion for 
summary judgment. The District Court ruled that: (1) The FCA adequately 
responded to the plaintiffs' comments; (2) the final rule was a logical 
outgrowth of the proposed rule; (3) the final rule complied with the 
applicable provisions of the Act; and (4) the plaintiffs waived their 
argument that the final loan participation rule violated the 1992 
amendments because they did not raise this argument in their comment 
letter. La Fed. Land Bank Ass'n, FLCA v. Farm Credit Admin., 189 F. 
Supp. 2d 47, (D.D.C. 2001).
    The plaintiffs appealed. On July 29, 2003, the Court of Appeals 
ruled that the final rule did not violate the Act and the 1992 
amendments thereto. La Fed. Land Bank Ass'n, FLCA v. Farm Credit 
Admin., 336 F.3d 1075 (D.C. Cir., 2003). In addition, it denied the 
plaintiffs' petition to vacate the final rule, stating, ``we think the 
probability that the [FCA] will be able to justify retaining the 
[final] rule is sufficiently high that vacatur of the rule is not 
appropriate.'' See 336 F.3d 1075, 1085. The Court of Appeals also 
affirmed the District Court's finding that the FCA did not need to seek 
additional public comment before it repealed the notice and consent 
requirements for out-of-territory participations because the final rule 
was a logical outgrowth of the proposed rule. However, the Court of 
Appeals found that: (1) The plaintiffs' comment letter opposed repeal 
of the notice and consent requirements for both out-of-territory 
lending and participations; and (2) the FCA was required to address the 
plaintiffs' comments before enacting the final rule. The Court of 
Appeals reversed the judgment of the District Court with instructions 
to remand the matter to the FCA for a response to the plaintiffs' 
comments.

II. Response to the Plaintiffs

    In accordance with the court's ruling, the FCA publishes this 
notice, which responds to the plaintiffs' joint comment letter. Our 
response addresses out-of-territory loan participations, which were the 
subject of both the final rule and the court decisions.

A. Legal Issues

    The plaintiffs alleged that: (1) The FCA lacked authority to 
rescind regulatory restrictions on out-of-territory activities by 
System lenders; and (2) the proposed rule would violate several 
provisions of the Act and section 401 of the Farm Credit Banks and 
Associations Safety and Soundness Act of 1992\4\ (1992 amendments). The 
Court of Appeals decided both of these issues, holding that the FCA had 
authority under the Act and the 1992 amendments to repeal the pre-
existing regulatory notice and consent requirements for out-of-
territory loan participations. Accordingly, this response does not 
recap the plaintiffs' legal arguments, the agency's response, and the 
Court of Appeals' rulings. The FCA refers interested parties to the 
Court of Appeals' opinion if they seek a detailed discussion of the 
legal issues.
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    \4\ Pub. L. 102-552, 106 Stat. 4102 (Oct. 28, 1992).
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B. Policy Issues

    In addition to its findings on the above legal issues, the Court of 
Appeals found that the FCA's ``only error was its failure to explain 
what seems to be a policy difference with the plaintiffs.'' Id. 
Accordingly, the FCA now responds to the plaintiffs' policy comments. 
The plaintiffs' comment letter objected to the repeal of notice or 
consent requirements for out-of-territory activities on policy grounds. 
The plaintiffs claimed that repeal of regulatory restrictions on out-
of-territory activities would have a detrimental impact on both the 
System and its borrowers. The plaintiffs raised three arguments. Their 
first argument is that geographic restrictions preserve the cooperative 
principles, local control, and financial interdependence of the FCS. 
The second argument is that ending restrictions on out-of-territory 
activities will introduce intra-System competition that will harm small 
farmers, ``who are the very people the System is designed to serve.'' 
The plaintiffs'' final argument is that the proposed rule would not 
advance any congressionally mandated purpose.
1. Cooperative Principles, Local Control, and Financial Interdependence
    The plaintiffs claimed that geographic boundaries reinforce the 
structure of System institutions, which are credit cooperatives that 
are owned and controlled by the local farmers who borrow from them. 
Accordingly, the plaintiffs believe that revoking regulatory 
restrictions on out-of-territory activities overturns the rights of 
farmer-owners to make decisions that affect their institution. Another 
argument that the plaintiffs raised is that allowing FCS institutions 
to make or participate in loans in the chartered territory of other 
System lenders without restriction is incompatible with an intra-System 
financial support structure that depends on joint and several liability 
and loss-sharing agreements.
    The FCA responds that the final rule does not authorize any FCS 
institution to lend directly to borrowers outside its chartered 
territory without consent. As a result, the final rule does not change 
the System's cooperative principles, local control, or financial 
interdependence. Cooperative principles, borrower stock, voting rights, 
and borrower rights continue to apply to loans that System institutions 
make. However, the final rule applies only to participations in loans 
made by non-System lenders. The borrowers are customers of non-System 
commercial lenders, not the FCS; therefore, they do not enter into a 
contractual relationship with any FCS lender. FCS institutions may buy 
participations in these loans from commercial lenders, but their 
contractual relationship is with the lead lender, not the borrower. 
Accordingly, borrower stock, cooperative membership requirements, and 
borrower rights do not apply. For these

[[Page 42855]]

reasons, repeal of the notice and consent requirements for loan 
participations do not adversely affect cooperative principles and local 
control of System institutions.
    Similarly, the final rule does not threaten the financial 
interdependence of System institutions. The final rule does not change 
the Farm Credit banks' statutory joint and several liability, or their 
lending relationships with their affiliated associations. In addition, 
the final rule does not bring FCS institutions into competition with 
each other for direct loans because it applies only to participations 
in loans that non-System lenders originate. Furthermore, System lenders 
participated in loans with non-System lenders long before the FCA 
repealed regulatory notice and consent requirements for out-of-
territory participations. Loan participations with non-System lenders 
have never undermined the System's financial interdependence.
2. Service to Small Farmers
    The plaintiffs claimed that removal of restrictions on out-of-
territory activities would be detrimental to the ``very people the 
System is designed to serve,'' especially small farmers and ranchers. 
More specifically, the plaintiffs alleged that the FCA's proposal would 
enable the bigger FCS associations to ``cherry pick'' loans to large 
and profitable farm operations outside their chartered territory, 
leaving loans to small and struggling farmers to the local association.
    First of all, the final rule addresses participations, not direct 
loans. More importantly, the final rule is not detrimental to small 
farmers. Nothing in the final rule weakens the System's statutory 
authority and commitment to serve small farmers. The Act expressly 
authorizes FCS banks and associations to participate in loans with each 
other and non-System lenders. Although lenders participate in credits 
to larger borrowers, loan participations for larger borrowers generate 
income and portfolio diversification which, in turn, facilitate System 
lending to small farmers.
3. Benefiting Agriculture
    Finally, the plaintiffs' comment letter claimed that rescinding 
restrictions on out-of-territory activities does not advance any 
congressionally mandated purpose. The FCA replies that loan 
participations achieve a congressionally mandated purpose because 
several provisions of the Act expressly authorize them. Buying out-of-
territory loan participations from non-System lenders improves ``the 
income and well-being of American farmers and ranchers by furnishing 
sound, adequate, and constructive credit * * * to them,'' which is an 
objective that Congress established for the System in section 1.1(a) of 
the Act.
    Eliminating territorial restrictions on loan participations 
promotes cooperation between System and non-System lenders, which 
ultimately benefits farmers and ranchers. Sound loan participation 
programs can increase the availability of agricultural credit for 
farmers and ranchers. System banks and associations can improve the 
liquidity of non-System lenders by purchasing participations in loans 
to farmers and ranchers which, in turn, enable non-System lenders to 
make more agricultural loans. The final rule also enables System 
lenders to diversify geographic and industry concentrations in loan 
portfolios by purchasing participations in sound loans made anywhere in 
the United States. Cooperation between System and non-System lenders 
benefits America's farmers, ranchers, and rural communities by ensuring 
a steady flow of agricultural credit in both good and bad economic 
times. For these reasons, the final rule furthers the goals that 
Congress set forth in the Act because it advances the System's mission 
of financing agriculture and rural America.

    Dated: July 13, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-16318 Filed 7-16-04; 8:45 am]
BILLING CODE 6705-01-P