[Federal Register Volume 69, Number 177 (Tuesday, September 14, 2004)]
[Proposed Rules]
[Pages 55362-55366]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20607]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
 ========================================================================
 

  Federal Register / Vol. 69, No. 177 / Tuesday, September 14, 2004 / 
Proposed Rules  

[[Page 55362]]



FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AC23


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; Investments in Farmers' Notes

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA, agency, us, or we) adopts 
a proposed rule that amends regulations governing investments in 
farmers' notes (Farmers' Notes). As a result, it should be easier for 
Farm Credit System (FCS, Farm Credit, or System) institutions and non-
System lenders to work together to finance farmers, ranchers, and 
aquatic producers or harvesters (farmers). The proposed rule would 
remove unnecessary regulatory restrictions on Farmers' Notes so this 
investment program will be able to keep pace with rapid changes in 
agricultural credit markets. Credit enhancements and a new 
concentration limit will strengthen the safety and soundness of the 
Farmers' Notes. The FCA also proposes amendments to its capital 
regulations.

DATES: You may send us comments by October 14, 2004.

ADDRESSES: Send us your comments by electronic mail to [email protected], through the Pending Regulations section of our Web site 
at http://www.fca.gov, or through the government-wide Web site http://www.regulations.gov. You may also submit your comments in writing (in 
triplicate) to S. Robert Coleman, Director, Regulation and Policy 
Division, Office of Policy and Analysis, Farm Credit Administration, 
1501 Farm Credit Drive, McLean, VA 22102-5090, or by facsimile 
transmission to (703) 734-5785. You may review copies of all comments 
we receive in the Office of Policy and Analysis, Farm Credit 
Administration.

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 the General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-2020.

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The purpose of this proposed rule is to: (1) Make affordable credit 
more available to farmers; (2) enable associations to provide 
additional funding and liquidity to non-System lenders; and (3) 
increase cooperation between System and non-System financial 
institutions and merchants that extend credit to agriculture (non-
System agricultural lenders). Although there are several different ways 
for System and non-System agricultural lenders to work together in 
extending credit to farmers, ranchers, cooperatives, and other eligible 
rural residents, this proposed rule focuses on investments in Farmers' 
Notes.

II. Overview of the Farmers' Notes Program

    The Farmers' Notes program has existed since 1966, when the FCA 
originally approved it. Under this program, certain FCS direct lender 
associations invest in notes, contracts, and other obligations that 
eligible farmers enter into with non-System agricultural lenders. 
Currently, Sec.  615.5172 authorizes production credit associations 
(PCAs) and agricultural credit associations (ACAs) to buy Farmers' 
Notes from private dealers and cooperatives that sell farm machinery, 
supplies, equipment, home appliances, and other items of a capital 
nature to eligible farmers and ranchers. As a result, the Farmers' 
Notes program provides liquidity to certain non-System lenders that 
extend credit to agriculture.
    The authority to purchase Farmers' Notes derives from sections 
2.2(10) and 2.12(18) of the Farm Credit Act of 1971, as amended (Act), 
which permit direct lender associations to invest their funds as may be 
approved by their funding bank under FCA regulations. Similar to other 
investments, the regulation places a portfolio cap and a concentration 
limit on association investments in Farmers' Notes. Currently, Sec.  
615.5172(c) limits investments in Farmers' Notes to 15 percent of each 
association's total outstanding loans at the end of its preceding 
fiscal year. Additionally, investments in Farmers' Notes sold by a 
single creditor cannot exceed 50 percent of the association's capital 
and surplus. Under current Sec.  615.5172(d), participating dealers and 
cooperatives must endorse Farmers' Notes that they sell to associations 
with full recourse. The full recourse requirement is designed as a 
credit enhancement, which is consistent with the treatment of Farmers' 
Notes as investments. Finally, the current regulation requires 
associations to contact those notemakers who meet their credit 
standards, and encourage them to become FCS borrowers.

III. Rulemaking on Farmers' Notes

A. Historical Background

    This proposed rule is the latest phase of a rulemaking that began 4 
years ago. On April 20, 2000, the FCA published an advance notice of 
proposed rulemaking (ANPRM) that asked the public questions about ways 
to improve the funding and discount relationship between Farm Credit 
banks and other financing institutions (OFIs).\1\ The commenters 
responded with a broad array of suggestions on various ways that System 
and non-System agricultural lenders could cooperate to extend credit to 
agriculture and rural America. As a result, the FCA decided to hold a 
public meeting on OFIs and other alternatives for FCS lenders to 
provide funding to non-System agricultural lenders. The Federal 
Register notice that announced the public meeting asked interested 
parties for input on both OFIs and ``other types of partnering 
relationships between System and non-System lending institutions that 
would increase the availability of funds to agriculture and rural 
America.'' \2\
---------------------------------------------------------------------------

    \1\ See 65 FR 21151 (April 20, 2000).
    \2\ See 66 FR 35428 (July 5, 2001).
---------------------------------------------------------------------------

    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 agricultural lenders. 
Many System and non-System commenters

[[Page 55363]]

encouraged us to promote other arrangements, in addition to the OFI 
program, that make it easier for Farm Credit banks and associations to 
provide funding and liquidity to non-System agricultural lenders. Many 
commenters expressed their desire for more flexible and informal 
arrangements between FCS and non-System agricultural lenders.

B. Original Proposed Rule

    On August 11, 2003, the FCA adopted a proposed rule (original 
proposed rule or proposed rule of August 11, 2003) on OFIs and Farmers' 
Notes that incorporated many of the comments and suggestions that we 
received from the ANPRM and at the public meeting.\3\ The FCA proposed 
four major changes to the Farmers' Notes regulation so that this 
program would be more responsive to the needs of other creditors and 
their customers. First, the original proposed rule would have expanded 
this program to all entities that routinely extend agricultural or 
aquatic credit to eligible farmers and ranchers in the normal course of 
their business. Whereas this program now is restricted to private 
dealers and cooperatives, the proposed rule of August 11, 2003, would 
have allowed all types of creditors, including financial institutions 
and merchants, to sell Farmers' Notes to FCS associations. Second, the 
original proposed rule would have expanded this program to long-term 
loans. Third, the proposed rule of August 11, 2003, would have 
permitted all FCS direct lenders to invest in Farmers' Notes, whereas 
this program is now limited to PCAs and ACAs, which have short- and 
intermediate-term lending authorities. Fourth, the original proposed 
rule would have allowed FCS associations to invest in notes from 
aquatic producers or harvesters and farm-related businesses.
---------------------------------------------------------------------------

    \3\ See 68 FR 47502 (Aug. 11, 2003).
---------------------------------------------------------------------------

    Other provisions of the original proposed rule would have ensured 
that FCS direct lender associations continue to treat Farmers' Notes as 
investments. Under Sec.  615.5172(b) of the proposed rule of August 11, 
2003, for example, FCS associations could have invested in Farmers' 
Notes that are secured by specified collateral that the underlying 
debtor pledges to creditors. The original proposed rule would have 
retained the 15-percent portfolio cap and the 50-percent concentration 
limit in Sec.  615.5172(c). Current Sec.  615.5172(d) requires the 
seller to endorse all Farmers' Notes with full recourse. The FCA 
proposed on August 11, 2003, to update this requirement by allowing 
other types of credit enhancements, such as guarantees, insurance, 
reserves of cash or marketable securities, subordinated interests, or a 
combination of such credit enhancements that would adequately cover the 
principal amount of the association's investment in Farmers' Notes.
    The proposed rule of August 11, 2003, would have deleted the 
provision in Sec.  615.5172 that currently requires associations to 
contact the farmers or ranchers who are indebted on these Farmers' 
Notes and encourage them to become FCS borrowers.

C. Comment Letters

    The FCA received a total of 111 comments on the proposed rule on 
OFIs and Farmers' Notes, of which 105 comment letters specifically 
addressed issues related to Farmers' Notes. Comments on Farmers' Notes 
came from the Farm Credit Council, two Farm Credit banks, two Farm 
Credit associations, an agricultural credit cooperative OFI, the 
Independent Community Bankers of America (ICBA), which is the trade 
association for community banks, and 98 affiliated commercial banks and 
their state banking trade associations. System commenters supported the 
proposed rule while all non-System commenters opposed it.
    All commercial bank commenters asked the FCA to withdraw the 
original proposal on Farmers' Notes. These commenters suggested that 
the FCA hold a public meeting and solicit congressional input on 
Farmers' Notes if the agency continues to believe that FCS associations 
need an expanded Farmers' Notes program. The ICBA and other commercial 
bank commenters stated that the proposed rule would ``reinvent an 
unused lending program'' as ``an expansive new consumer and business 
lending program that has not been authorized by Congress.''
    Commercial bank commenters also raised safety and soundness 
concerns about the Farmers' Notes program. The agricultural credit 
cooperative OFI told the FCA that the proposed revisions to Sec.  
615.5172 would not attract non-System agricultural lenders to the 
Farmers' Notes program or benefit their customers.
    System commenters believed that the proposed revisions to the 
Farmers' Notes regulation will strengthen cooperation between System 
and non-System lenders and increase the flow of credit to agriculture. 
Two System commenters, however, asked the FCA to revise the proposed 
regulation so it would not require that collateral ``of a capital 
nature'' secure all Farmers' Notes. One of these commenters suggested 
that the final rule should not require that collateral secure all 
Farmers' Notes. This commenter advised the FCA that the final rule 
should treat collateralization of Farmers' Notes as a credit 
enhancement.

D. The Supplemental Proposed Rule

    On April 22, 2004, the FCA Board approved a final rule on OFIs. The 
preamble informed the public that the FCA was not adopting a final rule 
on Farmers' Notes because it was still considering the best regulatory 
approach to this program.\4\
---------------------------------------------------------------------------

    \4\ See 69 FR 29852 (May 26, 2004).
---------------------------------------------------------------------------

    The FCA declines the request of commercial bank commenters to hold 
another public meeting on this issue. This rulemaking has progressed 
beyond the point where another public meeting will help the FCA to 
bring this rulemaking to a successful conclusion. Earlier phases of 
this rulemaking, such as the ANPRM, the public meeting in Des Moines 
and the proposed rule have already provided the FCA with the type of 
basic information that another public meeting will provide. Instead, 
input from the public on a specific regulatory proposal is the best way 
to develop a final rule that will improve the flow of funds to 
agriculture and encourage greater cooperation between the FCS and non-
System agricultural lenders.
    The FCA also declines the request of commercial bank commenters to 
consult with Congress about revisions to the Farmers' Note regulation. 
As discussed below, the FCA has express authority delegated by Congress 
under sections 2.2(10), 2.12(18), 5.17(a)(9), 7.6(c), and 7.8(b) of the 
Act to enact investment regulations for FCS associations. In addition, 
FCA submits all proposed rules to Congress for a 30-day review period 
under section 5.17 of the Act. FCA welcomes comments from Members of 
Congress as it does from all members of the public.

E. New Proposed Rule on Farmers' Notes

    The new proposed rule on Farmers' Notes responds to issues and 
concerns raised by both System and non-System commenters. The FCA 
proposes to retain the provisions in Sec.  615.5172(a) of the original 
proposed rule that would: (1) Expand the Farmers' Notes program to all 
non-System agricultural lenders; (2) allow all FCS direct lender 
associations to invest in Farmers' Notes; (3) extend this program to 
long-term mortgages; and (4) include credits to aquatic producers or 
harvesters, and farm-related businesses in this program. The FCA also 
proposes, without change,

[[Page 55364]]

Sec.  615.5172(d), which would authorize other credit enhancements for 
Farmers' Notes, such as guarantees, insurance, reserves, and 
subordinated interests. The FCA proposes again to repeal the provision 
in current Sec.  615.5172(d) that requires associations to contact the 
farmers or ranchers who are indebted on Farmers' Notes, and encourage 
them to become FCS borrowers. The new proposal addresses the 
commenters' concerns by: (1) Limiting investments in Farmers' Notes 
that are not backed by agricultural credits; (2) lowering the 
concentration limit for Farmers' Notes; and (3) not requiring 
collateral of a ``capital nature'' for Farmers' Notes. As we explain 
the new proposal in greater detail, we will respond to issues raised by 
various commenters.
    Commercial bank commenters assert that the Farmers' Notes program 
is really a lending program that is disguised as an investment program. 
The FCA responds that it has authorized the Farmers' Notes program by 
exercising its delegated powers under sections 2.2(10), 2.12(18), 
5.17(a)(9), 7.6(c), and 7.8(b) of the Act to regulate investments at 
FCS associations. FCA regulations authorize FCS institutions to hold 
investments for two fundamental, but distinct, purposes. The 
regulations in subpart E of part 615 authorize FCS institutions to hold 
investments for maintaining liquidity and managing market risks.
    Separately, the regulations in subpart F of part 615 permit FCS 
banks and associations to hold investments that advance their public 
policy mission of financing agriculture. Farmers' Notes are 
agricultural investments. The Farmers' Notes program enables FCS 
associations to act as a source of liquidity for non-System 
agricultural lenders, including small local entities, that sell 
agricultural supplies, equipment, machinery, other capital goods, and 
household appliances to farmers and ranchers on credit. Thus, this 
program benefits farmers, ranchers, and their suppliers.
    Under both the existing and proposed regulations, Farmers' Notes 
are subject to many regulatory criteria that apply to investments. For 
example, the regulation requires full recourse or other credit 
enhancements that upgrade the credit quality and reduce the risk of 
these assets. Additionally, Sec.  615.5172 imposes a portfolio cap on 
Farmers' Notes, which the Act and FCA lending regulations do not 
establish for agricultural or aquatic loans. Another distinction 
between Farmers' Notes and loans is that FCS associations discount 
Farmers' Notes from other creditors, rather than lending directly to 
eligible farmers and ranchers. When all of these factors are taken 
together, it is clear that Farmers' Notes is an investment, not a 
lending, program.
    Comment letters from commercial banks and their trade associations 
state that the original proposed rule would reinvent the Farmers' Notes 
program as an ``expansive new consumer and business lending program'' 
that would finance ``a vast array of retail merchants'' who sell non-
agricultural consumer products on credit to rural residents who are not 
farmers. This has never been the intent of the FCA, and the scope of 
this regulation does not shift the focus of the Farmers' Notes program 
away from farmers and agriculture. For example, FCS associations are 
authorized to invest only in notes from farmers, ranchers, aquatic 
producers or harvesters, and farm-related businesses that are eligible 
to borrow from the System. Additionally, the Farmers' Notes program 
focuses on agricultural, not consumer, credit. Therefore, FCS 
associations primarily will invest in Farmers' Notes that finance: (1) 
Agricultural or aquatic operations of farmers, ranchers, aquatic 
producers or harvesters, or (2) farm-related businesses.
    The FCA proposes two major changes to Sec.  615.5172 that should 
dispel any confusion about the scope of the Farmers' Notes program. 
First, the FCA proposes to revise Sec.  615.5172(a) to more clearly 
identify which creditors may sell Farmers' Notes to FCS associations. 
Second, proposed Sec.  615.5172(b) limits investments in Farmers' Notes 
that are for consumer goods and services.
    Under the proposed rule of August 11, 2003, Sec.  615.5172(a) would 
have allowed FCS associations to invest in Farmers' Notes given ``to 
entities that routinely extend credit in the normal course of their 
business.'' We now propose that Sec.  615.5172(a) require the seller of 
Farmers' Notes to be either: (1) A financial institution, or (2) an 
entity whose primary business is selling agricultural supplies, 
machinery, and equipment to eligible farmers and farm-related 
businesses, and extends agricultural or aquatic credit to such 
customers in the normal course of its business. This revision should 
remove any doubt that the Farmers' Notes program remains geared towards 
agricultural credit. The primary business of financial institutions is 
to extend credit. In contrast, merchants primarily sell goods and 
services, while providing credit to their customers as a supplemental 
but integral part of their overall business. The proposed rule does not 
authorize FCS associations to provide funding and liquidity to 
businesses that primarily sell consumer goods and services to the 
general public. The FCA has also added a new provision to Sec.  
615.5172(b) that expressly restricts consumer credit.
    Proposed Sec.  615.5172(a) and (b)(2) reinforce each other and 
prevent the Farmers' Notes program from expanding into a general 
consumer financing program. Proposed Sec.  615.5172(a) authorizes FCS 
associations to buy Farmers' Notes only from financial institutions and 
entities whose primary business is selling agricultural supplies, 
equipment, or machinery to farmers, ranchers, or aquatic producers or 
harvesters while debt on consumer goods and services from general 
retail businesses cannot qualify as Farmers' Notes under Sec.  
615.5172(b)(2). As a result, no FCS association could invest in notes 
from merchants whose primary business is selling consumer goods and 
services to people who are not eligible farmers, ranchers, or aquatic 
producers or harvesters. However, an association could buy notes that 
are secured by home appliances and furniture from a farm supply 
cooperative that sells such consumer goods to its farmer-members.
    In addition to these two regulatory revisions, another provision of 
Sec.  615.5172 ensures that FCS associations invest only in Farmers' 
Notes to eligible farmers, ranchers, aquatic producers or harvesters, 
and farm-related businesses. The new proposed regulation continues to 
require that an FCS association invest in Farmers' Notes only in 
accordance with policies prescribed by its own board and the board of 
its funding bank. Thus, each association must operate under policies 
that ensure it invests only in notes to eligible agricultural and 
aquatic producers or harvesters, and farm-related businesses. Failure 
to comply with such policies would violate the regulation.
    As requested by two System associations, the FCA has revised Sec.  
615.5172(b) so that it no longer requires collateral ``of a capital 
nature'' to secure Farmers' Notes for agricultural, aquatic, or farm-
related purposes. However, these notes must still be secured by some 
form of collateral as is appropriate for the type of funding being 
provided. Instead of limiting the collateral to items ``of a capital 
nature,'' the new proposal gives FCS associations the flexibility to 
accept other agricultural collateral such as accounts receivable or 
inventory, as appropriate.
    The FCA declines a System commenter's request to give FCS 
associations the option of investing in

[[Page 55365]]

unsecured Farmers' Notes. This commenter does not believe that the rule 
should require collateral to secure all Farmers' Notes. Instead, the 
commenter wants associations to have the option of requiring collateral 
as a credit enhancement. The FCA responds that securing Farmers' Notes 
with collateral enhances the safety and soundness of the Farmers' Notes 
program. From a legal perspective, secured credit is easier to collect 
if either the seller of these Farmers' Notes fails, or the underlying 
notemaker defaults. Together, both collateral and credit enhancements 
improve the quality and liquidity of Farmers' Notes, so they qualify as 
investments under the regulations.
    Commercial bank commenters suggested that the 15-percent portfolio 
cap and the 50-percent concentration limit in Sec.  615.5172(c) are 
inherently unsafe and unsound. According to these commenters, Farmers' 
Notes will not diversify the portfolios of FCS associations, which are 
already concentrated in agricultural assets. Another criticism of 
commercial banks is that Farmers' Notes are not liquid assets.
    In response, the FCA reiterates that FCA regulations authorize FCS 
institutions to hold investments for two different purposes. As 
discussed earlier, FCS institutions hold investments to: (1) Maintain 
liquidity and manage market risks, or (2) advance their public policy 
mission of financing agriculture. Farmers' Notes are investments in 
agriculture. Investing in Farmers' Notes enables FCS associations to 
provide funding and liquidity to non-System agricultural lenders. 
Farmers' Notes also increase the flow of affordable, dependable, and 
stable credit to America's farmers and ranchers, and it fosters 
cooperation between the FCS and non-System agricultural lenders. In 
this context, this program achieves the objectives that Congress 
identified in section 1.1 of the Act.
    As agricultural lenders, FCS associations have the expertise that 
is necessary to understand and manage the risks inherent in Farmers' 
Notes. Additionally, the regulation upgrades the quality of these 
assets and minimizes the risks to associations by: (1) Requiring 
collateral and credit enhancements on all Farmers' Notes, and (2) 
establishing a portfolio cap and concentration limit on these 
investments. Thus, this program does not expose FCS associations to 
significant risks that they cannot manage.
    Since 1972, FCA regulations have imposed a 15-percent portfolio cap 
and a 50-percent concentration limit on Farmers' Notes. We continue to 
believe that the 15-percent portfolio cap on Farmers' Notes is 
appropriate because FCS associations are cooperatives, and loans to 
their members should always comprise most of the assets in their 
portfolios. However, the suggestion that we should consider a lower 
concentration limit on Farmers' Notes has merit. We anticipate that a 
revised rule will increase investments in Farmers' Notes which, in 
turn, could expose System associations to greater safety and soundness 
risk issues from the counterparties in these transactions. For this 
reason, proposed Sec.  615.5172(c) limits the total amount of Farmers' 
Notes that an association may invest in from any single seller, 
guarantor, insurer, or other counterparty to 20 percent of the 
association's total capital. Although the current regulation and 
original proposed rule refer to ``capital and surplus,'' the new 
proposal ties the concentration limit to ``total capital,'' which is 
consistent with FCA's capital regulations. This limit is compatible 
with the concentration limits for other investments, and it adequately 
addresses counterparty risks associated with these investments.
    As noted earlier, the agricultural credit cooperative OFI stated 
that the Farmers' Notes regulation offers no incentives for non-System 
agricultural lenders. More specifically, this commenter asserted that 
full recourse and other credit enhancements frustrate the efforts of 
non-System agricultural lenders to minimize their capital, credit, and 
portfolio risks by selling notes to FCS associations. If non-System 
agricultural lenders do not take part in this program, the commenter 
reasoned that farmers and ranchers would not benefit from it. Although 
reducing capital, credit, and portfolio limits are important objectives 
for many agricultural lenders, the Farmers' Notes program bolsters the 
liquidity and provides an additional source of funds to agricultural 
businesses and other non-System agricultural lenders.
    Commercial bank commenters claimed that Sec.  615.5172, as 
originally proposed, fails to adhere to statutory restrictions that 
apply to cross-title lending. The FCA replies that investments are not 
subject to the same restrictions that apply to loans. Separately, 
almost all FCS associations are now ACAs, which have authority to make 
both short- and intermediate-term operating loans, and long-term 
mortgage loans. No free-standing PCAs are left in the System. There are 
only 12 stand alone Federal land credit associations (FLCAs) in the 
FCS, and all are relatively small. The FCA anticipates that many of 
these FLCAs will merge into ACAs in the near future. For these reasons, 
we do not believe that the cross-title concerns presented by the 
commenters are a serious issue.

IV. Capital Risk Weighting

    The preamble to the proposed rule of August 11, 2003, explained 
that we have interpreted FCA's capital adequacy regulations as 
requiring Farm Credit banks to risk weight investments in Farmers' 
Notes at 100 percent. The original proposed rule would have amended 
Sec.  615.5210 so that FCS associations could risk weight Farmers' 
Notes that exhibit specified risk-mitigating characteristics at 20 or 
50 percent. Under the proposed rule of August 11, 2003, System 
associations would continue to risk weight Farmers' Notes that do not 
meet these criteria, or otherwise exhibit a higher risk profile at 100 
percent. We received no comments about the risk weighting of Farmers' 
Notes. We now propose the risk-weighting guidelines for Farmers' Notes, 
as addressed in the original proposed rule, without change.
    The proposed rule would establish a 20-percent risk weighting for 
Farmers' Notes sold by entities that are either: (1) An equivalent to 
an Organization for Economic Cooperation and Development (OECD) \5\ 
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 
nationally recognized statistical rating organization (NRSRO).\6\ 
Additional criteria for a 20-percent risk weight is that the obligation 
must have full recourse or another credit enhancement.
---------------------------------------------------------------------------

    \5\ ``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.
    \6\ ``Nationally recognized statistical rating organization'' 
means an entity recognized by the Division of Market Regulation (or 
any successor Division) of the Securities and Exchange Commission 
(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 weight 
for Farmers' Notes sold by entities that: (1) Are not OECD banks but 
otherwise meet similar

[[Page 55366]]

capital and operational standards; and (2) carry an investment-grade or 
higher NRSRO rating, or the investment is guaranteed by a parent 
company that has such a rating. Again, full recourse or another 
appropriate credit enhancement is a condition for the 50-percent risk 
weight.
    The proposed rule retains a 100-percent risk weight for all 
Farmers' Notes that do not qualify for the 20-percent or 50-percent 
risk-weight categories. Sellers of Farmers' Notes that are well 
capitalized and well managed expose the System to less risk. Therefore, 
FCS institutions need less capital to support these investments. This 
approach is consistent with the direction from the proposed Basel 
Accord revisions, which are currently under consideration.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed 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 in 12 CFR Part 615

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

    For the reasons stated in the preamble, part 615, chapter VI, title 
12 of the Code of Federal Regulations is proposed to be amended as 
follows:

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

    1. 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 F--Property, Transfers of Capital, and Other Investments

    2. Revise Sec.  615.5172 to read as follows:


Sec.  615.5172  Investments by associations in Farmers' Notes.

    (a) In accordance with policies prescribed by its own board of 
directors and the board of the Farm Credit bank that funds it, each 
direct lender association may invest in notes, sales contracts, and 
other similar obligations (hereafter Farmers' Notes) that eligible 
farmers, ranchers, producers or harvesters of aquatic products, and 
farm-related businesses give to:
    (1) Financial institutions; and
    (2) Any entity whose primary business is selling agricultural 
supplies, machinery, or equipment to farmers, ranchers, aquatic 
producers or harvesters, and farm-related businesses, and extends 
agricultural or aquatic credit to such customers in the normal 
course of its business.
    (b) Farmers' Notes that each direct lender invests in must be 
secured by collateral pledged by the individual farmer, rancher, 
aquatic producer or harvester, or farm-related business. In 
addition, each Farmers' Note must evidence the funding of:
    (1) Agricultural assets that eligible farmers, ranchers, or 
producers or harvesters of aquatic products use in their 
agricultural or aquatic operations;
    (2) Household appliances, furniture, and goods that eligible 
farmers, ranchers, or producers or harvesters of aquatic products 
buy for their living needs from entities identified in paragraph 
(a)(2) of this section; or
    (3) Assets that eligible farm-related businesses use in 
providing farm-related services to eligible farmers and ranchers.
    (c) The total amount that an association may invest in Farmers' 
Notes, at any one time, must not exceed 15 percent of the balance of 
its loans outstanding at the close of the association's preceding 
fiscal year. In addition, the total amount that an association may 
carry as investments in Farmers' Notes from any one entity that 
sells, guarantees, insures, or provides another credit enhancement 
listed in paragraph (d) of this section must not exceed 20 percent 
of the association's total capital.
    (d) All Farmers' Notes in which an association invests shall 
have at least one of the following credit enhancements:
    (1) The selling entity must endorse each Farmers' Note with full 
recourse;
    (2) A guarantee by a creditworthy third party covers the entire 
principal amount of each Farmers' Note;
    (3) Insurance covering the entire principal amount of each 
Farmers' Note;
    (4) The selling entity or a third party maintains a reserve of 
cash or marketable securities of at least 10 percent of the entire 
principal amount of each Farmers' Note;
    (5) The selling entity or a third party holds a subordinated 
interest of at least 10 percent of the entire principal amount of 
each Farmers' Note; or
    (6) The entire principal amount of each Farmers' Note is covered 
by a combination of credit enhancements listed in this section.

Subpart H--Capital Adequacy

    3. Amend Sec.  615.5210 by adding new paragraphs (f)(2)(ii)(N), 
(f)(2)(iii)(D), and (f)(2)(iv)(F) to read as follows:


Sec.  615.5210  Computation of the permanent capital ratio.

* * * * *
    (f) * * *
    (2) * * *
    (ii) * * *
    (N) Investments in Farmers' Notes that:
    (1) Provide the Farm Credit System direct lender association 
full recourse against a seller or has other acceptable credit 
enhancements specified in Sec.  615.5172(d) of this part, and
    (2) Are guaranteed by an OECD bank or other institution that 
qualifies for a 20-percent risk weight under this section, or
    (3) Are sold by entities that:
    (i) Are rated in one of the highest three investment-grade 
rating categories from a NRSRO or the investment is guaranteed by a 
parent company with such a rating. If the entity has more than one 
NRSRO rating the lowest rating shall apply.
    (ii) Maintain capital to total assets of at least 9 percent.
    (iii) * * *
    (D) Investments in Farmers' Notes that:
    (1) Provide the Farm Credit System direct lender association 
full recourse against a seller or has other acceptable credit 
enhancements specified in Sec.  615.5172(d) of this part, and
    (2) The seller is not covered by the provisions of paragraph 
(f)(2)(ii)(N) (20-percent risk weight) of this section, but 
otherwise meets similar capital, risk identification and control, 
and operational standards, or
    (3) The credit provider carries an investment-grade or higher 
NRSRO rating or the investment is guaranteed by a parent company 
with such a rating. If the entity has more than one NRSRO rating the 
lowest rating shall apply.
    (iv) * * *
    (F) Investments in Farmers' Notes that do not otherwise qualify 
for a lower risk weight under this section.
* * * * *

    Dated: September 8, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-20607 Filed 9-13-04; 8:45 am]
BILLING CODE 6705-01-P