[Federal Register Volume 69, Number 220 (Tuesday, November 16, 2004)]
[Proposed Rules]
[Pages 67074-67075]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-25397]



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FARM CREDIT ADMINISTRATION

12 CFR Part 617

RIN 3052-AC24


Borrower Rights

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA) proposes to allow a 
borrower to waive borrower rights when receiving a loan from a 
qualified lender as part of a loan syndication with non-System lenders 
that are otherwise not required by section 4.14A(a)(6) of the Farm 
Credit Act of 1971, as amended (Act) to provide borrower rights. This 
proposal would provide qualified lenders needed flexibility to meet the 
credit needs of borrowers seeking financing from a qualified lender as 
part of certain syndicated lending arrangements.

DATES: Written comments should be received on or before December 16, 
2004.

ADDRESSES: Send us your comments by electronic mail to [email protected] 
or through the Pending Regulations section of our Web site, http://www.fca.gov or through the government-wide http://www.regulations.gov 
portal. You may also send written comments to S. Robert Coleman, 
Director, Regulation and Policy Division, Office of Policy and 
Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
Virginia 22102-5090, or by facsimile transmission to (703) 734-5784. 
You may review copies of all comments we receive at our office in 
McLean, Virginia.

FOR FURTHER INFORMATION CONTACT: Mark L. Johansen, Senior Policy 
Analyst, Office of Policy Analysis, Farm Credit Administration, McLean, 
VA 22102-5090, (703) 883-4498, TTY (703) 883-4434; or Howard Rubin, 
Senior Attorney, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-2020.

SUPPLEMENTARY INFORMATION: 

I. Background

    On January 17, 2003, FCA published a notice requesting comment on 
the regulatory treatment of loan syndications (68 FR 2540). After 
considering the comments, the FCA Board reaffirmed its long-standing 
interpretation that loan syndications come within a Farm Credit System 
(System) institution's direct lending authorities and, therefore, loan 
syndications to eligible borrowers are subject to the borrower rights 
requirements of the Act, and corresponding regulations. (69 FR 8407, 
Feb. 24, 2004)
    In their comments on the notice, the Farm Credit Council (FCC) and 
other System institutions stated that borrower rights are an impediment 
to System involvement in loan syndication transactions. Loan 
syndications are multi-lender transactions, generally involving a lead 
lender and at least one other participating lender, where each lender 
has a direct contractual relationship with the borrower. Typically, the 
loan servicing and loan collection procedures are the same for each 
lender, and these activities are undertaken according to standard 
agreements among the lenders in the transaction. System institutions 
commented that it is difficult to enter into these transactions when 
they have unique disclosure requirements and have to provide distressed 
loan restructuring rights and the right of first refusal on 
repurchasing foreclosed property. The commenters stated that commercial 
lenders see fulfillment of these rights as a delay to loan servicing 
and collection and they would rather enter into loan syndication 
transactions with lenders that are not required to offer such rights.
    The commenters also stated that borrowers in syndications are 
generally sophisticated in financial transactions and represented by 
counsel. Thus, the commenters contend that these borrowers are in an 
equal bargaining position with qualified lenders and should be free to 
choose to waive their borrower rights.
    Subsequently, we received two petitions under 5 U.S.C. 553(e) 
asking us to amend Sec.  617.7010(b) to allow borrowers to waive 
borrower rights in loan syndication transactions. These petitions cited 
reasons for granting a waiver similar to the previous commenters.

II. Section-by-Section Analysis

1. Waiver of Borrower Rights in Loan Syndications

    After reviewing System syndication transactions, we have determined 
that the borrower in these transactions generally possess a very high 
level of business sophistication. These borrowers are more likely than 
others to be able to provide a knowing and intelligent waiver of their 
rights. Therefore, we propose to amend Sec.  617.7010 to allow a 
borrower to waive borrower rights when receiving a loan from a 
qualified lender that is part of a loan syndication package with non-
System lenders that are otherwise not required by the Act to provide 
borrower rights.\1\ To ensure that the borrower understands the 
borrower rights being waived and is freely and intelligently waiving 
those rights, we require that the borrower be advised by legal counsel 
at the time of the waiver.
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    \1\ Section 617.7000 defines ``qualified lender'' as: (1) A 
System institution, except a bank for cooperatives, that makes loans 
as defined in part 617; and (2) each bank, institution, corporation, 
company, credit union, and association described in section 
1.7(b)(1)(B) of the Act (commonly referred to as an other financing 
institution), but only with respect to loans discounted or pledged 
under section 1.7(b)(1). The proposed waiver is intended to apply 
only to those situations where System institutions enter into loan 
syndications with non-System lenders that are otherwise not required 
by the Act (section 4.14A(a)(6)) to provide borrower rights.
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    We also invite comments on whether we should consider other 
criteria to further differentiate what borrower and what type of loan 
syndication transactions should be eligible for a waiver of borrower 
rights.
    The purpose of the waiver is to eliminate instances where borrower 
rights are an impediment to a borrower receiving credit from a 
qualified lender through a loan syndication with non-System lenders 
that are otherwise not required by the Act to provide borrower rights. 
As previously noted, borrower rights are not compatible with many loan 
syndication transactions because the servicing and collection practices 
must be the same for all lenders.
    The waiver provision in this proposed regulation is intended to be 
used only in addressing the problems qualified lenders have encountered 
in entering into loan syndications due to the requirement to provide 
the borrower with borrower rights. Section 617.7010(c) provides that 
this waiver provision is not to be used as a means of circumventing the 
borrower rights requirements by creating a syndication relationship 
whose primary purpose is to avoid borrower rights. A syndicated lending 
package is typically sought when the total credit would exceed the 
lending institution's lending limit or the risk associated with the 
total credit would exceed the risk tolerance of the individual lending 
institution. Our examination process will be mindful of this issue and 
will take appropriate action to address any abuses of this proposed 
waiver.

III. 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

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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 617

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

    For the reasons stated in the preamble, part 617, chapter VI, title 
12 of the Code of Federal Regulations is proposed to be amended as 
follows:

PART 617--BORROWER RIGHTS

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

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

Subpart A--General

    2. Amend Sec.  617.7010(a) by:
    a. Removing the reference, ``paragraph (b)'' and adding in its 
place, the reference ``paragraphs (b) and (c)'' in paragraph (a);
    b. Redesignating and revising existing paragraph (c) as new 
paragraph (d);
    c. Adding a new paragraph (c) as follows:


Sec.  617.7010  May borrower rights be waived?

* * * * *
    (c) A borrower may waive all borrower rights provided for in part 
617 of these regulations in connection with a loan syndication 
transaction with non-System lenders that are otherwise not required by 
section 4.14A(a)(6) of the Act to provide borrower rights. For purposes 
of this paragraph, a ``loan syndication'' is a multi-lender transaction 
in which each member of the lending syndicate has a direct contractual 
relationship with the borrower, but does not include a transaction 
created for the primary purpose of avoiding borrower rights.
    (d) All waivers must be voluntary and in writing. The document 
evidencing the waiver must clearly explain the rights the borrower is 
being asked to waive and provide an explanation of such rights. 
Additionally, a borrower in a loan syndication must certify in writing 
that the borrower was advised by legal counsel prior to executing a 
waiver.

    Dated: November 10, 2004.
Jeanette C. Brinkley,
Secretary, Farm Credit Administration Board.
[FR Doc. 04-25397 Filed 11-15-04; 8:45 am]
BILLING CODE 6705-01-P