[Federal Register Volume 72, Number 47 (Monday, March 12, 2007)]
[Proposed Rules]
[Pages 10939-10941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-4427]


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 Proposed Rules
                                                 Federal Register
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 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.
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  Federal Register / Vol. 72, No. 47 / Monday, March 12, 2007 / 
Proposed Rules  

[[Page 10939]]



FARM CREDIT ADMINISTRATION

12 CFR Part 627

RIN 3052-AC16


Title IV Conservators, Receivers, and Voluntary Liquidations; 
Joint and Several Liability--Priority of Claims

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, we), proposes to 
amend the priority of claims regulations to provide priority of claims 
rights to Farm Credit System (System, FCS, Farm Credit) banks if they 
make payments under a reallocation agreement to holders of consolidated 
and System-wide obligations on behalf of a defaulting System bank. We 
also propose to clarify that payments to a class of claims will be on a 
pro rata basis.

DATES: You may send comments on or before May 11, 2007.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, we encourage commenters to submit 
comments by e-mail or through the Agency's Web site or the Federal 
eRulemaking Portal. You may also send comments by mail or by facsimile 
transmission. Regardless of the method you use, please do not submit 
your comment multiple times via different methods. You may submit 
comments by any of the following methods:
     E-mail: Send us an e-mail at [email protected].
     Agency Web site: http://www.fca.gov. Once you are at the 
Web site, select ``Legal Info,'' then ``Pending Regulations and 
Notices.''
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
     Fax: (703) 883-4477. Posting and processing of faxes may 
be delayed. Please consider another means to comment, if possible.

    You may review copies of comments we receive at our office in 
McLean, Virginia, or from our Web site at http://www.fca.gov. Once you 
are in the Web site, select ``Legal Info,'' and then select ``Public 
Comments.'' We will show your comments as submitted, but for technical 
reasons we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: Christopher D. Wilson, Policy Analyst, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4414, TTY (703) 883-4434, or Rebecca S. Orlich, 
Senior Counsel, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    Our objectives in this proposed rule are to:
     Provide System banks that make payments under a 
reallocation agreement to holders of consolidated and System-wide 
obligations of a defaulting bank the same priority of claims rights 
they would have for payments made under statutory joint and several 
calls by the FCA.
     Clarify that claims in the same class will receive 
payments on a pro rata basis if there are insufficient assets in a 
receivership to pay the entire class in full.

II. Background

A. Joint and Several Liability Under the Act

    System associations obtain funding by means of direct loans from 
their affiliated Farm Credit banks. The banks in turn obtain their 
funding primarily by issuing System-wide obligations to investors 
through the Federal Farm Credit Banks Funding Corporation (Funding 
Corporation).\1\ The banks' authority to issue System-wide obligations 
is provided in section 4.2(d) of the Farm Credit Act of 1971, as 
amended (Act).\2\ Section 4.2(c) of the Act also authorizes the banks 
to obtain funding by issuing consolidated obligations with other banks 
operating under the same title of the Act, but all of the System's 
joint funding at the present time is through System-wide 
obligations.\3\
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    \1\ The Funding Corporation is the fiscal agent of the System 
established under section 4.9 of the Farm Credit Act of 1971, as 
amended (12 U.S.C. 2160).
    \2\ 12 U.S.C. 2153(d).
    \3\ 12 U.S.C. 2153(c).
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    Investors in consolidated and System-wide obligations have three 
levels of repayment sources. Under section 4.4(a)(2)(A) of the Act, 
each bank is primarily liable for the portion of any consolidated or 
System-wide obligation made on its behalf.\4\ If the bank that is 
primarily liable is unable to pay, payment must be made by the Farm 
Credit System Insurance Corporation (FCSIC), created in 1988. The FCSIC 
insures the timely payment of interest and principal on consolidated 
and System-wide obligations (these obligations are referred to as 
``insured obligations''). The source of payments by the FCSIC is the 
Farm Credit Insurance Fund (Insurance Fund), whose assets consist 
primarily of premiums paid by the System banks (as well as earnings on 
the premiums).\5\ The Insurance Fund must be used to make payments on 
behalf of System banks defaulting on their insured obligations, but the 
FCSIC also has discretion to make other expenditures out of the 
Insurance Fund.\6\
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    \4\ 12 U.S.C. 2155(a)(2)(A).
    \5\ Section 5.55 of the Act (12 U.S.C. 2277a-4).
    \6\ Section 5.60(c) of the Act (12 U.S.C. 2277a-9).
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    If a System bank is unable to pay the portion of any insured 
obligations issued on its behalf and the Insurance Fund is exhausted, 
section 4.4(a)(2) of the Act provides that the other (nondefaulting) 
System banks are jointly and severally liable for such timely payments 
as follows:
     The FCA will make calls on nondefaulting banks in 
proportion to each bank's proportionate share of the aggregate 
available collateral held by all nondefaulting banks.\7\
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    \7\ Section 4.4(a)(2)(F) of the Act requires the FCA to appoint 
a receiver upon making a joint and several call.
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     If the aggregate available collateral does not fully 
satisfy the insured

[[Page 10940]]

obligations of the defaulting bank, the FCA will make calls on all 
nondefaulting banks in proportion to each bank's remaining assets.
    A bank's ``available collateral'' is defined in section 
4.4(a)(2)(C) as ``the amount (determined at the close of the last 
calendar quarter ending before such call) by which a bank's collateral 
* * * exceeds the collateral required to support the bank's outstanding 
notes, bonds, debentures, and other similar obligations.''
    Furthermore, the Act provides subrogation rights to both the banks 
and the FCSIC for payments of insured obligations made on behalf of a 
defaulting bank. With respect to FCSIC, section 5.61(c)(1) and (2) of 
the Act provides:

    [O]n the payment to an owner of an insured obligation issued on 
behalf of an insured System bank in receivership, the [FCSIC] shall 
be subrogated to all rights of the owner against the bank to the 
extent of the payment * * * Subrogation * * * shall include the 
right on the part of the [FCSIC] to receive the same dividends from 
the proceeds of the assets of the bank as would have been payable to 
the owner on a claim for the insured obligation.\8\

    \8\ 12 U.S.C. 2277a-10(c).
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    With respect to System banks, section 4.4(a)(2)(E) provides:

    Any System bank that, pursuant to a call by the [FCA], makes a 
payment of principal or interest to the holder of any consolidated 
or System-wide obligations issued on behalf of another System bank 
shall be subrogated to the rights of the holder against such other 
bank to the extent of such payment.

B. FCA Priority of Claims Regulations

    Part 627 of our regulations governs the conduct of System 
institution conservatorships and receiverships. Section 627.2750 sets 
forth the priority of claims in the distribution of the assets of a 
bank in liquidation. After payment of certain receivership expenses and 
secured claims, paragraph (h) provides for the payment of ``[a]ll 
claims of holders of consolidated and Systemwide bonds and claims of 
the other Farm Credit banks arising from their payments pursuant to 
[joint and several calls by the FCA under] 12 U.S.C. 2155'' before 
payments are made to general creditors. Section 627.2755 requires the 
receiver to pay in full all the claims of a class of claims of the same 
priority (or make provision for such payment) before paying the claims 
of classes of lesser priority. That regulation further provides that 
the receiver must pay such claims on a pro rata basis if there are 
insufficient funds to pay in full any class of claims against a System 
association in receivership. However, the regulation does not address 
how the receiver must pay claims against a System bank or institution 
other than an association in the case of insufficient funds to pay a 
class of claims in full.

C. System Banks' Petition To Amend Regulations

    At the present time, the System banks and associations are well 
capitalized, and no bank or association has been placed in receivership 
since 1989. The FCA has never made joint and several calls on System 
banks to pay consolidated and System-wide bondholders, and monies from 
the Insurance Fund have never been used for that purpose. Nonetheless, 
the potential effect of a joint and several call based on banks' 
aggregate available collateral has caused System banks to consider 
possible alternative methodologies based on an agreement among the 
banks.
    In recent years, the banks have discussed the benefits and 
feasibility of using a methodology for joint and several calls based on 
the proportion of total System-wide debt on which each nondefaulting 
bank is primarily liable. The banks have explored the possibility of 
entering into a reallocation agreement among themselves to pay a 
defaulting bank's maturing insured obligations as the Insurance Fund is 
nearing exhaustion but before statutory joint and several calls are 
triggered. The banks have informed us that, while they are in general 
agreement on the outlines of an agreement for payment based on 
individual banks' outstanding System-wide debt, a key to an agreement 
is that payments made under the banks' agreement would be entitled to 
the same payment rights as if the banks had made the payments under a 
statutory joint and several call.
    The System banks have petitioned the FCA to amend our priority of 
claims regulations to provide the same subrogation rights to banks 
under a reallocation agreement to make joint and several payments on 
insured obligations that the banks would receive if they made payments 
under section 4.4(a)(2) of the Act. We have reviewed the banks' 
petition and believe there is merit in the banks' efforts to create an 
alternative methodology that they perceive has the potential benefit to 
increase funds available to pay a defaulting bank's insured 
obligations. Such an agreement would be subject to Agency approval. 
Therefore, we are proposing to amend our regulations to allow for such 
a reallocation agreement and to provide priority of claims rights 
equivalent to those granted to the banks for payments under section 
4.4(a)(2) of the Act.
    The proposed rule is described more fully below.

III. Description of Proposed Rule

Section 627.2750--Priority of Claims--Banks

    Section 627.2750 sets forth the priority of claims for banks in 
liquidation. Each paragraph describes a class of claims. Existing 
paragraph (h) provides for payment of claims of holders of consolidated 
and System-wide obligations and of other System banks arising from 
their payments made under statutory joint and several calls. We propose 
to add to this paragraph all claims of other System banks arising from 
their payments of consolidated and System-wide obligations under a 
reallocation agreement. The agreement must be in writing and approved 
by the FCA.

Section 627.2755--Payment of Claims

    Existing Sec.  627.2755 contains several provisions that apply to 
some or all types of System institutions that may be placed in 
receivership by the FCA under part 627 of our regulations.\9\ We 
propose to amend paragraph (a) by deleting language limiting the pro 
rata requirement to association receiverships. This will clarify that, 
in all System institution receiverships, if there are insufficient 
funds to pay a class of claims in full, payments to such class must be 
on a pro rata basis.
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    \9\ We note that part 627 of FCA's regulations does not apply to 
the Federal Agricultural Mortgage Corporation, also known as Farmer 
Mac. Regulations applicable to Farmer Mac are in part 650 of FCA's 
regulations.
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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 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 627

    Agriculture, Banks, Banking, Claims, Rural areas.

    For the reasons stated in the preamble, we propose to amend part 
627 of chapter VI, title 12 of the Code

[[Page 10941]]

of Federal Regulations to read as follows:

PART 627--TITLE IV CONSERVATORS, RECEIVERS, AND VOLUNTARY 
LIQUIDATIONS

    1. The authority citation for part 627 continues to read as 
follows:

    Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58, 5.61 of the 
Farm Credit Act (12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7, 
2277a-10).

Subpart B--Receivers and Receiverships

    2. Revise Sec.  627.2750(h) to read as follows:


Sec.  627.2750  Priority of claims--banks.

* * * * *
    (h) All claims of holders of consolidated and System-wide bonds and 
all claims of the other Farm Credit banks arising from their payments 
on consolidated and System-wide bonds pursuant to 12 U.S.C. 2155 or 
pursuant to an agreement among the banks to reallocate the payments, 
provided the agreement is in writing and approved by the Farm Credit 
Administration.
* * * * *


Sec.  627.2755  [Amended]

    3. Amend Sec.  627.2755(a) by removing the words ``described in 
Sec.  627.2745'' in the last sentence.

    Dated: March 7, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
 [FR Doc. E7-4427 Filed 3-9-07; 8:45 am]
BILLING CODE 6705-01-P