[Federal Register Volume 72, Number 186 (Wednesday, September 26, 2007)]
[Rules and Regulations]
[Pages 54527-54529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-18968]


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FARM CREDIT ADMINISTRATION

12 CFR Part 627

RIN 3052-AC16


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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, we), issues this 
final rule amending 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. The final rule also clarifies that payments to 
a class of claims will be on a pro rata basis.

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

[[Page 54528]]

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\ Currently, 
all of the System's joint funding 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. The first level is a bank's own primary 
liability under section 4.4(a)(2)(A) of the Act \4\ for its portion of 
any consolidated or System-wide obligation. The second level is 
payments made by the Farm Credit System Insurance Corporation (FCSIC) 
under section 4.4(d) of the Act if a bank is unable to pay its portion 
of liability on consolidated or System-wide obligations. The third 
level is joint and several calls made by FCA on nondefaulting banks 
under section 4.4(a)(2) of the Act in proportion to each bank's 
proportionate share of the aggregate available collateral \5\ held by 
all nondefaulting banks, or in proportion to each bank's remaining 
assets if the aggregate available collateral does not fully satisfy the 
insured obligations of the defaulting bank. The Act provides 
subrogation rights to both the banks and the FCSIC for payments of 
insured obligations made on behalf of a defaulting bank under sections 
4.4(a)(2)(E) \6\ and 5.61(c)(1),\7\ respectively.
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    \4\ 12 U.S.C. 2155(a)(2)(A).
    \5\ 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.''
    \6\ 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.''
    \7\ Section 5.61(c) provides: ``On 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.''
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B. Proposed Rule

    We proposed an amendment to the priority of claims rule in response 
to a petition by System banks to provide the same subrogation rights to 
banks for making joint and several payments on insured obligations 
under a reallocation agreement that the banks would receive if they 
made payments under section 4.4(a)(2) of the Act. In recent years, the 
banks have discussed the benefits and feasibility of using a 
methodology for paying 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 Farm Credit Insurance Fund is 
nearing exhaustion but before statutory joint and several calls are 
triggered. The banks have informed us that, while they have generally 
agreed 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 would be entitled to the same payment rights as if the 
banks had made the payments under a statutory joint and several call. 
Such an agreement would be subject to Agency approval.
    The proposed revision to the priority of claims rule as well as the 
amendment to clarify the related payment of claims regulation on pro 
rata payments were published in the Federal Register on March 12, 
2007.\8\ The proposals had a 60-day comment period that ended on May 
11, 2007. The proposals are described in Part III below.
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    \8\ See 72 FR 10939. See the preamble of this proposal for more 
in-depth discussion of the banks' joint and several liability under 
the Act.
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C. Comments on Proposed Rule

    We received three comments: One from the Farm Credit Council (FCC) 
on behalf of all System institutions, and two others from System banks. 
All of the commenters fully supported the revision to the priority of 
claims rule as proposed and did not suggest any changes. Furthermore, 
the FCC letter stated that it offered no objections to our proposal to 
clarify that payments to a class of claims would be on a pro rata basis 
if there are insufficient funds to pay the class in full.
    One commenter also asked us to consider a rulemaking to add 
subordinated debt to the list of claims priority categories in part 
627. At present, the liquidation priority of subordinated debt is not 
expressly addressed in our regulations. We agree that it is appropriate 
to specify the liquidation priority of claims of subordinated 
debtholders and are issuing a direct final rule on that subject 
concurrent with this final rule.

III. Description of Final Rule

Section 627.2750--Priority of Claims--Banks

    Section 627.2750 sets forth the priority of claims for banks in 
liquidation. 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. In the proposed rule, we proposed to revise this 
paragraph to include all claims of other System banks arising from 
their payments of consolidated and System-wide obligations under a 
reallocation agreement that is in writing and approved by the Agency. 
We adopt this provision as final.

Section 627.2755--Payment of Claims

    Existing Sec.  627.2755 contains several priority of claims 
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\ In the proposed rule, we proposed to amend paragraph 
(a) by removing language limiting the pro rata distribution 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. We adopt this provision as final.
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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 parts 650-655 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 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.


0
For the reasons stated in the preamble, we are amending part 627 of 
chapter VI,

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title 12 of the Code of Federal Regulations to read as follows:

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

0
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

0
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]

0
3. Amend Sec.  627.2755(a) by removing the words ``described in Sec.  
627.2745'' in the last sentence.

    Dated: September 20, 2007.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E7-18968 Filed 9-25-07; 8:45 am]
BILLING CODE 6705-01-P