[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Proposed Rules]
[Pages 50936-50941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-20367]


 ========================================================================
 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. 75, No. 159 / Wednesday, August 18, 2010 / 
Proposed Rules  

[[Page 50936]]



FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AC60


Loan Policies and Operations; Lending and Leasing Limits and Risk 
Management

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, Agency, we, our), by the 
Farm Credit Administration Board, is publishing for comment proposed 
amendments to our regulations relating to lending and leasing limits. 
We propose lowering the current limit on extensions of credit to a 
single borrower for each Farm Credit System (System) institution 
operating under title I or II of the Farm Credit Act of 1971, as 
amended (Act). The proposed rule would not affect the lending and 
leasing limits of title III lenders under Sec.  614.4355. However, we 
are proposing that all titles I, II and III System institutions adopt 
written policies to effectively identify, limit, measure and monitor 
their exposures to loan and lease concentration risks. This proposed 
rule, if adopted, would increase the safe and sound operation of System 
institutions by strengthening their risk management practices and 
abilities to withstand volatile and negative changes in increasingly 
complex and integrated agricultural markets.

DATES: You may send comments on or before October 18, 2010.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by e-mail or through FCA's Web site. As 
facsimiles (fax) are difficult for us to process and achieve compliance 
with section 508 of the Rehabilitation Act, we are no longer accepting 
comments submitted by fax. 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].
     FCA Web site: http://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     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.
    You may review copies of all 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 ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted 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 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: Paul K. Gibbs, Senior Accountant, 
Office of Regulatory Policy, Farm Credit Administration, 1501 Farm 
Credit Drive, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-
4434; or Wendy R. Laguarda, Assistant General Counsel, Office of 
General Counsel, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of this proposed rule are to:
     Strengthen the safety and soundness of System 
institutions;
     Ensure the establishment of consistent, uniform and 
prudent concentration risk management policies by System institutions;
     Ensure that all System lenders have robust methods to 
identify, measure, limit and monitor exposures to loan and lease 
concentration risks, including counterparty risks; and
     Strengthen the ability of System lenders to withstand 
volatile and negative changes in increasingly complex and integrated 
agricultural markets.
    The proposed regulation would not change the following provisions 
of the current lending limits rule: Definitions under Sec.  614.4350; 
computation of lending and leasing limit base under Sec.  614.4351; 
lending and leasing limits for Banks for Cooperatives (BCs) under Sec.  
614.4355; BCs look-through notes under Sec.  614.4357; the base 
calculation for computing the lending and leasing limit under Sec.  
614.4358; the attribution rules under Sec.  614.4359; lending and 
leasing limit violations under Sec.  614.4360; or the transition period 
prescribed in Sec.  614.4361.\1\
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    \1\ The proposed changes will not change existing regulations 
covering underwriting standards or lending procedures under Sec.  
614.4150.
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    We have elected not to address the lending limits for title III 
lenders at this time because of the complexity of the issues involved 
in lending to cooperatives under title III of the Act. Should the 
Agency decide to address the BCs lending limits at some future time, we 
will do so in a separate rulemaking.
    All System institutions, including title III institutions, would be 
given 6 months from the effective date of new Sec.  614.4362 to 
establish and implement written policies on limiting exposures to on- 
and off-balance sheet loan and lease concentration risks as prescribed 
therein.

II. Background

    The Act \2\ does not contain general lending and leasing limits for 
titles I and II System institutions outside of specific limits for 
processing and marketing and rural housing loans. However, both the 
Agency and the System recognize that lending limits are a sound banking 
practice and an effective risk management tool that enhance the safety 
and soundness of individual System institutions and the System as a 
whole. The Agency's current lending limit regulations,\3\ promulgated 
in 1993 with an effective date in 1994, were issued due to the System's 
structural changes resulting from the Agricultural Credit Act of 1987 
(1987 Act).\4\ This regulation created a uniform lending limit for all 
System banks and associations, with the exception of BCs,

[[Page 50937]]

and for all types of loans and leases. The 25-percent lending limit 
represented a balance between the Agency's safety and soundness 
concerns and the System's concerns of being able to service the credit 
needs of creditworthy, eligible borrowers.\5\
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    \2\ Public Law 92-181, 85 Stat. 583 (Dec. 10, 1971).
    \3\ See 58 FR 40311, July 28, 1993.
    \4\ Public Law 100-233, 101 Stat. 1568 (Jan. 6, 1988).
    \5\ See 58 FR 40311, 40318, July 28, 1993.
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    The current regulations do not impose lending limits based on 
specified risks, such as undue industry concentrations, counterparty 
risk, ineffective credit administration, participation and syndication 
activity, inadequate management and accounting practices, or other 
shortcomings that might have been present in a System institution's 
financial position or business practices. When the Agency issued the 
final regulations in 1993, we stated ``limiting the amount that can be 
lent to any one borrower or a group of related borrowers is an 
effective way to control concentrations of risk in a lending 
institution and limit the amount of risk to an institution's capital 
arising from losses incurred by large `single credits.' '' \6\ Other 
than concentration of risk to a single borrower, the Agency left it up 
to each individual System lender to address industry, counterparty and 
other concentrations of risk.
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    \6\ Id. at 40311.
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III. Proposed Limit on Loans and Leases to One Borrower/Lessee

A. In General

    The Agency is proposing to lower the lending and leasing limit on 
loans and leases (loans) to one borrower or lessee (borrower) for all 
System institutions operating under title I or II of the Act from the 
current limit of 25 percent to no more than 15 percent of an 
institution's lending and leasing limit base. Specifically, FCA 
proposes to lower the lending and leasing limit in Sec. Sec.  614.4352, 
614.4353 and 614.4356 to 15 percent. We are interested in receiving 
comments on the implications of this proposed limit for the smallest-
sized associations in the System. As noted above, the calculation for 
the lending and leasing limit base in Sec.  614.4351 would remain 
unchanged, as would the lending and leasing limit base in Sec.  
614.4355 for title III lenders. The proposed 15-percent limit would 
apply on the date a loan or lease is made and at all times thereafter, 
with certain exemptions for loans that violate the lending limit as set 
forth in Sec.  614.4360.\7\
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    \7\ Section 614.4360 and its stated exemptions from the 
requirements of Sec.  615.5090 remain unchanged, as noted earlier.
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    The Agency believes the proposed 15-percent limit is appropriate 
and necessary for the safe and sound operation of the System, given the 
changes in the System's structure, growth, authorities and practices 
since the current regulations became final in 1994. While the proposed 
15-percent limit is more in line with the practices of a majority of 
System lenders, which have established, by policy, internal lending 
limits well below the current regulatory limit, some System lenders 
rely on the current 25-percent regulatory limit. Given the extensive 
System practice of establishing internal hold limits well below the 
regulatory maximum and the significant concentration risk a 25-percent 
limit represents, FCA concludes that all System lenders should be 
required to implement internal lending limits at or below the proposed 
15-percent limit based on their institutions' specific circumstances, 
resources, financial condition, business activities and capability.

B. Substantial Changes in System Structure Since the 25-Percent Limit 
Was Adopted

    Since 1994, System banks have shifted their focus from supervising 
their district associations to operating as funding banks that 
predominately extend direct loans to, and manage funding for, their 
district associations. In turn, all associations have become direct 
lenders, no longer acting as agents for the district banks or relying 
on district bank policies for their day-to-day operations. During this 
same time period, the associations have gone through significant 
restructurings and consolidations. Today, there are fewer than 90 
associations in the System and all but a few of them are structured as 
agricultural credit associations with Federal land credit and 
production credit association subsidiaries. The proposed 15-percent 
lower lending limit is more appropriate to these larger consolidated 
direct lender associations, operating primarily as stand-alone lending 
institutions with greater lending capacity than ever before.

C. Substantial Growth in System Lending Capacity Since the 25-Percent 
Limit Was Adopted

    Coupled with these operational and structural changes, there has 
been substantial growth in the capital bases of System institutions 
since 1994, giving them much greater capacity to meet the needs of 
large borrowers. For example, the median System institutions based on 
permanent capital totaled $13.7 million at year-end 1994, compared to 
$98.5 million at year-end 2009. This change represents a 621-percent 
increase in capital and has increased the 25-percent lending limit 
amount in the median System institution from $3.4 million to $24.6 
million. Additionally, when you compare the 25-percent lending limit 
amount for the median System institution in 1994 to a 15-percent 
lending limit amount for a median System institution in 2009, there is 
effectively a 333-percent increase in the amount of the lending limit 
due to the increase in the median size of System institutions. 
Furthermore, when you compare the 25-percent lending limit amount for 
the smallest and largest System institutions in 1994 to a 15-percent 
lending limit amount for the smallest and largest System institutions 
in 2009, there is effectively an increase in the maximum amount of a 
loan that could be made to a single borrower from $105,000 to $822,000 
(a 685-percent increase) for the smallest System institution and from 
$188 million to $566 million (a 202-percent increase) for the largest 
System institution.
    Accordingly, because of the substantial growth in the System's 
lending capacity, the current 25-percent lending limit is no longer 
prudent or necessary to meet the needs of the System's borrowers. While 
the borrowing needs of the System's largest borrowers have also 
increased, the tools available to the System today (such as 
participations, syndications and guarantees) have made it possible to 
meet those needs with lower, more prudent lending and leasing limits. 
Such tools can also work to mitigate lending risks by enabling System 
lenders to share credit risk with each other as well as with other non-
System lenders and governmental entities.

D. Majority of System Institution Lending Limit Practices

    The Agency has found that a majority of System lenders have 
implemented internal lending limits at levels not only lower than the 
current 25-percent regulatory limit but, in many cases, lower than the 
proposed 15-percent limit. Therefore, the proposed 15-percent limit 
would be in line with a majority of the current lending practices in 
the System and, we believe, would not significantly disrupt System 
institution operations.
    The Agency also believes that even with the proposed lower limit of 
15 percent, the growth in System capital since 1994 leaves sufficient 
lending and leasing capacity in the System to adequately serve the 
credit needs of creditworthy, eligible borrowers.

[[Page 50938]]

E. Enhanced System Authorities Since the 25-Percent Limit Was First 
Adopted

    Since 1994, System institutions have used the authorities granted 
under the Act and implemented through FCA regulations to increase their 
loan portfolios and meet the mission of providing sound, adequate and 
constructive credit to American agriculture. During this time period, 
loans to processing and marketing operations have increased to meet the 
changing nature and needs of farming over the last decade and a half. 
Likewise, the System's ability to participate and syndicate loans both 
within and outside of the System has also grown since 1994. System 
institutions now routinely serve large borrowers by buying and selling 
participation and syndication interests to other System institutions 
and other lenders.
    The System's lending authorities ensure adequate credit for the 
next generation of farmers and are necessary for the future of a strong 
and stable agricultural industry. The System's lending authorities also 
allow farmers and ranchers to diversify their incomes and financial 
portfolios. However, the varied loans made for multiple agricultural 
purposes are not without a degree of risk, particularly when 
concentrations are not identified, measured, and managed. Similarly, 
while the System's increased participation and syndication channels 
reduce the risk of credit to large borrowers and enable System 
institutions to continue serving such large customers notwithstanding 
the proposed 15-percent lower lending limit, they also are not without 
some risk. Such lending channels increase counterparty risks, or those 
risks created by the potential default of the multiple parties doing 
business with the System.
    Therefore, System institutions must carefully manage and control 
the counterparty risk posed by purchasing or selling loan exposures 
through participations or syndications to other System and non-System 
lenders. With appropriate use and risk controls over syndications and 
participations, the Agency believes that the proposed 15-percent lower 
lending limit would reduce the potential risks of all large loans 
without jeopardizing the System's ability to provide the varied and 
multiple forms of credit that are necessary in today's agricultural 
environment.

F. Lending Limits of Other Federally Chartered Lending Institutions

    We recognize that a single industry lender like the System is not 
comparable in many respects to other Federally chartered lending 
institutions with more diverse lending authorities. Consequently, 
different factors are considered when arriving at a lending limit for 
the System. Notwithstanding these differences, we note that the 15-
percent proposed lower lending limit for the System is comparable to 
the lending limits of other Federally chartered lending 
institutions.\8\ We do not believe, therefore, that the proposed lower 
limit would put System institutions at a competitive disadvantage in 
the agricultural lending marketplace.
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    \8\ See, e.g., 12 CFR 32.3 (Office of the Comptroller of the 
Currency); 12 CFR 560.93 (Office of Thrift Supervision); and 12 CFR 
701.21 and 12 CFR 723.8 (National Credit Union Administration).
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G. Repeal of Sec.  614.4354

    The proposed rule would repeal Sec.  614.4354 pertaining to Federal 
land bank associations (FLBAs) since such associations have all been 
converted to direct lending institutions. We note, however, that the 
repeal of Sec.  614.4354 does not affect, modify, or change in any 
manner FCA's authority to charter an FLBA without direct lending 
authority in the future. If we were to issue such a charter at some 
future point, this provision of the regulation would be repromulgated 
to establish a lending limit for such an association.

H. Transition Period for Lower Lending Limit

    As previously noted, the proposed regulations would not change the 
existing transition rules in Sec.  614.4361. However, we want to make 
clear that this section should be read as providing that certain 
nonconforming loans (including commitments) made or attributed to a 
borrower prior to the effective date of existing subpart J, or the 
amendments proposed herein, will not be considered a violation of the 
lending and leasing limits during the existing contract terms of such 
loans, provided such loans complied with the regulatory lending limit 
when made.

IV. Policy on Limiting Exposures to Loan and Lease Concentration Risks

A. In General

    In addition to proposing a lower limit on loans to one borrower, 
FCA is proposing that each System lender's board of directors adopt and 
ensure implementation of a written policy that would effectively 
identify, measure, limit and monitor exposures to loan and lease 
concentration risks. This policy should include both on- and off-
balance sheet loan and lease exposures (participation and syndication 
activity).
    The country's recent economic crisis revealed the increasing 
complexity and volatility of the financial world over the past few 
decades. The increase in types and complexity of financial 
instruments--including mortgage-backed securities, collateralized debt 
obligations and credit default swaps--along with the rise in imprudent 
home mortgage lending practices helped to create the current 
instability and uncertainty in the financial lending markets that 
System institutions, along with all other lenders, are experiencing 
today.
    Like the growing complexity in the financial markets, agricultural 
markets and industries have also become more complex, integrated, 
inter-related and potentially turbulent over the years. The System has 
not been immune to these financial or agricultural instabilities. For 
instance, the recent financial woes in the biofuels industry (namely 
ethanol) that the System funded left many System institutions with 
large troubled loans with related potential loss exposures. Similarly, 
the recent financial troubles of the largest poultry industry producer 
in the United States had a domino and damaging effect on contract 
poultry growers throughout the industry, which demonstrated the impact 
of concentration risk and ultimately created credit stress in several 
System institutions. For these reasons, we believe enhanced focus on 
all loan and lease concentration risks is essential.

B. Safety and Soundness

    While many System lenders have adopted policies to manage their 
exposures to loan concentration risks, a number of institutions do not 
have any formal or written policies in place. Furthermore, some of 
those System institutions with established internal concentration 
limits operate without board policies that adequately address all 
aspects of identifying, measuring, limiting and monitoring those 
concentration risks that could adversely impact the institution's 
financial performance. FCA believes that the proposed policy 
requirements would ensure a comprehensive approach to mitigating loan 
and lease concentration risks and would represent a best practice in 
loan portfolio management. Such policies would help ensure the 
continuance of a safe and sound System by potentially reducing 
exposures to concentration risks.

[[Page 50939]]

    The proposed policy requirement is intended to address 
vulnerabilities in System loan portfolios resulting from both on- and 
off-balance sheet loan concentration risks, in particular those 
concentration risks that are not addressed by the attribution 
provisions of Sec.  614.4359.
    The Agency recognizes that there is not one ideal uniform approach 
to a loan concentration risk mitigation policy. Accordingly, this 
proposal outlines only the minimally required elements of such a 
policy. We have placed substantial responsibility on the board of 
directors to establish more detailed policies and procedures 
appropriate to the nature and scope of their institutions' credit 
activities, territory and risk-bearing capacity. For example, under the 
category of ``other concentration risks,'' System banks may find it 
necessary to develop policies that focus on district-wide loan 
concentrations and on the participation and syndication loans in their 
portfolios.

C. Policy Elements

    In addition to the specific loan and lease concentration risk 
exposures discussed below under ``Quantitative Methods'' in Part D, we 
are proposing to require that the policy include the following elements 
to ensure that it is properly developed, implemented and monitored:
    1. A clearly defined purpose and objective statement that sets 
forth the objectives of the policy and specific means of achieving such 
objectives. The Agency believes that such a statement would engage 
System boards of directors in forming a philosophy and direction for 
the management of their institutions' loan portfolio in the area of 
concentration risk mitigation.
    2. Clearly defined terms that are used consistently throughout the 
policy.
    3. Internal control requirements that:
    a. Define those authorities delegated to management. Such 
requirements should set forth organizational structure and reporting 
lines that clearly delineate responsibility and accountability for all 
management functions pertaining to mitigating exposures to both on- and 
off-balance sheet loan and lease concentration risks, including risk 
identification, measurement, limitation and oversight. In addition, the 
policy should establish, when feasible, a separation of duties between 
personnel executing transactions and those responsible for approval, 
evaluation and oversight of credit activities. This separation of 
duties promotes integrity and accuracy in lending practices that 
reduces the risk of loss. Finally, the policy should cross-reference 
the conflict of interest regulations in part 612 of this chapter to 
ensure that employees directly involved in lending and leasing are 
aware of their responsibilities to disclose actual or apparent 
conflicts with their official duties.
    b. Define those authorities retained for board action. Each 
institution's board of directors has a fiduciary duty to ensure that 
its institution's lending and leasing activities are prudently managed 
and in compliance with all applicable laws and regulations. 
Additionally, the board must ensure that the institution has adequate 
and qualified personnel to manage the risks associated with its lending 
and leasing activities. To this end, the Agency encourages each System 
board of directors to review its loan and lease portfolio concentration 
risk mitigation policy every year and make any adjustments that are 
necessary and proper in light of the institution's financial position 
and the lending environment.
    c. Address exceptions to the policy. Such procedures should set 
forth the basis for detecting deviations from, and making exceptions 
to, the policy requirements. In addition, the policy should describe 
the duties and responsibilities of management with regard to 
recommending and reporting on policy deviations or exceptions to the 
institution's board of directors, including what corrective actions 
must be taken to restore compliance with the policy. In no event may 
the lending and leasing limit exceed the applicable regulatory limits 
for title I, II, or III institutions.
    d. Describe reporting requirements. Such requirements should 
describe the content and frequency of the reports and the office or 
individual(s) responsible for preparing them for an institution's board 
of directors. The reports should focus on providing information that 
interprets the data and focuses the board on what is crucial to 
understand and consider.

D. Quantitative Methods

    The Agency is proposing that each policy contain a quantitative 
method(s) to measure and limit identified exposures to on- and off-
balance sheet loan and lease concentrations emanating from:
    (i) A single borrower;
    (ii) Borrowers in a single sector in the agricultural industry;
    (iii) A single counterparty; or
    (iv) Unique factors because of the institution's territory, nature 
and scope of its activities and risk-bearing capacity. Unique 
concentration exposures might include, but not limited to, borrowers 
that are reliant on the same processor, marketer, manager, integrator 
or supplier (or any combination thereof).
    Quantitative methods could include hold limits (for example, as a 
percentage of risk funds, capital, earnings/net income or other 
appropriate measurements or methods) that reasonably measure and limit 
concentration risk exposures. We emphasize that the proposed 15-percent 
regulatory limit on loans to one borrower establishes a ceiling limit. 
We encourage System institutions to choose more conservative limits on 
loans to one borrower as a majority of them have done under the current 
regulatory limit. When arriving at quantitative methods, System 
institutions should strongly take into account the stability and 
strength of their capital positions and set their hold limits or other 
risk management measures accordingly.
    The following are examples of concentration risk exposures that 
might be unique to a lender's territory:
     An institution has a preponderance of borrowers in its 
territory that are dependent on off-farm income from the same area 
manufacturing plant where the potential downsizing or closing of the 
plant could have a negative effect on loan repayment abilities.
     An institution has a preponderance of independent 
borrowers selling production to a very limited market (such as farmers 
selling eggs, sugar beets, cranberries) where a squeeze in the market 
could have a negative effect on loan repayment abilities.
     An institution has a preponderance of borrowers structured 
as limited liability companies or partnerships in which the same 
individuals or group of individuals own interests--not enough to 
trigger the attribution provisions under this subpart--but enough to 
create instability among the group of borrowers should the common 
investors experience financial difficulties.
     An institution has a preponderance of borrowers in a newly 
emerging market, such as biofuels, which also is an industry outside of 
the institution's area of expertise and in which volatile and 
unforeseen trends in the industry can have a negative effect on loan 
repayment abilities.

In all the foregoing examples, System institutions should prudently 
identify, measure, limit and monitor loan concentrations to these 
groups of borrowers.

    In determining concentration risk limits, the policy should take 
into

[[Page 50940]]

consideration other risk factors that could reasonably identify 
foreseeable loan and lease losses. Such risk factors could include 
borrower risk ratings, the institution's relationship with the 
borrower, the borrower's knowledge and experience, loan structure, type 
and location of collateral (including loss given default ratings), 
loans to emerging industries or industries outside of an institution's 
area of expertise, out-of-territory loans, counterparties, or 
weaknesses in due diligence practices. This list is exemplary only and 
not meant to be exhaustive. The risk factors to be considered by an 
institution would depend on the unique circumstances of the 
institution's credit operations.
    System institutions should give special consideration to 
counterparty risks. For example, when entering into a participation, 
the institution should consider how well it knows and trusts the 
originator to make full and fair disclosures and to competently service 
the loan. Conversely, when a System institution originates a 
participation, it must ensure that there are no material 
misrepresentations in its disclosures and that it has the ability to 
properly service the loan. System institution originators should also 
consider the risk of holding the entire loan should the loan become 
distressed and the counterparties prevail against the System 
institution in a lawsuit requiring the System institution to take back 
the participation. System institutions should consider the risks of 
concentrating too much of their participation and syndication loans 
with the same third party. Finally, System institutions should ensure 
that their policies prudently identify, measure, limit and monitor 
counterparty exposures with respect to their participation and 
syndication activity.
    We emphasize that robust due diligence practices are especially 
important when institutions are making loans outside of their 
territories or core areas of expertise, or with counterparties.

E. Six-Month Timeframe To Issue a Policy

    The proposed regulations would require all System lenders 
(including a title III lender) to establish written loan and lease 
concentration risk mitigation policies within 6 months from the 
effective date of these revised regulations. FCA believes that 6 months 
is a sufficient amount of time for System boards to design and adopt 
the policy requirements prescribed in new Sec.  614.4362.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), 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 Farm Credit 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, Farm Credit System institutions are not ``small entities'' 
as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 614

    Agriculture, Banks, Banking, Foreign trade, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, part 614 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. The authority citation for part 614 continues to read as 
follows:

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013, 
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207, 
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 
of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart J--Lending and Leasing Limits


Sec.  614.4352  [Amended]

    2. Section 614.4352 is amended by:
    a. Removing the comma after the word ``borrower'' and removing the 
number ``25'' and adding in its place, the number ``15'' in paragraph 
(a);
    b. Removing the comma after the word ``Act'' and removing ``exceeds 
25'' and adding in its place ``exceed 15'' in paragraph (b)(1); and
    c. Removing the comma after the word ``Act'' and removing 
``exceeds'' and adding in its place ``exceed'' in paragraph (b)(2).


Sec.  614.4353  [Amended]

    3. Section 614.4353 is amended by:
    a. Adding the words ``direct lender'' after the word ``No'';
    b. Removing the comma after the word ``borrower''; and
    c. Removing ``exceeds 25'' and adding in its place ``exceed 15''.


Sec.  614.4354  [Removed]

    4. Section 614.4354 is removed.


Sec.  614.4356  [Amended]

    5. Section 614.4356 is amended by removing the number ``25'' and 
adding in its place, the number ``15''.
    6. Section 614.4361 is amended by adding a new paragraph (c) to 
read as follows:


Sec.  614.4361  Transition.

* * * * *
    (c) The loan and lease concentration risk mitigation policy 
required by Sec.  614.4362 must be adopted and implemented within 6 
months from the effective date of such section.
    7. A new Sec.  614.4362 is added to subpart J to read as follows:


Sec.  614.4362  Loan and lease concentration risk mitigation policy.

    The board of directors of each System direct lender institution 
must adopt and ensure implementation of a written policy to effectively 
measure, limit and monitor exposures to concentration risks resulting 
from the institution's lending and leasing activities.
    (a) Policy elements.
    (1) The policy must include:
    (i) A purpose and objective;
    (ii) Clearly defined and consistently used terms;
    (iii) Quantitative methods to measure and limit identified 
exposures to loan and lease concentration risks (as set forth in 
paragraph (b) of this section); and
    (iv) Internal controls that delineate authorities delegated to 
management, authorities retained by the board, and a process for 
addressing exceptions and reporting requirements.
    (b) Quantitative methods.
    (1) At a minimum, the quantitative methods included in the policy 
must quantifiably measure and limit identified concentration risk 
exposures emanating from:
    (i) A single borrower;
    (ii) A single industry sector;
    (iii) A single counterparty; or
    (iv) Other lending activities unique to the institution because of 
its territory, the nature and scope of its activities and its risk-
bearing capacity.
    (2) In determining concentration limits, the policy must consider 
other risk factors that could reasonably identify foreseeable loan and 
lease losses. Such risk factors could include

[[Page 50941]]

borrower risk ratings, the institution's relationship with the 
borrower, the borrower's knowledge and experience, loan structure and 
purpose, type or location of collateral (including loss given default 
ratings), loans to emerging industries or industries outside of an 
institution's area of expertise, out-of-territory loans, 
counterparties, or weaknesses in due diligence practices.

    Dated: August 12, 2010.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 2010-20367 Filed 8-17-10; 8:45 am]
BILLING CODE 6705-01-P