[Federal Register Volume 79, Number 139 (Monday, July 21, 2014)]
[Proposed Rules]
[Pages 42238-42241]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-16695]


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FARM CREDIT ADMINISTRATION

12 CFR Chapter VI

RIN 3052-AC88


Statement on Regulatory Burden

AGENCY: Farm Credit Administration.

ACTION: Final Notice of Intent.

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SUMMARY: This document is part of the Farm Credit Administration's 
(FCA, Agency, we or our) 2013 initiative to reduce regulatory burden 
for Farm Credit System (FCS or System) institutions. Several System 
institutions responded to our July 2013 request for comments by 
identifying regulations that they considered burdensome, ineffective, 
or duplicative, and this document responds to those comments.

DATES: July 21, 2014.

ADDRESSES: Farm Credit Administration, 1501 Farm Credit Drive, McLean, 
Virginia 22102-5090.

FOR FURTHER INFORMATION CONTACT: 
Lori R. Markowitz, Policy Analyst, Office of Regulatory Policy, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4487, TTY (703) 
883-4056; or
Mary Alice Donner, Senior Counsel, Office of General Counsel, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 
883-4056.

SUPPLEMENTARY INFORMATION: 

I. Background

    On July 18, 2013, we published a document in the Federal Register 
inviting the public to comment on our regulations that duplicate other 
requirements, are not effective in achieving stated objectives, are not 
based on law, or impose burdens that are greater than the benefits 
received.\1\ We received letters from Farm Credit East, ACA (Farm 
Credit East), Farm Credit Services of America, ACA (FCSA), Lone Star 
AgCredit, ACA (Lone Star), AgSouth Farm Credit, ACA (AgSouth), and the 
Farm Credit Council (Council) containing 16 comments. The letters 
commented on regulations concerning: Standards of conduct; eligibility 
and scope of financing; participations and syndications; liquidity 
reserve; issuance of equities; borrower rights; production of 
documents; financing for farm-related services; advisory votes on 
senior officer compensation; FCA guidance; and technical corrections 
needed.
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    \1\ See 78 FR 42893.
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    The purpose of this document is to discuss the comments raised 
about FCA

[[Page 42239]]

regulations and FCA activities. A number of the issues raised by 
commenters concern changes that cannot be implemented because they are 
inconsistent with the Farm Credit Act of 1971, as amended (Act), safety 
and soundness, and/or other guidance. Some comments raise issues that 
are the subject of other regulatory projects scheduled for 
consideration by the FCA as set forth in the FCA's 2014 Regulatory 
Project Plan, which is available on the FCA's Web site, and those 
issues will be addressed in the planned regulatory projects. In other 
cases, commenters identified issues that need significant further 
evaluation before we can consider whether changes are appropriate. 
Although we are not recommending changes to these regulations at this 
time, we may propose changes in the future.

II. Regulations That We Are Not Proposing To Change at This Time

A. Standards of Conduct

    Comment: The Council stated that the requirements in Sec. Sec.  
612.2140 and 612.2150 regarding director- and employee-prohibited 
conduct prohibit System employees and directors from acquiring property 
owned by the bank or any affiliated association that was acquired as a 
result of a foreclosure or similar action except by inheritance or 
through public auction or open competitive bidding available to the 
general public. The Council stated that the Standards of Conduct 
regulations could reference collateral acquired by a System institution 
directly or through use of an acquired property unincorporated business 
entity.
    FCA Response: On February 20, 2014, the FCA published a proposed 
rule that would amend our Standards of Conduct regulations. See 79 FR 
9649. This comment is being considered by the FCA as part of that 
rulemaking project.

B. Eligibility and Scope of Financing

    Comment: The Council and Farm Credit East both felt that there is a 
need to revisit the processing and marketing authorities found in Sec.  
613.3010, which deal with financing for processing or marketing 
operations. They both stated that there is considerable overlap between 
certain farm-related business services with some processing and 
marketing operations. They both feel that the idea that a marketing and 
processing business provides value to local agriculture only when there 
is some throughput is out of step with the realities of today's local 
food systems and inhibits the System's ability to serve the growing 
local food industry.
    FCA Response: The requirement for throughput in order to finance 
processing and marketing operations is found in the Act, particularly 
in sections 1.11 and 2.4. FCA regulations echo the requirements in the 
Act and do not place any additional quantifier on how much throughout 
is required. While we are not aware of any regulatory changes that we 
could make in implementation of this statutory requirement at this 
time, we note that we do have an active project on our 2014 Regulatory 
Projects Plan to review our regulations relating to lending to farm-
related businesses. We will consider this comment in connection with 
that review.

C. Participations/Syndications Reporting Requirements

    Comment: Farm Credit East commented that the reporting requirements 
in the participations/syndications study are burdensome and manually 
intensive. Farm Credit East states that the study has been in place for 
several years and it would be appropriate for the FCA to revise the 
definition of participation therefore eliminating the burdensome nature 
of the study.
    FCA Response: The FCA appreciates that the reporting requirements 
for this study can be inconvenient in the short term. However, we 
believe that detailed reporting is necessary for a thorough analysis of 
the issue and credibility of the study. We will take these comments 
into consideration as we continue to evaluate the syndication study and 
its reporting requirements.

D. Liquidity Reserve

    Comment: The Council stated that under Sec.  615.5143, securities 
used for investment, risk management, or cash management purposes 
cannot count toward meeting regulatory liquidity standards. The Council 
states that the FCA's requirement that an investment serve a single 
purpose is unduly burdensome and increases costs for System 
institutions.
    FCA Response: Section 615.5143 provides that ineligible investments 
may not satisfy liquidity requirements under Sec.  615.5134. Section 
615.5134(c) provides that an unencumbered investment held in the 
liquidity reserve cannot be used as a hedge against interest rate risk 
if liquidation of that particular investment would expose the bank to a 
material risk of loss. Inversely, as the FCA discussed in the preamble 
to its final rule on investment management, the rule allows a System 
bank to hedge interest rate risk with assets held in the liquidity 
reserve provided that the hedging activity would not expose the bank to 
a material risk of loss in a liquidity crisis.\2\ This issue was vetted 
recently in connection with that rulemaking and we continue to believe 
that for safety and soundness reasons all assets held in the liquidity 
reserve should be unencumbered, marketable, and should not be used as a 
hedge against interest rate risk if liquidation of that particular 
investment would expose the bank to a material risk of loss. The FCA 
encourages the Council and others to consider submitting this and 
related comments in response to the FCA's request for comment on its 
proposed Investment Eligibility rule.\3\
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    \2\ See 78 FR 23438, 23450 (April 18, 2013).
    \3\ See FCA News Release, June 12, 2014; http://www.fca.gov. 
Following a 30-day period for congressional review, the proposed 
rule will be published in the Federal Register for a 90-day comment 
period.
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E. Issuance of Equities

    Comment: The Council commented that the 60-day approval window 
required under Sec.  615.5255(f) for issuance of equities can preclude 
a System institution from taking advantage of market conditions and 
result in a more costly preferred stock issuance. The Council suggested 
that the FCA consider establishing a shelf registration process which 
could provide for a standardized preferred stock offering and be valid 
for a set period of time. The FCA could approve the terms and 
conditions of the offering. When the institutions determine that market 
conditions are right, they could submit revised recent financial 
results for expedited FCA approval and then issue the preferred stock.
    FCA Response: The FCA agrees that there may be situations in which 
a shelf registration process is efficient. The FCA is open to and will 
consider and evaluate any institution request under Sec.  615.5255 to 
establish a shelf registration for a standardized preferred stock 
offering for a set period of time. We would prefer to continue to 
address this topic on a case-by-case basis under Sec.  615.5255 until 
we and FCS institutions have gained more experience with shelf 
approvals. After further study, FCA may propose changes to Sec.  
615.5255 to incorporate shelf approvals or may provide guidance in an 
Agency Bookletter or Informational Memorandum.

F. Borrower Rights

    Comment: Lone Star commented that the requirements outlined under 
Sec.  617.7410(a) should be clarified or expanded to recognize and take 
into account that the purpose of a distressed

[[Page 42240]]

loan restructuring and safety and soundness are not satisfied when a 
borrower engages in criminal activity or diverts, wastes, or dissipates 
collateral. Lone Star further stated that a qualified lender should not 
be required to offer a distressed loan restructuring to a borrower who 
has engaged in a criminal activity, such as fraud, false statements on 
an application, false financial information, misapplication of 
fiduciary property, or related activities independent of collateral 
issues altogether. The qualified lender, under those circumstances, 
should be able to take actions necessary to protect the collateral and 
minimize the loss to the institution without having to first offer an 
opportunity to restructure the distressed loan.
    FCA Response: The rules regarding borrower rights are set forth by 
statute. The Act provides generally that a lender may not foreclose on 
any distressed loan before providing notice and giving the borrower an 
opportunity to apply for loan restructuring. See section 4.14A(b). A 
lender may consider the borrower's management skills to protect the 
collateral, including any suspected wrongful activity, in the lender's 
consideration of the borrower's application for restructuring. See 
section 4.14A(d). The lender's authority to enforce a contractual 
provision allowing foreclosure without following restructuring 
procedures is also dictated by statute. The Act provides that a lender 
may enforce contractual provisions that allow the lender to foreclose 
if the lender has reasonable grounds to believe that the loan 
collateral will be destroyed, dissipated, consumed, concealed or 
permanently removed from the State. See section 4.14A(j). The FCA is 
unable to issue regulations expanding upon this statutory authority. In 
analyzing a restructuring application and in considering whether a 
lender has grounds for taking immediate action to protect collateral, 
we caution that suspicion or evidence of a criminal act or the filing 
of a criminal referral to appropriate authorities does not establish 
guilt of any criminal activity.
    Comment: Farm Credit East commented that in cases where a borrower 
has recommended a loan restructuring plan and the association wishes to 
accept that plan, it should not be required to conduct a separate least 
cost analysis for the restructuring request.
    FCA Response: FCA has previously concluded in its Frequently Asked 
Questions on borrowers' rights, available on our Web site, that the 
least cost analysis is required by the Act, is appropriate for a safe 
and sound analysis of whether to restructure the loan, and should be 
prepared for every plan of restructure. Section 4.14A(d) of the Act 
provides that when a qualified lender receives an application for 
restructuring from a borrower, the qualified lender must consider, in 
determining whether or not to restructure the loan, whether the cost of 
restructuring is equal to or less than the cost of foreclosure. Such 
analysis provides a sound basis for an association to determine whether 
and under what terms a restructuring application should be approved. 
FCA is frequently reviewing issues relating to borrowers' rights as 
part of its examination process as well as its borrower complaint 
review process. We will give further consideration to this comment and 
consider whether we can provide any additional guidance or identify 
options for conducting a more streamlined analysis for new 
restructuring applications that the association believes should be 
approved, when a least cost analysis with respect to the loan has 
already been performed.

G. Production of Confidential Documents

    Comment: The Council stated that the FCA should amend Sec.  
618.8330 to permit an institution to produce documents in cases when an 
attorney is acting as an officer of the court in states where that is 
permitted. AgSouth, FCSA and Farm Credit East stated that the current 
process related to the production of documents during civil litigation 
requires an order signed by a judge and creates unnecessary burdens of 
time and expense for the association, while affording no additional 
protection to the borrower. AgSouth stated that each state has rules in 
place that require counsel to maintain the confidentiality and 
integrity of the information sought and there is no discernible risk to 
the borrower over having a judge issue the order.
    FCA Response: Section 618.8330(a) allows a bank or association to 
disclose confidential information if it is a party to the litigation. 
Section 618.8330(b) provides that if a bank or association is not a 
party to the litigation, confidential borrower information may be 
released only if a judge issues an order. We understand and appreciate 
the feedback that this requirement may pose an inconvenience to the 
institution. At the same time, we believe it is important to ensure 
impartial and fair decisions as to whether the litigant needs the 
confidential information in the institution's possession. Although we 
are not proposing a regulatory change at this time, we will research 
and consider the state of the law on discovery orders and whether there 
may be alternative means of protecting confidential institution and 
borrower information while providing more flexibility and less burden 
for institutions.

H. Financing for Farm-Related Services

    Comment: The Council and Farm Credit East stated that we should 
consider a revision to Sec.  613.3020 regarding eligibility for farm-
related service financing. Both believe that the Act allows the FCA 
considerable discretion in defining the types of businesses eligible to 
be considered ``farm-related'' services and that the 50-percent 
requirement for full financing is too restrictive. The Council stated 
that in many cases involving farm-related businesses, the service 
component is so interwoven with the product being provided, any attempt 
to distinguish the service amount from the value of the product can be 
arbitrary. The Council noted that the FCA included an ``end review'' of 
the Farm Related Services authority on its Fall 2013 Regulatory Agenda. 
The Council and Farm Credit East also stated that the FCA should 
include ``aquatic-related'' service providers as eligible for System 
financing. Further, the Council believes the FCA should undertake a 
comprehensive review of the statutory authority and remove any 
impediments to eligibility for System financing that is not based on 
the Act.
    FCA Response: The FCA is conducting an ongoing review to evaluate 
the System's lending to farm-related service businesses under Sec.  
613.3020 and whether our regulations provide the appropriate framework 
for determining eligibility and purposes of financing for service 
providers, including service providers within local food systems, in 
accordance with the Act. We are considering these comments as part of 
that review. As indicated in FCA's 2014 Regulatory Projects Plan, the 
FCA projects it will continue this review through September of 2014.
    With respect to aquatic-related services, sections 1.9(2), 
1.11(c)(1), and 2.4(a)(3) of the Act authorize title I and II System 
lenders to extend credit to businesses that furnish farm-related 
services to farmers and ranchers directly related to their on-farm 
operation needs. The Act does not reference financing businesses that 
furnish aquatic-related services to aquatic producers and harvesters. 
We are closely following this topic.

[[Page 42241]]

I. Advisory Votes on Senior Officer Compensation

    Comment: Farm Credit East commented that Sec.  611.410, which 
addresses non-binding advisory votes on senior officer compensation, 
should be repealed as it raises legal liability issues for System 
directors. Farm Credit East stated further that the regulations are 
unnecessary and burdensome.
    FCA Response: On June 9, 2014, the FCA Board approved a final rule 
to remove non-binding, advisory vote provisions \4\ and repeal this 
regulation.
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    \4\ See 79 FR 34621, June 18, 2014.
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J. Inconsistent Interpretations of Regulations and Guidance

    Comment: The Council noted a concern regarding Agency 
interpretations of existing regulations. The Council stated that in 
many cases the guidance provided by the FCA with respect to regulations 
is helpful, but in some cases the Agency confuses ``other guidance'' 
with adopted regulations. The Council stated that one area System 
institutions report inconsistent interpretations by examiners is the 
requirement for System institution Human Capital Plans under Sec.  
618.8440(b)(7). Another concern noted by the Council relates to Federal 
Financial Institutions Examination Council (FFIEC) guidance. The 
Council stated that the FCA often makes reference to guidance from the 
FFIEC but considers it voluntary. The Council asserted that if the FCA 
references FFIEC guidance, it would be more appropriate to go through 
the proper procedures for adopting the guidance formally.
    FCA Response: The FCA appreciates this feedback on its regulatory 
and examination activities. We agree that inconsistent interpretations 
of our regulations or guidance can create confusion and can be 
burdensome to institutions. We are committed to working to reduce any 
inconsistencies that may exist. To address the specific issue with 
respect to the Human Capital Plans required by Sec.  618.8440(b)(7),\5\ 
we hope that FCA's ``Frequently Asked Questions (FAQ) on Operating and 
Strategic Business Planning for Diversity and Inclusion'' will help 
reduce inconsistencies in interpretation of those requirements.\6\ 
Questions 4 through 10 of the FAQs address Human Capital Plans. The 
Office of Examination is working diligently to ensure a consistent 
examination approach to these provisions.
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    \5\ See 77 FR 25577, May 1, 2012.
    \6\ The FAQs can be found at http://www.fca.gov/about/businessplanning-diversity.html.
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    The FFIEC is a formal interagency body empowered to prescribe 
uniform principles, standards, and report forms for the Federal 
examination of financial institutions. Its members include the Board of 
Governors of the Federal Reserve System, the Federal Deposit Insurance 
Corporation, the National Credit Union Administration, the Office of 
the Comptroller of the Currency, and the Consumer Financial Protection 
Bureau. While the FCA is not a FFIEC member, it does publish 
interagency regulations with some of the FFIEC members, and it shares 
common goals including uniformity in the regulation of, and safety and 
soundness in, financial institutions. FFIEC guidance, unless adopted by 
FCA, is not mandatory for FCS institutions, although the guidance can 
be useful as an example of a best practice for FFIEC member 
institutions. FCA commits to better communicating what references are 
requirements for compliance, guidance or best practices in its 
examination and supervision, policy development, and legal functions.

K. Obsolete References

    Comment: The Council pointed out that FCA regulations at Sec. Sec.  
615.5206, 615.5208, and 630.20(g)(3)(i)(A) contain references to the 
Financial Assistance Corporation and those obsolete references should 
be removed.
    FCA Response: The FCA has proposed removing two of the obsolete 
references in its proposed rule on Regulatory Capital, Implementation 
of Tier 1/Tier 2 Framework and will remove the remaining obsolete 
reference in the final rule or another rulemaking.\7\
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    \7\ See FCA News Release, May 8, 2014; http://www.fca.gov.
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III. Future Efforts To Reduce Regulatory Burden on System Institutions

    As noted above, we will consider some of the regulatory burden 
issues raised in separate regulatory projects. We will continue our 
efforts to remove regulatory burden. However, we will maintain those 
regulations that are necessary to implement the Act and are critical 
for the safety and soundness of the System. Our approach is intended to 
enable the System to continue to provide credit to America's farmers, 
ranchers, aquatic producers, their cooperatives and other rural 
residents.

    Dated: July 11, 2014.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2014-16695 Filed 7-18-14; 8:45 am]
BILLING CODE 6705-01-P