[Federal Register Volume 85, Number 165 (Tuesday, August 25, 2020)]
[Rules and Regulations]
[Pages 52248-52254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-16135]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 615, and 621

RIN 3052-AD09


Criteria To Reinstate Non-Accrual Loans

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) amends our 
regulations governing how high-risk loans within the Farm Credit System 
are classified by clarifying the factors used to place loans in 
nonaccrual status and revising reinstatement criteria.

DATES: This regulation shall become effective no earlier than 30 days 
after publication in the Federal Register during which either or both 
Houses of Congress are in session. Pursuant to 12 U.S.C. 2252(c)(1), 
FCA will publish a notice of the effective date in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Ryan Leist, Senior Accountant, Office of 
Regulatory Policy, (703) 883-4223, TTY (703) 883-4056.
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The final rule objectives are to:
     Enhance the usefulness of high-risk loan categories;
     Replace the subjective measure of ``reasonable doubt'' 
used for reinstating loans to accrual status with a measurable 
standard;
     Improve the timely recognition of a change in a loan's 
status; and
     Update existing terminology and make other grammatical 
changes.

II. Background

    The Farm Credit Act of 1971, as amended (Act),\1\ requires Farm 
Credit System (System) institutions to maintain financial statements in 
accordance with generally accepted accounting principles (GAAP).\2\ FCA 
is charged with issuing regulations to implement this requirement. FCA 
regulations at Part 621 address accounting and reporting requirements 
for System institutions, including the use of GAAP. As part of these 
requirements, subpart C of part 621, ``Loan Performance and Valuation 
Assessment,'' establishes standard performance categories for high-risk 
loans and sets forth the criteria for reinstating those loans to 
accrual status.\3\
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    \1\ Public Law 92-181, 85 Stat. 583.
    \2\ See, for example, 12 U.S.C. 2254(b).
    \3\ 58 FR 48780, September 20, 1993.
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    We issued a proposed rule on April 3, 2019, to amend subparts A and 
C of part 621.\4\ Specifically, we proposed changes to Sec.  621.6 on 
loan performance categories as well as the Sec.  621.9 criteria for 
reinstating loans to accrual status. We proposed using more measurable 
standards and aligning high-risk loan categories with the criteria used 
to determine when a loan is suitable for reinstatement to accrual 
status. We also proposed emphasizing the role servicing plays in 
addressing high-risk loans and moving definitions currently located in 
the body of Sec. Sec.  621.6 and 621.9 to the existing definition 
section of part 621. We proposed moving four terms and their meaning 
from subpart C to subpart A, which contains the ``Definition'' section 
at Sec.  621.2. In doing so, we proposed some modifications to the 
terms. The comment period for the proposed rule closed on June 3, 2019.
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    \4\ 84 FR 12959.
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III. Comments and Our Responses

    We received eight comment letters on our proposed changes to 
subparts A and

[[Page 52249]]

C of part 621: One letter from the Federal Farm Credit Banks Funding 
Corporation on behalf of the System's Accounting Standards Workgroup 
(SASW); one letter from a Farm Credit bank (CoBank, ACB); and six 
letters from System associations. CoBank and two associations expressed 
support for remarks made by the SASW, but the associations noted either 
exceptions or additions to specific aspects of the SASW comments. Two 
associations submitted remarks substantially similar to those offered 
by SASW. Two other associations offered comments independent of the 
SASW comment letter.
    In general, all the commenters supported our objectives in issuing 
the proposed rule. However, most commenters asked that we amend the 
rule to mirror the guidance provided by the Federal Financial 
Institutions Examination Council (FFIEC).\5\ The commenters' reason for 
asking us to change our rules to mirror FFIEC standards was 
comparability within the financial services industry. In the proposed 
rule, we explained that, unlike commercial lenders and their 
regulators, neither FCA nor the System is subject to the reporting 
standards issued by the FFIEC.\6\ However, FCA's present accounting 
classification rules are generally similar, although not identical, to 
FFIEC standards.\7\ Further, we issued the proposed rule with an 
understanding of the financial regulatory environment as it relates to 
both the System's cooperative structure and status as a GSE. As a 
result, we continue our policy of maintaining a similarity to the FFIEC 
guidance, but deviating where necessary to accommodate the different 
operational and credit considerations of the System.
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    \5\ FFIEC was created in 1979 through title X of Public Law 95-
630. FFIEC facilitates uniformity in those federal examinations of 
financial institutions conducted by 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. FFIEC issues uniform principles, standards and reporting 
formats used by these regulators.
    \6\ FCA is not a FFIEC regulatory agency and therefore neither 
it nor the System is required to follow FFIEC standards.
    \7\ We consider the policy positions of other regulators to 
decide if we should follow them or take a different approach if 
appropriate to implement the requirements and expectations of the 
Act.
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    Separately, two associations commented on certain areas of 
discussion in the preamble to the proposed rule. One association 
expressed concern with the sample list of risk factors we gave for 
evaluating the collectability of a loan. This commenter stated that the 
examples of substantial collateral being abandoned and a lawsuit being 
filed against a primary obligor could, as stand-alone considerations, 
cause a loan to be placed into nonaccrual status. We believe there are 
many risks affecting current or future payments on a loan, including 
but not limited to those described in the preamble to the proposed 
rule. However, institutions must still evaluate the risk to the 
continued collection of principal or interest in connection with the 
requirements in Sec.  621.6 to determine the proper loan performance 
category. The other commenter raised concerns with a footnote in the 
preamble to the proposed rule that gave samples of what might be an 
``adverse action.'' This commenter remarked that the samples given were 
more expansive then those currently in regulations. We agree that we 
provided in the preamble to the proposed rule more examples of what 
might be considered an adverse action than are listed in Sec.  
617.7400(d). Just as examples given in part 617 of our regulations are 
not all-inclusive, the list we used in the preamble is also not all-
inclusive. Both lists of examples are intended to inform the reader of 
possible items to consider when making the identification of an adverse 
action.
    Below we address comments specific to our proposed changes to 
Sec. Sec.  621.2, 621.6 and 621.9. All provisions are finalized as 
proposed, unless changes are discussed in our response to comments 
below.

A. Definitions [Sec.  621.2]

    We proposed moving four existing terms, whose meanings are 
currently located in the body of regulatory provisions, to the 
``Definitions'' section in Sec.  621.2. In moving the terms, we also 
proposed contextual and grammatical changes to each of the terms to 
improve clarity. We finalize this action, but with changes to the 
definitions for three terms to respond to comments received.
    1. Term ``adequately secured''.
    We proposed clarifying language to explain that the term 
``adequately secured'' describes collateral where there is a perfected 
security interest. Five of the eight commenters suggested the term 
``adequately secured'' be replaced by ``well secured'' to mirror FFIEC 
terminology. These commenters also asked that the definition be 
replaced with the one used by other financial regulators. One 
association supported our proposed clarifications to the meaning of the 
term ``adequately secured'' and stated it did not believe the term 
should be changed to ``well secured'' as doing so would change System 
credit quality classifications, specifically the loss given default 
parameters for loan-to-net-realizable-value requirements.\8\ Instead, 
this commenter suggested just using the term ``secured.'' Another 
association stated a preference for a clearer definition, making no 
comment on the term ``adequately secured'' itself. This commenter asked 
for the definition to discuss net realizable value.
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    \8\ The commenter referred to its individual risk guidance. The 
Combined Farm Credit System Risk Rating Guidance also uses the term 
adequately secured.
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    We believe the existing term ``adequately secured'' is known and 
established in System policies and procedures. Changing it as suggested 
by some commenters could create unnecessary confusion. The term 
``adequately secured'' has been used in FCA regulations since 1986 \9\ 
to describe loan security. Additionally, it is used in System-wide risk 
rating guidance for specific loan risk categories. Any of the suggested 
changes to the term would directly impact this credit guidance and 
potentially result in deviations from the operational and credit 
considerations of the System. Therefore, we do not believe changing the 
existing term, ``adequately secured,'' to either ``well secured'' or 
just ``secured'' would be appropriate.
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    \9\ See 51 FR 8644 (March 13, 1986). Also, the United States 
Department of Agriculture Farm Service Agency uses the term 
``adequately secured'' in its guaranteed loan program requirements.
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    We considered making some adjustments to the definition of 
``adequately secured'' based on comments expressing concern with the 
phrase ``perfected security interest'' but decided to make no change to 
that element. We want institutions to consider whether a lien on 
collateral is valid and enforceable when making ``adequately secured'' 
decisions in the context of categorizing high-risk assets. Should a 
particular security interest not be properly perfected, we expect 
institutions to look to other collateral when deciding if the loan is 
``adequately secured.'' However, we are replacing the term 
``collateralized'' with ``secured'' in the introductory sentence of the 
definition to improve clarity and comparability with other financial 
regulators. Additionally, the final rule adds ``collateral in the form 
of'' to the beginning of item (1) in the definition of ``adequately 
secured.'' This change increases comparability with other financial 
regulators and adds clarity to the term's use as requested by 
commenters. We also corrected punctuation identified by one commenter 
as causing confusion. As

[[Page 52250]]

finalized, the rule clarifies that the term ``adequately secured'' 
means either a lienhold on property or a guarantee on repayment, or 
both.
    2. Term ``in the process of collection''.
    We proposed removing language on documented future collection of 
past due amounts, replacing it with language clarifying that the term 
``in the process of collection'' includes both debt collection and loan 
servicing efforts expected to result in either the recovery of the loan 
balance (including accrued interest and penalties) or reinstatement of 
the loan to current status in the near future. One association 
supported the proposed removal of the 180 day timeframe in the 
definition, while all other commenters were silent on that specific 
aspect. The SASW, CoBank, and four associations commented that the 
definition of ``in the process of collection'' was too restrictive. 
Commenters explained that the use of a probable and specific event is a 
higher hurdle than the definition used by other financial regulators.
    We agree with the comments that using probable and specific events 
within the definition is too constraining so we remove it from the 
final rule text. Instead, as suggested by commenters, we replace it by 
adding the word ``reasonably'' before ``expected to result in 
recovery.'' We believe this increases the definition's similarity to 
FFIEC guidance without adverse impact to the System's unique operating 
structure. We also remove the word ``and'' joining both ``debt 
collection and loan servicing efforts'', replacing it with ``or'' as is 
done in FFIEC guidance. We believe this change is appropriate as it may 
not always be applicable to have both debt collection and loan 
servicing occurring in all circumstances.
    3. Term ``past due''.
    We proposed replacing language within the definition of ``past 
due'' when discussing existing servicing actions. There were no 
specific comments on this proposed change to the definition. Instead, 
the SASW, CoBank, and four associations asked that the definition of 
``past due'' be adjusted to reflect the definition used by other 
financial regulators under FFIEC. Commenters specifically remarked that 
our definition of ``past due'' is inconsistent with other financial 
regulators and suggested clarifying the term to allow for either 
interest or principle to be delinquent in satisfaction of the term 
``past due.''
    We reviewed the FFIEC definition for ``past due'' and believe the 
concerns of the commenters regarding separation of principle and 
interest was based on receipt of partial payments. As such, we adjust 
the definition to provide that when loan payments have not been 
received in full and on time, they will be ``past due.'' We believe 
adding ``in full'' addresses concerns that past due amount may consist 
of interest and not principal, or vice versa. If either principal or 
interest are due under the payment terms (as may be the case when there 
is a partial payment), but unpaid, the loan is past due.
    4. Term ``sustained performance''.
    We proposed clarifying that ``sustained performance'' on a loan is 
based on contractual payment terms. Only one comment was received on 
this proposed clarification. That commenter was an association that 
expressed support for the clarification. We final the term as proposed.

B. High-Risk Loan Classification [Sec.  621.6]

    We proposed clarifying changes to the categories for high-risk 
loans in Sec.  621.6, including removing redundancies and aligning 
Sec.  621.6 with proposed changes to Sec.  621.9. We also proposed 
removing the last sentence of this section's introductory paragraph 
that required loans meeting more than one performance category to be, 
in all cases, categorized as ``nonaccrual.'' One association objected 
to removing this sentence, expressing concern that doing so would 
result in inconsistencies in classifications due each association's 
interpretation of which is the most appropriate performance category to 
assign a loan. We do not share this commenter's concern and final this 
change as proposed. We believe institutions should determine the most 
appropriate performance category for a high-risk loan, understanding 
that no more than one category may be used at any given time. We also 
believe the other changes to Sec. Sec.  621.6 and 621.9 will facilitate 
this decision-making process.
    We note that the final rule does not address disclosures required 
by the Accounting Standards Update related to credit losses and the 
disclosure of nonaccrual loans.\10\ FCA addressed disclosure 
requirements related to the new accounting standard in a separate 
rulemaking process.\11\ While the current incurred loss methodology 
under GAAP is based on a probable threshold, the measurement of credit 
losses is changing under the Financial Accounting Standards Board's 
(FASB) new credit loss standard. When effective, the new standard will 
replace the current GAAP incurred loss methodology with one that 
reflects lifetime expected credit losses for financial assets measured 
at amortized cost over the entire contractual term.\12\ Although the 
new standard does not address when a financial asset should be placed 
in nonaccrual status, it will increase the credit quality-related 
disclosures for loans.
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    \10\ Accounting Standards Update No. 2016-13, Financial 
Instruments--Credit Losses (Topic 326): Measurement of Credit Losses 
on Financial Instruments, dated June 2016.
    \11\ See Proposed rule, ``Implementation of the Current Expected 
Credit Losses Methodology for Allowances, Related Adjustments to the 
Tier 1/Tier 2 Capital Rule, and Conforming Amendments.'' (84 FR 
49684 September 23, 2019).
    \12\ On October 16, 2019, the FASB affirmed its decision to 
allow public business entities such as the System (who are not SEC 
filers) to defer adopting the new credit loss standard until January 
1, 2023.
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1. Identifying Nonaccrual Loans [Sec.  621.6(a)]
    We proposed updating language in Sec.  621.6(a) to clarify that a 
loan is properly categorized as a ``nonaccrual loan'' when there is a 
known risk to the continued collection of principal or interest. We 
also proposed clarifying the use of ``charge off'' in Sec.  621.6 by 
retaining its classification use for loans with any portion charged off 
through means other than formal loan servicing as discussed in part 617 
or a Troubled Debt Restructuring (TDR). The SASW, CoBank, and four 
associations suggested conforming our nonaccrual loan classification 
rules to those used by other financial regulators, which do not use 
charge offs in classifications.\13\
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    \13\ See ``Nonaccrual Status'' definition in Glossary of FFIEC 
Instructions for Preparation of Consolidated Reports of Condition 
and Income, FFIEC 031 and 041, updated September 2019.
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    In response to these comments, the final rule does not include 
charge offs as a consideration when classifying a loan. By removing 
charge offs, the final rule increases comparability with the FFIEC's 
three possible conditions for nonaccrual status: Deterioration in the 
financial condition of the borrower; payment of full principal and 
interest is not expected; and loans 90 days or more past due. A loan 
with a charge off should still be considered for nonaccrual status if 
there is known risk to the continued collection of the principal or 
interest. If an institution has determined the collection of a loan's 
outstanding principal and interest, plus future interest accruals, over 
the full term of the loan is not expected because of a documented 
deterioration in the financial condition of the borrower, then the loan 
should be placed in nonaccrual status, including loans with charge 
offs.
    As final, the rule regarding categorizing high-risk loans remains

[[Page 52251]]

consistent with GAAP and the financial industry's performance 
categories.\14\ Although not exactly matching FFIEC guidelines, those 
aspects of FFIEC guidance appropriate for System operations already 
exist in our rules, to the extent possible. Therefore, we are not 
making the other requested changes to Sec.  621.6(a) beyond a 
corresponding adjustment to language on loans past due to read ``90 
days or more past due.'' We also make a technical change to adjust the 
numbering of the subparagraphs required after removing the charge off 
provision.
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    \14\ See SEC Industry Guides, Statistical disclosure by bank 
holding companies, III Loan portfolio, C. Risk elements.
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    One association questioned how the term ``charge off'' was used in 
a footnote of the preamble to the proposed rule. The commenter 
explained the usage of the term was inconsistent with how the term was 
applied in the context of existing Sec. Sec.  621.6 and 621.9, noting 
that we did not propose a definition of ``charge off'' in Sec.  621.2. 
Any identified loan loss, whether it is principal or interest, must be 
charged off. The charge off discussion in the proposed rule preamble 
related to earned but uncollected interest income that was accrued and 
determined to be uncollectible. FCA was not attempting to define the 
term charge off to include only interest income, but explaining that 
when an institution determines that the contractual value of a loan or 
other asset exceeds the amount that can reasonably be expected to be 
collected, the institution is expected to immediately charge off the 
asset in the amount determined to be uncollectible.\15\
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    \15\ Refer to 12 CFR 621.5(b).
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2. Formally Restructured Loans (TDR) [Sec.  621.6(b)]
    We proposed adding a short explanation of loans classified under 
the TDR category. The SASW, CoBank, and four associations suggested 
what we proposed was too narrow, explaining the reference to `financial 
concession' does not encompass other potential concessions. These 
commenters suggested we replace the sentence with the GAAP definition. 
A separate commenter expressed support for our clarification effort to 
distinguish TDRs from other servicing.
    Since we proposed the language to add clarity and comments received 
indicated the proposed additional language raised more questions, we 
are not finalizing the rule with this second sentence. We believe 
referencing a TDR under GAAP in the first sentence accurately reflects 
the category and, by removing the last sentence, the rule will avoid 
having to be amended for any future changes to GAAP. For this same 
reason we are not accepting the suggestion to quote GAAP within the 
rule. We also make a technical change to spell out the meaning of 
``TDR'' within the rule text.
3. Classifying Loans 90 Days Past Due [Sec.  621.6(c)]
    We proposed changes to the high-risk loan category, ``Loans 90 days 
past due still accruing interest,'' to improve readability and add 
clarity. We received no comments on our proposed changes, but as a 
conforming change to comments made on our definition of ``past due'' 
and other comments asking for our rules to more closely resemble FFIEC 
guidance, we have adjusted the language discussing this category to 
read ``90 days or more past due.'' This change allows the specific 
provision to read substantially similar to FFIEC guidance.

C. Reinstating Nonaccrual Loans [Sec.  621.9]

    We proposed replacing the criteria a loan must satisfy before being 
reinstated to accrual status with requirements that are based upon 
repayment patterns and loan security. The SASW, CoBank, and four 
associations asked that we instead use the same reinstatement criteria 
as is contained in FFIEC guidance. In response to comments received, we 
again considered the FFIEC reinstatement guidance but continue to 
believe System operations require different reinstatement criteria. In 
particular, we are sensitive to the fact the FFIEC guidelines are 
premised upon monthly loan repayments whereas the System most often 
provides annual payment amortizations. Additionally, safety and 
soundness concerns related to the economics of primarily lending to the 
agricultural sector also warrant deviations from the reinstatement 
practices of commercial lenders. As such, we believe the final rule 
strikes the appropriate balance given the risks arising from the 
specialized lending activities of the System.
    Some commenters questioned the value of qualifying reinstatement 
based on a loan becoming past due while classified as nonaccrual. We 
agree with these comments and final the rule with changes that remove 
the language regarding a loan becoming past due while in nonaccrual 
status from all of paragraph (a), excepting the core requirement that a 
loan be current when reinstated. Additionally, a commenter remarked on 
an apparent redundancy in the proposed text discussing servicing 
efforts. We agree and the final rule removes the identified redundancy 
between paragraph (a) and subparagraph (a)(1). Specifically, we removed 
from Sec.  621.9(a)(1) the requirement that known risks have been 
addressed through servicing, because the servicing element is already 
mentioned in paragraph (a) as an aspect that must be considered for all 
loans in nonaccrual status. We also accepted the related comment that 
the proposed language of (a)(1) implied only servicing could address 
the risks leading a loan to be classified as nonaccrual. The final rule 
replaces the relevant phrase in (a)(1) with one asking that the risks 
be mitigated. This change leaves open the manner of mitigation, as 
suggested by the commenter.
    One association asked that we entirely remove servicing as a 
consideration to reinstating a loan to accrual status. This same 
commenter asked if documentation maintained elsewhere in a loan file 
regarding servicing could serve to demonstrate an association's efforts 
for purposes of complying with Sec.  621.9(a). Other commenters 
remarked that servicing should not be used at all in accounting 
classifications. We disagree that servicing does not play an important 
role in addressing high risk loans. Servicing a loan is a key element 
of addressing risk to collectability and assessing the loan's readiness 
to be reinstated to accrual status. Loans that receive effective and 
constructive loan servicing have a much greater likelihood of remaining 
current over time. Further, loan servicing is a critical process for 
institutions to work through with borrowers to address the underlying 
cause of the borrower's financial and repayment weaknesses that caused 
the loan's original nonaccrual designation. We also remind the 
commenters that the servicing element replaces the requirement to 
remove all reasonable doubt as to the willingness and ability of the 
borrower to perform under the loan terms. As explained in the preamble 
to the proposed rule, we looked for alternative criteria that were more 
measurable than the ``reasonable doubt'' requirement and identified 
loan servicing as an appropriate substitute. We continue to believe 
servicing addresses the safety and soundness concerns behind the 
``reasonable doubt'' requirement and therefore is an appropriate 
replacement. As to the question on documentation, as a general matter 
we are not seeking duplication of existing servicing documentation when 
considering a loan for reinstatement. We

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anticipate a reference to documented servicing should be sufficient.
    One commenter supported changing the reinstatement criteria to 
allow a continuously current loan to be restored to accrual status 
without sustained performance. Six other commenters stated that the 
reinstatement criteria should not consider future performance or 
repayment. We believe the consideration of future repayment capacity is 
part of the process in determining the collectability of the loan and 
whether the loan should be reinstated to accrual status. Demonstrating 
future repayment capacity ensures the known risks to the collection of 
the loan have been mitigated. By requiring future repayment capacity, a 
reinstated loan should have mitigated the known risks to loan 
collection and the loan should not subsequently fall back into 
nonaccrual status in the next reporting period. We also believe this is 
consistent with prudent credit risk management practices. Further, the 
final rule adds flexibility for establishing the repayment pattern for 
loans placed in nonaccrual status when past due and that are adequately 
secured, which we believe improve the timely recognition of a change in 
a loan's status when compared to the existing rule.
    One association asked that we incorporate into our nonaccrual 
regulations the guidance contained in our Informational Memorandum, 
``Examination of Loans Guaranteed by Federal and Local Government 
Agencies,'' dated July 10, 1998. This IM discusses, among other things, 
the loan guarantees from United States Department of Agriculture Farm 
Services Agency. We do not believe our nonaccrual regulations should 
prescribe the accounting treatment for specific loan types and 
circumstances. We continue to believe guaranteed loans being serviced 
in accordance with the terms of a Government guarantee are normally 
presumed to be in process of collection and adequately secured.
    Two associations commented that our performance criteria, used to 
reinstate nonaccrual loans, causes a direct negative monetary impact on 
member-borrowers. These commenters explained that under each of their 
board approved patronage program, member-borrowers are not eligible for 
patronage when a loan is in nonaccrual status, even if the loan is 
current on payments. Therefore, by not being able to reinstate the loan 
to accrual status once current, its member-borrowers are denied 
patronage.
    FCA does not believe our regulations created the disadvantage cited 
by the commenters because each association sets its own patronage 
payment pools in a manner it determines is rational and equitable.\16\ 
Further, FCA discourages System institutions from solely using loan 
performance categories for patronage policies. As illustrated by the 
above two comments, using loan performance categories for purposes 
other than what they are intended may inappropriately cost a member-
borrower patronage he or she earned. One of the benefits of being a 
member-borrower of the System is the opportunity to earn, and be paid, 
patronage. When an institution has a patronage policy, the policy sets 
forth if patronage will be paid and the eligibility requirements for 
receiving patronage payments.\17\ Should, for example, a policy provide 
that patronage may be denied or reduced based solely on a loan's 
performance classification, a member-borrower with a current loan in 
nonaccrual status would be denied patronage. Meaning, the institution 
relying solely on a performance classification when setting patronage 
pools may not be giving full consideration to whether those loans in 
nonaccrual status that also are current on payments contributed to the 
earnings of the institution and therefore should receive consideration 
for patronage payments.\18\ Thus, these commenters can address their 
concerns about a loan classification's having a direct negative 
monetary impact on their member-borrowers by changing their own 
patronage policies.
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    \16\ 12 CFR 615.5230(c)(3).
    \17\ Each institution determines its own patronage policy, 
setting forth eligibility criteria. See 12 CFR 615.5230(c)(3).
    \18\ Refer to 12 CFR 615.5230(c)(3), providing in relevant part 
that ``payment of patronage shall be established on a rational and 
equitable basis that will ensure that each patron of the institution 
receives its fair share of the earnings of the institution and bears 
its fair share of the expenses of the institution.''
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    As a corresponding change to those made in Sec.  621.6, we final 
the rule without the proposed Sec.  621.9(a)(2), which would have 
required charged off amounts to be collected prior to reinstatement. As 
discussed earlier, we removed charge offs as a consideration to placing 
a loan into nonaccrual status. For consistency, we also remove use of 
charge offs when reinstating a loan. In relation to this, the proposed 
subparagraphs (a)(3) and (a)(4) were renumbered (a)(2) and (a)(3) 
within this final rulemaking.

D. Other Comments on Subpart C of Part 621

    We received several comments on a section of our regulations where 
no changes had been proposed. The comments were directed at our rules 
of aggregation in Sec.  621.7, asking us to apply the rule at the loan 
level rather than the customer level. Commenters also asked us to 
consider revising or eliminating the rule of aggregation because it 
requires an institution to move a performing loan to nonaccrual status 
despite having its own performance assessment and collateral support. 
The commenters also stated FCA's rule of aggregation is not consistent 
with other financial regulators.
    We proposed no changes to this section of our regulations so are 
not making any as part of this final rulemaking. Instead, we will take 
the request for changes to Sec.  621.7 under consideration and 
potentially address them in future rulemakings. We do explain that when 
one loan to a borrower is placed into nonaccrual status, FCA 
regulations do not require an institution to automatically place all of 
a borrower's loans into nonaccrual status. The primary purpose of FCA's 
rule of aggregation is to ensure that when a borrower's loan is placed 
in nonaccrual status, an institution immediately evaluates whether or 
not other loans to the same borrower, or loans for which the same 
borrower is responsible for repayment, should also be placed in 
nonaccrual.\19\ FCA regulation Sec.  621.7(b) provides if the 
borrower's other loans represent an independent credit risk and are 
fully collectible, then they may remain in their current performance 
category and are not required to be moved to nonaccrual status. This is 
comparable to the recommendation of other financial regulators that a 
financial institution evaluate its loans and other extensions of credit 
to a single borrower when one of the borrower's loans meets the 
criteria for nonaccrual status.
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    \19\ See 58 FR 48780 (Sept. 20, 1993).
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IV. Regulatory Flexibility Act and Major Rule Conclusion

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), FCA hereby certifies that the final rule would 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.

[[Page 52253]]

    Under the provisions of the Congressional Review Act (5 U.S.C. 801 
et seq.), the Office of Management and Budget's Office of Information 
and Regulatory Affairs has determined that this final rule is not a 
``major rule,'' as the term is defined at 5 U.S.C. 804(2).

List of Subjects in 12 CFR Parts 611, 615 and 621

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Reporting and recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, parts 611, 615 and 621 of 
chapter VI, title 12 of the Code of Federal Regulations is amended as 
follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

    Authority:  Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12, 
4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 
7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 2012, 
2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 2122, 
2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208, 2209, 
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279f-1, 2279aa-
5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; 
secs. 414 of Pub. L. 100-399, 102 Stat. 989, 1004.


Sec.  611.1205  [Amended]

0
2. Section 611.1205 is amended by removing ``Sec.  621.2(c)'' and 
adding in its place ``Sec.  621.2'' wherever it appears.

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
3. The authority citation for part 615 is revised to read as follows:

    Authority:  Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 
2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 
5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm 
Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 
2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 
2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 
2279aa-6, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a), Pub. L. 100-
233, 101 Stat. 1568, 1608; sec. 939A, Pub. L. 111-203, 124 Stat. 
1326, 1887 (15 U.S.C. 78o-7 note).


Sec.  615.5131  [Amended]

0
4. Section 615.5131 is amended by removing the word ``Sec.  621.2(f)'' 
and adding in its place the word ``Sec.  621.2'' each place it appears.

PART 621--ACCOUNTING AND REPORTING REQUIREMENT

0
5. The authority citation for part 621 is revised to read as follows:

    Authority:  Secs. 4.12(b)(5), 4.14, 4.14A, 4.14D, 5.17, 5.22A, 
8.11 of the Farm Credit Act (12 U.S.C. 2183, 2202, 2202a, 2202d, 
2252, 2257a, 2279aa-11); sec. 514 of Pub. L. 102-552.


0
6. Section 621.2 is amended by:
0
a. Removing the paragraph designations (a) through (n); and
0
b. Adding definitions in alphabetical order for ``Adequately secured'', 
``In the process of collection'', ``Past due'', and ``Sustained 
performance'' to read as follows:


Sec.  621.2  Definitions.

* * * * *
    Adequately secured means the loan is secured by either or both:
    (1) Collateral in the form of perfected security interests in, or 
pledges of, real and/or personal property (including securities with an 
estimable value) having a net realizable value sufficient to repay the 
loan's outstanding principal and accrued interest.
    (2) The guarantee of a financially responsible party in an amount 
sufficient to repay the loan's outstanding principal and accrued 
interest.
* * * * *
    In the process of collection means debt collection or loan 
servicing efforts are proceeding in due course and are reasonably 
expected to result in the recovery of the loan's principal balance, 
accrued interest and penalties or reinstatement of the loan to current 
status within a reasonable time period.
* * * * *
    Past due means a contractually scheduled loan payment has not been 
received in full on or before the contractual due date and remains due.
* * * * *
    Sustained performance means the borrower has resumed on-time 
payment of the full amount of scheduled contractual loan payments over 
a sustained period. In accordance with the contractual payment 
schedule, the sustained on-time repayment period is demonstrated by 
making 6 consecutive monthly payments, 4 consecutive quarterly 
payments, 3 consecutive semiannual payments, or 2 consecutive annual 
payments. The payments considered are those listed in the loan contract 
as due during the sustained performance period, regardless of whether 
scheduled payments are interest-only, unequally amortized principal and 
interest, equally amortized principal and interest, or a combination of 
payment amounts.

0
7. Revise Sec.  621.6 to read as follows:


Sec.  621.6  Categorizing high-risk loans and other property owned.

    Each institution must employ the practices of this section when 
categorizing high-risk loans and loan-related assets. A loan must not 
be put into more than one performance category.
    (a) Nonaccrual loans. A loan is categorized as nonaccrual if there 
is a known risk to the continued collection of principal or interest. 
Once a loan is categorized as nonaccrual, it must remain in that 
category until reinstated to accrual status pursuant to Sec.  621.9. 
Loans placed into nonaccrual status when current are also subject to 
the notice and review provisions of part 617 of this chapter. A loan 
must be categorized as nonaccrual if one or more of the following 
conditions exist:
    (1) The loan may or may not be past due, but the institution has 
determined collection of the outstanding principal and interest, plus 
future interest accruals, over the full term of the loan is not 
expected because of a documented deterioration in the financial 
condition of the borrower;
    (2) The loan is 90 days or more past due and is not otherwise 
eligible for categorization under paragraph (c) of this section; or
    (3) Legal action, including foreclosure or other forms of 
collateral conveyance, has been initiated to collect the outstanding 
principal and interest.
    (b) Formally restructured loans (TDR). A loan is categorized as a 
formally restructured loan (Troubled Debt Restructure(TDR)) if the 
restructuring is determined to be a TDR under generally accepted 
accounting principles and the guidance issued by the Financial 
Accounting Standards Board.
    (c) Loans 90 days past due still accruing interest. A loan is 
categorized as 90 days past due still accruing interest when it is 90 
days or more contractually past due, adequately secured, and in the 
process of collection. If the loan is not adequately secured, it cannot 
be categorized under this category unless there is evidence to suggest 
repayment within a reasonable time period of either the past due amount 
or the remaining principal and interest owed.
    (d) Other property owned. Any real or personal property, other than 
an interest-earning asset, that has been acquired as a result of full 
or partial liquidation of a loan, through foreclosure, deed in lieu of 
foreclosure, or other legal means.

[[Page 52254]]


0
8. Revise Sec.  621.9 to read as follows:


Sec.  621.9  Reinstatement to accrual status.

    (a) Before being reinstated to accrual status, a loan must be 
current on contractual payments and the borrower offered servicing in 
accordance with the institution's policies maintained under either 
Sec.  614.4170 or part 617 of this chapter, whichever is applicable. 
Additional reinstatement eligibility requirements are dependent upon 
certain characteristics of the loan under review.
    (1) A loan that was current when placed in nonaccrual status 
pursuant to Sec.  621.6(a)(1) may be reinstated to accrual status if 
the known risks to the continued collection of principal or interest 
have been mitigated. If the loan was past due when placed in nonaccrual 
status, it may only be reinstated under either paragraph (a)(2) or 
(a)(3) of this section, as applicable.
    (2) A loan placed in nonaccrual status when past due and not 
adequately secured must remain current on contractual payments for a 
period of sustained performance before it may be reinstated.
    (3) A loan placed in nonaccrual status when past due and adequately 
secured must have a recent repayment pattern demonstrating future 
repayment capacity to make on-time payments before it may be 
reinstated. The repayment pattern is established in one of two ways:
    (i) Sustained performance in making on-time contractual payments, 
or
    (ii) A recent history of making on-time partial payments in amounts 
the same or greater than newly restructured payment amounts.
    (b) Nothing in this section prevents a current loan from being 
reinstated to accrual status in response to a Credit Review Committee 
decision issued under section 4.14D(d) of the Farm Credit Act of 1971, 
as amended, when that decision was made in compliance with applicable 
laws, regulations, and in accordance with generally accepted accounting 
principles.

    Dated: July 21, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-16135 Filed 8-24-20; 8:45 am]
BILLING CODE 6705-01-P