[Federal Register Volume 85, Number 188 (Monday, September 28, 2020)]
[Rules and Regulations]
[Pages 60691-60694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18552]


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FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AC92


Amortization Limits

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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[[Page 60692]]

SUMMARY: The Farm Credit Administration (FCA, we, or our) is repealing 
the regulatory requirement that production credit associations (PCAs) 
amortize their loans in 15 years or less, while requiring Farm Credit 
System (FCS or System) associations to address amortization through 
their credit underwriting standards and internal controls.

DATES: This regulation will be effective 30 days after publication in 
the Federal Register during which either or both Houses of Congress are 
in session. We will publish a document announcing the effective date in 
the Federal Register.

FOR FURTHER INFORMATION CONTACT: Lori Markowitz, Senior Policy Analyst, 
Office of Regulatory Policy, (703) 883-4487, TTY (703) 883-4056, 
[email protected] or Richard A. Katz, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 884-4056, [email protected].

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of the final rule are to:
     Repeal regulatory provisions that impose amortization 
limits on PCA loans; and
     Require associations to address loan amortization in their 
credit underwriting standards and internal controls.

II. Background

    As FCS institutions restructured and merged over the years, and the 
agricultural economy evolved, FCA periodically issued or revised 
regulations in part 614 that implement the statutory authorities of 
System banks and associations to make, participate in, and buy and sell 
other interests in, loans to eligible borrowers. Pursuant to statute, 
these regulations also establish how the powers and obligations of the 
constituent banks or associations are consolidated, and to the extent 
necessary, reconciled in the successor institutions created by the 
Agricultural Credit Act of 1987.
    In 1997, FCA amended its regulations governing lending authorities, 
credit underwriting, and loan terms and conditions and provided 
freestanding PCAs greater flexibility to meet their borrowers' credit 
needs to purchase expensive equipment and other chattels. Since 1997, 
Sec.  614.4040(a)(2) has allowed PCAs, under policies approved by their 
funding banks, to make loans with maturities of 10 years or less, but 
amortize them over a period not to exceed 15 years, subject to the 
following conditions: (1) Each such loan may be refinanced only if the 
PCA determines at the time of refinancing that the loan meets its loan 
policies and underwriting criteria, (2) refinancing may not extend 
repayment beyond 15 years from the date of the original loan, and (3) 
acquiring unimproved real estate is not the sole purpose of the loan.
    In 1997, FCA also made a substantive revision to the agricultural 
credit association (ACA) lending authority regulation, Sec.  614.4050, 
to recognize the statutory authority of ACAs to make long-term real 
estate loans that mature in not less than 5 years nor more than 40 
years either under their PCA or their Federal land credit association 
(FLCA) long-term mortgage lending authority. Also, ACAs are subject to 
less stringent regulatory requirements than PCAs regarding aquatic 
loans, and loans that mature between 7 and 10 years.
    Over the years in regulatory burden initiatives, we have received 
comments that there is a discrepancy between PCA and ACA lending 
authorities. A common criticism is that the regulations permit ACA 
parents to make 10-year operating loans to borrowers, without any 
restriction on amortization, while PCA subsidiaries cannot amortize the 
same loans for a period longer than 15 years.

III. Synopsis of the Proposed Rule

    In response to the restructuring of the System, changes in the 
agricultural economy, and input we received from the FCS, we published 
a proposed rule on January 23, 2020,\1\ that would repeal the above-
mentioned restrictions on the amortization of PCA loans in Sec.  
614.4040(a)(2). We also proposed repealing Sec.  614.4040(a)(3) which 
requires that the maturities on short- and intermediate-term PCA loans 
are appropriate for the purpose and underlying collateral of each loan, 
and comply with the association's loan underwriting standards adopted 
pursuant to Sec.  614.4150 and the general requirements of Sec.  
614.4200. The FCA also proposed to restructure Sec.  614.4050 so our 
lending authority regulation for ACAs would have the same structure and 
format as comparable regulations for PCAs and FLCAs. As noted in the 
preamble to the proposed rule, FCA did not substantively amend Sec.  
614.4050.\2\
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    \1\ 85 FR 3867.
    \2\ See 85 FR 3869 (Jan 23, 2020).
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    The proposed rule would amend Sec.  614.4200 to require direct 
lenders \3\ that amortize loans over a period that is longer than their 
term to maturity (hereafter ``balloon loans'') to address loan 
amortization in their credit underwriting standards. More specifically, 
FCA proposed to add a new paragraph at the end of Sec.  614.4200 that 
would require FCS direct lenders to establish loan amortization 
schedules for balloon loans that are (1) Consistent with their loan 
underwriting standards that they adopt pursuant to Sec.  614.4150 and, 
(2) are appropriate to the type and purpose of the borrower's loan, the 
expected useful life of the asset being financed, and repayment 
capacity of the borrower.
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    \3\ Currently, all direct lenders operating under titles I and 
II of the Act are associations. All Farm Credit banks operating 
under title I of the Act have transferred their authority to make 
real estate mortgage loans directly to eligible borrowers to their 
associations. However, FCS banks retain residual authority under 
section 1.3 of the Act to make mortgage loans directly to eligible 
borrowers in geographic areas where no association operates. For 
this reason, final Sec.  614.4200(c) applies to both Farm Credit 
banks and associations.
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IV. Comments and Our Responses

    We received six comment letters, two from System banks, two from 
System associations, and two from trade associations--one representing 
FCS institutions and the other representing commercial banks. Most of 
the comments supported the rule as proposed and the repeal of the PCA 
amortization limit. One System commenter requested that we reaffirm 
prior guidance on unrestricted amortization of ACA loans. The 
commercial bank trade association opposed the repeal of the 
amortization limits for PCA loans. According to this commenter, repeal 
of Sec.  614.4040(a)(2) would allow FCS institutions wide latitude to 
agree to longer amortization periods which could cause FCS borrowers 
stress when the loans need to be refinanced or repriced and interest 
rates have risen. In addition, this commenter urged FCA to conduct an 
analysis of possible negative impacts from relaxing the rules 
pertaining to loan amortization.
    After considering all the comments that we received, we are 
finalizing the proposed rule without change. The Farm Credit Act of 
1971, as amended, establishes the terms to maturity on loans made by 
direct lenders operating under titles I or II. However, the statute 
does not prohibit System direct lenders, such as PCAs, FLCAs, or ACAs 
from amortizing a loan over a period that is longer than its term to 
maturity. Instead, as discussed in greater detail below, prudent credit 
underwriting standards and practices at System direct lenders are 
necessary and appropriate to control the risks inherent in all loans, 
particularly balloon loans.
    An amortization schedule that exceeds the term of the loan is often

[[Page 60693]]

used by financial institutions to provide borrowers with credit 
repayment terms that meet their needs. The balloon payment that results 
when such loans mature is either repaid, or the remaining principal 
balance is refinanced. The decision to refinance the balloon payment at 
its due date is based on many factors, including the borrower's 
financial position to cover payments based on a new amortization 
schedule, current interest rates, and the remaining useful life of the 
asset being financed.
    Under the final rule, all FCS direct lenders that amortize loans 
over timeframes that are longer than their terms to maturity must 
address loan amortization in their credit underwriting standards. As 
noted earlier, final Sec.  614.4200(c) requires associations that offer 
balloon loans to set amortization schedules that are consistent with 
loan underwriting standards required by Sec.  614.4150 and appropriate 
to the type and purpose of the borrower's loan, the expected useful 
life of the asset being financed, and the repayment capacity of the 
borrower.
    The FCA expects FCS direct lenders to address these factors not 
only when extending a loan, but also when deciding whether to renew and 
refinance the borrower's loan. This regulatory approach strikes a 
balance between allowing FCS associations to offer loan products that 
meet the specific credit needs of each borrower, while ensuring that 
every loan exhibit sound credit underwriting practices. More 
specifically, final Sec.  614.4200(c) provides System institutions 
latitude to develop credit underwriting parameters that meet the 
diverse credit needs of their borrowers within a regulatory framework 
that precludes loans from being continually refinanced at maturity by 
tying loan amortization to each borrower's repayment capacity and the 
useful life of the underlying asset.
    The final rule that the FCA adopts reduces unnecessary regulatory 
burden on FCS direct lender associations. Offering balloon loans to 
customers is a business decision. Managing credit risks in loans that 
amortize over a longer timeframe than their term to maturity is the 
responsibility of the lender. The most effective and efficient way to 
control the risks in such loans is through strong credit underwriting 
standards and practices developed by the lender, rather than 
prescriptive regulations that substitute an agency's opinion for the 
financial institution's business judgement. We note that the statutory, 
regulatory, and supervisory framework for loans that amortize on a 
different schedule than their terms to maturity is virtually the same 
for FCS institutions, commercial banks, and other non-System lenders.
    As noted above, a commercial bank trade association opposed repeal 
of amortization requirements in Sec.  614.4040(a)(2) on PCA loans 
because the commenter believes that this regulatory provision is 
necessary to promote safety and soundness. We respond that from 1997 
until now, our regulations only addressed the amortization of PCA 
loans, but not balloon loans originated by FLCAs or ACAs. As a result, 
long-term real estate mortgage loans made by FLCAs and ACAs, and short- 
and intermediate-term ACA loans have never been subject to regulatory 
restrictions on amortization. As explained in the preamble to the 
proposed rule, the FCA added these amortization requirements to Sec.  
614.4040 in 1997 so PCAs would have greater flexibility in the terms 
they could offer farmers and ranchers to purchase expensive equipment 
and chattels through loans that matured within 10 years in accordance 
with the statute. As a result of corporate restructuring of System 
associations over the past 23 years, there are no longer any stand-
alone PCAs. All PCAs have become subsidiaries of ACAs, which have 
authority to make short-, intermediate, and long-term loans.
    In this context, it becomes clear that the amortization limits for 
PCA loans in Sec.  614.4040(a)(2) were not designed for safety and 
soundness. Corporate restructuring rendered the requirements in Sec.  
614.4040(a)(2) obsolete. As we stated in the proposed rule, FCA views 
loan amortization as a credit underwriting issue, not a legal authority 
issue. For these reasons, we are adopting the final rule, as proposed.

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 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.

List of Subjects in 12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, 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 amended as follows:

PART 614--LOAN POLICIES AND OPERATIONS

0
1. The authority citation for part 614 is revised to read as follows:

    Authority:  42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; 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, 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 (12 U.S.C. 2121 
note).


0
2. Section 614.4040 is amended by revising paragraph (a) to read as 
follows:


Sec.  614.4040  Production credit associations.

    (a) Short- and intermediate-term loans. Production credit 
associations are authorized to make or guarantee short- and 
intermediate-term loans and provide other financial assistance for a 
term of:
    (1) Not more than 7 years;
    (2) More than 7 years, but not more than 10 years, as set forth in 
policies approved by the funding bank; or
    (3) Not more than 15 years to producers and harvesters of aquatic 
products for major capital expenditures, including but not limited to 
the purchase of vessels, construction or purchase of shore facilities, 
and similar purposes directly related to the operations of producers or 
harvesters of aquatic products.
* * * * *

0
3. Section 614.4050 is amended by:
0
a. Removing the introductory text;
0
b. Revising paragraph (a);
0
c. Removing paragraph (b);
0
d. Redesignating paragraphs (c) and (d) as paragraphs (b) and (c) 
respectively;
0
e. In newly redesignated paragraph (c)(1)(i) introductory text, 
removing ``(a)'' and adding ``(a)(1)'' in its place;
0
f. In newly redesignated paragraph (c)(1)(ii) introductory text, 
removing ``(b) of this part'' and adding ``(a)(2) of this section'' in 
its place;
0
g. In newly redesignated paragraph (c)(2)(i), removing ``(a)'' and 
adding ``(a)(1)'' in its place;
0
h. In newly redesiganted paragraph (c)(2)(ii), removing ``(b)'' and 
adding ``(a)(2)'' in its place; and
0
i. In newly redesignated paragraph (c)(3), removing ``(c)'' and adding 
``(b)'' in its place.
    The revision reads as follows:

[[Page 60694]]

Sec.  614.4050  Agricultural credit associations.

    (a) Terms to maturity on loans. Agricultural credit associations 
are authorized to make or guarantee, subject to requirements of Sec.  
614.4200:
    (1) Long-term real estate mortgage loans with maturities of not 
less than 5 nor more than 40 years, and continuing commitments to make 
such loans; and
    (2) Short- and intermediate-term loans and provide other similar 
financial assistance for a term of not more than:
    (i) 10 years; or
    (ii) 15 years to aquatic producers and harvesters for their aquatic 
operations.
* * * * *

0
4. Section 614.4200 is revised by adding paragraph (c) to read as 
follows:


Sec.  614.4200  General requirements.

* * * * *
    (c) Loan amortization. If a direct lender amortizes a loan over a 
period of time that is longer than the term to maturity under Sec.  
614.4000(a), Sec.  614.4010(a), Sec.  614.4030(a), Sec.  614.41040(a), 
or Sec.  614.4050(a)(1) or (2), it must establish a loan amortization 
schedule that is:
    (1) Consistent with its loan underwriting standards adopted 
pursuant to Sec.  614.4150; and
    (2) Appropriate to the type and purpose of the loan, expected 
useful life of the asset being financed, and the repayment capacity of 
the borrower.

    Dated: August 19, 2020.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-18552 Filed 9-25-20; 8:45 am]
BILLING CODE 6705-01-P