[Federal Register Volume 85, Number 194 (Tuesday, October 6, 2020)]
[Rules and Regulations]
[Pages 62945-62950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19711]


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FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AD35


Organization; Funding and Fiscal Affairs, Loan Policies and 
Operations, and Funding Operations; Investment Eligibility

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) adopts a 
final rule that amends its investment regulations to allow Farm Credit 
System (FCS or System) associations to purchase and hold the portion of 
certain loans that non-FCS lenders originate and sell in the secondary 
market, and that the United States Department of Agriculture (USDA) 
unconditionally guarantees or insures as to the timely payment of 
principal and interest.

[[Page 62946]]


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 notification of the effective date in the Federal 
Register.

FOR FURTHER INFORMATION CONTACT: Jeremy R. Edelstein, Associate 
Director, David J. Lewandrowski, Senior Policy Analyst, Finance & 
Capital Market Team, Office of Regulatory Policy, (703) 883-4414, TTY 
(703) 883-4056, or Richard A. Katz, Senior Counsel, Office of General 
Counsel, (703) 883-4020, TTY (703) 883-4056, Farm Credit 
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of the final rule are to authorize FCS associations 
to buy as investments for risk management purposes, portions of certain 
loans that non-System lenders originate, and the USDA fully guarantees 
as to principal and interest to:
     Augment the liquidity of rural credit markets;
     Reduce the capital burden on community banks and other 
non-System lenders who choose to sell their USDA guaranteed portions of 
loans, so they may extend additional credit in rural areas; and
     Enhance the ability of associations to manage risk.

II. Background

    In 1916, Congress created the System to provide permanent, stable, 
affordable, and reliable sources of credit and related services to 
American agricultural and aquatic producers. The System consists of 3 
Farm Credit Banks, 1 agricultural credit bank, 67 agricultural credit 
associations, 1 Federal land credit association, service corporations, 
the Federal Farm Credit Banks Funding Corporation (Funding Corporation) 
and the Federal Agricultural Mortgage Corporation (Farmer Mac).\1\ Farm 
Credit banks (which include both the Farm Credit Banks and the 
agricultural credit bank) issue System-wide consolidated debt 
obligations in the capital markets through the Funding Corporation, 
which enable associations to provide short-, intermediate-, and long-
term credit and related services to farmers, ranchers, producers and 
harvesters of aquatic products, rural residents for housing, and farm-
related service businesses.\2\ The System's enabling statute is the 
Farm Credit Act of 1971, as amended (Act).\3\
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    \1\ The use of the terms ``System'' and ``FCS'' in this preamble 
and final rule does not, from this point forward, refer to Farmer 
Mac.
    \2\ The agricultural credit bank lends to, and provides other 
financial services to farmer-owned cooperatives, rural utilities 
(electric and telephone), and rural water and waste water disposal 
systems. It also finances U.S. agricultural exports and imports, and 
provides international banking services to cooperatives and other 
eligible borrowers. The agricultural credit bank operates a Farm 
Credit Bank subsidiary.
    \3\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov 
under ``Laws and regulations,'' and ``Statutes.''
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    This rulemaking addresses investments that associations purchase 
and hold pursuant to their authority in sections 2.2(11) and 2.12(17) 
of the Act. In 2014, FCA proposed a new rule that would have authorized 
associations to purchase and hold, as investments, obligations issued 
or guaranteed by the United States or its agencies for risk management 
purposes.\4\ Under the proposed rule, no association could hold 
investments in an amount that exceeds 10 percent of its total 
outstanding loans.
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    \4\ See 79 FR 43301 (July 25, 2014).
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    FCA received more than 1,250 comment letters on this proposal. 
After consideration of these comments, FCA changed the term 
``obligations'' in the proposed rule to the more narrow term 
``securities'' in the final rule. FCA also added Sec.  615.5140(b)(2) 
to the final regulation to clarify that individual loan portions 
purchased in the secondary market that are unconditionally guaranteed 
or insured by the United States (U.S.) government or its agencies as to 
principal and interest are not eligible risk management investments for 
FCS associations. The FCA delayed the effective date of the final rule 
until January 1, 2019.\5\
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    \5\ See 83 FR 27486 (June 12, 2018).
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    Shortly after we approved and published the final rule, several FCS 
associations, community banks, and a broker-dealer expressed concern 
that final Sec.  615.5140(b)(1) and (b)(2) would disrupt the secondary 
market for the portions of loans that USDA fully and unconditionally 
guarantees as to both principal and interest. Representatives of the 
Office of the Administrator for the Rural Business Cooperative Service 
at USDA (USDA Administrator) contacted FCA to support these parties. 
More specifically, concerns were raised about the potential impact that 
the final rule could have on the secondary market for USDA-guaranteed 
portions of loans and, more broadly, on rural development. The USDA 
Administrator, two community banks, and the broker-dealer warned that 
the withdrawal of FCS associations from this market could substantially 
reduce the liquidity in this market and the availability of credit in 
rural areas.
    In response to the concerns raised by the USDA Administrator and 
market participants, FCA decided to review final Sec.  615.5140(b)(1) 
and (b)(2) and consider their impact on the secondary market for loans 
that the USDA fully and unconditionally guarantees as to principal and 
interest. As a result of this review, FCA proposed to amend Sec.  
615.5140(b)(2) to exempt USDA-guaranteed loan portions from Sec.  
615.5140(b)(1), as well as a conforming change to Sec.  
615.5140(b)(3).\6\ More specifically, the proposed rule would amend 
Sec.  615.5140(b)(2) to allow System associations to purchase in the 
secondary market, portions of loans that are originated by non-FCS 
institutions, and that the USDA fully and unconditionally guaranteed or 
insured as to both principal and interest.
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    \6\ See 84 FR 49069 (September 18, 2019).
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    The FCA also decided to grant temporary regulatory relief to 
certain System associations that had been active or expressed an 
interest in the secondary market for USDA-guaranteed loan portions, 
notwithstanding the prohibition in Sec.  615.5140(b)(1) and (b)(2) that 
became effective on January 1, 2019.\7\ We believe that granting the 
``No Action'' requests of these associations is appropriate to prevent 
any disruption in the secondary market for USDA-guaranteed loan 
portions and to maintain the pre-existing status quo while this 
rulemaking is pending and we consider input from the public. FCA placed 
strict conditions on those associations that were granted regulatory 
relief, and closely monitored their activity.
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    \7\ Several System associations asked the FCA in writing not 
take action against them for purchasing USDA-guaranteed loan 
portions. FCA granted limited ``No-Action'' relief to those 
associations that demonstrated that they have: (1) Experience in the 
secondary market for USDA-guaranteed loan portions, and (2) 
appropriate risk management controls in place to engage in this 
activity. In granting ``No-Action'' relief requests, FCA placed 
strong and appropriate Conditions of Approval on each association to 
ensure that such loan portions were purchased and managed in a safe 
and sound manner.
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III. Comment Letters

    The comment period expired on November 18, 2019. We received a 
total of 34 comment letters from a trade association representing FCS 
lenders, 2 Farm Credit banks, 7 FCS associations, the National Rural 
Lenders' Roundtable, which is a forum for lenders that use USDA 
guarantee programs, a commercial bank trade association, 21 community 
bankers, and an individual.

[[Page 62947]]

Essentially, 24 commenters supported the proposed rule, but asked us to 
further revise the regulation so System associations could buy loan 
portions that any U.S. government agency fully and unconditionally 
guarantees as to principal and interest. One System commenter suggested 
that our regulations should grant both System banks and associations 
the exact same investment authorities. Nine commenters opposed the 
proposed rule, and asked FCA to withdraw it. Commercial bank commenters 
were divided with 13 supporting the proposed rule and, for the most 
part, seeking its expansion to all U.S. government loan-guarantee 
programs, while 9 bank commenters opposed it. The individual commenter 
expressed no opinion about whether FCA should adopt, modify, or retract 
the proposed rule.
    Supporters claim that the proposed rule mutually benefits community 
banks and other non-System rural lenders, System associations, and 
rural communities. According to these commenters, selling USDA-
guaranteed loan portions to FCS associations is advantageous to rural 
community banks because it increases their liquidity, which can enable 
them to originate more loans in rural areas. The proposed rule also 
strengthens the informal secondary market for USDA-guaranteed loans in 
rural areas, in which commercial bankers comprise the majority of 
buyers and sellers. As several commenters point out, System 
institutions have historically played a pivotal role in the secondary 
market for USDA-guaranteed loans.\8\ The proposed rule benefits System 
associations by enabling them to diversify their portfolios in a way 
that is consistent with their statutory mission to provide an adequate 
and flexible flow of stable credit into rural areas.\9\ USDA guarantees 
ensure that System associations generally have no credit risk \10\ when 
they purchase these loan portions in the secondary market, which 
reduces risk exposure to capital and increases resilience of the 
balance sheet.
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    \8\ USDA guarantees loans to borrowers who are both eligible and 
ineligible to borrow from the System. FCA lending regulations in 
Part 614 already authorize FCS banks and associations to buy the 
USDA-guaranteed portions of loans to eligible borrowers under their 
loan participation authorities. USDA loan guarantees to eligible 
borrowers that are purchased under the loan participation 
regulations are not subject to a portfolio limit, or other 
requirements of these investment regulations. Final Sec.  
615.5140(b)(2) only affects USDA guarantees for loans to ineligible 
borrowers or borrowers whose eligibility status is uncertain.
    \9\ See preamble and section 1.1(a) of the Act.
    \10\ However, these guaranteed loan portions may expose 
investors to premium risk, operational risk, and funding risk. The 
preamble to the proposed rule addressed potential premium and 
operational risks. See 84 FR 49070, footnote 4 (September 18, 2019). 
In addition, System associations may also be exposed to funding risk 
which could include basis risk, interest rate risk, and risks 
related to the transition away from the London Interbank Offered 
Rate.
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    Most commenters who supported the proposed rule also told us that 
Sec.  615.5140(b) should permit associations to purchase and hold 
portions of loans guaranteed by other U.S. government agencies as 
investments, such as the Small Business Administration (SBA),\11\ 
Bureau of Indian Affairs, and the Department of Energy. According to 
these commenters, the logic for allowing associations to buy USDA-
guaranteed loan portions also applies to all U.S. government-guarantee 
loan programs. More specifically, expanding this regulatory authority 
beyond USDA would, in the opinion of these commenters, promote a more 
robust secondary market for all U.S. government loan programs, which 
would ultimately benefit the customers of commercial banks and their 
local communities.
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    \11\ SBA administers various programs for guaranteeing loans to 
small businesses under the Small Business Act of 1953 and the Small 
Business Investment Act of 1958. Pursuant to Sec.  5(g)(1) of the 
Small Business Act of 1953, 15 U.S.C. 634(g)(1) and 13 CFR 120.620, 
SBA guarantees the timely payment of principal and interest, which 
is backed by the full faith and credit of the United States, on Pool 
Certificates issued by authorized brokers and dealers who assemble 
these pools. Such Pool Certificates are eligible investments for FCS 
associations under Sec.  615.5140(b)(1), and for FCS banks under 
Sec.  615.5140(a)(1).
    A separate program under section 7(a) of the Small Business Act 
of 1953, 15 U.S.C 636(a), and 13 CFR 120.621 addresses SBA 
guarantees of portions of individual loans. Under the 7(a) program, 
loan originators obtain SBA guarantees for portions of individual 
loans. Each guaranteed portion of a loan is evidenced by an 
individual certificate. If the originator sells the guaranteed 
portion of the loan in the secondary market, the SBA's fiscal 
transfer agent will record who is the current registered holder of 
the loan guarantee certificate. If the registered holder does not 
receive timely payments of principal and interest because the 
borrower defaulted, or the loan originator or the fiscal transfer 
agent failed to perform its obligations (in accordance with 13 CFR 
120.621(b)), the SBA will purchase the guaranteed portion of the 
loan from the registered holder for an amount equal to the unpaid 
principal and the accrued interest due on the date of SBA's 
purchase. SBA-guaranteed portions of individual loans under the 
section 7(a) program are not eligible investments for System banks 
and associations under Sec.  615.5140. However, FCS banks and 
associations may purchase and hold these individual SBA-guaranteed 
loan portions under FCA's loan participation regulations only if the 
underlying borrowers are eligible System borrowers.
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    System commenters point out that the plain language of sections 
2.2(11) and 2.12(17) of the Act expressly authorize associations to 
invest in obligations issued or insured by the U.S. and its agencies. 
Most System commenters asked us to authorize associations to buy loan 
portions guaranteed by other U.S. government agencies after we enact 
this final rule. System commenters noted that our previous investment 
regulations permitted FCS banks and associations to buy and hold loan 
obligations that U.S. government agencies guaranteed, and they urged us 
to restore this regulatory framework.
    One System association opined that FCA exceeded its statutory 
authority by repealing the regulation that authorized associations to 
buy any guaranteed obligation issued by any U.S. government agency. 
According to this commenter, existing Sec.  615.5140(b)(1) and (b)(2) 
is incompatible with the ``unambiguously expressed intent of 
Congress.'' This commenter asked the FCA to authorize System 
associations to buy and hold any obligation guaranteed by all U.S. 
government agencies, either in this final rule, or by another prompt 
agency action.
    As noted earlier, nine commercial bank commenters asked the FCA to 
withdraw the proposed rule and retain the current investment regulation 
for FCS associations. According to these commenters, Congress 
specifically established Farmer Mac as the System institution that 
would operate the secondary market for loan portions that the USDA 
guarantees for loan originators. Augmenting the liquidity of rural 
credit markets and reducing the capital burdens on loan originators is 
the role that these commenters believe Congress assigned to Farmer Mac, 
not FCS associations. Opponents of the proposed rule claim that the 
FCA, as the regulator of both FCS lenders and Farmer Mac, is creating 
``a duplicate and redundant secondary market'' that will create 
unnecessary intra-System competition to Farmer Mac's detriment. The 
proposed rule's objective of enhancing the ability of associations to 
manage risks could, in the view of these commenters, be achieved if 
associations ``were to use Farmer Mac as a secondary market as Congress 
intended, rather than trying to create their own secondary market.''
    These commenters also dispute that sections 2.2(11) and 2.12(17) of 
the Act authorize associations to purchase interest in loans that non-
System lenders originate and USDA guarantees. According to these 
commenters, these two statutory provisions authorize associations to 
buy and sell loans insured by U.S. government agencies and FCS banks, 
not loans originated by non-System lenders. Opponents of the proposed 
rule claim that FCS associations are not indispensable to the

[[Page 62948]]

secondary market of USDA-guaranteed loan portions and, therefore, this 
rule is not necessary to provide a flexible flow of affordable credit 
into rural areas.

IV. Final Rule

    After reviewing and considering the comment letters received on the 
proposed rule, the FCA now finalizes the proposed rule without change. 
Specifically, the final rule amends Sec.  615.5140(b)(2) to allow 
System associations to purchase in the secondary market, the portions 
of loans that non-FCS institutions originate and that the USDA fully 
and unconditionally guarantee \12\ or insured as to both principal and 
interest.
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    \12\ Lenders who originate loans that are eligible for USDA 
guarantees only obtain a conditional guarantee from the USDA. The 
guarantee is conditional on the lender complying with the 
origination and servicing regulatory requirements applicable to the 
loan, as well as other program requirements. Loan originators may 
sell the USDA-guaranteed portions of their loans, in the form of an 
assignment, to other persons, including individuals, corporate 
entities, and other financial institutions. See, 7 CFR 762.160, 
1779.65, 3575.65, and 4279.75. Pursuant to these regulations, the 
seller must submit a form to the USDA that identifies the party that 
becomes the holder of record. Id. A purchaser who subsequently 
assigns the loan guarantee to another party must similarly comply 
with the same requirement. Only an assignee who is listed as the 
holder of record for the loan guarantee may seek payment from the 
USDA if the borrower defaults. The USDA provides an unconditional 
guarantee to a good-faith guarantee holder who purchased the 
guaranteed portion of the loan from the loan originator or a holder 
of an assignment, including such transaction made in the secondary 
market.
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    The FCA proposed to amend existing Sec.  615.5140(b)(2) so 
associations could purchase only USDA-guaranteed loan portions because 
it is specifically what the USDA Administrator, several FCS 
associations, community banks and a broker-dealer requested. Loan 
guarantee programs of other U.S. government agencies are outside the 
scope of this rulemaking. Most System commenters urged us to promptly 
finalize the proposed rule, and then subsequently consider other U.S. 
agency-guaranteed loan programs. For all these reasons, this final rule 
allows FCS associations to purchase and hold only loan portions that 
the USDA fully and unconditionally guarantees as to principal and 
interest.
    One System commenter claims that sections 2.2(11) and 2.12(17) of 
the Act reflects Congress' ``unambiguously expressed intent'' to allow 
associations to buy and hold obligations guaranteed by any U.S 
government agency as investments. Therefore, any regulation that 
prohibits or restricts the ability of associations to do so would, in 
the opinion of that commenter, exceed FCA authority. For this reason, 
the commenter's position is that the final rule or another action by 
FCA must immediately authorize associations to buy loan obligations 
guaranteed under any U.S. government agency program.
    FCA disagrees with the commenter's interpretation of Act. The text, 
structural framework, and history of the Act indicates that Congress 
granted FCA discretion to impose conditions and constraints by 
regulation on how System institutions exercise their statutory powers 
in various circumstances. We note that the introductory text to 
sections 2.2 and 2.12 of the Act, which the commenter invokes, 
expressly states the powers of each association are subject to 
regulation by FCA. Additionally, section 5.17(a)(9) of the Act 
authorizes FCA to ``prescribe rules and regulations necessary or 
appropriate for carrying out this Act.''
    From time to time, FCA has exercised its powers under these 
statutory provisions to enact regulations that place limits on the 
statutory authorities of System banks and associations, especially in 
the area of investments. Reasons for limiting System's statutory 
authorities include, but are not limited to: (1) Preserving the 
System's safety and soundness; (2) implementing various legal 
requirements that apply to the System; and (3) ensuring that FCS 
activities and operations are compatible with its status as a 
government-sponsored enterprise that extends credit to agriculture and 
other eligible borrowers in rural America. For decades, FCA regulations 
have limited System investments by amount, type, credit quality, and 
purpose even though the Act is silent on these issues. For these 
reasons, we conclude that FCA has authority under the Act to impose by 
regulations restrictions on the types of obligations guaranteed by U.S. 
government agencies that System institutions may purchase and hold.
    In this context, the final rule is within the scope of the Act and 
FCA's statutory authority. We have amended our association investment 
regulations periodically in the past as circumstances changed, and we 
may do so again in the future if we determine that evolving conditions 
require further regulatory revisions. In the meantime, the final rule 
strikes a balance between the needs and interests of USDA, FCS 
associations, a significant segment of rural community banks, and rural 
credit markets. We observe that USDA loan guarantee programs focus 
primarily on the credit needs of rural residents and their communities, 
whereas similar loan guarantee programs of other U.S. government 
agencies do not. USDA loan guarantee programs overall are uniquely 
compatible with the System's mission, as a government-sponsored 
enterprise, to provide stable and affordable credit to agriculture and 
other authorized needs in rural America.
    As noted earlier, one System commenter opined that FCS banks and 
associations should have the exact same investment authorities under 
our regulations. This issue is outside the scope of our current 
rulemaking. The preamble to the final Investment Eligibility rule that 
we issued in 2018 explained why the investment authorities of System 
banks and associations are different under these regulations.\13\
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    \13\ See 83 FR 27493 (June 12, 2018).
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    We now respond to comments from the commercial bankers who opposed 
the proposed rule. As discussed earlier, these commenters point out 
that Congress established Farmer Mac as the System's secondary market 
operator. These commenters also note that the Act expressly authorizes 
Farmer Mac, not System associations, to operate the secondary market 
for USDA-guaranteed loans. These commenters claim that our proposal 
would establish a duplicative secondary market, without statutory 
authority, and the resulting intra-System competition will harm Farmer 
Mac as well as ``several hundred community banks that actively conduct 
business with Farmer Mac.''
    Farmer Mac did not submit a comment letter. As a result, Farmer 
Mac, on its own behalf, did not raise any of the issues that the 
commenters brought up.
    This amendment to Sec.  615.5140(b)(2) neither violates the Act, 
nor is it contrary to Congressional intent, as these commenters allege. 
In response to these commenters, sections 2.2(11) and 2.12(17) of the 
Act expressly authorize associations to buy obligations of or insured 
by the U.S. and its agencies, and these provisions are separate and 
distinct from Farmer Mac's authority under several provisions of title 
VIII of the Act to purchase, hold, and securitize loan portions 
guaranteed by USDA.\14\ In

[[Page 62949]]

granting these authorities to Farmer Mac, Congress did not repeal other 
provisions of the Act that authorize FCS banks and associations, 
subject to FCA regulation, to invest in obligations of or insured by 
the U.S. or its agencies, including USDA fully-guaranteed loan 
portions.
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    \14\ Titles VII and VIII of the Agricultural Credit Act of 1987 
chartered Farmer Mac. See Public Law 100-233, 101 Stat. 1568, 1686 
(Jan. 6, 1988). The former General Counsel of FCA issued a legal 
opinion concluding that System institutions did not have authority 
under the Act to securitize their loans and sell the resulting 
securities in the secondary market. This legal opinion influenced 
Congress to create Farmer Mac. [See 133 Cong. Rec.S. 16909 (daily 
ed. Dec. 2, 1987) Originally, the only loans that qualified for 
Farmer Mac programs were the types of agricultural and rural home 
mortgages that System lenders, other than banks for cooperatives, 
could originate. The Food, Agriculture, Conservation, and Trade Act 
of 1990 added portions of loans that the USDA guarantees under the 
Consolidated Farm and Rural Development Act to the statutory 
definition of ``qualified loan'' in section 8.0(7) of the Act. See 
Public Law 101-624, Sec.  1839(b), 104 Stat. 3359, 3835 (Nov 28, 
1990). The Food, Conservation and Energy Act of 2008 further 
expanded the definition of ``qualified loan'' in re-designated Sec.  
8.0(7) of the Act to include loans and interest in loans for an 
electric or telephone facility from a cooperative lender to a 
borrower who is eligible for loans under the Rural Electrification 
Act of 1936. See Public Law 110-234, Sec.  5406(a), 122 Stat. 923, 
1158 (May 22, 2008).
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    The opponents of the proposed rule also claim that the Act does not 
allow FCS associations to buy USDA-guaranted loan portions from non-
System loan originators. We respond that these commenters have 
misinterpreted the Act. Although FCA banks and associations generally 
lack authority to buy most loans (and portions thereof) from the non-
System lenders, the Act carves out exceptions, such as sections 2.2(11) 
and 2.12(17) of the Act. Since USDA-guaranteed obligations qualify as 
eligible investments under sections 2.2(11) and 2.12(17), System 
associations may buy them from any bona fide seller, including 
community banks, and other non-System lenders.
    Beyond their legal arguments, these commenters also claim that 
allowing associations to buy USDA-guaranteed loan portions from non-
System originators is detrimental to Farmers Mac and the broader 
secondary market. However, these commenters did not provide any data, 
information, or analysis that supports their claim that the proposed 
rule would harm Farmer Mac.\15\ Instead information provided by the 
USDA, and comment letters received from a majority of community bank 
commenters contradict these assertions. As noted in the preamble to the 
proposed rule, USDA informed FCA that the FCS in recent years has 
constituted as much as 40 percent of the secondary market for USDA loan 
guarantees. The majority of community bankers who commented on the 
proposed rule told us that System associations play a beneficial role 
in this secondary market. These commenters also stated that System 
associations that buy these guaranteed loan portions enable community 
banks to reinvest the sale proceeds back into local communities. These 
comments support one of FCA's objectives in this rulemaking, which is 
to augment liquidity of rural credit markets. As stated above, Farmer 
Mac did not comment on the proposed rule.
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    \15\ Since Farmer Mac has been granted this authority in 1990, 
it has been and continues to be an active participant in this 
secondary market. It currently holds over $2.2 billion in USDA's 
guaranteed loan portions (See Farmer Mac Reports 2019 Results, Pg. 
9, https://www.farmermac.com/wp-content/uploads/Farmer-Mac-Reports-2019-Results.pdf).
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    One commenter claimed that ``FCS lenders have long desired to 
operate their own secondary market, and FCA's proposal would lay the 
groundwork allowing them to do so.'' We disagree with this comment. As 
discussed in greater detail above, the Act does not authorize System 
banks and associations to securitize assets and then sell the resulting 
securities to investors. Associations buy USDA guaranteed loan portions 
in the secondary market from willing sellers, the majority of which are 
commercial banks, and then hold those investments for risk management 
purposes.
    The proposed rule would not enable FCS lenders to ``operate their 
own secondary market'' as the commenter alleges. At most, System 
associations would resume their previous role as a meaningful 
participant in the longstanding informal secondary market. FCA proposed 
this rule after USDA provided data and information that substantiated 
its claim \16\ that the System's withdrawal from this secondary market 
actually disrupts it. Allowing System associations to return to the 
informal secondary market for USDA loan guarantees provides additional 
liquidity and funding sources to those market participants who opt to 
engage in these transactions.
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    \16\ In the proposed rule, we indicated that data provided by 
USDA shows that loan originators retain approximately 60 percent of 
the USDA-guaranteed portions of such loans and sell the remaining 40 
percent in the secondary market, often at a premium. See 84 FR 49069 
(September 18, 2019).
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    For the reasons discussed in the preamble, the final rule amends 
Sec.  615.5140(b)(2) to allow System associations to purchase in the 
secondary market, the portions of loans that non-FCS institutions 
originate and that the USDA fully and unconditionally guarantee or 
insured as to both principal and interest.

V. 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.
    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).

Lists of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

    For the reasons stated in the preamble, part 615 of chapter VI, 
title 12 of the Code of Federal Regulations are amended as follows:

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

0
1. The authority citation for part 615 continues 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, 8.7, 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-7, 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.  615.5140  [Amended]

0
2. Amend Sec.  615.5140 by revising paragraphs (b)(2) and (3) to read 
as follows:
* * * * *
    (b) * * *
    (2) Secondary market Government-guaranteed loans. In addition to 
investing in the securities described in paragraph (b)(1) of this 
section, each Farm Credit System association may also manage risk by 
holding those portions of loans that:
    (i) Lenders, which are not Farm Credit System institutions, 
originate and then sell in the secondary market; and
    (ii) The United States Department of Agriculture fully and 
unconditionally guarantees or insures as to both principal and 
interest.
    (3) Risk management requirements. Each association that purchases 
investments pursuant to paragraphs (b)(1) and (2) of this section must

[[Page 62950]]

document how its investment activities contribute to managing risks as 
required by paragraph (b)(1) of this section. Such documentation must 
address and evidence that the association:
* * * * *

    Dated: September 1, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-19711 Filed 10-5-20; 8:45 am]
BILLING CODE 6705-01-P