TITLE:  Opinion on Whether the Farm Credit Administration's National Charter Initiative is a Rule Under the Congressional Review Act, B-286338, October 17, 2000
BNUMBER:  B-286338
DATE:  October 17, 2000
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Opinion on Whether the Farm Credit Administration's National Charter
Initiative is a Rule Under the Congressional Review Act, B-286338, October
17, 2000

B-286338

October 17, 2000

The Honorable James A. Leach
Chairman, Committee on Banking
and Financial Services
House of Representatives

Subject: Opinion on Whether the Farm Credit Administration's National
Charter Initiative is a Rule Under the Congressional Review Act

Dear Mr. Chairman:

This is in response to your letter of September 21, 2000, requesting our
view as to whether the Farm Credit Administration's (FCA) national charter
initiative is a "rule" under the Congressional Review Act (CRA) portion of
the Small Business Regulatory Enforcement Fairness Act (SBREFA) (5 U.S.C.
801 et seq.) and whether the initiative should have been issued using the
notice and comment rulemaking procedures contained in the Administrative
Procedure Act (APA). 5 U.S.C. 553.

The FCA is an independent agency responsible for examining and regulating
the activities of the Farm Credit System (FCS), a nation-wide system of
borrower-owned financial institutions operated as cooperatives. The FCA is
currently in the process of accepting applications for national charters
that would remove regulatory geographic barriers imposed on FCS
institutions.

Rules Subject to Congressional Review

Chapter 8 of title 5, United States Code, entitled "Congressional Review of
Agency Rulemaking," is designed to keep Congress informed about the
rulemaking activities of federal agencies and to allow for congressional
review of rules. The requirements of chapter 8 take precedence over any
other provision of law.

Section 801(a)(1) provides that before a rule becomes effective, the agency
promulgating the rule must submit to each House of Congress and to the
Comptroller General a report containing:

"(i) a copy of the rule;

(ii) a concise general statement relating to the rule, including whether it
is a
major rule; and

(iii) the proposed effective date of the rule."

On the date the report is submitted, the agency must also submit to the
Comptroller General and make available to each House of Congress certain
other documents, including a cost-benefit analysis, if any, and agency
actions relevant to the Regulatory Flexibility Act, 5 U.S.C. 601 et seq.,
the Unfunded Mandates Reform Act of 1995, 5 U.S.C. 202 et seq., and any
other relevant information or requirements under any other legislation or
any relevant executive orders. 5 U.S.C. 801(a)(1)(B)(I)-(iv).

Once a rule, whether determined to be a major rule or not, is submitted in
accordance with section 801(a)(1), special procedures for congressional
consideration of a joint resolution of disapproval are available for a
period of 60 session days in the Senate or 60 legislative days in the House.
5 U.S.C. 802. These time periods can be extended upon a congressional
adjournment. 5 U.S.C. 801(d)(1).

A major rule may not become effective until 60 days after it is submitted to
Congress or published in the Federal Register, whichever is later. 5 U.S.C.
801(a)(3)(A).

Section 804(3) provides that for purposes of chapter 8, with some
exclusions, the term "rule" has the same meaning given the term in 5 U.S.C.
551(4), which defines rules subject to the Administrative Procedure Act
(APA). The APA definition of a "rule" is as follows:

"the whole or a part of an agency statement of general or particular
applicability and future effect designed to implement, interpret, or
prescribe law or policy or describing the organization, procedure, or
practice requirements of an agency and includes the approval or prescription
for the future of rates, wages, corporate or financial structures or
reorganizations thereof, prices, facilities, appliances, services or
allowances therefor or of valuations, costs, or accounting, or practices
bearing on any of the foregoing."

Chapter 8 contains several exclusions for the APA definition of "rule":

"(A) any rule of particular applicability, including a rule that approves or
prescribes for the future rates, wages, prices, services, or allowances
therefor, corporate or financial structures, reorganizations, mergers, or
acquisitions thereof, or accounting practices or disclosures bearing on any
of the foregoing; (B) any rule relating to agency management or personnel;
or (C) any rule of agency organization, procedure, or practice that does not
substantially affect the rights or obligations of non-agency parties."
5 U.S.C. 804(3).

FCA's National Charter Initiative

Historically, FCA has used its powers to charter, regulate, and examine FCS
institutions in a way that generally promoted exclusive territories. On July
24, 1998, the FCA's Board adopted a Philosophy Statement on Intra-System
Competition, which announced the FCA's support for removing regulatory
geographic barriers. According to the FCA, it approached this objective
through a proposed rulemaking. On November 9, 1998, FCA published a proposed
rule that would have eliminated geographic restrictions on direct lending,
related services, and certain loan participations by amending or repealing
several regulations. 63 Fed. Reg. 60219.

On April 25, 2000, a final rule was issued that deleted the requirements for
a FCS institution to provide notice to or seek consent from other FCS
institutions when it buys participation interest in loans originated outside
its chartered territory. 65 Fed. Reg. 24101. The portion of the proposed
rule that would have removed restrictions on direct lending and related
services outside an institution's designated territory was not incorporated
into the final rule. That restriction is the notice and consent requirement
that a direct lender in one territory give notice and receive consent from
another direct lender before financing a borrower in the other institution's
chartered territory.

Instead, in an Informational Memorandum, dated March 8, 2000, FCA announced
to all FCS institutions its plans to remove restrictions on direct lending
and related services through the chartering process.

On May 3, 2000, the FCA issued a booklet entitled "National Charters,"
which, according to the FCA, explains how to apply for a national charter,
what the territory of a national charter will be, and what conditions would
be imposed in connection with granting a national charter. On July 20, 2000,
the Booklet was published in the Federal Register as a notice with a request
for comments. 65 Fed. Reg. 45066.

FCA's Position

The FCA contends that its initiative is not a "rule" under the CRA or the
APA because the action it is taking in granting the national charters
constitutes an "adjudication" under the APA. Also, the Booklet does not set
out any rules or requirements for institutions but merely announces how the
FCA intends to proceed in future chartering actions.

The Farm Credit Act of 1971, as amended, authorizes the FCA to issue and
amend the charters of FCS institutions. Section 2.0(b)(8) of the Act gives
the FCA the power, under rules and regulations prescribed by the FCA or by
prescribing in the terms of the charter, to provide for the territory within
which the association's operations may be carried on. 12 U.S.C.
2071(b)(8)(C).

FCA states that a chartering action is considered an "adjudication" under
the APA, which is defined as the agency process for the formulation of an
order. 5 U.S.C. 551(7). The APA definition of "order" specifically includes
licensing and the definition of "license" includes charters. 5 U.S.C. 551
(6) and (8).

Regarding the Booklet, the FCA states that it sets out the procedure for the
FCA's acceptance of applications for national charters beginning on July 1,
2000, and provides guidance on the application process and the national
charter territory. FCA argues that the Booklet itself does not set out any
rules or requirements for FCS institutions but merely announces how the FCA
intends to proceed in future chartering actions. FCA states that the Booklet
is not binding on the FCA and is not enforceable against the FCS
institutions but is merely a policy statement with no future effect.

Accordingly, since section 551(4) of the APA defines "rule" as "the whole or
a part of an agency statement of general or particular applicability and
future effect designed to implement, interpret, or prescribe law or policy
," and FCA argues the Booklet has no future effect, FCA concludes that the
Booklet is not a rule under the APA.

Likewise, since the Booklet is not a "rule" under the APA and the CRA
definition of "rule" has the same meaning given the term in section 551,
with several exceptions, FCA argues it cannot be a "rule" under the CRA.

Analysis

A review of the actions of the FCA and the contents of the Booklet do not
support the FCA's conclusion that the Booklet is not a "rule" under the
Congressional Review Act and is not subject to the notice and comment
procedures of the APA.

As noted above, the Farm Credit Act of 1971 gave the FCA broad powers to
issue and amend the charters of FCS institutions and to provide for the
territory in which the association's operations may be carried on. The only
restriction regarding territories appears to be the requirement in 12 U.S.C.
2002(b) that there shall not be more than 12 farm credit districts. There is
no statutory restriction on what the FCA can designate as an institution's
territory under 12 U.S.C. 2071(b)(8)(C). Therefore, FCA's determination,
expressed in the National Charter Booklet, to change its policy of limiting
FCS institutions to specified territories and permitting national
territories or charters, is unrelated to any particular institution's
application for a charter and is therefore, not an adjudication. [1]

Further support for this conclusion is found in the 1947 Attorney General's
Manual on the Administrative Procedure Act [2] which states:

"Of particular importance is the fact that ‘rule' includes agency
statements not only of general applicability but also those of particular
applicability applying either to a class or to a single person. In either
case, they must be of future effect, implementing or prescribing future
law."

"[T]he entire Act is based upon a dichotomy between rulemaking and
adjudication . Rulemaking is agency action which regulates the future
conduct of either groups of persons or a single person; it is essentially
legislative in nature, not only because it operates in the future but also
because it is primarily concerned with policy considerations . Conversely,
adjudication is concerned with the determination of past and present rights
and liabilities."
Id., at 13-14.

Many agency rules are not described as such. [3] They may be referred to as
"a guideline," "direction," "directive," "instruction," "clarification,"
"manual section," "policy," etc. While how an agency describes a document
may be considered in determining whether the document is a rule under the
APA, the courts primarily consider the substantive effect of the document.
[4] Although FCA describes the Booklet as simply announcing how the FCA
intends to proceed in future chartering actions and does not set out any
rules or requirements for institutions, determining its status requires an
examination of its contents and the content's impact.

While FCA argues that policy statements are not rules subject to notice and
comment procedures under the APA, if a policy statement is of general
applicability, future effect, and prescribes policy, it is not entitled to
the policy statement exemption but should have been issued using notice and
comment. [5]

The Booklet contains the steps an institution must take to obtain a National
Charter. It includes a sample of the certified resolution approved by the
institution's board of directors, which, according to the Booklet, is the
only document needed for application before September 30, 2000. Also, the
following requirements are contained in the Booklet:

   * "If a direct lender association is part of a parent/operating
     subsidiary structure, both the parent and all subsidiaries must apply
     for a national charter at the same time."

   * "[T]o satisfy the FCA's application requirement the resolution must
     incorporate the association board's acceptance of the FCA's conditions
     of approval ."

   * "Each association that receives a national charter must revise its
     business plan to define where it plans to provide new or expanded
     services and demonstrate that it has sufficient capacity to provide
     those services in a safe and sound manner."

   * "The association will be obligated to extend credit and offer related
     services to all eligible and creditworthy customers in its LSA [Local
     Service Area]."

   * "The association may exercise only those authorities authorized by its
     pervious charter until it transmits to the FCA a revised business plan,
     including an LSA Plan, that has been adopted by its board of directors
     and that incorporates the requirements set forth in this booklet."

   * "The association must update its LSA Plan annually as part of adopting
     the operational and strategic business plan required by sect. 618.8440."

We find that these requirements are of general applicability and of future
effect. Applications for national charters can continue to be submitted any
time after September 30, 2000, but will be processed using standard
procedures rather than the expedited approval for a January 1, 2001,
effective date. Clearly, the effect of the Booklet is prospective.

Regarding FCA's argument that the Booklet is not binding upon itself, we
again disagree. By issuing the Booklet, FCA has advised the FCS institutions
to rely on the steps and procedures contained therein and to fully expect
that upon submission of the board of directors' resolution, a national
charter will be issued. This is especially true of any institution which is
not operating under a cease and desist order and there are no safety or
soundness concerns. Booklet, page 2. It is only after the issuance of the
national charter that revised business plans, which incorporate how they
plan to lend outside their Local Service Area, need be submitted. Therefore,
we find that FCA's Booklet has bound the agency to the grant of national
charters.

Accordingly, we find that the Booklet, while labeled a statement of policy
by the FCA, in actuality, meets the requirements of a legislative
rule--which should have been issued using informal rulemaking procedures,
including notice and comment. As noted earlier, this Booklet accomplishes
the same result as that portion of the November 9, 1998, proposed rule that
was dropped by FCA in the promulgation of the April 25, 2000, final rule.
Where the final result and its impact on outside parties, as discussed
below, remains the same, merely restyling or repackaging the document does
not change the requirements of compliance with the APA.

While the above conclusion results in the Booklet clearly being a "rule" for
purposes of the CRA, we believe a discussion of the position taken by the
FCA regarding the CRA and its exclusions from the requirements for
submission of "rules" for congressional review will prove useful.

In its submission to our Office, FCA argues that the Booklet cannot be a
"rule" under the CRA because it is excluded as a "rule of agency
organization, procedure, or practice that does not substantially affect the
rights or obligations of non-agency parties." 5 U.S.C. 804(3)(c).

During final consideration of SBREFA, of which the CRA was Subtitle E,
Representative McIntosh, a principal sponsor of the legislation, emphasized
that the effect of private parties is important in applying the exclusion at
issue here:

"Pursuant to section [804(3)(c)], a rule of agency organization, procedure,
or practice, is only excluded if it ‘does not substantially affect the
right or obligation of nonagency parties.' The focus of the test is not on
the type of rule but on its effect on the rights or obligation of nonagency
parties. A statement of agency procedures or practice with a truly minor,
incidental effect on nonagency parties is excluded from the definition of
the rule. Any other effect, whether direct or indirect, on the rights and
obligations of nonagency parties is a substantial effect within the meaning
of the exception. Thus, the exception should be read narrowly and resolved
in favor of nonagency parties who can demonstrate that the rule will have a
nontrivial effect on their rights and obligations. [6]

A review of the Booklet shows the effect the national charters can have on
other parties. The Booklet advises that even if an institution does not plan
to apply for a national charter and does not intend to lend outside its LSA,
it should still consider revising its business plan to reflect changes in
its operating environment. The Booklet continues with the warning that as
other associations with national charters begin to offer products and
services to customers in its territory, the competitive environment may
change significantly. Booklet, page 5. This admonition clearly indicates
that the FCA recognizes the effect of the Booklet and national charters on
other parties.

The issuance of the Booklet, after the withdrawal of the portion of the
proposed rule of November 8, 1998, that would have had the same effect, is
the type of agency action that the passage of the CRA was intended to
curtail. Under the CRA, these actions are subject to congressional review,
notwithstanding the label applied by the agency. [7]

Finally, regarding the status of the "rule" under the CRA as a "major rule,"
this issue is to be resolved by the Office of Management and Budget (OMB). A
major rule is one found by OMB's Office of Information and Regulatory
Affairs (OIRA) to meet certain conditions, such as whether the rule will
have an annual effect on the economy of $100 million or more. 5 U.S.C.
804(2). As the CRA places this determination with OIRA, we express no
opinion on the status of the rule. We have been informally advised by OIRA
that no determination has been made, since the FCA did not consider the
Booklet a "rule" and it has not been submitted to OIRA. Upon receipt of the
appropriate information, OIRA will proceed to make a decision of the rule's
status.

Accordingly, we find that the Booklet constitutes a "rule" under the APA and
should have been issued using notice and comment procedures. We also find
that the Booklet is a "rule" under the CRA and should be submitted by the
FCA to Congress and the Comptroller General in accordance with the
provisions of the CRA.

We trust this is responsive to your request. If you have any questions,
please contact James Vickers, Assistant General Counsel, on 512-8210.

Sincerely yours,

Anthony H. Gamboa
Acting General Counsel

Notes

1. The Supreme Court has held that the difference between rulemaking and
adjudication is a distinction between proceedings resulting in the
formulation of policy type rules, and proceedings for the purpose of
adjudicating disputed facts in particular cases. United States v. Florida E.
Coast Ry. Co., 410 U.S. 224 (1973).

2. Cited as "the Government's own most authoritative interpretation of the
APA" in Bowen v. Georgetown University Hospital, 488 U.S. 204 at 220
(1988)(Scalia, J., concurring).

3. Kenneth Culp Davis & Richard J. Pierce, Jr., 1 Administrative Law
Treatise sect.sect. 6.2 & 6.3 (3rd ed. 1994); Batterton v. Marshall, 648 F.2d 694,
702 (D.C. Cir. 1980).

4. Mt. Diablo Hospital District v. Bowen, 860 F.2d 951, 956 (9th Cir. 1988);
Anderson v. Butz, 550 F.2d 459, 463 (9th Cir. 1977); Lewis-Mota v. Secretary
of Labor 469 F2d 478, 481 (3rd Cir. 1972); Davis & Pierce, supra, at 229.

5. McLouth Steel Products Corporation v. Thomas, 838 F.2d 1317 (D.C. Cir.
1988).

6. 142 Cong. Rec. H3005 (daily ed. March 28, 1996).

7. In his floor statement during final consideration of the bill,
Representative McIntosh pointed out that rules subject to congressional
review are not the same as those subject to APA notice and comment
requirements:

"All too often, agencies have attempted to circumvent the notice and comment
requirements of the Administrative Procedure Act by trying to give legal
effect to general policy statements, guidelines, and agency policy and
procedure manuals. Although agency interpretative rules, general statements
of policy, guideline documents, and agency and procedure manuals may not be
subject to the notice and comment provisions of section 553(c) of title 5,
United States Code, these types of documents are covered by the
congressional review provisions of the new chapter 8 of title 5."

"Under section 801(a), covered rules, with very few exceptions, may not go
into effect until the relevant agency submits a copy of the rule and an
accompanying report to both Houses of Congress. Interpretive rules, general
statements of policy, and analogous agency policy guidelines are covered
without qualification because they meet the definition of a ‘rule'
borrowed from section 551 of Title 5, and are not excluded from the
definition of rule." 142 Cong. Rec. H3005 (daily ed. March 28, 1996).