[Federal Register Volume 76, Number 100 (Tuesday, May 24, 2011)]
[Rules and Regulations]
[Pages 29992-29997]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-12771]
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FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AC60
Loan Policies and Operations; Lending and Leasing Limits and Risk
Management
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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SUMMARY: The Farm Credit Administration (FCA, Agency, we, our) issues
this final rule amending our regulations relating to lending and
leasing limits (lending limits) and loan and lease concentration risk
mitigation (risk mitigation) with a delayed effective date. The final
rule lowers the limit on extensions of credit to a single borrower or
lessee (collectively borrower) for each Farm Credit System (System)
institution operating under title I or II of the Farm Credit Act of
1971, as amended (Act). This final rule also adds new regulations
requiring all titles I, II, and III System institutions to adopt
written policies to effectively identify, limit, measure and monitor
their exposures to loan and lease (collectively loan) concentration
risks. We expect this final rule will increase the safe and sound
operation of System institutions by strengthening their risk mitigation
practices and abilities to withstand volatile and negative changes in
increasingly complex and integrated agricultural markets.
DATES: Effective Date: This regulation will be effective on July 1,
2012, provided either or both Houses of Congress are in session for at
least 30 calendar days after publication of this regulation in the
Federal Register. We will publish a notice of the effective date in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Paul K. Gibbs, Senior Accountant, Office of Regulatory Policy, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090,
(703) 883-4498, TTY (703) 883-4434; or
Wendy R. Laguarda, Assistant General Counsel, Office of General
Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090, (703) 883-4020, TTY (703) 883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this final rule are to:
Strengthen the safety and soundness of System
institutions;
Ensure the establishment of consistent, uniform and
prudent loan
[[Page 29993]]
and lease concentration risk mitigation policies by System
institutions;
Ensure that all System lenders have robust methods to
measure, limit and monitor reasonably foreseeable exposures to loan and
lease concentration risks, including counterparty risks; and
Strengthen the ability of System lenders to withstand
volatile and negative changes in increasingly complex and integrated
agricultural markets.
II. Background
On August 18, 2010, the FCA published a proposed rule (75 FR 50936)
in the Federal Register to lower the lending limit on loans and leases
to one borrower for all System institutions operating under title I or
II of the Act from the current limit of 25 percent to a limit of no
more than 15 percent of an institution's lending limit base. We further
proposed that each title I, II and III System institution's board of
directors adopt and ensure implementation of a written policy that
would effectively measure, limit and monitor exposures to loan
concentration risks.
III. Comments on the Proposed Rule and Our Responses
A. In General
The FCA received a total of six comment letters, including five
from System associations and one from the System's trade association.
No comment letters were received from outside of the System. In
addition, FCA personnel had substantive oral communications during the
comment period with the signatories of two of the comment letters
regarding clarification of their written comments. These substantive
discussions have been reduced to writing and placed in the public
rulemaking file.
B. Specific Comments and Responses on the Proposal To Reduce the
Lending Limit From 25 Percent to 15 Percent
1. Agreement With the Proposal
A few commenters agreed with the proposal to reduce the lending
limit from 25 percent to 15 percent. One commenter also indicated that
it does not anticipate that the lower limit will negatively affect its
current lending and leasing practices.
In addition, one commenter recommended that there be consistent
limits for titles I and II lenders as well as for title III lenders.
This commenter explained that titles I and II lenders also provide
financing for cooperatives and would be at a competitive disadvantage
with CoBank, ACB (CoBank), the only title III lender in the System.
While it is true that associations provide some financing directly to
cooperatives, the overwhelming majority of lending to cooperatives by
titles I and II lenders is made through CoBank. We fully support
continuation of these risk-sharing arrangements, and believe that risk
sharing among associations and their funding banks and/or CoBank will
enable associations to continue to meet the credit needs of
cooperatives, which choose to do business through their local
association. We do not believe the 15-percent lending limit will change
this business landscape, nor create a competitive disadvantage for
titles I and II lenders. Further, as stated in the preamble to the
proposed rule, we chose not to address the title III lending limits in
this rulemaking due to the complexity of the issues and indicated that,
should we decide to address title III lending limits in the future
through a regulation amendment, we would do so in a separate
rulemaking.
2. No Need To Lower the Limit
A few commenters questioned the need to lower the lending limit,
stating that a lower limit was not the best solution to address unsafe
lending practices. Rather than lower the limit for those institutions
with a positive track record, these commenters advised the Agency to
address the few problem institutions individually.
We believe that lowering the lending limit is an effective way to
ensure that System institutions' lending practices do not result in
unsafe concentrations of risk. Moreover, as stated in the proposed
rule, the significant growth in System capital since the lending limit
was last set in the early 1990s provides the System with significant
lending capacity. Accordingly, the current 25-percent limit is no
longer considered necessary or prudent.
Further, as stated in the proposed rule, a majority of titles I and
II lenders already have internal lending limits that are more aligned
with the 15-percent limit the Agency is now imposing. Therefore, those
System institutions with a positive track record should not find
compliance with the 15-percent limit onerous. The Agency also believes
that imposing such limits by regulation rather than on individual
institutions best meets due process principles of fairness,
consistency, and transparency, as well as providing an opportunity to
be heard through the public comment process.
One commenter also stated that there was no need to lower the
lending limits because its funding bank already enforces a 20-percent
hold limit. The fact that System banks are enforcing limits below the
current 25-percent limit evidences their recognition that the current
limit is too high and provides additional support for the new limit of
15 percent.
One commenter questioned the need to lower the lending limit since
risk may be mitigated using Farm Service Agency guarantees, farm
program subsidies and crop insurance. We note that loans or portions of
loans that have a Government guarantee, as well as loans fully secured
by obligations fully guaranteed by the United States Government, are
exempt from the computation of loans to one borrower under Sec.
614.4358 of the lending limit regulation. Hence, the fact that a System
institution may mitigate risk using such guarantees has no bearing on
loans subject to the lending limit.
3. Impact on Competitiveness
One commenter indicated that lowering the lending limit to 15
percent would put System institutions at a competitive disadvantage
with National banks, which may loan up to 15 percent plus an additional
10 percent if the loan is fully secured by readily marketable
collateral such as livestock, dairy cattle and warehouse receipts.
Similarly, this commenter indicated that System institutions would be
at a competitive disadvantage with State-chartered banks because such
banks also have higher lending limits.
The FCA has carefully considered whether the 15-percent limit would
put System lenders at a competitive disadvantage with National and
State-chartered banks and have concluded it will not for all of the
following reasons. First, an overwhelming majority of titles I and II
lenders currently have in-house lending limits of 20, 15 and even 10
percent. The 15-percent limit, therefore, should not have a significant
impact on the competitive position of the majority of System
institutions with regard to National and State banks. We also note that
these self-imposed limits have not resulted in a reduction in the
System's market share of agricultural lending--a market share that has,
in fact, grown over the last decade or so.
Second, our review of lending limit regulations for State-chartered
banks indicates that such limits vary widely. However, like National
banks, in most case loans with higher lending limits made by State-
chartered banks must be fully secured by readily marketable collateral.
The FCA also considered, but did not adopt exceptions to the rule
based on the type and quantity of collateral supporting the loan. The
concern over
[[Page 29994]]
the time and difficulty of administering such exceptions outweighed any
potential benefits that might result for System borrowers. Furthermore,
the FCA does not wish to encourage System institutions to place undue
reliance upon collateral as a basis for extending credit above the 15-
percent limit.
The Agency also believes that comparisons with National and State-
chartered banks are of limited value given that the System as a single-
industry agricultural lender, a cooperative and a Government-Sponsored
Enterprise with public mission responsibilities, operates very
differently in many respects from other Federal or State-chartered
lending institutions. Given the unique and public purpose role of the
System, the Agency has an obligation to ensure its safety and soundness
so that the System remains a dependable and adequate source of credit
to American farmers and ranchers. We also believe the 15-percent
lending limit appropriately addresses the Agency's concerns over the
volatility of agricultural lending as well as single-credit and
industry concentrations. For all the foregoing reasons, we believe the
15-percent limit will enhance the overall strength of each System
institution, thus leveraging the System's ability to compete even more
successfully with National and State-chartered banks for a share of the
agricultural credit market.
Another commenter stated that the lower limits would delay the loan
approval process since more than one lending institution would be
involved in a loan, further reducing an institution's competitiveness
in the marketplace. FCA acknowledges that a longer loan approval
process may result from risk-sharing agreements (i.e., participations,
capital/asset pools, guarantees, etc.). However, we also believe that
the additional due diligence performed by the other lenders in these
risk-sharing agreements will lead to better credit decisions and a
stronger loan portfolio in each System institution--benefits that will
far outweigh any inconveniences resulting from such agreements.
Further, the delayed effective date of this rule will give System
institutions time to forge new relationships with other institutions so
that procedures can be in place for approving such loans without
significant delay.
4. Impact on Future Earnings
One commenter asserted that the lower lending limit would cause a
substantial reduction in future earnings because larger loans represent
its association's best quality, least risky and most profitable segment
of its loan portfolio.
While large loans may be of sound quality and profitable, such
loans have a greater impact on the viability of an institution should
they deteriorate. It is the Agency's belief that a diversified loan
portfolio that serves all eligible borrowers, both large and small, is
one of the best ways to ensure an institution's stability.
Further, earning streams need not suffer, nor should any potential
loans be forced out of the System solely on the basis of this final
regulation. Each System institution should use the time provided by the
delayed effective date of this rule to develop risk-sharing agreements
so it can continue to meet the needs of the borrowers in its territory.
Another commenter indicated that the lower lending limit would
reduce earnings because an association would be forced to sell off high
quality loans, resulting in a lower return on assets and equity along
with a restricted ability to build capital. This commenter also
believed that the lower limit would reduce net income, negatively
affecting an association's efficiency performance as reflected in its
gross and net operating rates and efficiency ratio.
Although a System institution may temporarily forego some earnings
as a result of reducing the size of a loan it holds, any opportunity
cost should be offset by its reduced exposure to concentration risk.
Such concentration risk is a greater threat to the safety and soundness
of a System institution than a temporary loss of earnings. In addition,
lower concentration risk levels require less capital to buffer risk
that may exist in a loan portfolio, thereby lowering the capital
requirements of a System lender.
Finally, we note that all existing loans are grandfathered under
the transition provisions of this regulation. Therefore, unless the
terms of a loan are changed, rendering it a ``new loan'' under the rule
that would need to comply with the 15-percent lending limit, System
institutions will not be forced to sell off high quality loans.
Further, the delayed effective date should give System institutions
enough time to forge the necessary lending relationships to offset any
anticipated negative income and performance results.
5. Effect on Patronage Distributions and Customer Service
Two commenters stated that the lower limits would result in a loss
of patronage paid to borrowers because System institutions would be
forced to sell more participations to lenders not paying patronage. One
of these commenters asserted that a loss of patronage payments by an
association would cause its borrowers to spread rumors about the
financial troubles of the association, resulting in a negative image
for the System throughout the community. One of these commenters also
stated that the lower limit would unnecessarily hurt farmers and
ranchers.
While one of the effects of the final regulation is expected to be
the greater use of risk-sharing agreements, the FCA expects that those
System institutions paying patronage will find like partners or,
alternatively, partners that will agree to patronage. System lenders
can use these risk-sharing agreements to manage risk while still
receiving financial consideration in the form of patronage or loan fees
from a loan sale. These agreements should mitigate any temporary impact
from reducing the size of loan held by a lender, as the lender can
still receive income without bearing the risk of loss from holding a
larger portion of the loan principal or commitment.
We also believe that such risk-sharing activities will encourage
additional market discipline in System institutions by requiring them
to price loans appropriately in order to find willing lending partners.
We believe that the added due diligence, diversity and market
discipline that lending partners bring to a System institution's loan
and patronage practices will strengthen System institutions, ensure
their long-term safety and soundness and benefit, rather than hurt, the
System's farmer and rancher borrowers.
6. Effect of Lower Limits on Smaller System Institutions
A few commenters stated that, while lower limits may be appropriate
for larger System associations, they would cause hardships on smaller
associations. These commenters were concerned that the lower lending
limit would make it even more challenging for small associations to
meet the capital demands of those borrowers with large farming and
ranching operations. One commenter suggested that the Agency should
consider making exceptions to the 15-percent limit for small
associations or allowing the System funding banks to make such
exceptions in their general financing agreements with their district
associations. Alternatively, this commenter suggested allowing the
funding banks to authorize an association's use of a higher lending
limit, not to exceed 25 percent, subject to other credit factors such
as the association's size and capital base.
[[Page 29995]]
The Agency is sensitive to the fact that the lower limit may
initially be more of a burden on smaller System associations. In
response to this concern, we are issuing this regulation with a delayed
effective date of approximately 1 year to give all titles I and II
lenders more time to establish participation, syndication, capital
pooling or other risk-sharing agreements so that they may continue to
serve the needs of the borrowers in their territories.
However, we also note, as stated in the preamble to the proposed
regulation, that the substantial growth in the capital bases of titles
I and II System institutions since the current lending limit was first
promulgated, has given all System lenders, including the smaller ones,
much greater capacity to meet the needs of large borrowers. It is also
true that smaller System institutions are often more at risk from large
loans that cease to perform since their capacity to absorb such losses
is often not as great as in larger-sized institutions.
The FCA considered the commenters' suggestions for exceptions to
the lending limit for smaller associations and also considered the
following alternatives to address the issue:
Establishing the lending limit at the greater of 15
percent or a specific dollar amount for smaller System institutions, or
Permanently grandfathering existing loans (even when the
terms of the loan change) held by smaller institutions with a higher
lending limit percentage or based on a specified dollar amount.
We ultimately rejected all of these alternatives for several
reasons, not the least of which is our continued belief that the 15-
percent lending limit is necessary for the long-term safety and
soundness of all System institutions, including and especially the
smaller institutions. We also believe that making exceptions for
smaller associations, either through the funding banks or by
regulation, would be difficult to effectively administer and monitor,
and could end up weakening rather than strengthening the smaller
institutions. Finally, with the delayed effective date providing time
for System institutions to establish additional risk-sharing
agreements, we believe that all System institutions, including the
smaller ones, will be able to continue to meet the mission of servicing
the credit needs of the creditworthy, eligible borrowers in their
respective territories.
Finally, one commenter stated that lowering the lending limit for
the smallest System associations is not necessary because such
institutions pose no risk to the System as a whole.
As the safety and soundness regulator, it is the FCA's duty to
ensure the safe and sound operation of every System institution. It
would be irresponsible for the Agency to ignore or permit an unsafe
lending limit based on the notion that the System as a whole could
absorb the insolvency of a small institution. Further, it is important
to consider the disruption caused by the failure of an institution to
its farmer and rancher borrowers, to the consequences on the
institution's employees or members of the community, or to the fact
that the continued viability of even the smallest System association is
vital to achieving the mission of the System.
This same commenter indicated that the lower limit would reduce the
System's diversity in business models, presumably by forcing the
smaller associations to merge with larger associations. A reduction in
the diversity of System business models does not necessarily accompany
the further consolidation of the System. We believe that the most
successful business models adapt to changes in the operating
environment, which serves to strengthen the System.
Given the concern over the impact of the 15-percent lending limit
on smaller associations, the Agency especially encourages each funding
bank to carefully evaluate the lending limits imposed by its general
financing agreements (GFA). It may be appropriate to maintain the GFA
limit at the 15-percent level for smaller associations if the bank and
associations determine that the 15-percent level is needed to
adequately serve the needs of the borrowers in their respective
territories. This analysis should be completed with regard to each
particular association's lending capacity, history, expertise, etc.,
and the resulting risk to the funding bank.
7. Transition Period
One commenter indicated that the transition rule contained in Sec.
614.4361 should be lengthened to allow System institutions sufficient
time to develop risk-sharing agreements to conform new loans to the 15-
percent lending limits without a loss of business or customers. The FCA
agrees with the need to provide more time to System institutions to
develop such agreements which is why, as mentioned earlier, this final
rule is being issued with a delayed effective date, giving institutions
approximately 1 year to comply with the rule's requirements.
Therefore, we are deleting proposed Sec. 614.4361(c), which in the
proposed rule would have given titles I and II System institutions 6
months from the effective date to comply with the new limits and would
have given titles I, II and III System institutions 6 months from the
effective date to comply with the new policy requirements.
C. Specific Comments and Responses on the Proposed Loan and Lease
Concentration Risk Mitigation Policies
1. Agreement With the Proposal
Two commenters agreed with the requirement to adopt risk mitigation
policies and recognized the need for all financial institutions to
adhere to such policies. However, one of these commenters added that
such policies will not, in and of themselves, protect the System
without corresponding efforts from associations to responsibly manage
portfolio risk. The FCA agrees with these comments and encourages each
title I, II and III System institution's board of directors to adopt
robust internal controls, such as reporting requirements and other
accountability safeguards, so that the board remains engaged in
ensuring that those policy authorities delegated to management are
effectively carried out.
2. Need for the Regulation
One commenter indicated that it did not believe that the FCA has to
change its regulations to require associations to set prudent lending
limits.
The FCA believes that a regulation requiring a written risk
mitigation policy is necessary since our current regulations do not
impose lending limits based on specified risks in an institution's loan
portfolio and practices. The policy required by this final rule focuses
on the mitigation of risks caused by undue industry concentrations,
counterparty risks, ineffective credit administration, inadequate due
diligence practices, or other shortcomings that could be present in a
System institution's lending practices. The recent stresses experienced
by System institutions caused by downturns in the poultry, ethanol, hog
and dairy industries underscore the need for such policies in System
institutions.
This commenter also indicated that the FCA has sufficient
enforcement powers to ensure safe and sound loan portfolio risk
mitigation by System institutions and also reminded the FCA of
Congress' previous instruction to eliminate all regulations that ``are
unnecessary, unduly burdensome or costly.''
The risk mitigation policy required by this rule is intended to
strengthen a
[[Page 29996]]
System institution's loan portfolio so that it can better withstand
stresses experienced by a single borrower, industry sector or
counterparty. The policy must set forth sound loan and lease
concentration risk mitigation practices in order to prevent weak and
unsound practices. In contrast, our enforcement authorities apply when
a System institution (or other persons) engages, has engaged, or is
about to engage in an unsafe or unsound practice in conducting the
business of the institution. In addition, this commenter stated that
the lower lending limits do not justify the need to regulate the
specific content of an institution's lending policies, asserting that
FCA's existing loan policy regulation at Sec. 614.4150 already
establishes the necessary regulatory framework for lending standards.
In lieu of the regulations proposed by the FCA, this commenter suggests
simply adding the phrase ``effectively measure, limit and monitor
exposures to concentration risk'' to existing Sec. 614.4150.
Section 614.4150 addresses requirements for prudent credit
extension practices and underwriting standards for individual loans,
but falls short of addressing concentration risks inherent in an
institution's loan portfolio. Although some institutions have already
established policies to address loan concentration risks, many have
not. This final regulation is necessary to ensure that all System
institutions adopt adequate risk mitigation policies. System
institutions are free, however, to incorporate the requirements of this
policy into their already existing lending policies.
For all the foregoing reasons, we believe that the establishment of
a policy to mitigate loan concentration risks is necessary and will not
be unduly burdensome or costly to System institutions.
3. Lack of Specificity in the Requirements for a Loan and Lease
Concentration Risk Mitigation Policy
A few commenters thought that the risk mitigation policy was too
vague, the risks mentioned would be too difficult to quantify, and the
policy would not make the System safer, noting specifically that:
The quantitative method(s) are not sufficiently defined
and may unnecessarily limit the flexibility of System institutions
seeking to facilitate credit opportunities for eligible and qualified
System borrowers;
Certain System institutions serve areas where particular
agricultural industries dominate in their territories, resulting in
unavoidable loan concentrations in their loan portfolios;
Risks emanating from unique factors, such as dependence on
off-farm income from a local manufacturing plant are difficult to
effectively identify, measure, limit and monitor and are not
susceptible to meaningful quantitative measures. Attempts to measure
such risks could lead to arbitrary decisions that contradict the
System's mission of making credit available to qualified farmers;
The requirements of the policy could prevent System
institutions from making loans to producers with a limited market for
their farm products;
The imposition of specific policy elements and
quantitative methods is not appropriate for a regulation since each
institution's territory, nature and scope of its activities and risk-
bearing capacity is unique;
The regulation provides no definition of the meaning of a
``single-industry sector'' so it is unclear how broadly or narrowly
this phrase should be defined;
It is neither practical, necessary, or realistic to create
a meaningful quantitative method around what may be a limitless set of
risk factors; and finally,
The policy would not enhance the underlying safety and
soundness of the System.
The FCA recognizes that there is no ideal uniform approach to a
loan and lease concentration risk mitigation policy. For this reason,
the regulation intentionally outlines only minimally required elements.
It is up to each institution, based on the unique risks in its
territory and risk-bearing capacity, to identify and define
concentration risks so that they can be effectively mitigated. For
these reasons, the regulation gives institutions wide latitude to
define terms, such as ``industry sectors'' according to their best
business judgment and based on the familiarity with the types of
agriculture in their territories.
For those commenters expressing apprehension about which risk
factors to identify, we have added language to the rule clarifying that
quantitative methods need be established only for significant
concentration risks that are reasonably foreseeable. We leave it to the
discretion of each institution, using their experience in providing
agricultural credit and their best business judgment, to determine
which credit concentration risks are significant--that is, which risks
have the most potential to lead to serious loss.
The discretion the rule gives to System institutions is intended to
ensure that institutions adequately control risk without limiting their
ability to continue being a steady source of credit to all eligible and
creditworthy borrowers in their respective territories. The policy
should not result in System institutions having to make arbitrary
credit decisions or turn away qualified borrowers. Rather, the policy
requires institutions to mitigate rather than deny those loan
concentrations presenting significant and reasonably foreseeable risks.
Concentration risks caused, for example, by territories with producers/
borrowers that have limited agricultural markets or few agricultural
sectors may be mitigated through one or more of the following options,
including hold limits, an increase in capital, loss-sharing agreements
or other risk mitigation tools.
Consistent with the language in the preamble to the proposed
regulations, we have deleted the reference to direct lender from the
regulation text to make clear that the loan and lease concentration
risk mitigation policy requirements also apply to title III System
institutions.
4. Period for Adopting the New Loan and Lease Concentration Risk
Mitigation Policy
One commenter encouraged the FCA to carefully consider the
difficulty System institutions are likely to have in implementing the
proposed changes. This commenter also indicated that the 6-month period
for adopting the risk mitigation policy would not provide sufficient
time for System boards of directors to properly evaluate and adopt
policies to address those concentrations in their current portfolios
that are not currently measured. As discussed in detail above, the
final regulation is being issued with a delayed effective date, giving
all System institutions approximately a 1-year period to adopt such
policies.
IV. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), the FCA hereby certifies that the final rule will
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the Farm Credit 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, Farm Credit System institutions are not ``small entities''
as defined in the Regulatory Flexibility Act.
[[Page 29997]]
List of Subjects in 12 CFR Part 614
Agriculture, Banks, banking, 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 continues to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (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, 2202c, 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.
Subpart J--Lending and Leasing Limits
Sec. 614.4352 [Amended]
0
2. Section 614.4352 is amended by:
0
a. Removing the comma after the word ``borrower'' and removing the
number ``25'' and adding in its place, the number ``15'' in paragraph
(a);
0
b. Removing the comma after the word ``Act'' and removing ``exceeds
25'' and adding in its place ``exceed 15'' in paragraph (b)(1); and
0
c. Removing the comma after the word ``Act'' and removing ``exceeds''
and adding in its place ``exceed'' in paragraph (b)(2).
Sec. 614.4353 [Amended]
0
3. Section 614.4353 is amended by:
0
a. Adding the words ``direct lender'' after the word ``No'';
0
b. Removing the comma after the word ``borrower''; and
0
c. Removing ``exceeds 25'' and adding in its place ``exceed 15''.
Sec. 614.4354 [Removed]
0
4. Section 614.4354 is removed.
Sec. 614.4356 [Amended]
0
5. Section 614.4356 is amended by removing the number ``25'' and adding
in its place, the number ``15''.
0
6. Section 614.4362 is added to subpart J to read as follows:
Sec. 614.4362 Loan and lease concentration risk mitigation policy.
The board of directors of each title I, II, and III System
institution must adopt and ensure implementation of a written policy to
effectively measure, limit and monitor exposures to concentration risks
resulting from the institution's lending and leasing activities.
(a) Policy elements. The policy must include:
(1) A purpose and objective;
(2) Clearly defined and consistently used terms;
(3) Quantitative methods to measure and limit identified exposures
to significant and reasonably foreseeable loan and lease concentration
risks (as set forth in paragraph (b) of this section); and
(4) Internal controls that delineate authorities delegated to
management, authorities retained by the board, and a process for
addressing exceptions and reporting requirements.
(b) Quantitative methods. (1) At a minimum, the quantitative
methods included in the policy must measure and limit identified
exposures to significant and reasonably foreseeable concentration risks
emanating from:
(i) A single borrower;
(ii) A single-industry sector;
(iii) A single counterparty; or
(iv) Other lending activities unique to the institution because of
its territory, the nature and scope of its activities and its risk-
bearing capacity.
(2) In determining concentration limits, the policy must consider
other risk factors that could identify significant and reasonably
foreseeable loan and lease losses. Such risk factors could include
borrower risk ratings, the institution's relationship with the
borrower, the borrower's knowledge and experience, loan structure and
purpose, type or location of collateral (including loss given default
ratings), loans to emerging industries or industries outside of an
institution's area of expertise, out-of-territory loans,
counterparties, or weaknesses in due diligence practices.
Dated: May 19, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2011-12771 Filed 5-23-11; 8:45 am]
BILLING CODE 6705-01-P