[Federal Register Volume 61, Number 97 (Friday, May 17, 1996)]
[Proposed Rules]
[Pages 24907-24909]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12411]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Proposed
Rules
[[Page 24907]]
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AB67
Loan Policies and Operations; Other Financing Institutions
AGENCY: Farm Credit Administration.
ACTION: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA) requests public comment
through an Advance Notice of Proposed Rulemaking (ANPRM) concerning
potential revisions to the regulations in subpart P of part 614 that
govern the funding and discount relationship between Farm Credit System
(Farm Credit, FCS, or System) banks that operate under title I of the
Farm Credit Act of 1971, as amended (Act), and non-System other
financing institutions (OFIs). Farm Credit Banks (FCBs) and
agricultural credit banks (ACBs) are authorized to fund and discount
certain short- and intermediate-term loans for non-System lenders, such
as commercial banks, savings associations, credit unions, trust
companies, agricultural credit corporations, and other agricultural and
aquatic lenders as part of their mission to finance agriculture,
aquaculture, and other specified rural credit needs. External
developments, such as the consolidation of the commercial banking
industry, the advent of interstate banking and branching, the gradual
reduction of Federal assistance to agriculture and rural communities,
and the increased interest of non-System financial institutions in
additional sources of funding and liquidity may necessitate revisions
to the regulations in subpart P of part 614 so that System banks can
fulfill their obligation to meet demands in rural communities for
short- and intermediate-term credit. The purpose of any future
rulemaking would be to ensure that eligible and creditworthy farmers,
ranchers, aquatic producers and harvesters, processing and marketing
operators, farm-related businesses, and rural homeowners will continue
to have access to affordable, dependable, and stable short- and
intermediate-term credit through both System and non-System lenders.
Specifically, this ANPRM seeks comments regarding the FCA's OFI
regulations and how they may be revised to better implement the
statutory provisions.
DATES: Written comments should be received on or before July 16, 1996.
ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,
Associate Director, Regulation Development, Office of Examination, Farm
Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-
5090 or sent by facsimile transmission to the FAX number at (703) 734-
5784. Copies of all communications received will be available for
review by interested parties in the Office of Examination, Farm Credit
Administration.
FOR FURTHER INFORMATION CONTACT:
Eric Howard, Policy Analyst, Regulation Development, Office of
Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)
883-4498, or
Richard A. Katz, Senior Attorney, Regulatory Enforcement Division,
Office of General Counsel, Farm Credit Administration, McLean, VA
22102-5090, (703) 883-4020, TDD (703) 883-4444.
SUPPLEMENTARY INFORMATION: The Agricultural Credit Act of 1923 1
created 12 Federal intermediate credit banks (FICBs) to discount
agricultural production loans for national and State banks, trust
companies, savings associations, credit unions, agricultural credit
corporations, incorporated livestock loan companies, and other
specified lenders. In 1930, Congress authorized the former FICBs to
make secured loans and advances directly to such institutions
(hereinafter OFIs).2 As a result, OFIs could borrow from and
discount production agricultural loans with System banks before the
Farm Credit Act of 1933 3 created production credit associations
(PCAs) as an alternative source of financing the operating needs of
farmers and ranchers.
---------------------------------------------------------------------------
\1\ Pub. L. No. 503, 42 Stat. 1454, (Mar. 4, 1923).
\2\ Pub. L. No. 439, 46 Stat. 816, (June 26, 1930).
\3\ Pub. L. No. 75-73D, title II, 48 Stat. 257, 259, (June 16,
1933).
---------------------------------------------------------------------------
The legislative history to the Act reveals that Congress originally
granted OFIs discount privileges at System banks in order to redress
the scarcity of operating credit for farmers and ranchers.4 During
the past 73 years, Congress has responded to the changing demands of
agricultural producers and other rural residents for affordable short-
and intermediate-term credit by updating the statutory authorities of
the FICBs and their successor FCBs and ACBs 5 to provide funding
and financial assistance to both System and non-System lenders.
Currently, section 1.7(b) of the Act authorizes OFIs to obtain funding
from FCBs or ACBs for any loan that a PCA could make under section 2.4
of the Act to eligible farmers, ranchers, aquatic producers and
harvesters, processing and marketing operators, farm-related
businesses, and rural homeowners.
---------------------------------------------------------------------------
\4\ See H. R. Rep. No. 1712, 67th Cong., 1st. Sess. (Feb. 25,
1923), P. 17.
\5\ Section 410 of the Agricultural Credit Act of 1987 (1987
Act) created the FCBs through the mandatory merger of the Federal
Land Bank and the FICB in each Farm Credit district. See Pub. L. No.
100-233, Sec. 410, 101 Stat. 1568, 1637, (Jan. 6, 1988). Section 7.0
of the Act allows a FCB to merge with a bank for cooperatives in
order to form an ACB. Section 7.0 of the Act derives from section
416 of the 1987 Act. Section 7.0 was further amended by section
408(b) of the Agricultural Credit Technical Corrections Act of 1988.
See Pub. L. No. 100-233, Sec. 416, 101 Stat. 1568, 1645, (Jan. 6,
1988); Pub. L. No. 100-399, Sec. 408(b), 102 Stat. 989, 1001, (Aug.
17, 1988).
---------------------------------------------------------------------------
Section 1.7(b)(4) of the Act requires the FCA to enact regulations
that assure that funding from Farm Credit banks operating under title I
of the Act will be ``available on a reasonable basis'' to any national
bank, State bank, trust company, agricultural credit corporation,
incorporated livestock loan company, savings association, credit union,
association of agricultural producers engaged in making loans to
farmers and ranchers, or corporation engaged in making loans to
producers or harvesters of aquatic products that: (1) Is significantly
involved in lending for agricultural or aquatic purposes; (2)
demonstrates a continuing need for supplementary sources of funds to
meet the credit requirements of its agricultural or aquatic borrowers;
(3) has limited access to national or regional capital markets; and (4)
does not use the services of System banks to extend
[[Page 24908]]
credit to persons and for purposes that cannot be financed by a PCA
under title II of the Act. According to the legislative history to
section 1.7(b)(4) of the Act,6 Congress intended that Farm Credit
banks act as a primary funding and liquidity source for small, local
OFIs so they in turn could meet certain short- and intermediate-term
credit needs in their rural communities.7 However, the legislative
history to section 1.7(b)(4) of the Act also indicates that Congress
did not intend to exclude other agricultural creditors from funding or
discounting loans with System banks,8 so long as they have a need
for supplementary funds that cannot be met through access to national
or regional capital markets.
---------------------------------------------------------------------------
\6\ Current section 1.7(b)(4) derives from section 203 of the
Farm Credit Act Amendments of 1980 (1980 Act). See Pub. L. No. 96-
592, Sec. 203, 94 Stat. 3437, 3441, (Dec. 24, 1980). Section 203 of
the 1980 Act substantially revised former section 2.3 of the Act,
which set forth the lending authorities of the FICBs. The new OFI
eligibility criteria in section 203 of the 1980 Act were
incorporated into former section 2.3(d) of the Act. Section 401 of
the 1987 Act, which set forth the powers and obligations of the
FCBs, recodified the requirements in former section 2.3(d) as
section 1.7(b)(4) of the Act. See Pub. L. No. 100-233, Sec. 401, 101
Stat. 1568, 1625 (Jan 6, 1988).
\7\ See H.R. 96-1287, 96th Cong., 2d. Sess., (1980), 21, 32-34.
See also 126 Cong. Rec. H 10960-64 (daily ed. Nov. 19, 1980).
\8\ Id.
---------------------------------------------------------------------------
Section 1.7(b) of the Act requires FCBs and ACBs to extend credit
to qualified OFIs (within the confines of safety and soundness) as part
of their mission to finance agriculture, aquaculture, and other
specified rural credit needs. While many OFIs often compete directly
with PCAs and agricultural credit associations (ACAs) that own voting
stock in the FCB or ACB, the Act requires Farm Credit banks to extend
funding on a safe and sound lending basis to any qualified OFI so that
farmers, ranchers, aquatic producers and harvesters, farm-related
businesses and rural homeowners have access to affordable and
dependable credit.
The number of OFIs that fund or discount loans with System banks
has declined from a peak of 327 in 1982 to 22 on December 31, 1995.
Furthermore, the amount of credit that System banks have extended to
OFIs has decreased from almost $914 million in 1981 to $230.8 million
as of December 31, 1995. The farm crisis of the 1980s caused a decline
in overall agricultural debt, which in turn, substantially reduced the
number of OFIs and their demand for System financing. The FCS also
experienced significant financial stress between 1984 and 1989, and
many OFIs terminated their discounting relationship with System banks
because: (1) They sought to reduce their exposure to loss by retiring
their investments in FCS banks; (2) the FCS no longer offered
competitive rates; or (3) several OFIs ceased operations as a result of
merger or closure. Many rural commercial banks, including some OFIs,
merged with regional banks or bank holding company networks that did
not qualify for OFI status because they were no longer significantly
engaged in agricultural lending.
The financial strength of Farm Credit banks has significantly
improved in the past several years. As a result, FCBs and ACBs are
better positioned to help increase the availability of reasonably
priced and dependable credit in many of America's rural communities.
Efforts by Federal and State governments to balance their budgets may
reduce direct assistance to agriculture and rural development in future
years. As rural areas require greater private sector investment to
sustain their economic viability, local financial institutions are
seeking alternative means to provide affordable credit to their
communities on a sustainable basis. Rural lenders also face liquidity
problems from time-to-time. Loan-to-deposit ratios at rural depository
institutions are now at historically high levels.9 As the
commercial banking industry continues to consolidate into large
national and regional networks it is unclear how the credit needs in
rural communities will be affected.
---------------------------------------------------------------------------
\9\ A recent study indicates that loan-to-deposit ratios at
commercial banks of all sizes that substantially engage in
agricultural lending have risen from 53.6 percent in 1987 to 86.2
percent as of June 30, 1995. See Economic Research Service, U.S.
Dep't of Agriculture, (AIS-60), Agricultural Income and Finance
Situation and Outlook Report, 11, 53. (Feb. 1996).
---------------------------------------------------------------------------
Today, several non-System financial institutions are once again
expressing interest in obtaining FCS funding for their short- and
intermediate-term loans to agricultural and other rural borrowers.
However, many of these non-System institutions perceive barriers that
impede their access to System funding. Although a variety of factors
may have contributed to the historical decline in the OFI lending
program, the FCA wants to eliminate any regulatory restrictions that
are not required by the Act and its legislative history or do not
promote safety and soundness of the FCS.
The FCA wants to ensure that the relationship between Farm Credit
banks and OFIs provides another means for meeting the short- and
intermediate-term credit needs of agricultural producers and other
rural borrowers, as Congress intended. The existing regulations were
enacted in 1981, after Congress amended the OFI provisions in the Act.
See 46 FR 51886 (Oct. 22, 1981). As a result of external developments
over the past 15 years, the FCA believes that it is now time to review
these regulations in subpart P of part 614 to determine whether they
are appropriately addressing the credit needs of non-System
institutions that lend to agriculture and rural communities. An ANPRM
will give all interested parties an opportunity to provide the FCA with
information to assist it in developing proposed regulations that will
be responsive to the credit needs of OFIs and their borrowers.10
Furthermore, the FCA seeks guidance about how new regulations can best
promote equitable treatment of OFIs and System associations by FCBs and
ACBs. Comments from non-System lenders are encouraged so that the FCA
can consider the needs and concerns of eligible financial institutions
that the Agency does not examine or regulate.
---------------------------------------------------------------------------
\10\ The FCA is aware that Congress is considering proposals
that would provide non-System financial institutions greater access
to funding and discount relationships with System banks. These
legislative proposals go substantially beyond what the existing
statute allows. Should any of these proposals be enacted, the FCA
would review the regulations in light of the new statutory
provisions.
---------------------------------------------------------------------------
The Act establishes certain requirements that OFIs must meet in
order to initiate and maintain a relationship with the FCS. For
example, section 1.10(b) of the Act authorizes FCBs and ACBs to extend
credit to OFIs so they can make short- and intermediate-term loans to
persons who would be eligible to obtain credit from PCAs.11
Additionally, each OFI is required by section 4.3A(c)(1)(D)(iii) of the
Act to purchase non-voting equity in its funding FCB or ACB. Finally,
the same borrower rights that PCAs must provide also apply to OFI loans
that are funded by a Farm Credit bank.
---------------------------------------------------------------------------
\11\ Section 1.10(b) of the Act allows FCBs and ACBs to extend
financial services to PCAs, ACAs, and OFIs so they can make: (1)
Aquatic loans that mature within 15 years; and (2) loans to farmers,
ranchers, farm-related businesses, and non-farm rural homeowners
that mature within 7 years, unless the bank's board, under the
regulations of the FCA, approve loans that are repayable within 10
years.
---------------------------------------------------------------------------
Safety and soundness issues will also be addressed when the FCA
proposes new OFI regulations. OFIs may pose different safety and
soundness considerations for the FCA than direct lender associations.
For example, OFIs may merit a different regulatory treatment than
System associations for questions relating to collateral and lien
perfection because, in contrast to System associations, OFIs can borrow
[[Page 24909]]
from other lenders without the permission of their System funding
banks. In contrast to the authorities vis-a-vis FCS institutions, the
FCA lacks broad authority to: (1) Appoint a conservator or receiver for
insolvent OFIs; 12 or (2) determine the priority of claims against
OFIs in liquidation.13
---------------------------------------------------------------------------
\12\ Section 4.12(b) of the Act grants the FCA ``exclusive power
and jurisdiction to appoint a conservator or receiver'' for FCS
banks and associations.
\13\ For the past 65 years, the Federal courts have interpreted
various Farm Credit Acts as authorizing the FCA to determine the
priority of claims for System institutions in liquidation. See
Wheeler v. Greene, 280 US 49 (1929); Knox National Farm Loan
Associations v. Phillips, 300 US 194 (1937); Little v. First South
Production Credit Association, CA No. J890021 (W) (S.D. Miss. May
16, 1990).
---------------------------------------------------------------------------
The FCA requests comments and information that address the
following questions:
I. Eligibility for OFI Status
A. Significant Involvement in Agricultural or Aquatic Lending
1. What criteria (such as assets, income, composition of the loan
portfolio, or other factors) best determine whether an OFI is
significantly involved in agricultural or aquatic lending as required
by section 1.7(b)(4)(B)(i) of the Act and what specific threshold, if
any, should new regulations use? Please explain your recommendation.
2. How should the FCA define an agricultural lender? Would the
profiles of agricultural lenders established by other Federal agencies
be useful? Please explain your recommendation.
B. An OFI's Need for Supplemental Sources of Funds
What criteria should be used to determine whether depository and
non-depository OFIs demonstrate a continuing need for supplementary
sources of funds to meet the credit requirements of their agricultural
or aquatic borrowers, as required in section 1.7(b)(4)(B)(ii) of the
Act? Please explain your recommendations.
C. OFI Access to National or Regional Capital Markets
1. Has the existing regulatory definition of ``national or regional
capital markets'' in Sec. 614.4540 become outmoded? If so, what factors
in today's financial environment demonstrate that an OFI has limited
access to ``national or regional capital markets?''
2. The Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 will enable bank holding companies and their commercial bank
affiliates to expand, over time, their interstate banking and branching
networks. How will this law affect the concept of limited access to
``national or regional capital markets'' in section 1.7(b)(4)(B)(iii)
of the Act?
D. Mergers, Consolidations, and Acquisitions of OFIs
When an OFI merges, consolidates, or is acquired by another
financial institution, the eligibility of the successor entity to
borrow from an FCB or an ACB must be established anew. Under what
conditions, if any, should a successor to an existing OFI be entitled
to ``grandfather'' rights?
E. Parent and Affiliate Relationships
1. What factors should determine whether an OFI applicant is
considered together with its parents and affiliates as a single entity?
2. Section 1.7(b)(4)(D) of the Act establishes specific criteria
for FCA review of OFI application denials based on the OFI's subsidiary
or affiliate relationships. Under Secs. 614.4550 and 614.4555, the FCA
creates a review procedure when an FCB or ACB rejects an OFI's request
for financing for any reason. In the interest of eliminating
unnecessary prior approvals and case-by-case reviews, the FCA requests
comments on whether there is a compelling need for the regulations to
continue to require an FCA review of all OFI applications that have
been denied. Please explain your recommendation.
F. Eligibility of Major Financial Institutions
The statute and the legislative history indicate that agricultural
lenders that do not meet the criteria of sections 1.7(b)(4)(B) (ii) and
(iii) of the Act could still fund or discount certain loans with System
banks. What restrictions, if any, should the regulations impose on
System funding to these types of institutions?
II. Place of Discount
1. Should new regulations continue the territorial restrictions in
existing Sec. 614.4660 which require that an OFI must obtain financing
from the FCB or ACB (designated System bank) in whose territory: (1)
The OFI maintains its headquarters; or (2) more than 50 percent of the
OFI's borrowers is concentrated? If not, what criteria should determine
which Farm Credit bank should finance an OFI? Please explain your
recommendation.
2. Under what circumstances, if any, should new regulations allow
an FCB or ACB to extend financing to an OFI that does not operate in
its chartered territory if the designated System bank does not approve
the OFI's application?
3. Are there any aspects of the Riegle-Neal Interstate Banking and
Branching Efficiency Act of 1994 that the FCA should consider as it
develops new regulatory provisions that determine the place of discount
for commercial banks and nonbank affiliates of bank holding companies
whose networks operate in the chartered territories of more than one
Farm Credit bank? Please explain your recommendation.
III. Safety and Soundness
A. Supplemental Collateral
Under what circumstances, if any, should OFIs be required by the
new regulations to pledge cash and readily marketable securities or
other assets as additional collateral for their loans from System
banks?
B. OFI Lending Limit
Current regulations at Sec. 614.4565 impose a lending limit on
OFIs. Is this limit appropriate? If not, what alternatives do you
suggest and why? How should concentration risk be addressed in a
general financing agreement between an OFI and a Farm Credit bank?
C. Insolvency of an OFI
How should new regulations safeguard the interests of an FCB or ACB
when an OFI is liquidated?
IV. Fair Treatment Between OFIs and Direct Lender Associations
1. Do current regulations adequately and appropriately ensure that
FCBs and ACBs accord impartial and equitable treatment to both FCS
associations and OFIs? If not, what changes should be made and why?
2. The regulations currently require, with certain limited
exceptions, that OFIs must be treated in a manner that is comparable to
direct lender associations. To the extent feasible, the FCA seeks to
ensure that OFIs and FCS associations are treated equitably by their
funding banks. What circumstances, if any, justify different standards
concerning equity investment in the funding bank, interest rate
charges, and servicing fees?
V. Other Issues
Are there other regulatory changes, not addressed above, that would
improve an FCS bank's ability to serve an OFI and its agricultural
customers? Please explain your recommendations.
Dated: May 13, 1996.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 96-12411 Filed 5-16-96; 8:45 am]
BILLING CODE 6705-01-P