Organization; General Provisions; Disclosure to Shareholders; Technical Assistance and Financially Related Services; Member Insurance

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB43

Organization; General Provisions; Disclosure to Shareholders;

Technical Assistance and Financially Related Services; Member Insurance

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit

Administration Board (Board), proposes to amend the regulations

governing Technical Assistance and Financially Related Services and

Member Insurance. Subpart A of the proposed regulation defines what

constitutes technical assistance, financial assistance and financially

related services and what types of activities the Farm Credit System

(System) institutions are authorized to provide. The proposed

regulation allows greater flexibility in this area, while maintaining

the FCA's ability to regulate safety and soundness risks. The FCA's

existing prior approval requirement is eliminated and replaced with a

post-review process for all services, except for those that have never

been authorized by the FCA. The FCA also proposes to amend the Member

Insurance regulation to clarify existing rules and reduce regulatory

burdens wherever possible.

DATES: Comments should be received on or before December 30, 1994.

ADDRESSES: Comments may be mailed or delivered (in triplicate) to

Patricia W. DiMuzio, Associate Director, Regulation Development, Office

of Examination, Farm Credit Administration, McLean, Virginia 22102-

5090. Copies of all communications received will be available for

examination by interested parties in the Office of Examination, Farm

Credit Administration, McLean, Virginia.

FOR FURTHER INFORMATION CONTACT:

Linda C. Sherman, Policy Analyst, Regulation Development, Office of

Examination, Farm Credit Administration, McLean, VA 22102-5090, (703)

883-4498, TDD (703) 883-4444, or

Joy E. Strickland, Senior Attorney, Regulatory Operations Division,

Office of General Counsel, Farm Credit Administration, McLean, VA

22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background and Statutory Authorities

Under title I, section 1.12; title II, sections 2.5 and 2.12 (15);

and title III, section 3.7 of the Farm Credit Act of 1971, as amended

(the Act), the FCA is responsible for promulgating regulations

governing the offering and administering of technical assistance,

financial assistance, and financially related services by banks and

associations (hereinafter referred to as ``related services'').

System institutions have offered credit life insurance and a

variety of other credit-related services over the past 40 years.

Pursuant to regulations adopted in 1984, the FCA is responsible for the

review and approval of bank financial services policies and must also

approve each new related service program on a case-by-case basis before

it is offered by a bank or its affiliated associations. The FCA took no

further Systemwide action until 1993, when the Board adopted a policy

statement (58 FR 36410, July 2, 1993) and subsequently issued a

bookletter (366-OE, September 3, 1993) authorizing the providing of

related services outside an institution's chartered territory, under

certain circumstances.

On December 2, 1993, FCA Board Chairman Billy Ross Brown completed

a study entitled ``The Farm Credit System's Authorized Services'' and

directed staff to use it as a basis for revising the existing

regulations. The proposed regulation also incorporates the intent of

the FCA Board's Policy Statement on Regulatory Philosophy published in

the Federal Register on February 17, 1994 (59 FR 32189).

II. Regulatory Burden Comments and Petitions for Rulemaking

On June 23, 1993, the FCA Board published a ``Statement of

Regulatory Burden'' (58 FR 34003) that requested comments regarding how

the FCA could lessen the regulatory burden on System institutions. In

response, the agency received three comment letters on related

services, including one on Member Insurance. These comments are

addressed in this proposed regulation and are referred to as

``Regulatory Burden Comments.''

Also in 1993, the Farm Credit Banks' Presidents Planning Committee

(PPC) authorized an initiative to review the FCA regulations and make

recommendations concerning those that the System believes are not

directly related to safety and soundness or unduly restrict the full

exercise of authorities granted by the Act. This initiative produced a

System work group on related services (PPC work group) which included

representatives from associations and banks in the AgriBank, Baltimore,

Columbia, Springfield, and Western Farm Credit Districts. In July 1993,

FCA met with the PPC work group to hear its concerns and objectives.

The PPC work group completed its study on November 2, 1993, and

provided the results to the FCA Board for its consideration in this

proposed rule. The study recommended:

(1) Elimination of existing prior approval requirements;

(2) revision of coordination requirements to provide for increased

flexibility in providing intra- and inter-district services;

(3) revision of the requirement for bank annual review of service

programs;

(4) increased flexibility in how banks and associations administer

related service programs; and

(5) various technical and clarifying changes in subparts A and B.

On April 4, 1994, the FCA received a ``Petition for Rulemaking to

Revise 12 CFR part 618--subpart A, Concerning Financially Related

Services'' (hereinafter referred to as ``FRS petition''), submitted by

a Washington, D.C., law firm on behalf of one agricultural credit

association (ACA), three Federal land credit associations (FLCAs) and

five production credit associations (PCAs) in California and Michigan.

The petitioners supported the PPC work group's recommendations, but

suggested that, in light of the FCA Board's February 17, 1994 Policy

Statement on Regulatory Philosophy (59 FR 32189), the FCA should

consider a broader rulemaking proceeding and more fundamental changes

in the regulation than may have originally been contemplated.

The petitioners focused on areas where expanded authorities could

be considered and requested that the FCA:

(1) Define related services (although no definition was suggested);

(2) authorize the offering of other services for a fee;

(3) provide for a non-exclusive list of approved related services;

(4) eliminate the prior approval requirement;

(5) eliminate the annual bank review of related service programs;

and

(6) encourage innovative means for offering related services that

meet borrower needs.

On May 4, 1994, the FCA received a petition from an ACA in Michigan

(hereinafter referred to as ``Insurance petition'') asking the FCA to

reconsider the requirement in the Member Insurance regulations (subpart

B) that insurance only be sold to members who have a debtor/creditor

relationship.

In addition to the above petitions and System input, over the past

18 months the FCA has received prior approval requests and technical/

interpretive questions that have raised issues regarding what types of

services are authorized, what types of institutions can offer services,

and who the recipients of these services can be. Issues included

questions about incidental authorities, sale of insurance out-of-

territory, and sale of fee appraisals other than directly to members or

borrowers.

III. Proposed Regulatory Approach

System institutions desire greater flexibility to use their

statutory authority for providing related services in order to serve

the evolving needs of farmers and ranchers and to meet competitive

pressures. Although the FCA understands the System's desire to expand

current related service activities, the agency's primary concerns

continue to focus on safety and soundness issues and whether the System

remains within the limits of current statutory authorities.

Underlying these proposed regulations, is FCA's conclusion that,

under most circumstances, it would be appropriate to replace the

current prior approval requirement with specific criteria for

determining what services can be offered and under what circumstances.

However, the FCA, in its role as a safety and soundness regulator,

wishes to reserve the right to review new services in order to ensure

that they would not present excessive risk to the System. Because it is

difficult to foresee what types of new services will be proposed, it is

impracticable to prescribe specific regulations for new services that

have yet to be offered by the System. The FCA, therefore, proposes to

remove as much of the regulatory burden as possible, while maintaining

its ability to apply the statute, achieve regulatory objectives, and

preserve flexibility. The FCA has also reduced the role the funding

bank is required, by regulation, to play in overseeing such programs.

This allows the institution offering a service to take the primary

responsibility for the related services it provides.

The proposed regulation in part 618 defines terms and establishes

specific authorizing criteria so that each institution can evaluate the

services it would like to offer its customers. Thus, the proposed

regulation clarifies the FCA's primary safety and soundness concerns

and distinguishes between the types of services that can be offered and

the programs for delivering these services.

Subpart A has been rewritten and reorganized because of the

wholesale nature of the regulatory changes proposed by the FCA. In

proposed Sec. 618.8000, the FCA sets forth a definition of ``related

service'' which includes insurance and encompasses activities

previously referred to as technical assistance, financial assistance,

or financially related services. The proposed regulation also details

regulatory eligibility requirements for recipients of such services.

In proposed Sec. 618.8010 (``Related Services Authorization

Process''), the FCA replaces the prior approval in the existing

regulation in part, by communicating to all institutions those services

it has approved, which may then be offered without further regulatory

approval. The proposed regulation also describes the process for the

FCA's review of new services.

Proposed Sec. 618.8015 (``Policy Guidelines'') requires each

institution offering related services to adopt a policy addressing

related services. Proposed Sec. 618.8020 (``Feasibility Requirements'')

contains criteria for the feasibility analysis that must be performed

in conjunction with developing a new service program.

Proposed Sec. 618.8025 (``Feasibility Reviews'') addresses the

statutory requirement for the board of directors of each funding bank

to determine that association-related service programs are feasible.

The proposed regulation requires the association to perform a

feasibility analysis and requires the bank's board of directors to

verify that this analysis has been done, and limits the scope and

frequency of reviews that the bank must perform.

The final section in subpart A, Sec. 618.8030 (``Out-of-Territory

Related Services''), establishes a regulatory basis for providing out-

of-territory related services. The FCA's policy statement and

bookletter on offering services outside an institution's chartered

territory would be superseded by these provisions.

The proposed Member Insurance regulation in subpart B remains

largely unchanged with two exceptions: (1) The requirement for a

debtor/creditor relationship would no longer be necessary for sales of

certain types of insurance; and (2) employee compensation for insurance

sales would be allowed within certain limits.

IV. Section-by-Section Analysis

A. Subpart A--Related Services

1. Section 618.8000--Definitions

Section 618.8000 of the proposed regulation would define the term

``program'' to mean the method or procedure by which an institution

provides a related service. The purpose of the definition is to

distinguish between the concept or type of activity that will be

provided, such as farm business consulting, and the manner in which an

institution will provide the particular service. The distinction

between the type of related service and the institution's program for

providing the service will be addressed further in the discussion of

proposed Sec. 618.8010. ``Related services'' would be defined to mean

any activity provided by a System bank or association that pertains to

the recipient's on-farm, aquatic or cooperative operation, including

control of related financial matters. The definition is intended to be

broadly construed in order to encompass services, other than the making

of loans, that an institution may want to offer to persons or entities

eligible to borrow. It should be noted that the proposed definition

does not rely upon whether the institution charges fees or makes a

profit from offering a service in making a determination as to whether

it is considered a ``related service.'' The FCA recognizes that

institutions may offer related services at cost or at a slight loss in

order to increase customer satisfaction or attract new customers. Such

decisions are considered business decisions that will be reviewed in

the examination context. The proposed definition of related services is

not intended to include advertising or purely promotional activities.

Although other terms, such as ``technical assistance,'' ``financial

and technical assistance,'' and ``financially related services,'' are

referenced in the Act, the distinction among these types of services

has become negligible. In fact, the legislative history for the

enactment of the Farm Credit Act of 1971\1\ does not distinguish among

these terms. Therefore, in order to reduce any confusion, the proposed

definition would include all services referred to above.

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\1\Pub. L. 92-181, Dec. 10, 1971.

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The PPC work group commented that the on-farm requirement should

not be interpreted to limit authorized related services to only those

services that relate to the physical operations of the farm. The FCA

agrees that Congress did not intend the on-farm requirement to be

interpreted in such a restrictive manner and, historically, the FCA has

not done so in approving related service programs. The FCA interprets

the on-farm requirement to mean that related services must pertain to

the farming or aquatic operations of the recipients or be useful in

managing the financial matters of such operations. In fact, many of the

services specifically mentioned by Congress when it enacted the related

services authority in 1971 are related to farming and aquatic

operations and controlling the risks associated with such operations

rather than being a direct part of the physical operation. Those

services specifically mentioned in the statute or legislative history

include insurance, estate planning, and tax services.

Finally, the proposed regulation would also define ``System banks

and associations'' to include Farm Credit Banks (FCBs), Agricultural

Credit Banks (ACBs), banks for cooperatives (BCs), production credit

associations (PCAs), agricultural credit associations (ACAs), Federal

land bank associations (FLBAs), and Federal land credit associations

(FLCAs). The Federal Agricultural Mortgage Corporation and the Farm

Credit Banks Funding Corporation would not be included because these

and other similar Farm Credit institutions are not authorized to

provide related services. Although service corporations are not

included within the term ``System banks and associations,'' these

entities would continue to be authorized to offer related services,

except insurance, based on section 4.25 of the Act.\2\

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\2\Section 4.25 of the Act states that service corporations may

perform all the functions and services of the banks, with the

exception of extending credit and providing insurance.

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2. Section 618.8005--Eligibility

Based on the provisions of sections 1.12, 2.5, 2.12(15) and 3.7 of

the Act, proposed Sec. 618.8005 requires that related services\3\ be

offered by an institution to persons or entities eligible to borrow

from the System. The proposed regulation would determine eligible

recipients for related services by reference to persons eligible to

borrow as defined in the lending regulations at part 613 of this

chapter. Proposed Sec. 618.8005(a) would authorize FCBs and

associations to offer related services to the persons eligible to

borrow as defined in Secs. 613.3010; 613.3020(a)(1), (a)(2), and (b);

and 613.3045. For BCs, proposed Sec. 618.8005(b) would authorize

related services to be provided to eligible borrowers as defined in

Secs. 613.3110 and 613.3120. Proposed Sec. 618.8005(c) would authorize

ACBs to offer related services appropriate to on-farm and aquatic

operations to persons eligible to borrow as specified in paragraph (a)

of this section and to offer related services appropriate to

cooperative operations to entities eligible to borrow as specified in

paragraph (b) of this section.

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\3\Although insurance is included within the definition of

related services, more specific eligibility requirements are

provided in revised Sec. 618.8040; those requirements govern

eligibility for receipt of insurance.

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The FCA is currently developing proposed amendments to the lending

eligibility regulations. Once any lending eligibility amendments become

final, Sec. 618.8005 would be modified as necessary to conform to

lending eligibility.

The FCA believes that marketers and processors that meet the

eligibility requirements of Sec. 613.3045 would also be included within

the recipients that Congress considered eligible to receive related

services. For any processing and marketing unit to be eligible to

borrow, there must be a portion of the operation's throughput that is

produced on-farm by the entity or its owners. The FCA believes that

related services provided to marketing and processing units would be

appropriate to the on-farm or aquatic operations of the unit or its

owners. Therefore, these entities would be included within the eligible

recipients specified in proposed Sec. 618.8005(a). Because rural home

residents and farm-related businesses do not have farming or aquatic

operations, services provided to them would not meet the statutory

``on-farm'' requirement and, therefore, they would continue to be

excluded from the eligible recipients specified in proposed

Sec. 618.8005.

The proposed regulation would approach the eligibility provisions

for related services offered by ACBs in the same manner as eligibility

is treated for FCBs and BCs. An ACB would be authorized under proposed

Sec. 618.8005(c) to provide related services to persons eligible to

borrow from FCBs. Such related services would have to be appropriate to

the on-farm and aquatic operations of the recipients. Further, an ACB

could provide related services to its cooperative customers, as long as

the service is appropriate to their cooperative operations. Therefore,

although an FCB and BC will be combined into an ACB, the services that

can be provided to each type of borrower under titles I, II, and III of

the Act would not change under the proposed regulation.

Recent requests from System institutions have led the FCA to

consider whether there are situations in which persons eligible to

borrow may be denied the ability to receive the benefit of related

services merely because an intermediary or other person or entity

involved would not meet the eligibility requirements of the Act. The

FCA believes that all farmers, ranchers, and other eligible persons and

entities should be able to receive the full benefit of the related

services authorized in the Act. Similar requests have been received

asking the FCA to consider allowing the System to provide fee

appraisals for agricultural real estate to entities such as the Farmers

Home Administration (FmHA), commercial banks, and other lenders in

connection with loan applications from persons eligible to borrow, and

loan servicing actions (including bankruptcies and foreclosures)

involving agricultural assets. The FCA also received a letter from the

FmHA requesting that System institutions be authorized to provide the

appraisals.

The FmHA and certain System institutions have stated that there is

a shortage of qualified agricultural appraisers in certain areas of the

country, especially following the Financial Institutions Reform,

Recovery and Enforcement Act.\4\ System personnel, who have developed

an expertise in agricultural appraisals, could help meet this need. The

availability of qualified appraisers would benefit farmers and ranchers

in that their property would be fairly valued in situations such as

loan applications and loan servicing. Under current regulations, System

institutions have not been able to provide the appraisals when they are

provided directly to the FmHA or a commercial bank, entities not

eligible to borrow from a System institution. Also, the FmHA procedures

provide that the FmHA will contract for appraisals rather than having

each borrower obtain an appraisal.

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\4\Pub. L. 101-73, Aug. 9, 1989.

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Therefore, proposed Sec. 618.8005(d) would provide that related

services may be offered to recipients that do not otherwise meet the

eligibility requirements, as long as such service is offered in

connection with loan applications, loan servicing, and other

transactions between these recipients and persons or entities eligible

to borrow under the criteria in proposed Sec. 618.8005(a), (b), or (c)

discussed above.

The service in question would have to be a part of or pertain to

the transaction. For example, if a System institution offered a soil

testing service, a natural food store wishing to purchase produce from

a farmer could utilize the System institution's service to test the

soil for pesticides. Although the eligible farmer directly benefits

from the service and could arrange for the testing from the

institution, the food store may wish to contract for the service

directly in order to ensure independence of the testing. The System

institution could not, however, offer tax planning services to the

natural food store because tax planning does not pertain to the store's

transaction with the farmer and does not directly benefit the eligible

farmer. In addition, the authority to provide related services in

Sec. 618.8005(d) would not depend on which party arranges for or pays

for the related services. Finally, for BCs and ACBs, proposed

Sec. 618.8005(d) would not change the requirements of Sec. 613.3120 of

this chapter that a voting stockholder must substantially benefit from

services provided in connection with foreign export or import

transactions.

One of the Regulatory Burden comments stated that System

institutions should have the authority to provide related services to

non-eligible entities as long as such services did not comprise the

majority of the institution's program. The FCA does not believe that

statutory or regulatory eligibility requirements depend on the

percentage of an institution's services that are provided to the person

or entity whose eligibility is in question, and did not include this

suggestion in the proposed regulation.

Finally, the FCA does not agree with the view advanced by the Farm

Credit Council (FCC) and FRS petitioners that appraisals and other

services could be provided to non-eligible entities pursuant to the

institutions' incidental authorities under sections 1.5(21), 2.2(20),

2.12(20), and 3.2(16) of the Act. System institutions were created for

the express purpose of providing lending and related services. It is a

general principle of corporate law that incidental powers are those

powers that are directly and immediately appropriate to the execution

of powers expressly granted and cannot be used to waive a specific

limitation on an express power.\5\ Therefore, any use of incidental

authorities for activities derived from either lending or related

services express powers would still be subject to the limitations on

those express powers.

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\5\Fletcher Cyc. Corp. Sec. 2485 (rev. perm. ed. 1989).

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3. Section 618.8010--Related Services Authorization Process

As part of its commitment to reducing the regulatory burden, the

FCA proposes to eliminate the existing regulatory requirement that each

System bank or association obtain the FCA's prior approval before

providing a related service program. In addition, System institutions

requested a change in the approval process to lessen the burden and

speed up the process. A number of suggestions were made regarding the

process; many of these have been incorporated into the proposed

regulation.

The proposed regulation sharply reduces the FCA's up-front role in

two ways. First, the FCA would only evaluate proposals for new related

services up front, that is, only services that have not previously been

approved by the FCA. Second, only the service itself, not an

institution's program, would initially be evaluated. This means that

the FCA's evaluation of new services could occur before the proposing

institution prepares a complete feasibility analysis or its funding

bank completes its review. In fact, while the FCA would expect well-

documented service proposals, an institution would not need to devote

valuable resources to developing its operational program before

submitting a new related service for the FCA's evaluation. Following

the FCA's authorization of the service, any authorized institution

could develop and offer a program based on regulatory criteria in

proposed Secs. 618.8020 and 618.8025 without obtaining prior approval

from the FCA. The institution's program would then be subject to review

in the course of the examination process.

The first step in the proposed new process would be the compilation

of related services that have been determined to meet the definition

and other criteria specified in this regulation (the Related Service

List or simply ``the list''). As provided in proposed

Sec. 618.8010(c)(2), the list would briefly describe each related

service, capturing key distinguishing aspects of the activity, as well

as a designation of the types of institutions authorized to offer the

specific services. Institutional restrictions would mainly be due to

statutory limitations related to eligible recipients. Finally, any

special conditions placed on offering a given service would be

identified on the list. It is anticipated that these conditions would

be the exception rather than the rule and would apply mainly to complex

services, with readily identifiable safety and soundness risks.

Appendix A contains a sample list consisting of all previously

approved related services known to have at least one active program

among System banks and associations and those services specifically

mentioned in the statute. The sample list is included as an attachment

to this Federal Register document for informational purposes only and

will not become part of the final regulation.

Although every attempt has been made to identify existing services,

the FCA recognizes that its historical records may not be complete.

Therefore, System banks and associations currently offering services

that meet the related service definition, but are not part of the

sample list, should submit such services during the comment period if

they wish to continue providing them after the revised regulation

becomes effective. Institutions should provide the title of the service

and a brief description, including any previous action taken by the FCA

on the related service. If there is no existing documentation, then the

institution should provide sufficient information for the FCA to

consider the service based on the provisions in proposed

Sec. 618.8010(b). These services may be included on the initial list to

be published concurrently with the final regulation. If some services

require further study, they will be considered for inclusion on the

list after the regulation is finalized.

Once a service is determined to meet the regulatory criteria and is

placed on the list, proposed Sec. 618.8010(b) would provide that System

banks and associations could develop programs and subsequently offer

the related service, subject to any special conditions and

institutional restrictions identified on the list. This proposal would

eliminate the requirement in existing Sec. 618.8000(c) that the FCA

approve each institution's related services program. The FCA believes

that an institution's program for offering the service and its capacity

to offer that service can be reviewed during the examination process.

Proposed Sec. 618.8010(c)(4) would require that when a listed service

is first offered by an institution, the institution must notify the

FCA's Office of Examination field office responsible for examining that

institution.

An institution that wishes to offer a related service not

previously evaluated by the FCA would need to submit a written proposal

pursuant to proposed Sec. 618.8010(b). Neither a formal bank review nor

a detailed operational program (per existing regulations) would be

required prior to requesting that the FCA review the service. In the

event of complex or controversial proposals, proposed

Sec. 618.8010(b)(3) acknowledges that the FCA, at its discretion, may

publish the proposed service in the Federal Register for public

comment.

No later than 60 days after receipt of a complete proposal,

including any additional information the FCA may require, System

institutions would be notified of the FCA's action pursuant to

Sec. 618.8010(b)(4). Although the FCA would normally act promptly on a

proposed service, for good cause and prior to the expiration of the 60

days, the review period could be extended for up to a total of 120

days. The FCA would formally notify all System institutions of its

action by bookletter or other appropriate forms of communication.

Proposed new related services would be evaluated by the FCA based

on the provisions of proposed Sec. 618.8010(b). The FCA would consider

two key aspects in evaluating a related service. The first aspect is

whether the service is authorized; that is, whether it meets the

definition of a related service in proposed Sec. 618.8000(b). For

example, a service provided by a title I or title II lending

institution would have to be appropriate to on-farm operations and

would have to be targeted to the defined eligible recipients. When

evaluating that service, the FCA would also consider whether the

service would be appropriate to cooperative operations and, if so,

include BCs and ACBs as authorized institutions.

The second key aspect the FCA would consider is whether significant

risk factors are inherent in the service and whether they can be

managed or eliminated. This evaluation would involve assessing the

degree of risks in the areas of financial liability, operational

matters, and conflicts of interest.

Financial liability includes any liability that could arise as a

result of offering the service. For example, such liability could arise

if institution personnel make management decisions on a customer's

behalf. The primary concern is whether such liability has the potential

to materially impact an institution's financial condition.

Operational risk is the risk involved in implementing a service.

This risk could occur if an institution fails to properly prepare for

or administer a service. Examples of how this could arise are: (1) If

significant staff training is required in order to competently offer

the service, but is not contemplated or planned; or (2) if there are

substantial up-front costs in setting up a new service that may not be

recouped.

Finally, conflict of interest would include any conflict that might

arise between the interests of the institution and those of the

recipient as a result of offering the service. An example would be the

conflict that could arise when, as part of the farm business consulting

service, an institution employee suggests a management strategy that

requires the recipient to borrow more money.

If risks were identified in any of these areas but some

modification could eliminate, minimize, or control them, the service

could be added to the list with special conditions or institutional

restrictions. In addition, in order to better evaluate risk areas, a

service could be placed on the list subject to the condition that it

only be offered on a pilot basis by one or more institutions. If such

risks could not be minimized to a degree that would make the service

appropriate for System institutions to provide, approval to provide the

service would be denied. In considering the risks associated with a

proposed new service, the FCA would evaluate the risks as they pertain

to any System institution or the System as a whole. Program weaknesses

would be addressed through the examination or enforcement functions of

the FCA.

In considering the agency's role in reviewing proposed related

services, the FCA considered a range of options, including the current

prior approval approach and the proposal by the PPC work group. Under

the PPC's proposal, institutions would notify the FCA of their intent

to offer an existing or new related service program. If the FCA did not

object within specified time periods, the institution could offer the

service. Although this suggestion would reduce the current regulatory

burden, the FCA believes that because it would require every

institution to submit a program proposal to the FCA, it would still be

more burdensome than necessary. The FCA proposes instead to evaluate

each new service only once. If an institution concludes that the

service meets the criteria for authorization, it could then offer such

service once a feasibility analysis was prepared in accordance with the

regulatory requirements. The FCA believes this proposed process will

reduce time needed for staff review and the regulatory burden placed on

System institutions, while appropriately minimizing the risks of

offering unauthorized or unsafe and unsound services.

4. Section 618.8015--Policy Guidelines

Existing Sec. 618.8000(b) authorizes district and bank boards to

establish policies pertaining to related service programs. This section

also includes general policy guidelines and requires that the FCA

approve the policies. The FCA proposes to amend existing

Sec. 618.8000(b) primarily by eliminating the requirements that a

district bank establish a single related services policy for the

district and that the FCA approve these policies.

Section 618.8015 of the proposed regulation would require that each

System institution offering related services formulate policies

pertaining to the development, implementation, marketing, and offering

of related services. This change would reduce the supervisory burden of

the funding bank and appropriately place the responsibility on the

offering institutions. This change would not, however, absolve the

funding bank from providing the necessary guidance on districtwide

issues, such as its approach for verifying the feasibility analyses of

associations' related service programs.

Proposed Sec. 618.8015 would also eliminate the requirement that

the FCA approve district and bank policies. This proposed change is

consistent with the FCA's intent to remove unnecessary prior approval

functions and rely instead on the examination function to evaluate

compliance, performance, and safety and soundness.

The FCA proposes to modify the existing guidance for the content of

the related services policy. The proposed regulation would require the

policy to include clearly stated purposes, objectives, and operating

parameters. In addition, the proposed regulation would require

institutions to link each related service program it offers to its

business plan and long-term strategic goals. Proposed Sec. 618.8015(b)

and (c) retain the requirements in existing Sec. 618.8000(b)(1) and (2)

that all related services be offered on an optional basis and that all

fees associated with a service be identified and disclosed to the

recipient.

The FCA proposes to eliminate as unnecessary the specific

requirements in existing Sec. 618.8000(b)(4) that banks and

associations maintain detailed records because other regulatory

provisions exist that require maintaining such records in order to

comply with the institutions' internal control policies.

The FCA also proposes to eliminate the requirement in existing

Sec. 618.8000(b)(4) that the bank annually review each service offered

in the district. This change was also supported by the PPC work group

and in the FRS petition. As discussed above, the FCA has concluded that

the emphasis on accountability is at the institution level, and

regularly reviewing an activity and reporting the results to the board

should be a standard part of managing an institution.

5. Section 618.8020--Feasibility Requirements

Sections 1.12, 2.5, 2.12, and 3.7 of the Act authorize FCBs, ACBs,

PCAs, ACAs, FLBAs, FLCAs and BCs, respectively, to offer related

services. Each section specifies that there be a determination of

feasibility before a related service is offered. The FCA believes that

the ultimate accountability and responsibility in offering related

services rests with the institution offering the service. Therefore,

although the funding bank has a statutory role to determine that

related services are feasible, each offering institution should

document the feasibility of providing a related service.

Neither the statute nor the existing regulation defines

feasibility. Under the existing approval process for related service

programs, a definition is not critical because the feasibility

determination is centralized at the bank level and reviewed by the FCA

in the prior approval process. However, the proposed rule moves to a

post-review environment, which creates a need to specify the

feasibility criteria.

Section 618.8020 of the proposed regulation would enumerate minimum

feasibility requirements. The FCA proposes that the feasibility

analysis include support that a proposed related service is an FCA-

authorized service. (If a proposed service is not authorized, the

institution can request that it be authorized via the process outlined

in Sec. 618.8010(b).) The feasibility analysis would also include an

overall cost/benefit analysis based on the evaluation of the market,

pricing, competition, expected financial returns, operational risks,

financial liability, and conflicts of interest. This would also include

an analysis to show that the service is compatible with the offering

institution's business plan and strategic goals. These requirements

should not be interpreted as all-encompassing, and in many instances

there will be other issues that will also need to be addressed.

6. Section 618.8025--Feasibility Reviews

Section 2.5 of the Act authorizes a PCA to offer related services

as determined feasible by the board of directors of the FCB. Section

2.12(15) of the Act authorizes an FLBA to offer related services that

it determines, with FCB approval, are feasible. Therefore, the FCB has

a statutory role in the determination of whether a related service

program is feasible for an association to offer. Historically, the FCB

has conducted reviews of each related service, at least annually, at

both the bank and association level. Additionally, existing

Sec. 618.8000(a)(5) requires that the bank board annually determine the

financial feasibility of its related service programs.

As stated in the preceding discussion of proposed Sec. 618.8020,

the FCA believes the determination of feasibility of a proposed program

should ultimately be the responsibility of the offering institution.

Nonetheless, the funding bank does have a statutory responsibility.

Therefore, the FCA proposes in Sec. 618.8025 to require the funding

bank to verify that the association performed the feasibility analysis

pursuant to Sec. 618.8020. It would permit the funding bank to prevent

the offering of the related service only if it determines that the

feasibility analysis is inadequate or that the analysis fails to

indicate that the program can be feasibly provided by the association.

Any conclusion by the bank that the feasibility analysis is incomplete

or fails to demonstrate the program's feasibility must be fully

supported and communicated to the association in writing within 60 days

of its submission to the bank.

The FCA concludes that this approach creates the least amount of

burden, maintains the funding bank's statutory role, supports the

bank's ability to supervise its credit, and permits greater association

autonomy. The FRS petitioners suggested making the bank's determination

of feasibility automatic, in the absence of extraordinary

circumstances, for those proposed services that the FCA has authorized.

The FCA does not agree that either the bank's or association's

determination of feasibility should be automatic. The FCA's

determination of whether a particular service should be authorized is

fundamentally different from the determination of whether an individual

service program is feasible for a given association. Moreover, the FCA

does not accept the premise that the funding bank could fulfill its

statutory role by making an automatic assumption of feasibility for

those services that the FCA has already authorized.

7. Section 618.8030--Out-of-territory Related Services

Proposed Sec. 618.8030 would allow a System bank or association to

offer a related service outside of its chartered lending territory. It

would replace guidance provided in FCA Bookletter 366-OE, which

implemented the FCA Board policy statement concerning the offering of

out-of-territory related services (58 FR 36410, July 2, 1993).

Presently, an institution is required to obtain the concurrence of all

System banks or associations serving the territory before it can offer

its related services. The other chief conditions are: (1) A common

program requirement within a district (associated with existing related

service regulations); and (2) a requirement that the service provided

within the institution's territory remain as the primary component of

its services.

The proposed regulation eliminates the common program feature in

Sec. 618.8000(b)(3) because the FCA recognizes that this feature

reflects an out-of-date system structure. In addition, the PPC work

group and FRS petition both requested that the FCA drop the common

program requirement in favor of greater flexibility.

The requirement that related services provided within an

institution's own territory remain the institution's primary service

component is not part of the proposed regulation. The FCA concludes

that as long as an institution is able to adequately serve the needs of

eligible borrowers in its chartered territory, there should not be a

limit on how much business it conducts out of its territory. The FCA

agrees with a comment made by the PPC work group that services can have

a positive effect on an institution's credit program by providing

diversity and an additional income stream.

Under the proposed regulation, the requirement for consent before

offering related services out-of-territory would be modified. In

proposed Sec. 618.8030(a), an institution would be required to obtain

the concurrence of at least one institution chartered to service that

outside territory. The FCA believes it is important to preserve the

rights of all System institutions within their chartered territories.

The fact that some territories overlap is irrelevant to the right of an

institution to determine what services it wishes to provide in its own

territory. Thus, the FCA believes that if a bank or association wishes

to make a related service available to its customers, it can arrange

with any other System institution to provide the service in its

chartered territory without any other institution's consent. This

outcome is no different from the current situation in which an

institution can offer a service itself or it can contract with a non-

System entity to offer the service; in either case, the institution is

not required to obtain the consent of any other institution.

The proposed regulation also requires that for services provided

out of its territory, the providing institution must meet all of the

requirements of subparts A and B of part 618, including adopting a

related services policy and determining feasibility. It should be noted

that if the providing institution is expanding an existing program, a

new feasibility analysis and bank verification would be needed. An

institution that gives consent to another bank or association to

provide a related service in its chartered territory need must meet the

requirements of proposed Sec. 618.8030, but need not comply with the

other requirements of subparts A and B, unless the program consented to

imposes on the consenting institution a financial obligation, in which

case the consenting institution must comply with Secs. 618.8015,

618.8020, and 618.8025.

Another aspect to the out-of-territory issue is whether an

institution that initially concurs in another institution providing

related service programs in its territory can later withdraw its

approval. One example could be a situation in which an institution has

approved a service in its territory because that service is not

currently offered, but later that institution wishes to begin

exclusively offering the same service. The FCA believes that by

entering into a written agreement with specific terms, conditions, and

timeframes, the consenting institution can best protect its interests.

One example could be that the institutions enter into a formal

contractual arrangement that provides for termination by either party

with proper notice.

B. Subpart B--Member Insurance

1. Section 618.8040--Authorized Insurance Services, Debtor/Creditor

Relationship

The PPC work group and the Insurance petition raised questions

concerning the authority in section 4.29 of the Act for banks

(excluding banks for cooperatives) and associations to provide to

members and borrowers credit or term life and credit disability

insurance appropriate to protect the loan commitment. When it enacted

section 4.29 of the Act, Congress stated that for System institutions

to ``sell credit or term life, there must be a debtor-creditor

relationship and the amount of insurance should be appropriate to

protect but not exceed the total loan commitment to the member-

borrower.''\6\ Therefore, current regulations require that a debtor-

creditor relationship exist for the sale of credit or term life and

credit disability insurance. Although the Insurance petition requested

that this requirement be removed from the regulations, the FCA

concludes that this is a statutory requirement, not only a regulatory

requirement.

---------------------------------------------------------------------------

\6\See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 43 (1980).

---------------------------------------------------------------------------

Questions have also arisen as to whether the debtor-creditor

relationship must exist with the institution offering credit or term

life or credit disability insurance. For example, in situations in

which related services may be offered out-of-territory, a borrower may

have a debtor-creditor relationship with the bank or association in the

territory, but an out-of-territory association may be offering the

insurance. The FCA interprets section 4.29 of the Act and its

legislative history to mean that there must be a borrowing relationship

with a System institution, but not necessarily with the institution

offering the service. Therefore, as long as the recipient of credit or

term life or credit disability insurance has a debtor-creditor

relationship with a bank or association of the System, the insurance

can be offered by any institution authorized to provide insurance to

that recipient. Accordingly, in proposed Sec. 618.8040(b)(1), the FCA

would add a statement that the debtor-creditor relationship does not

necessarily have to be with the offering institution.

Another question related to the debtor-creditor requirement was

raised by the PPC work group. The issue involves situations in which a

borrower relies upon a spouse's income for repayment of the loan and

wishes to purchase credit or term life and disability insurance on the

spouse, but the spouse is not a co-maker of the loan. The FCA considers

it to be unlikely that a spouse who significantly contributes to the

loan's repayment would not have signed the note. Nevertheless, because

spouses may have contractual liability for the debt by operation of

state law, the proposed regulation would permit the sale of credit

insurance on a borrower's spouse. As with all other situations, the

amount of insurance offered could not exceed the total amount of the

loan commitment to the borrower.

The FCA's review of the legislative history on the enactment of

section 4.29 of the Act indicates that a debtor-creditor relationship

is not necessary for System institutions to provide other insurance

necessary to protect the member's farm or aquatic unit, such as hail

and multiple-peril crop insurance.\7\ Accordingly, this restriction has

been deleted in the proposed regulation. Purchasers of other insurance

would, however, have to be either members or borrowers. Proposed

Sec. 618.8040(b)(2) would define members (for subpart B only) to

include a stockholder or participation certificate holder who acquired

stock or participation certificates to obtain a loan, for investment

purposes, or to qualify for other services of the association or bank.

Therefore, the reference in existing Sec. 618.8030(b)(1) to eligibility

for landlords of tenants and tenants of landlords having a debtor-

creditor relationship would be removed as unnecessary. Such tenants or

landlords would be eligible to receive hail or multiple-peril crop

insurance upon becoming members of a bank or association. Similar to

the debtor-creditor requirement in proposed Sec. 618.8040(b)(1), the

purchaser of other types of insurance does not have be to a borrower or

member of the offering bank or association, but can be a borrower or

member of any System bank or association.

---------------------------------------------------------------------------

\7\See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 44 (1980).

---------------------------------------------------------------------------

2. Section 618.8040(b)(5)--Incentive Compensation for Sale of Insurance

Section 618.8040(b)(5) is proposed to be amended to clarify how

incentive compensation for sale of insurance may be provided to

employees. The existing regulation states that ``Bank or association

personnel shall not benefit, directly or indirectly, from insurance

sales by receipt of commissions, gifts, or incentive awards.'' The

proposed regulations would allow incentive compensation for sale of

insurance with some limitations.

The prohibition of compensation for insurance sales was included in

the existing regulation to prevent conflicts of interest between System

employees and borrowers and to implement the requirement in section

4.29 of the Act that borrowers not be coerced into buying insurance

from System institutions. The FCA believes that unrestricted

compensation of loan officers or other employees, based on volume of

insurance sales can lead to abusive, high-pressure sales practices. In

addition, other Federal financial regulators agree and continue to

place limitations on employee compensation derived from insurance

sales. At the same time, however, the FCA recognizes that if sale of

insurance is a part of an employee's regular job, incentive

compensation should be allowed to some extent. Additionally, the FCA is

aware that some institutions have instituted bonus pools that are

shared by employees who may not be involved in selling insurance. The

proposed regulation accommodates those arrangements as well.

The issue of employee compensation for insurance sales was raised

in 1992 when it became known that some institutions had employee

compensation programs that allowed direct compensation for insurance

sales. On May 20, 1992, the FCA issued Bookletter 327-OE, which

recognized that some System employees were compensated for insurance

sales in one of two ways: (1) Incentive bonuses were directly tied to

the insurance sales generated by each employee; or (2) incentive

bonuses were tied in some way to the net income of the institution,

part of which was derived from sales of insurance. The bookletter

stated that compensation that is tied directly to insurance sales is

not in compliance with current regulations. However, the FCA did not

intend to apply that determination to the second type of plan where

compensation is tied to the net income of an institution. Since that

bookletter was issued, the FCA has received a number of inquiries from

System institutions requesting clarification on whether specific

compensation plans would be considered acceptable. In addition, the PPC

work group requested that the FCA consider the issue of compensation

for sale of insurance as part of its project to amend Sec. 618.8000.

Proposed Sec. 618.8040(b)(6) allows for incentive compensation for

sale of insurance in line with what is currently allowed in the

commercial banking industry. In any single year, the amount of

incentive compensation attributable to insurance sales cannot exceed 5

percent of the recipient's annual base salary. This limitation applies

to individual incentive plans, as well as bonus pools or any other type

of plan. If an employee participates in both an individual plan and

some form of bonus pool, the amount of incentive compensation

attributable to sale of insurance received from each plan must be

aggregated for purposes of determining whether it meets the 5-percent

limitation.

It should be noted that insurance is the only related service for

which there is any restriction on employee incentive compensation. At

this time, the FCA has concluded that there is no need for similar

limitations on other related services because those services are not as

directly linked to the loan-making process. Furthermore, customers may

be able to more readily evaluate the benefit of other related services.

3. Section 618.8040--Other Regulatory Changes

The requirement in Sec. 618.8040(b)(10) that the bank review

annually the individual association member insurance services would be

eliminated. This provision was originally included to be consistent

with other related service requirements in subpart A, which are now

also to be removed. The proposed rule removes the annual review

requirement from both subparts A and B. As previously discussed, the

FCA believes the review function is most appropriately handled at the

level of the institution offering the program. The FCA expects that

each institution offering insurance will review its program

periodically to determine that it is operating in a safe and sound

manner and that it remains consistent with the institution's business

plan and long-term strategic goals.

In order to reflect the creation of Agricultural Credit Banks, the

FCA clarifies that under proposed Sec. 618.8040(a) ACBs may provide

insurance to the persons eligible to borrow as identified in titles I

and II of the Act and corresponding regulations. This would not be a

change from the existing regulations.

Technical changes were also made to parts 611 and 620 in order to

conform with the proposed regulatory changes in part 618, subparts A

and B.

List of Subjects

12 CFR Part 611

Agriculture, Banks, Banking, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, Banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

12 CFR Part 620

Accounting, Agriculture, Banks, Banking, Reporting and

recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, parts 611, 618, and 620 of

chapter VI, title 12 of the Code of Federal Regulations is proposed to

be amended to read as follows:

PART 611--ORGANIZATION

1. The authority citation for part 611 continues to read as

follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,

5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act; 12 U.S.C.

2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2243, 2244, 2252,

2279a-2279f-1, 2279aa-5(e); secs. 411 and 412 of Pub. L. 100-233,

101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102

Stat. 989, 1003 and 1004.

Subpart G--Mergers, Consolidations, and Charter Amendments of

Associations

Sec. 611.1125 [Amended]

2. Section 611.1125 is amended by removing the word ``financially''

in paragraph (b)(2).

PART 618--GENERAL PROVISIONS

3. The authority citation for part 618 is revised to read as

follows:

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,

4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12

U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,

2200, 2211, 2218, 2243, 2244, 2252).

Sec. 618.8030 [Redesignated as Sec. 618.8040]

4. In subpart B, Sec. 618.8030 is redesignated as new

Sec. 618.8040.

5. Subpart A is revised to read as follows:

Subpart A--Related Services

Sec.

618.8000 Definitions.

618.8005 Eligibility.

618.8010 Related services authorization process.

618.8015 Policy guidelines.

618.8020 Feasibility requirements.

618.8025 Feasibility reviews.

618.8030 Out-of-territory related services.

Subpart A--Related Services

Sec. 618.8000 Definitions.

For the purposes of this subpart, the following definitions shall

apply:

(a) Program means the method or procedures used to deliver a

related service. This distinguishes the particulars of how a related

service will be provided from the type of activity or concept.

(b) Related service means any service or activity provided by a

System bank or association that pertains to the recipient's on-farm,

aquatic, or cooperative operations, including control of related

financial matters. The term ``related service'' includes, but is not

limited to, technical assistance, financial assistance, financially

related services and insurance, but does not include lending or leasing

activities.

(c) System banks and associations means Farm Credit Banks,

agricultural credit banks, banks for cooperatives, agricultural credit

associations, production credit associations, Federal land bank

associations and Federal land credit associations.

Sec. 618.8005 Eligibility.

(a) Farm Credit Banks and associations may offer related services

to persons eligible to borrow as defined in Secs. 613.3010,

613.3020(a)(1), (a)(2), (b), and 613.3045 of this chapter.

(b) Banks for cooperatives may offer related services to entities

eligible to borrow as defined in Secs. 613.3110 and 613.3120 of this

chapter.

(c) Agricultural credit banks may offer related services

appropriate to on-farm and aquatic operations to the persons eligible

to borrow specified in paragraph (a) of this section and may offer

related services appropriate to cooperative operations of entities

eligible to borrow as specified in paragraph (b) of this section.

(d) System banks and associations may provide related services to

recipients that do not otherwise meet the requirements of paragraphs

(a), (b), and (c) of this section in connection with loan applications,

loan servicing, and other transactions between these recipients and

persons eligible to borrow as defined in paragraphs (a), (b), or (c) of

this section, as long as the service provided is a part of or pertains

to the transaction between the parties. Such services include, but are

not limited to, fee appraisals of agricultural assets performed for the

Farmers Home Administration, commercial banks and other lenders.

Sec. 618.8010 Related services authorization process.

(a) Authorities. (1) The Farm Credit Administration (FCA) shall

authorize related services that meet the criteria specified in this

regulation. System banks and associations may only offer related

services that are authorized by the FCA.

(b) New service proposals. (1) A System bank or association that

wishes to offer a related service that the FCA has not previously

authorized must submit to the FCA, in writing, a proposal that includes

a description of the service, how it meets the regulatory definition of

``related services'' in Sec. 618.8000(b), and the risk analysis cited

in Sec. 618.8020(b)(3). The FCA will evaluate the proposed service

based on the information submitted, and may also consider whether there

are extenuating circumstances or other compelling reasons that justify

the proposed service or support a determination that the service is not

authorized. This evaluation will focus primarily on Systemwide issues

rather than on institution or program-specific factors.

(2) When authorizing a proposed related service, at its discretion,

the FCA may impose special conditions or limitations on any program to

offer a related service.

(3) At its discretion the FCA may, during its evaluation of a

proposed related service, publish the proposed related service in the

Federal Register for public comment.

(4) Within 60 days of the FCA receiving a completed proposal,

including any additional information the FCA may require, the FCA will

act on the request. The FCA shall approve the request, deny the

request, or notify the requesting institution that the service shall be

published for public comment in the Federal Register. For good cause

and prior to the expiration of the 60 days, the FCA may extend this

period for an additional 60 days.

(5) The FCA shall notify all System banks and associations by

bookletter or other means each time it determines whether a proposed

related service is or is not authorized.

(c) Previously authorized services. (1) For related services that

have been authorized by the FCA, any System bank or association may

develop a program and subsequently offer the related service to

eligible recipients, subject to any special conditions or institutional

limits placed by the FCA. These programs will be subject to review and

evaluation during the examination process.

(2) The FCA shall make available to all Farm Credit institutions a

list of such related services (``related services list'' or ``list'')

and will update it in accordance with paragraph (b)(5) of this section.

The list will contain the following:

(i) A description of each related service;

(ii) Identification of any special conditions on how the related

service may be offered; and

(iii) The types of institutions authorized to offer each type of

related service.

(3) Within 30 days of implementing a related service program

already on the list, the System bank or association must notify the FCA

Office of Examination field office responsible for examining that

institution.

Sec. 618.8015 Policy guidelines.

(a) The board of directors of each institution providing related

services shall adopt a policy addressing related services. The policy

should include clearly stated purposes, objectives, and operating

parameters for offering related services and a requirement that each

service offered be consistent with the institution's business plan and

long-term strategic goals. Such policy should also be subject to review

under the institution's internal control policy.

(b) All related services must be offered to recipients on an

optional basis. If the institution requires a related service as a

condition to borrow, it must inform the recipient that the related

service can be obtained from the institution or from any other person

or entity offering the same or similar related services.

(c) All fees for related services shall be separately identified

from loan interest charges and disclosed to the recipient of the

service.

Sec. 618.8020 Feasibility requirements.

For every related service program an institution provides, it must

document program feasibility. The feasibility analysis shall include

the following:

(a) Support for the determination that the related service is

authorized; and

(b) An overall cost-benefit analysis of offering the program that

demonstrates its feasibility, taking into consideration the following

items:

(1) An analysis of how the program relates to or promotes the

institution's business plan and strategic goals;

(2) An analysis of the expected financial returns of the program

which, at a minimum, must include an evaluation of market, pricing,

competition issues, and whether the program would be expected to make a

profit or if its purpose is to be combined with a broader objective

aimed at contributing to the overall financial health of the

institution or the individual borrower; and

(3) An analysis of the risk in the program, including:

(i) An evaluation of the operational costs and risks involved in

offering the program, such as management and personnel requirements,

training requirements, and capital outlays;

(ii) An evaluation of the financial liability that may be incurred

as a result of offering the program and any insurance or other measures

that are necessary to minimize these risks; and

(iii) An evaluation of the conflicts of interest, whether real or

perceived, that may arise as a result of offering the program and any

steps that are necessary to reduce these conflicts.

Sec. 618.8025 Feasibility reviews.

Prior to an association offering a related service program for the

first time, the board of directors of the funding bank must verify that

the association has performed a feasibility analysis pursuant to

Sec. 618.8020. The bank's review is limited to a determination that the

feasibility analysis is complete and that the analysis establishes that

it is feasible for the association to provide the program. Any

conclusion by the bank that the feasibility analysis is incomplete or

fails to demonstrate the program's feasibility must be fully supported

and communicated to the association in writing within 60 days of its

submission to the bank.

Sec. 618.8030 Out-of-territory related services.

System banks and associations may offer related services outside

their chartered territories subject to the following condition. Any

System bank or association desiring to offer related services outside

its chartered territory must obtain the consent of at least one

institution chartered to serve the territory in which the related

service is to be provided. Such consent shall be in the form of a

written agreement with specific terms and conditions, including

timeframes.

(a) The providing institution must fulfill all requirements of

subparts A and B of this part 618.

(b) An institution that consents to another bank or association

providing a related service in its chartered territory must meet the

requirements of this section, but need not comply with the other

requirements of subparts A and B of this part 618, unless the program

consented to imposes a financial obligation on the consenting

institution. In such cases, the consenting institution must comply with

Secs. 618.8015, 618.8020 and 618.8025.

6. Newly designated Sec. 618.8040 is amended by revising paragraph

(b)(1); by removing paragraph (b)(10); by redesignating existing

paragraphs (b)(2) through (b)(9) as paragraphs (b)(3) through (b)(10);

by adding a new paragraph (b)(2); by removing the reference

``Sec. 618.8030(b)(3)(i)'' and adding in its place, the reference

``Sec. 618.8040(b)(4)(i)'' in newly designated paragraph (b)(3); and by

revising newly designated (b)(6) to read as follows:

Subpart B--Member Insurance

Sec. 618.8040 Authorized insurance services.

* * * * *

(b) Bank and association board policies governing the provision of

member insurance programs shall be established within the following

general guidelines:

(1) A System bank or association may provide credit or term-life or

credit-disability insurance only to persons who have a loan or lease

with a System bank or association. The loan or lease does not

necessarily have to be with the institution providing the insurance.

Term-life insurance coverage may continue after the loan has been

repaid or the lease terminated, provided the member can reasonably be

expected to borrow again within 2 years, and provided the continuation

of insurance is not contrary to state law.

(2) A debtor-creditor relationship is not required for the sale of

other insurance specified in paragraph (a) of this section, as long as

purchasers are members or borrowers of a System bank or association.

For the purposes of this section, ``member'' means a stockholder or

participation certificate holder who acquired stock or participation

certificates to obtain a loan, for investment purposes, or to qualify

for other services of the association or bank.

* * * * *

(6) Bank or association personnel shall not benefit from insurance

sales by receipt of commissions or gifts from underwriting insurance

companies. However, an employee may participate in an institution's

incentive plan under which incentive compensation is provided for the

sale of insurance. In any single year, such compensation shall not

exceed an amount equivalent to more than 5 percent of the recipient's

annual base salary.

* * * * *

PART 620--DISCLOSURE TO SHAREHOLDERS

1. The authority citation for part 620 continues to read as

follows:

Authority: Secs. 5.17, 5.19, 8.11 of the Farm Credit Act (12

U.S.C. 2252, 2254, 2279aa-11); sec. 424 of Pub. L. 100-233, 101

Stat. 1568, 1656.

Subpart B--Annual Report to Shareholders

Sec. 620.5 [Amended]

2. Section 620.5 is amended by removing the word ``financial'' and

adding in its place, the word ``related'' each place it appears in

paragraph (a)(3).

Dated: October 26, 1994.

Floyd Fithian,

Acting Secretary, Farm Credit Administration Board.

Appendix A to the Preamble--Sample Related Services List\1\

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Authorized institutions

Type of service Description Special Conditions

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ACB (Title I and II), Estate Planning Providing information and assistance ......................

FCB, ACA, PCA, FLBA, Service. concerning development of estate plans.

FLCA. Does not include providing legal counsel

or advice or executing the estate planning

documents.

ACB, FCB, BC, ACA, PCA, Fee Appraisal Providing real and personal property ......................

FLBA, FLCA. Service. appraisals and evaluations. (Note:

appraisals done in conjunction with making

or servicing System loans are not

considered related services for the

purpose of this regulation.)

ACB, FCB, BC, ACA, PCA, Recordkeeping Providing recordkeeping systems tailored to ......................

FLBA, FLCA. Service recipients' needs.

(including

AgrifaxR).

ACB, FCB, BC, ACA, PCA, Tax Planning and Preparing tax returns and assisting ......................

FLBA, FLCA. Preparation. recipients in understanding tax

implications of alternative management

decisions and strategies.

ACB (Title 1 and II), Farm Business Assisting with business planning for on- Institutions must have

FCB, BC, ACA, PCA, Consulting. farm or aquatic operations. Includes such procedures in place

FLBA, FLCA. activities as assisting individuals in to ensure conflicts

defining business goals, identifying of interest do not

management problems, and formulating or occur between the

analyzing alternative strategies for credit and business

achieving goals. Institution personnel may consulting function.

not be involved in making management

decisions.

ACB (Title III), BC.... Cooperative Providing consulting services to Institutions must have

Business cooperatives or other eligible recipients procedures in place

Consulting. to assist management and directors in to ensure conflicts

making business decisions. May include of interest do not

educational seminars, development of occur between the

computer services, business analysis, credit and business

feasibility studies, and activity consulting functions

coordination (e.g., coordination of

activities on mergers or formation of

joint ventures). Institution personnel may

not be involved in making management

decisions.

ACB (Title III), BC.... Foreign Currency Providing foreign currency exchange Subject to the

Exchange. services necessary to individual criteria under 12 CFR

transactions that may be financed under 614.4900.

Title III, section 3.7(b) of the Farm

Credit Act of 1971, as amended.

ACB (Title III), BC.... Financial Risk Providing risk management products that (1) Interest rate

Management for enable customers to hedge interest rate swaps should be

Customers. risk inherent in their balance sheets. included with the

Limited to the following derivative borrower's total debt

products: when calculating

Interest rate swaps, caps, collars lending limits under

and floors; 12 CFR part 614,

Forward rate agreements; and subpart J. For swaps

Exchange-traded and over-the- where the bank keeps

counter interest rate options on eligible an offsetting

interest rate futures contracts position, it must

include the credit

(Products may be offered as part of loan risk of the swaps

packages or as stand-alone hedging tools.) with the borrower's

total debt when

calculating lending

limits. Credit limits

for each counterparty

should be determined

by reviewing the

potential magnitude

of adverse payment

increases over the

life of the swap.

(2) Related services

programs are subject

to annual audits by a

CPA.

ACB (Title I and II), Credit Life Coverage that pays off an outstanding loan ......................

FCB, ACA, PCA, FLBA, Insurance or or mortgage in the event of the policy

FLCA. Mortgage Life holder's death.

Insurance.

ACB (Title I and II), Group Term Life One-year group life insurance coverage that ......................

FCB, ACA, PCA, FLBA, Insurance. is renewable at the end of each year.

FLCA.

ACB (Title I and II), Credit Disability Insurance that provides for loan or ......................

FCB, ACA, PCA, FLBA, and Accident mortgage payments, or some degree of

FLCA. Insurance or income protection if the insured is

Mortgage disabled.

Disability

Insurance.

ACB (Title I and II), Hospital Income Insurance that provides a specified amount ......................

FCB, ACA, PCA, FLBA, Insurance. of income while the insured is

FLCA. hospitalized. A form of credit disability

insurance, and subject to the debtor-

creditor requirement.

ACB (Title I and II), Multiple-peril Insurance covering hazards incident to the ......................

FCB, ACA, PCA, FLBA, Crop Insurance growing and storage of crops.

FLCA. (including

insurance

provided by the

Federal Crop

Insurance

Corporation).

ACB (Title I and II), Crop Hail Insurance providing protection against ......................

FCB, ACA, PCA, FLBA, Insurance. damage or loss of crops due to hail or

FLCA. certain other named perils.

ACB (Title I and II), Hay (or Other Insurance that covers loss of hay or other ......................

FCB, ACA, PCA, FLBA, Crop) Fire crops due to fire.

FLCA. Insurance.

ACB (Title I and II), Title Insurance... Insurance against loss or damage resulting ......................

FCB, ACA, PCA, FLBA, from defects or failure of title or from

FLCA. the enforcement of liens existing against

title at the time of the insurance.

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\1\The sample list is included as an attachment to this Federal Register document for informational purposes

only. The attachment will not become part of the final regulation.

[FR Doc. 94-26839 Filed 10-28-94; 8:45 am]

BILLING CODE 6705-01-P