Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; General Provisions

FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, 618

RIN 3052-AB53

Loan Policies and Operations; Funding and Fiscal Affairs, Loan

Policies and Operations, and Funding Operations; General Provisions

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

Board (Board), adopts a final rule that repeals several regulations

concerning loan policies and operations, funding, and miscellaneous

items as well as two Agency prior-approval requirements. These repeals

are part of an ongoing effort by the FCA to reduce unnecessary

regulatory burdens on Farm Credit System (FCS or System) institutions.

EFFECTIVE DATE: This rule shall become effective upon the expiration of

30 days after publication in the Federal Register, during which either

or both Houses of Congress are in session. Notice of the effective date

will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

W. Eric Howard, Policy Analyst, Regulation Development, Office of

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

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

or

Richard A. Katz, 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

On June 10, 1993, the FCA Board approved a Statement on Regulatory

[[Page 20009]] Burden seeking public comment on the appropriateness of

requirements that the FCA regulations impose on the FCS. More

specifically, the FCA asked the public to identify regulations that

either duplicate other governmental requirements, are not effective, or

impose a burden that is greater than the benefit derived. The notice of

intent was published in the Federal Register (58 FR 34003) on June 23,

1993. After reviewing all responses to the notice of intent, the FCA

proposed on January 10, 1995, to delete the following regulatory

provisions: Secs. 615.5104; 615.5105(c); 615.5170 (b) through (e);

615.5190; 615.5498; 615.5500; 615.5520; 615.5530; and 618.8220.

Additionally, the FCA proposed the repeal of the Agency prior-approval

requirements in Sec. 614.4470 (b)(1) and (b)(3). See 60 FR 2552

(January 10, 1995).

The Farm Credit Council (Council), on behalf of its members, and a

production credit association (PCA) submitted comments concerning the

proposed deletions. The Council strongly supported the repeal of the

above-cited regulations and Agency prior-approval requirements, and

encouraged the FCA to adopt the entire proposal as a final rule.

Although the PCA lauded the FCA's effort to reduce regulatory burdens

on System institutions, it offered no comments about the FCA's proposal

to repeal the above-cited regulations and prior-approval requirements.

Instead, the PCA petitioned the FCA to address three regulatory burden

issues that were not included in the proposed rule.

In response, the FCA emphasizes that its proposal of January 10,

1995, represents the first phase in an ongoing process to reduce

regulatory burdens on FCS institutions. As the FCA explained in the

preamble to the proposed rule, the FCA is in the process of evaluating

all recommendations for reducing regulatory burdens that System

commenters submitted to the Agency in response to the notice of intent.

The FCA will address all remaining regulatory burden issues, including

those raised by the PCA, either in (1) Regulatory projects that the FCA

Board identifies in the Unified Agenda of Federal Regulations, which is

routinely published in the Federal Register, or (2) subsequent phases

of this project.

The FCA now adopts its January 10, 1995 proposal as a final rule

without amendment. The regulations that the FCA now repeals are not

necessary to implement or interpret the Farm Credit Act of 1971, as

amended (Act), or to promote the safe and sound operations of FCS

institutions. For this reason, the repeal of these regulations and

Agency prior-approval requirements will relieve unnecessary regulatory

burdens on the FCS. The following is a brief explanation of the

rationale for repealing each of these regulatory requirements.

II. Analysis of Changes and Comments by Section

A. Loans Subject to Bank Approval

The FCA now eliminates from both Secs. 614.4470 (b)(1) and (b)(3)

the requirement that the Agency preapprove certain insider loan

transactions at System associations. Section 614.4470(a) requires

funding banks to preapprove loans that their affiliated associations

make to: (1) Their own directors or employees; (2) directors or

employees of a jointly managed association; or (3) bank employees.

Until now, Sec. 614.4470(b) required FCA approval of loans to any

borrower whenever certain institution-affiliated parties: (1) Received

proceeds of a loan in excess of an amount established by the funding

bank; or (2) endorsed, guaranteed, or co-made a loan in excess of the

amount established by the funding bank.

These Agency prior-approval requirements in Sec. 614.4470 (b)(1)

and (b)(3) are inconsistent with the FCA's status as an arm's-length

regulator. Furthermore, these insider activities can be adequately

evaluated and controlled through means other than prior approval by the

FCA. Sections 612.2140 and 612.2150 establish adequate safeguards to

prevent directors, officers, and employees of System institutions from

using their positions for personal gain. In addition, Sec. 620.5

requires System institutions to disclose insider loan transactions in

their annual reports to shareholders. The FCA has sufficient

examination and enforcement powers to ensure that loans to institution-

affiliated parties do not undermine the solvency of any FCS bank or

association. Once the repeal of the Agency prior-approval requirements

in Sec. 614.4470(b) becomes effective, the FCA shall rely upon its

examination authority to determine whether: (1) Bank policy adequately

deters insider abuses at System institutions; and (2) associations are

complying with bank policy. The FCA is currently reviewing whether

other prior-approval requirements that are not mandated by the Act

should be retained.

B. Debt Policy and Consolidated Systemwide Notes

The FCA now repeals Secs. 615.5104 and 615.5105(c) because they

have been superseded by a new regulation, Sec. 615.5135. Section

615.5104 requires each bank to adopt a policy for the management of its

debt, while Sec. 615.5105(c) requires the debt management policy of

each bank to identify the maximum amount of discount notes that can be

outstanding at any one time. Each FCS bank is now required by

Sec. 615.5135 to adopt an asset/liability management policy.

Furthermore, Sec. 615.5135 requires the policies of System banks to

address the management of both assets and liabilities in a more

comprehensive manner than Secs. 615.5104 and 615.5105(c). Because

Sec. 615.5135 has rendered Secs. 615.5104 and 615.5105(c) obsolete, the

Agency is deleting these two regulations. In the FCA's opinion, the new

investment regulations in subpart E of part 615 enhance the ability of

Farm Credit banks to control liquidity and solvency risks in their

portfolios.

C. Real and Personal Property

The FCA now repeals Secs. 615.5170 (b) through (e). These

regulations are not needed to: (1) Implement or interpret provisions in

the Act that govern the acquisition of real or personal property by FCS

banks and associations; or (2) promote safety and soundness. In FCA's

opinion, these provisions impose burdens on System institutions that

are no longer justified by the benefits derived. These regulatory

provisions prescribe detailed operational standards, rather than

performance criteria, for ensuring the safe and sound operation of

System banks and associations. The FCA also believes that Sec. 615.5170

(d) and (e) are no longer necessary because the safety and soundness

concerns posed by information system processing technology are now

adequately addressed in FCA Information Systems Bulletins.

Additionally, Information Systems Bulletin 92-1 addresses information

system risks in mergers and acquisitions. The FCA also observes that

paragraphs (b), (c), and (d) of Sec. 615.5170 contain obsolete

references to the ``district boards'' that were abolished by section

409(d) of the Agricultural Credit Technical Corrections Act of

1988.1

\1\ Pub. L. 100-399, section 409(d), 102 Stat. 989, 1003,

(August 17, 1988).

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The FCA will, however, retain Sec. 615.5170(a) because this

provision implements sections 1.5(5) and 3.1(5) of the Act. These

sections authorize each bank, subject to regulation by the FCA, to

acquire, hold, dispose, and otherwise exercise all the usual incidents

of ownership of real and personal property necessary or convenient to

its business. Sections 2.2(5) and 2.12(5) of the Act provide

associations with similar [[Page 20010]] authorities subject to the

supervision by their funding bank and regulation by the FCA. Section

615.5170(a) implements these sections of the Act by specifically

stating that the ownership of real estate for office quarters of any

bank or association ``shall be limited to facilities reasonable and

necessary to meet the foreseeable requirements of the institution.''

Furthermore, Sec. 615.5170(a) expressly prohibits any FCS institution

from acquiring real property ``if it involves, or appears to involve, a

bank or association in the real estate or other unrelated business.''

This restriction also serves a safety and soundness purpose because

such extraneous business activities may increase the exposure of System

institutions to loss.

D. Deposits of Funds

The FCA is repealing Sec. 615.5190 because sections 1.5(14),

2.2(10), 2.12(18) and 3.1(12) of the Act provide the requisite

authority for FCS institutions to deposit current funds in commercial

banks that are either members of the Federal Reserve System or are

insured by the Federal Deposit Insurance Corporation (FDIC).

The FCA is also repealing Sec. 615.5190(b) because there is no

statutory basis for requiring CoBank to make foreign deposits for the

other banks for cooperatives (BCs). The FCA originally adopted this

provision in 1981 because, at that time, only the former Central Bank

for Cooperatives (CBC) had expertise to reduce the safety and soundness

risks that derive from currency exchange transactions. See 46 FR 51881

(October 22, 1981). After the CBC and most district BCs merged to form

CoBank, the FCA amended Sec. 615.5190(b) to require CoBank to assume

the CBC's function. See 56 FR 2671 (January 24, 1991). The rationale

for Sec. 615.5190(b) no longer exists because: (1) Individual BCs have

acquired greater international lending experience since 1981; and (2)

most BCs have consolidated into CoBank. In this context,

Sec. 615.5190(b) unnecessarily restricts BCs, other than CoBank, from

becoming active in the international arena. The FCA has determined that

the safety and soundness risks inherent in currency exchange

transactions should not be controlled by a regulation that unduly

restricts the business flexibility of BCs and ACBs to offer a full

range of high-quality, low-cost international financial and credit

services to their customers independently of CoBank. Rather, the FCA

will rely upon its examination and enforcement powers to ensure that

all BCs and ACBs conduct their currency exchange transactions in a safe

and sound manner. Another FCA regulation, Sec. 614.4900 establishes

safety and soundness standards for currency exchange transactions by

BCs and ACBs.

Another provision in Sec. 615.5190(b) prohibits FCS banks from

holding certificates of deposit that are denominated in foreign

currencies as investments under Sec. 615.5140. This provision predates

the recent revision of Sec. 615.5140, which now requires System banks

to acquire investments that are denominated only in United States

dollars. Hence, Sec. 615.5190(b) is unnecessary.

E. Farm Credit Securities as Illustrations

The FCA also repeals Sec. 615.5498, which regulates the

illustration of Farm Credit securities that are used for educational or

illustrative purposes. The purpose of this regulation is to deter

counterfeiting of definitive FCS securities. Since virtually all FCS

securities are now issued in book-entry form, Sec. 615.5498 is

obsolete. The Federal Farm Credit Banks Funding Corporation and

individual System banks can implement adequate safeguards to minimize

the risk of counterfeiting of the few securities that are still issued

in definitive form.

F. Open Registered Mail and Express Policy

The FCA now repeals subpart P of part 615, which consists of

Secs. 615.5500, 615.5520, and 615.5530. These three regulations govern

the shipment of negotiable securities through the United States Postal

Service. The regulations of subpart P of part 615 were designed to

eliminate the System's exposure to loss at a time when FCS negotiable

securities were routinely shipped by mail between the Bureau of

Printing and Engraving and the Federal Reserve Bank of New York. The

practice of shipping negotiable securities through the mail was

discontinued several years ago. The advent of electronic and computer

technology for transferring negotiable securities through the book-

entry system has rendered subpart P of part 615 obsolete.

G. Contributions and Membership in Other Organizations

The FCA is repealing Sec. 618.8220, which requires the boards of

directors of FCS banks and associations to approve: (1) Charitable

contributions; and (2) the payment of membership dues in any voluntary

association, club, or society. The regulation further requires boards

of directors, during the approval process, to consider the business

benefits and tax consequences of such contributions and memberships for

the bank or association.

In the FCA's opinion, Sec. 618.8220 unnecessarily interferes in the

internal operations of System institutions and imposes a regulatory

burden that is not commensurate with the safety and soundness risks

posed by System charitable and social activities. The FCA's examination

and enforcement powers can adequately deter System institutions from

conducting these activities in an unsafe and unsound manner.

List of Subjects

12 CFR Part 614

Agriculture, Banks, banking, Foreign trade, Reporting and

recordkeeping requirements, Rural areas.

12 CFR Part 615

Accounting, Agriculture, Banks, banking, Government securities,

Investments, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

For the reasons stated in the preamble, parts 614, 615, and 618 of

chapter VI, title 12 of the Code of Federal Regulations are hereby

amended to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 continues to read as

follows:

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3,

2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20,

3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E,

4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8,

7.12, 7.13, 8.0, 8.5, of the Farm Credit Act (12 U.S.C. 2011, 2013,

2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094,

2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184,

2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a,

2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2,

2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101

Stat. 1568, 1639.

Subpart M--Loan Approval Requirements

Sec. 614.4470 [Amended]

2. Section 614.4470 is amended by removing the words ``and approved

by the Farm Credit Administration'' from paragraphs (b)(1) and

(b)(3). [[Page 20011]]

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

AND FUNDING OPERATIONS

3. The authority citation for part 615 continues to read as

follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,

2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20,

6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12

U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093,

2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b,

2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10,

2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart C--Issuance of Bonds, Notes, Debentures and Similar

Obligations

Sec. 615.5104 [Removed]

4. Section 615.5104 is removed.

Sec. 615.5105 [Amended]

5. Section 615.5105 is amended by removing paragraph (c).

Subpart F--Property and Other Investments

Sec. 615.5170 [Amended]

6. Section 615.5170 is amended by removing paragraphs (b), (c),

(d), (e) and the designation for paragraph (a).

Subpart G--[Removed and reserved]

7. Subpart G, consisting of Sec. 615.5190, is removed and reserved.

Subpart O--Issuance of Farm Credit Securities

Sec. 615.5498 [Removed and reserved]

8. Section 615.5498 is removed and reserved.

Subpart P--[Removed and reserved]

9. Subpart P, consisting of Secs. 615.5500, 615.5520, and 615.5530

is removed and reserved.

PART 618--GENERAL PROVISIONS

10. The authority citation for part 618 continues 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).

Subpart F--Miscellaneous Provisions

Sec. 618.8220 [Removed and reserved]

11. Section 618.8220 is removed and reserved.

Dated: March 13, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-10007 Filed 4-21-95; 8:45 am]

BILLING CODE 6705-01-P