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: Final rule.

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

Credit Administration Board (Board), issues a final regulation

governing Technical Assistance and Financially Related Services and

Member Insurance. Subpart A of the final regulation defines technical

assistance, financial assistance and financially related services and

clarifies what types of services the Farm Credit System (System or FCS)

institutions are authorized to provide. The final regulation maintains

the FCA's ability to regulate safety and soundness risks while allowing

FCS institutions greater flexibility to exercise statutory authorities.

The existing prior approval requirement is replaced with a list of

authorized services, a post-review process for all services that have

been authorized by the FCA, and a procedure for obtaining FCA

authorization to offer a new service that has not been previously

reviewed and authorized. The final rule replaces the FCA Board Policy

Statement on Out-Of-Territory Financially Related Services (FCA-PS-50

BM-10-June-93-03) and the FCA Bookletter on Out-Of-Territory

Financially Related Services dated

[[Page 34091]]

September 3, 1993. The final Member Insurance regulation clarifies

existing rules and reduces regulatory burdens wherever possible.

EFFECTIVE DATE: The final regulation 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:

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: On October 31, 1994, the FCA proposed

amendments to its regulation on financially related services and member

insurance. 59 FR 54399. 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

(hereinafter referred to as ``related services'') by banks and

associations.

Farm Credit System institutions have expressed a desire to serve

the evolving needs of farmers and ranchers more effectively through

their statutory authority for providing related services. The FCA

understands the System's desire to offer the fullest range of related

services allowable under statutory authorities, as long as safety and

soundness risks can be managed.

The FCA has concluded that, under most circumstances, it is

appropriate to replace the current prior approval requirement with

specific regulatory criteria for determining which services can be

offered and under what circumstances. However, in its role as a safety

and soundness regulator, the FCA will continue to review new services

in order to ensure that they are legally authorized and do not present

excessive risk to the System. The FCA believes this is a reasonable

approach and that it is impracticable to prescribe specific regulations

for new services that have yet to be offered by the System. Consistent

with the FCA's role as an arm's-length regulator, the final rule

requires an institution offering a service to assume primary

responsibility for the related services it provides. The FCA will

ensure safety and soundness and compliance primarily through use of its

examination and supervisory powers.

I. Regulatory Burden

The final regulation accomplishes a significant reduction in

regulatory burden for System institutions and reduces the FCA's

administrative costs of assuring compliance with the regulation. It

replaces an outdated prior approval requirement with regulatory

guidance that holds individual institutions more accountable for their

activities. The remaining regulatory costs are justified in order to

meet statutory requirements and address safety and soundness concerns.

II. Public Comments

The comment period on the proposed regulation at Sec. 618.8000

closed on December 30, 1994. The FCA received a total of 116 comment

letters from the public. These included 111 letters from System

institutions in addition to the letters from the Farm Credit Council

(FCC) on behalf of its membership; the American Bankers Association

(ABA); the Independent Bankers Association of America (IBAA); the

Savings and Community Bankers Association (SCBA); and Minnesota Mutual

Insurance Corporation (Minnesota Mutual). Prior to finalizing its

comments, the FCC received input and concurrence on its comments from

its membership and a work group established by System institutions to

study related services. The comments received from System institutions

included letters from directors/stockholders and employees of the

institutions.

Two additional letters were received after the comment period

closed, one from the Kentucky Bankers Association (KBA) and one from an

FCS association. Because the KBA's comments were essentially the same

as those made by the ABA, the responses to the ABA comments address the

comments made by the KBA. The FCS association's comments were

essentially the same as the majority of those received from other

System institutions and are similarly addressed.

With a few exceptions, the comments from System institutions and

the FCC were overwhelmingly supportive. They concluded that the FCA has

achieved an appropriate balance between its statutory responsibility to

focus on safety and soundness issues and the need to remove unnecessary

regulatory burdens. They identified the reduction in prior approval

requirements as an example of significantly reducing regulatory burden.

The exceptions include disagreement with the proposed rule on out-of-

territory related services, and 11 System institutions suggested

additional revisions to the process, the eligibility criteria, and the

insurance issues.

The trade industry groups were more critical of the proposed

regulation. They expressed concerns that it exceeds the System's

statutory authorities, that it may create possible competitive

disadvantages for commercial banks, and that it may pose safety and

soundness risks by reducing involvement by the FCA and System banks.

The trade industry groups also commented on a number of specific points

in the proposed regulation.

The following narrative summarizes general concerns raised by the

trade industry groups (ABA, IBAA, TBA, and SCBA) about the proposed

regulation, addresses specific comments received on the various

sections of the regulation during the comment period, and responds to

those comments.

III. General Comments

The trade industry groups are concerned that the proposed

regulation would allow System institutions to exceed existing statutory

authorities; they believe any expansion of authorities would be more

appropriately addressed through legislative means. They further believe

the proposed rule allows System institutions greater latitude to

provide services that are not justified by the needs of the borrowers.

The IBAA also believes that elements of the proposed rule may increase

safety and soundness risks or allow a System institution to compete

unfairly against private corporations. It concludes that these changes

would cause the FCA to give up much of its mandated regulatory

oversight and power to control abuses of these functions. Finally, the

trade industry groups suggest that, with this proposal, the FCA is not

only permitting but also encouraging the System to violate the statute.

The FCA believes the Act clearly authorizes System institutions to

offer a variety of related services, subject to regulation by the FCA

for safety and soundness concerns. Further, the Supreme Court has

recently confirmed that a bank regulator is to be given great deference

in interpreting the statute it is charged to enforce.1 The statute

clearly

[[Page 34092]]

authorizes System institutions to provide financial and technical

assistance to borrowers, applicants, and members and to make available

to them related services appropriate to their on-farm and aquatic

operations under regulations prescribed by the FCA. Therefore, the FCA

believes it is well within its authority to define by regulation such

related services, the conditions under which they can be offered, and

to whom they can be offered. Furthermore, the FCA believes that its

interpretation of these statutory authorities must take into account

changing conditions in the agricultural and financial sectors. The

FCA's role as a safety and soundness regulator requires that it openly

recognize changing conditions and respond accordingly.

\1\ See, Nations Bank v. Variable Annuity Life Insurance

Company, 786 F. Supp. 6639 (SD Tex. 1991), rev'd 998 F. 2d 1295 (5th

Cir. 1993), rev'd U.S. Dkt. No. 93-1612 (Jan. 8, 1995).

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The IBAA commented that it has long opposed measures to expand the

powers granted to System institutions and objected to the publication

of the proposed rule prior to a new congressional session. The FCA

disagrees and points out that the final rule is well within the FCA's

statutory authority and, like the statute, the proposed regulation

limits authorized services to the on-farm operations of persons or

entities eligible to borrow from the System. Further, farm related

businesses and rural home borrowers were specifically not included as

eligible recipients for related services.

The trade industry groups also commented that the proposed rule

would lead to, or encourage, predatory loan pricing by System

institutions. However, much of the comment by the ABA is not relevant

to the regulation being promulgated because the objection deals

directly with loan pricing, not related services. They also objected to

a statement in the preamble suggesting that the rule would allow

related services even if priced at cost or at a slight loss in order to

increase customer satisfaction or attract new customers. The ABA

contends that this aspect of the proposed rule encourages the bundling

of below-cost services with loans in such a manner that loan packages

would be priced below market rates. Contrary to this assertion, the

proposed and final rule discourage such packaging. For example,

Sec. 618.8015 retains the existing requirement to disclose separately

the cost of any related service from loan fees and, if the service is

required as a condition of the loan, to inform the recipient that

purchasing the service from a System institution is optional. Thus, the

regulation does not encourage related services to be bundled with

loans. In addition, in most cases there is no requirement that the

purchaser have a lending relationship in order to receive a related

service.

The IBAA claims that for safety and soundness reasons below-market

pricing of services should not be allowed and that the FCA should

oversee the pricing of such products. The FCA believes that the

feasibility analysis required by Sec. 618.8020 will ensure that the

pricing of each related service is justified. Each institution offering

such a service must conduct a feasibility analysis, which includes

pricing and an evaluation of the market. Related service programs will

also be examined by the Agency to ensure they are being operated in a

safe and sound manner.

A. Section-by-Section Analysis of Comments Received

1. Section 618.8000--Definitions

The FCA received several comments on the definition of related

services in proposed Sec. 618.8000(b). The ABA believes the definition

exceeds what is contemplated by the statute because it contains the

phrase ``pertains to'' the recipient's on-farm operations rather than

the phrase ``appropriate to'' that is used in the existing regulation

and the statute. The ABA contends that ``appropriate to'' is narrower

and more carefully tailored than ``pertains to'' and requires a

considerably stronger nexus between the farm operation and the related

service. The FCA did not intend for the definition of related services,

as proposed, to expand the types of services that may be provided under

the statute, but believed that the proposed rule defined related

services using a more common term. In order to be responsive to the

commenters and alleviate any concerns that the definition of related

services has expanded System institutions' authorities beyond those

granted in the statute, the definition in the final rule has been

modified to mirror the wording in the statute.

The IBAA commented that although the proposed regulation defines

the term ``related services'' to include, but not be limited to,

technical assistance, financial assistance, financially related

services, and insurance, it did not specify what types of activities

these terms might encompass. Further, the IBAA is opposed to the

addition of ``financial assistance'' as a related service because it

believes financial assistance should be addressed through regulations

governing lending or similar functions. The FCA noted in the proposed

regulation that several terms are used in the statute to describe a

category of non-lending type activities in which System institutions

are authorized to engage. Financial assistance and technical assistance

are two such terms used in section 3.7(b) of the Act to describe the

non-lending services banks for cooperatives are authorized to provide

to their customers. For the purpose of this regulation, financial

assistance does not include making loans or leases or any other type of

lending activity. Confusion over these terms is the primary reason that

the FCA proposed using a single term to reference the types of services

that may be provided by the different types of System institutions. In

fact, the IBAA's comment further supports the need for one general term

rather than continuing to use several terms, such as financial

assistance, that could have different meanings. The IBAA's arguments

for change were not convincing; therefore, the final regulation remains

as proposed in this regard.

The FCC agreed with the FCA's statement in the proposed preamble

that related services should be broadly construed. The FCC also agreed

that the definition should not include advertising or purely

promotional activities, but it suggested that services provided by

third parties (with the cooperation of a System entity), which present

little, if any, risk of financial liability to the System entity,

should likewise not be considered ``related services.''

The FCA confirms its statement in the preamble to the proposed rule

that advertising and purely promotional activities are not intended to

be included within the definition of related services. The FCA further

acknowledges that the distinction between promotional activities and

related services can be unclear. Although it is easy to conclude that

passing out pens with a Farm Credit logo is a purely promotional

activity, and that providing farm recordkeeping for eligible borrowers

is a related service, there are many activities that will fall in

between.

The FCA also recognizes that System institutions participate in

various business arrangements through third parties, and it is often

difficult to determine whether an institution is, in fact, offering a

related service by cooperating with a third party provider. Assisting

individual borrowers in preparing their tax returns is clearly a

related service, whereas renting out an association conference room for

a 4-H Club lecture is not a related service. However, when the service

is provided by a third party in cooperation with a System institution,

the line between

[[Page 34093]]

what is or is not a related service will often be more difficult to

draw.

The FCA concludes that neither advertising and promotional

activities, nor services provided by third parties, should be

automatically excluded from the definition of related service in the

final rule. Rather, a case-by-case evaluation must be made for the

activities based on a number of factors. The level of risk in a

particular service, even if provided by a third party, is not the sole

deciding factor as to whether a proposed service meets the definition

of a related service. Likewise, the mere existence of a third party as

the service provider is not determinative as to whether an activity is

or is not a related service. In addition, the lack of profitability is

not necessarily determinative when evaluating whether promotional

activities are related services. Various factors (such as the nature of

the activity, who provides the service, and the level of involvement

and responsibility of both parties) should be used in evaluating

whether an activity is properly considered a ``related service.'' The

statute requires that related services provide assistance to eligible

borrowers in managing their on-farm operations and should always be

used as a guide when questions arise.

Four associations commented that the FCA should define related

services in such a way as to eliminate activities that are necessarily

incidental to lending or leasing activities (such as appraisal

services) and are reasonably and customarily performed in the business

of rural or agricultural lending and leasing. These associations

contend that such an exclusion from the definition of related services

would eliminate unnecessary regulatory burdens such as the need for

approving the feasibility of activities that are inherently feasible

because they are normal and customary activities of institutions in

their primary business of lending and leasing.

The FCA addressed this issue in the preamble to the proposed

regulation. See 59 FR 54402, October 31, 1994. The commenters have

provided no information that would cause the FCA to resolve this issue

in a different manner. The fact that an institution customarily

performs a service as part of its lending function does not

automatically mean that the service, when provided on an independent

fee basis, would not be a related service. Nor does it necessarily

follow that establishing a program to provide a service on a fee basis

will always make good business sense for an institution. Each activity

must be evaluated to determine the statutory authority that enables the

institution to engage in the activity and what statutory restraints

exist on the exercise of that authority. As discussed in the preceding

paragraph, there is no bright-line test or absolute standard that the

Agency could adopt in the regulation to categorically exclude certain

types of activities. The FCA is not convinced that it is necessary to

exclude certain activities from the definition of related services;

thus, the definition has been adopted as proposed.

The FCC commented that the definition of System banks and

associations in proposed Sec. 618.8000(c) should be modified to

incorporate service corporations in order to eliminate any uncertainty

as to whether those entities are authorized to offer related services.

In the preamble to the proposed rule, the FCA noted that because

section 4.25 of the Act grants service corporations the powers and

authorities of Farm Credit banks, they would continue to be authorized

to provide related services. In addition, Sec. 611.1136 of this chapter

provides that service corporations are subject to the regulations

governing banks and associations. Nevertheless, although the FCA does

not believe it is required, service corporations have been included in

the final definition of ``System banks and associations'' in order to

eliminate any uncertainty.

Unless specifically excepted, all provisions of part 618 apply to

service corporations, and service corporations may offer those services

that System banks are authorized to offer. With regard to eligibility

criteria, service corporations are authorized to provide services to

entities eligible to borrow from the owners of the service corporation,

as prescribed in Sec. 618.8005(d). The FCA notes, however, that certain

service corporations may be restricted by charter or the special

purposes for which they were created from offering related services or

certain types of related services. For example, service corporations

are prohibited by section 4.25 of the Act from offering insurance.

Service corporation charters may also include special restrictions on

the manner in which they can offer related services or on the manner in

which certain provisions of part 618 of this chapter apply to their

offering of services. Finally, the Related Services List may also

contain special conditions that affect how a service corporation can

offer a related service.

2. Section 618.8005--Eligibility

The IBAA commented that the proposed regulation was not clear as to

whether marketers and processors would be eligible for related services

regardless of whether they were eligible for borrowing. It further

stated that if such entities were eligible for related services, but

not eligible for borrowing, then the eligibility criteria were too

vague and ambiguous. The IBAA believes that marketers and processors

should only be eligible for related services if a debtor-creditor

relationship already exists between the entity and a System

institution.

In response, the FCA notes that Sec. 618.8005(a) of the proposed

regulation provides that Farm Credit banks and associations may offer

related services to persons eligible to borrow as defined in

Sec. 613.3045 of the regulations, which provides the requirements for

on-farm throughput for lending eligibility. Therefore, marketers and

processors must be eligible to borrow from a System institution in

order to receive related services. On the other hand, the Act does not

require that only current borrowers may receive related services (apart

from credit life and disability insurance), and the Agency declines to

impose such a limitation by regulation. Accordingly, the suggestions

regarding the eligibility of marketers and processors were not adopted.

The FCC and two associations recommended that Sec. 618.8005 be

revised to enable System banks and associations to provide related

services to farm-related businesses and rural homeowners. The FCA

believes that a change in the Act is required before farm-related

businesses and rural homeowners could be considered eligible recipients

of related services. Currently, the Act restricts related services

offered by Farm Credit banks and associations to those that are

appropriate to on-farm or aquatic operations. Farm-related businesses

and rural homeowners who do not have farm or aquatic operations would

not be eligible for services that must, by statute, be appropriate to

such operations.

Numerous System commenters expressed support for proposed

Sec. 618.8005(d), now Sec. 618.8005(e), which authorizes the provision

of related services to recipients that would not otherwise meet the

requirements of Sec. 618.8005(a) through (c). As proposed, this

provision was limited to services provided that were a ``part of or

pertained to'' a transaction between an eligible borrower and the

recipient of the service. Based on a concern that this language might

permit an expansion of related services beyond the Agency's intentions,

the language has been modified in the final rule. The rule now states

that the service may be provided only if it is ``requested by the

eligible

[[Page 34094]]

borrower or necessary to the transaction.'' As a result, appraisals,

loan servicing, and other services that are necessary to a transaction

with an eligible borrower may be provided to any party to the

transaction. In situations in which the related service may be useful,

but perhaps not necessary, it may be provided to any party to the

transaction at the request of the eligible borrower.

The IBAA does not believe that this authority is necessary or

justifiable and believes that it constitutes an unwarranted expansion

of authorized services. As noted in the preamble to the proposed rule,

this provision was included in order to accommodate eligible borrowers

who were not able to receive related services directly due to

circumstances involving their transactions with non-eligible entities.

See 59 FR 54402, October 31, 1994. For example, an eligible borrower

who needs an appraisal of agricultural real estate in connection with a

loan application with a commercial bank or the former Farmers Home

Administration (FmHA) is typically precluded from obtaining it, because

the commercial bank regulations and FmHA procedures generally require

that the eligible borrower's appraisal be procured by the lender. The

FCA has determined that the purposes of the Act would be frustrated if

eligible borrowers could not receive related services solely because

the regulations of other Federal agencies or the transactional

requirements with other entities preclude them from directly

contracting for the services from System institutions. Further, the FCA

has concluded that System institutions are authorized by statute to

provide related services for persons eligible to borrow, even if a non-

eligible entity is involved in the transaction and may be the party

that actually obtains the service on behalf of the person eligible to

borrow.

For these reasons, the FCA believes that Sec. 618.8005(e) is

necessary in order to ensure that eligible borrowers are able to

receive related services and is justified by the Act under factual

situations presented to the FCA. The FCA further believes that this

provision, as modified in the final rule, ensures that the System will

continue to be able to appropriately serve farmers and ranchers as

Congress intended.

One of the associations that commented favorably on

Sec. 618.8005(e) suggested that this authority could be used in

situations in which an intermediary business would be providing a

bundle of services that include some offered by System institutions.

However, it noted that in some instances it may be difficult if not

impossible to trace the end-user of the information and services.

Therefore, it urged the FCA to interpret Sec. 618.8005(e) to allow

services to be provided to those business entities because the services

would ultimately benefit eligible farmers and ranchers and members of

the agricultural community. The FCA is unable to interpret

Sec. 618.8005(e) to allow related services to be provided in situations

in which the transaction and the eligible borrower receiving the

services cannot be readily identified as such. Although the FCA

recognizes that farmers and agriculture in general may benefit from

System institutions being able to provide services to other non-

eligible entities that in turn serve agricultural interests, the FCA

does not believe that a general benefit to agriculture is sufficient to

meet the eligibility requirements of the Act. Therefore, related

services may only be provided pursuant to Sec. 618.8005(e) when an

identifiable eligible borrower is a party to the same transaction.

In the preamble to the proposed regulation, the FCA noted that

banks for cooperatives would continue to be subject to the requirements

of section 3.7(b) of the Act and Sec. 613.3120 when providing related

services in connection with export and import transactions pursuant to

proposed Sec. 618.8005(d), now Sec. 618.8005(e). Subsequent to the

approval of the proposed regulation on September 29, 1994, the Farm

Credit System Agricultural Export and Risk Management Act (Pub. L. 103-

376, October 19, 1994) removed the requirement in section 3.7(b) that a

voting stockholder of the bank substantially benefit from services

provided in connection with export transactions. The FCC requested that

FCA clarify the impact of this statutory amendment in the final rule.

The FCA confirms that in light of Pub. L. 103-376, the requirements of

3.7(b) and Sec. 613.3120 of this chapter (that a voting stockholder

must substantially benefit from related services) only apply in

connection with import transactions.

After considering all of the comments received on Sec. 618.8005,

adding new paragraph (d), clarifying the scope of paragraph (e), and

addressing legislative amendments, the FCA has adopted Sec. 618.8005 as

modified.

3. Section 618.8010--Related Services Authorization Process

Comments and suggestions in this area were received from the ABA,

IBAA, SCBA, FCC, and four System associations and included

recommendations on the following issues. A large majority of the System

institutions commented positively on the changes made to this section,

supported the streamlined process, and felt the proposed regulation

would reduce regulatory burdens.

The ABA is concerned that the scope of the sample RS List, in

Appendix A of the proposed rule, exceeds the definition of related

services in the proposed regulation. However, it does not reference any

specific service or give examples of how it considers the definition to

be improperly interpreted. The FCA has concluded that all of the listed

related services fall within the definition of related services in

proposed and final Sec. 618.8000(b) and within System institutions'

statutory authorities.

The ABA also perceived the preamble to the proposed rule as

allowing System institutions to provide services that might currently

be offered in the System but which had not previously been approved.

The FCA did not intend to permit any institution to offer unauthorized

services. However, the Agency did not previously approve all types of

technical assistance programs which would now come under the definition

of related service. Consequently, the proposed regulation included a

cautionary statement and a sample list because once the final RS List

is published, no service may be offered unless it is on the list. The

FCA was not notified during the public comment period of any related

service being offered that was not on the sample RS List, thus

confirming the Agency's conclusion that all services currently being

offered are already on the sample RS List. The only comments received

pertaining specifically to the sample RS List focused on how some of

the insurance services or special conditions were described on the

list. The sample RS List was modified slightly to reflect these

suggestions and will be published both as an appendix to the final

regulation and in a bookletter subsequent to the finalization of this

regulation. (See comments on the RS List at the end of this preamble.)

The ABA commented that no related service should be approved unless

the public has at least 60 days to comment on it. Similarly, the IBAA

recommended that System institutions be required to file a Notice of

Intent, which would state that a related service is going to be

offered, in order to allow entities outside the System to object to

programs that would place them at a competitive disadvantage. The

proposed rule does not require mandatory public comments on all

services but allows the FCA to publish new services where appropriate.

[[Page 34095]]

While there is no statutory requirement for publication of services

or a public notice and comment period, the Agency believes that its

evaluation of new services, particularly complex or controversial

service proposals, will be aided by public comment. It was for this

reason that the FCA published the sample RS List with the proposed

regulations. As a result, there is a greater standard of public

disclosure than existed previously under the prior approval rule.

However, there may be situations in which public comment is not

necessary or beneficial to the safety and soundness of the System and

may impose a burden on System institutions while having little, if any,

overriding benefit. An example would be a potential service that is

very similar to one already on the RS List. Finally, whether or not

services are published for comment, the FCA will continue to measure

all new service proposals against the statutory authorities and

evaluate them based on safety and soundness concerns. Therefore, the

proposed regulation was not changed in response to these comments.

Regarding the commenters' desire for public notice of new services

and general concerns over competition between System institutions and

other banking institutions, Congress authorized such competition when

it enacted the related service provisions in 1971. Competition was a

major issue at the time the legislation was enacted and one that was

thoroughly debated.2 Public notice and comment requirements were

not placed in the Act, and it would not be appropriate for the FCA to

limit the offering of related services under the statute simply because

offering the service might have a competitive impact on non-System

entities. The FCA's mission of ensuring the safety and soundness of

System institutions would preclude it from unnecessarily limiting the

System's ability to successfully compete with other entities that share

its market.

\2\ See, Pub. L. 92-181 (Dec. 10, 1971) and its legislative

history.

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The SCBA is concerned that the regulation permits System

institutions to provide services without effective regulatory oversight

and congressional scrutiny. It states that the proposal does far more

than reduce regulatory burden and is inconsistent with congressional

actions dealing with the System, commercial banks, and savings

institutions. To the contrary, the FCA believes that the regulation

maintains a distinction between determining whether a new service is

authorized under the statute and evaluating the feasibility of

implementing a particular program at a particular institution.

Elimination of the prior approval of each related service program

relieves regulatory burden. This does not eliminate the FCA's

responsibility for safety and soundness, but merely shifts oversight to

the examination and enforcement processes. Determination of statutory

authorities continues to be closely controlled in the approval process

and, contrary to the SCBA's comment, is not inconsistent with recent

congressional actions.

The FCC and four associations expressed concern that System

institutions will be precluded from offering a new service because

another institution's proposal was previously denied. They asked for

clarification on whether the denial or modification of a service

proposed by a specific institution is intended to apply to only that

institution or to all institutions. While the FCA's intent to consider

new services as Systemwide initiatives was clear, they expressed

concern that disapproval of a proposed new service would preclude a

resubmission that appropriately addresses the reasons for denial. This

result was not intended by the Agency. Approvals or denials are not

expected to be specific to the institution making the request. Action

on new services will generally be based on the type of service proposed

and not on how the service program will be implemented by a given

institution. As long as a particular type of service is authorized, it

will be put on the RS List, but it could be limited to certain types of

institutions or subject to various conditions to address safety and

soundness concerns. Notwithstanding this, disapproval of a particular

service request does not preclude approval of a different request at

another time. The FCA expects, however, that any subsequent request

would satisfactorily address the concerns noted in previous

disapprovals. There may also be services that either are not authorized

under the statute or present so many inherent risks to safety and

soundness that it would be inappropriate for any System institution to

provide them.

The FCC also commented that if a request for a new service is

denied, the notification of denial should include an explanation for

the denial. The FCA agrees. While this was intended to be understood in

the proposed regulation, proposed Sec. 618.8010(b)(5) has been modified

to clarify this point.

The FCC and three associations commented that the process could be

improved by requiring the FCA to immediately notify an institution upon

receipt of a related service proposal and provide an FCA contact for

future reference. Also, once the FCA determines a proposal is complete,

the commenters felt the institution should be notified in writing that

the 60-day approval process has begun. This suggestion is consistent

with existing FCA practices and administrative processes. The FCA

intends to provide immediate notification of receipt of a new service

proposal, including a preliminary conclusion as to the completeness of

the proposal and when the 60-day period begins. If more information is

needed later or complex issues arise, such as requesting the charter of

a new organization to provide such services, the FCA may choose to

extend this period for another 60 days. Because these actions are

already a part of FCA's administrative practices, changes were not made

to the proposed regulation.

The FCC recommended that the FCA should notify the applying

institution of the results of its actions within the 60-day timeframe

for acting on proposed new related services. In addition, the FCC

suggested that notice of FCA's decision to other System institutions

should occur after written notice is given to the requesting

institution. The FCA agrees that notification should be included within

the 60-day period and that notice to the requesting institution should

occur first; Sec. 618.8010(b)(5) has been modified accordingly.

The SCBA and IBAA commented that a well-defined, narrow list of

permissible related services should be included in the final rule to

prevent unauthorized, and possibly unsound, services from being

provided by System institutions. It believes unauthorized services may

not be detected in a timely manner through the examination process.

They suggested that, at a minimum, institutions should notify the FCA

of their intent to offer these services for the first time. The FCA

believes that the ``Related Services List'' attached to the final rule

is a well-defined list of permissible related services. Proposed

Sec. 618.8010(c)(3) would have required institutions to notify the FCA

examination team of their intent to offer a service program within 30

days of implementing a related service already on the RS List. The FCA

agrees, however, that a prior notification could be beneficial in

preventing an unauthorized and possibly unsafe or unsound service

program from being implemented because it would give the examiners an

opportunity to discuss a proposed service program with the offering

institution prior to implementation.

[[Page 34096]]

Therefore, the final regulation at Sec. 618.8010(c)(3) has been

modified to require notification to the FCA 10 business days before an

institution may begin to offer a service already on the RS List.

The IBAA and the SCBA commented on the elimination of the prior

approval of related service programs, the additional elimination of the

prior approval of district and bank policies, and the elimination of

the requirement for annual bank reviews of association services. The

commenters concluded that elimination of these types of oversight

activities jeopardizes the safety and soundness of System institutions

and weakens the Agency's monitoring and control over System

institutions. They further believe that reliance on the examination

process alone is inadequate. The IBAA also commented on the removal of

the records requirement in the current regulation at

Sec. 618.8000(b)(4).

The FCA does not believe that elimination of the FCA prior approval

or the annual bank review function creates significant safety and

soundness risks, but rather, that the final regulation eliminates

duplicative evaluations of authorities to provide new services. Program

risks that are incurred by individual institutions offering related

services can be adequately controlled by a number of factors,

including: (1) Special conditions placed on the RS List for services

raising special concerns; (2) mandatory feasibility analysis prior to

offering any related service programs; (3) bank oversight and review

through feasibility analyses and certain conditions imposed through

general financing agreements (GFAs); (4) notification of the

appropriate Office of Examination field office before a service is

first offered; and (5) periodic examination of program operations and

results by the FCA with appropriate follow-up in exercising its

supervisory power as warranted. The final regulation and other existing

regulations are adequate to address safety and soundness concerns and

provide the FCA with appropriate oversight of the process.

4. Section 618.8015--Policy Guidelines

There were no specific comments received on this section of the

proposed regulation, and the final regulation is adopted as proposed.

5. Section 618.8020--Feasibility Requirements

Three System commenters stated that the final rule should recognize

that the extent of the feasibility analysis required is dependent on

whether or not the service is offered for a profit and the overall

risks of the service to the institution. The FCA agrees that the extent

of the analysis will vary; however, it does not agree that

profitability is the sole determining factor. In fact, it is

conceivable that a service that is ``low-priced'' or ``free'' to the

recipient would still bear a cost to the institution and would require

more extensive analysis to justify offering it. The extent of the

analysis should be appropriate to the level of institution involvement

and the financial and operational risks in a service.

Four other System commenters urged the FCA to explain in its

commentary that the final rule could be interpreted as minimizing the

regulatory requirements for offering certain types of services. They

conclude that services that are normal and customary activities of

institutions in their primary business of lending and leasing should be

considered inherently feasible and, therefore, not subject to the

regulation. The FCA disagrees with the commenters. Although converting

a lending-related activity into a fee service will often prove

feasible, this will depend on many factors, including market demand,

pricing opportunities, and capital position. The cost benefit analysis

required by Sec. 618.8020(b) will enable the institution to determine

whether offering a fee service will promote its business objectives.

The ABA commented that it believes that the FCA's approach to

meeting the statute's feasibility requirement is flawed because the

proposed regulatory language does not offer a definition of feasibility

but instead states that feasibility is a function of 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. The commenter further states that

the proposed rule does not address issues of managerial and financial

capability to provide a related service, i.e., management structure,

employee qualifications, and capital position. Lastly, the commenter

recommended that a detailed and specific feasibility determination be

required from each institution for each related service to be offered.

The IBAA also believes that the feasibility criteria are too loose, but

it did not elaborate.

The FCA agrees with the commenters that managerial and financial

capabilities ought to be addressed in the feasibility analysis.

Although the proposed rule contains various managerial and financial

assessments, Sec. 618.8020(b)(1) has been modified to include a

specific requirement for an evaluation of the consistency of the

program with the institution's capital plan. Section 618.8020(b)(3)(i)

continues to require ``[a]n evaluation of the operational costs and

risks involved in offering the program, such as management and

personnel requirements, training requirements, and capital outlays.''

The recommendation for a detailed and specific feasibility

determination is also already reflected in the rule. Section 618.8020

begins with a requirement that an institution document program

feasibility for every related service program it provides.

Regarding the criticism that the proposed rule offers no definition

of feasibility, the FCA believes that the approach taken is

comprehensive and will be effective. The final rule specifies the cost

and benefit criteria by which feasibility must be determined. It

requires an institution to analyze the program against an array of

business factors and to document its conclusion that this analysis

demonstrates the program's feasibility.

The IBAA urged that the feasibility analysis include a

demonstration that a need for the service exists. The FCA believes that

a prudent feasibility analysis would necessarily include an evaluation

of the market and a discussion of the need for a particular service. In

fact, Sec. 618.8020(b)(2) specifically requires an evaluation of

market, pricing and competition issues.

6. Section 618.8025--Feasibility Reviews

The proposed rule reduces the role of the bank when an association

is offering a related service. The IBAA believes that more oversight

should be maintained because association activity ultimately places the

bank and, therefore, the taxpayer at risk.3 In particular, the

commenter believes that there is a danger of a bank simply ``rubber

stamping'' programs without giving adequate review of feasibility and,

therefore, the proposed rule does not meet the statutory requirement.

The FCA disagrees with this conclusion. The statute requires the bank

to determine the feasibility of each related service offered by an

institution, but it is silent regarding who must do the actual

feasibility analysis. The most appropriate persons to do the analysis

are the persons who will be providing the service. The bank will then

fulfill its oversight duties by verifying that the

[[Page 34097]]

analysis is complete and that the analysis establishes the feasibility

of the service. The bank also has considerable supervisory control

through regulatory and funding mechanisms such as its GFAs.

Furthermore, the FCA will be scrutinizing the banks' reviews and

general oversight of association and service corporation operations as

a part of the examination function.

\3\ The FCA notes that pursuant to section 4.4 and other

sections of the Act, the United States is not liable for obligations

of System institutions. Thus, there is no direct risk to the

taxpayers.

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

The IBAA also believes that the FCA should review the feasibility

of programs offered by individual associations to ensure safety and

soundness. The FCA agrees with this comment and believes that the

proposed and final rules do not indicate otherwise. In fact, the

preamble to the proposed rule states that the examination function will

evaluate compliance, performance, and safety and soundness. The FCA

firmly believes that the ongoing examination function is fully capable

of protecting the public and the investor.

One System institution proposed that association boards of

directors, rather than the district bank, be given the authority to

verify and certify the adequacy of program feasibility and concluded

that the FCA could issue a cease and desist order if it later

determines that the feasibility analysis for a service is incomplete.

The FCA clarifies that association boards already have the authority to

verify feasibility. In fact, they are expected to approve the offering

of all related services and, by doing so, approve the adequacy of the

feasibility analysis. In addition, the FCA does not believe that the

commenters suggested approach would fulfill the statutory requirement

for bank determination of feasibility.

Three System commenters asked for clarification regarding the

feasibility analysis for those services that are currently being

offered at the time the final rule becomes effective. They also

concluded that if a bank review is only needed on a first-time service,

then an institution need not resubmit a feasibility analysis for a

service that was previously offered.

The FCA agrees that for those services that are being offered prior

to the effective date of the final rule, an institution does not need

to resubmit a feasibility analysis. However, for those situations where

an institution formerly offered a particular service, but is not

currently offering it, Sec. 618.8025 has been modified to require bank

review of feasibility for any service that an institution did not offer

during the most recently completed business cycle (generally 1 year).

In other words, in addition to services never offered before,

previously offered but currently inactive services will require bank

review of the feasibility analysis.

In summary, proposed Sec. 618.8025(a) was modified to require bank

review for any service that an institution will be offering that it did

not offer during the most recently completed business cycle. Because

service corporations are referenced in the definition of ``System banks

and associations,'' Sec. 618.8025(b) has been added to require that,

prior to offering a related service for the first time, a service

corporation's feasibility analysis must be verified by the owners of

the service corporation. If the owners all agree, any one bank with

significant ownership interest can be delegated this responsibility.

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

One Farm Credit Bank and two affiliated associations raised

concerns about providing related services outside of an institution's

chartered lending territory. The proposed regulation at Sec. 618.8030

allows System institutions to provide related services outside of their

chartered territories, provided they obtain the consent of at least one

FCS bank or association authorized to lend (i.e., direct lender) in

that territory. Further, the proposed rule does not distinguish between

an institution having the right to invite a third party service

provider into its territory or consenting to an unsolicited request to

offer out-of-territory services.

The commenters are concerned about the competitive implications of

allowing such activities and feel the FCA should impose additional

conditions beyond simply receiving the consent of at least one

institution. They believe the competition will result because most

related services will be purchased in conjunction with a lending

relationship, and an institution's opportunity to offer out-of-

territory services will be broader than the authority to extend credit

out-of-territory. While the bank agrees that requiring the consent of

all institutions chartered to serve a given territory could interfere

with an institution's right to determine what services it wishes to

provide its members, it also believes that the related service

regulation should not create an unlevel playing field for System

institutions sharing the same geographic territory.

The commenters suggest requiring System institutions that want to

offer out-of-territory services to offer such services to all

institutions sharing the same territory on the same or equitable terms

and conditions. They argue that concern for the System's future well-

being justifies this additional burden, which they perceive as minimal.

The bank suggests that having authority to offer services outside of a

chartered lending territory could have a significant impact. The

commenter's suggestion would provide each institution with an equal

opportunity to negotiate for a service to be provided in its territory.

Institutions could decline to authorize another institution to provide

services to its customers on its behalf, but no one institution would

be in a position to prevent any other FCS institutions from reaching

agreements and providing services to their customers.

The FCA understands the commenter's concerns regarding intra-System

competition, but it also notes that related services differ from

lending and that services are not always offered in the same manner as

loan products. While some intra-System competition for loans exists,

System institutions are limited by charter to providing specific types

of loans for certain purposes (i.e., short-, intermediate-, or long-

term loans). By contrast, intra-System competition is inherent in the

way eligibility for related services is determined, because related

services can be provided to an entity that is ``eligible to borrow''

from an institution. Thus, for example, both PCAs and FLBAs are

authorized to provide services to the same borrowers in their chartered

territories.

The Agency has concluded that the commenters proposal does not

solve many of the problems associated with the additional competition

created by out-of-territory related services. Under the commenter's

proposal, the requirement for an opportunity to negotiate for the

service could lead to cumbersome, protracted negotiations, could pose

more than a minimal burden on System institutions, and would still

result in only one institution being required to give its consent for

an out-of-territory institution to compete with another institution in

the territory.

Notwithstanding that some competition inherently exists in

providing related services in a given territory, the Agency recognizes

that the provision of related services out-of-territory creates the

potential for additional intra-System competition. Thus, the Agency

believes that the proposed rule should be modified to address some of

the issues raised by the commenters. The final regulation has been

modified to limit competition without consent in situations where

services are already being provided to borrowers. Final

Sec. 618.8030(a) provides that an out-of-territory institution must

obtain the consent of all chartered institutions currently offering the

same

[[Page 34098]]

service in the territory in which the service will be provided.

Consent must be obtained regardless of whether the institution is

offering the service itself or through an out-of-territory System

institution or a third party. If no institution in the territory is

offering the same service that the out-of-territory institution wishes

to offer, the out-of-territory institution need only obtain the consent

of any one direct lender chartered to serve the territory.

The Agency believes that the final regulation balances the

territorial rights of institutions, the rights of institutions to

control the manner in which they conduct their business, and the needs

of borrowers for related services. If borrowers in a territory already

have access to a particular related service, there is no compelling

need to allow additional competition from an out-of-territory

institution without the consent of the institutions currently offering

the same services. Although the Agency believes that this is the most

appropriate resolution of the out-of-territory issue, the Agency

welcomes additional comments on Sec. 618.8030.

Another comment by the IBAA on out-of-territory related services

concerned retaining a requirement in the existing rule that the service

provided within the offering (out-of-territory) institution's chartered

territory remain the primary component of that institution's services.

The comment is grounded in terms of cooperative principles in that a

key premise for forming a cooperative is to primarily do business with,

and for the benefit of, its own members. While the FCA acknowledges

this premise, it believes that decisions on business practices are best

left to the membership and local boards of directors, rather than the

FCA. The restriction advocated by the IBAA could impair the ability of

Farm Credit institutions to meet their customers' needs for related

services, particularly when the service in question is unique or not

widely available from other sources. It should also be noted that a

System bank board is free to impose more stringent requirements for

their territory (such as is recommended in the three comment letters)

than the minimal ones being set forth by the FCA.

Four System associations commented that the proposed relaxation of

the limitations on out-of-territory service offerings should be

considered in the context of the FCA's proposed policy statement on

``Non-Exclusive Territories'' (59 FR 17543, April 13, 1994). These

associations submitted comments on the proposed policy statement

earlier in 1994. The FCA considered all of the comments on the proposed

policy statement in drafting Sec. 618.8030 and believes the final rule

is an appropriate resolution to related service issues at this time.

However, the FCA notes that adoption of a final board policy statement

on non-exclusive territories may require future changes to the

regulation.

The IBAA expressed safety and soundness concerns about permitting

System institutions to expand related service programs beyond the

boundaries of their chartered lending territories. It stated that the

FCA needs to exert oversight in this area if institutions significantly

expand programs in large or distant geographic areas. The IBAA believes

that allowing institutions to market services nationwide would

contradict current statutory language that requires the FCA to charter

institutions to serve specific areas.

There are no geographic restrictions in the Act on the ability of

the FCA to issue or amend institution charters. See, Act, sections

5.17, 1.3, 2.0, and 2.10. In fact, the Agency has the authority to

issue nationwide charters or amend an existing charter to authorize

nationwide activities. Further, the regulation requires an appropriate

feasibility analysis covering an institution's ability to manage its

proposed service program operation in all areas where the program is

offered. The examination function will ensure that all institution

activities, regardless of where conducted, are conducted in a safe and

sound manner. Therefore, the FCA does not agree with the IBAA and has

made no changes in response to its comments on this issue.

Section 618.8030(d) has been added in order to address service

corporations. A service corporation may provide related services

outside of its chartered territory (i.e., the chartered territory of

its owners) subject to the requirements of Sec. 618.8030(a)-(c).

However, service corporations cannot give consent to an out-of-

territory institution to offer services in the service corporation's

(or its owners) territory.

B. Subpart B--Member Insurance

1. Section 618.8040--Authorized Insurance Services

The IBAA commented that the proposed regulation allows out-of-

territory associations to offer credit or term life and credit

disability insurance to any individual who has a borrowing relationship

with a System institution, but not necessarily with the bank or

association selling the insurance. The IBAA is concerned that this will

allow a single institution to sell insurance nationwide and believes

that such ``expansion'' should not be allowed because System

institutions are chartered to serve specific areas and local farmers.

As noted earlier, the FCA has the authority to charter institutions to

serve specific territories, which may include nationwide charters.

Further, the FCA does not agree that this would result in an expansion

of insurance services. The proposed and final rule simply permit System

institutions to serve their members' needs without obligating each

association to have the ability to offer the insurance products itself.

The IBAA disagreed with the FCA's conclusion that the System should

be able to sell spouses credit insurance because a spouse may have a

contractual liability for the debt by operation of state law. The basis

for its disagreement is that the FCA has not established a need for the

System to provide such a service. The FCA notes that the insurance

would be sold to the borrower, on the life of the spouse, not sold

directly to the spouse. There is no statutory requirement that the FCA

establish a need for a service before the System is authorized to offer

it. However, when an institution decides to offer a particular related

service, as a part of its feasibility analysis, it must evaluate the

potential market for that service in the areas in which the service

will be offered. The FCA directs the commenters to the preamble to the

proposed regulation for supporting discussion on this issue (59 FR

54405, October 31, 1994). No change was made to the final regulation in

response to this comment.

The IBAA also commented that, by eliminating the requirement that a

debtor-creditor relationship exist for System institutions to provide

other insurance products, such as crop insurance, and by allowing

``members'' to be eligible to buy crop insurance, the FCA has exceeded

congressional intent by allowing the System to provide insurance to

non-System borrowers. The FCA notes that the legislative history of

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

applies only to credit or term life and credit disability insurance (or

similar types) in that this insurance must be ``appropriate to protect

the loan commitment in the event of death or disability of the

debtors.'' See 59 FR 54399, October 31, 1994. Therefore, the debtor-

creditor requirement for ``other'' insurance was removed in order to

allow System institutions to exercise the full authority granted by the

Act. As a result, for ``other'' types of insurance, purchasers need

only be eligible to borrow (as with other types of related services).

[[Page 34099]]

Because section 4.29 of the Act only authorizes borrowers or

members to purchase insurance, the Agency felt it was necessary to

define ``member'' in the proposed regulation. The FCA did not intend

for the definition of member to be interpreted to mean that persons not

eligible to borrow could purchase ``other'' insurance from System

institutions. In order to clarify this point, the FCA revised the

definition of member in Sec. 618.8040(b)(2) of the final rule to

include the phrase ``eligible to borrow.''

2. Section 618.8040(b)(6)

Several commenters asked that the 5-percent limitation on

compensation for sale of insurance be removed from the final

regulation. One association did not object to the 5-percent limitation

for full-time loan officers who also sell insurance as a part of their

job. However, the commenter felt this limitation was too restrictive

for full-time insurance salespersons and those persons involved in

direction or management of insurance sales. The association further

believes that such a limitation is not needed because the conflict of

interest between loan making and insurance is not present, and it

argued that such a limitation would restrict its ability to attract and

motivate highly qualified insurance personnel.

The FCA continues to believe that unrestricted incentive

compensation based on volume of insurance sales may lead to conflicts

of interest or coercion in the case of loan officers and other

employees involved in the lending operations of an institution.

However, the FCA also recognizes that the potential for conflicts of

interest or coercion is significantly less with regard to full-time

insurance personnel. The FCA also agrees that in the case of full-time

insurance sales personnel, such a limitation could impair an

institution's ability to attract the best qualified people to these

positions. Accordingly, proposed Sec. 618.8040(b)(6) is modified so

that, with respect to full-time insurance personnel or full-time

managers and supervisors of insurance departments, the 5-percent

limitation only applies to the sale of credit life and similar types of

insurance (insurance that pays on a loan or mortgage in the event of

death or disability of the debtor).

One commenter suggested that the final regulation should include

commentary notes stating that insurance is the only service with

regulatory restrictions on employee incentive compensation. The FCA

does not believe that this is necessary because the regulatory

structure and language make it clear that the restriction on employee

incentive compensation applies only to insurance.

C. Public Comments Received on the Sample Related Services List

The FCC commented that under Farm Business Consulting and

Cooperative Business Consulting Services, the requirement that

institutions must have procedures in place to ``ensure conflicts of

interest do not occur between the credit and the business consulting

functions'' is too burdensome. The FCC suggested that the special

condition should require that institution ``policies address and manage

conflicts of interest to reduce risk to the entity by avoiding or

disclosing certain conflicts as may be appropriate.'' The FCA

recognizes that, as stated, the condition could be onerous. The Agency

expects institutions to eliminate conflicts of interest whenever

possible and operationally feasible. However, there may be instances

when such conflicts cannot be eliminated, but with proper operating

procedures, can be managed in such a way as to limit the risk posed to

the institution to an acceptable level. Language in the attached RS

List was modified to more clearly state this requirement.

Minnesota Mutual commented that the sample RS List did not include

two types of insurance services, individual term life and mortgage

accidental death insurance, currently offered by System institutions.

The FCC also commented that ``Group Term Life Insurance'' should be

changed to ``Term Life Insurance'' to conform to section 4.29(a)(1) of

the Act. Although the FCA intended that these types of insurance be

included within those on the RS List, the list has been modified to

more accurately reflect these concerns.

The FCC commented that crop hail insurance and multiple-peril crop

insurance should be combined into one category of single- and multiple-

peril insurance in order to accommodate other types of single-peril

crop insurance that may be available or become available in the future.

After researching the legislative history of the 1980 amendments to the

Act, the FCA believes that it is appropriate to limit the types of crop

insurance that the System could sell to hail and multiple-peril crop

insurance as is plainly stated in the Act. Accordingly, the FCA did not

make this suggested change to the RS List.

As a final note, a small number of technical changes were made to

proposed part 618, subparts A and B, in order to enhance the clarity of

the regulations. Technical changes were also made to parts 611 and 620

in order to conform with the regulatory changes in part 618.

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 are 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,

4.21, 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, 2209, 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 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).

Sec. 618.8030 [Redesignated as 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.

[[Page 34100]]

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 type of activity provided

by a System bank or association that is appropriate 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, Federal land credit associations, and service

corporations formed pursuant to section 4.25 of the Act.

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 of 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) Service corporations formed pursuant to section 4.25 of the Act

may offer related services to persons eligible to borrow from the

owners of the service corporation, pursuant to paragraphs (a), (b),

(c), and (e) of this section.

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

recipients that do not otherwise meet the requirements 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 requested by an eligible borrower or necessary to

the transaction between the parties. Such services include, but are not

limited to, fee appraisals of agricultural assets provided to any

Federal agency, commercial banks, and other lenders.

Sec. 618.8010 Related services authorization process.

(a) Authorities. System banks and associations may only offer

related services that meet the criteria specified in this regulation

and are authorized by the FCA.

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

proposes or intends 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, a statement of 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 related

service or program to offer a related service.

(3) At its discretion the FCA may, at any time 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 to authorize a new service. The FCA shall approve

the request, deny the request, or publish the service 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) Within the time period established in paragraph (b)(4) of this

section, the FCA shall notify the requesting institution of its

actions. Following notification of the requesting institution, the FCA

will notify all System banks and associations of its determination on

the proposed service by bookletter or other means. If a service is not

authorized, the reasons for denial will be included in the

notifications to the System and the requesting institution.

(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 and enforcement process.

(2) The FCA shall make available to all System banks and

associations a list of such related services (``related services list''

or ``list'') and will update the list in accordance with paragraph

(b)(5) of this section. The list will contain the following:

(i) A description of each related service; and

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

related service;

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

service may be offered. The special conditions and description of the

service will be fully detailed in FCA's notice to System institutions

under paragraph (b)(5) of this section.

(3) At least 10 business days prior to 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 in writing and provide it with a description

of the proposed related service program.

Sec. 618.8015 Policy guidelines.

(a) The board of directors of each System bank or association

providing related services must adopt a policy addressing related

services. The policy shall 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

shall also be subject to review under an appropriate 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 must be separately identified

from loan interest charges and disclosed to the recipient of the

service prior to providing or implementing the service.

[[Page 34101]]

Sec. 618.8020 Feasibility requirements.

For every related service program a System bank or association

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 that demonstrates program

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, and whether offering

the service is consistent with the long-term goals described in its

capital plan;

(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 expected profitability. This analysis should

include an explanation of how the program will contribute to the

overall financial health of the institution; 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 eliminate or appropriately manage these

conflicts.

Sec. 618.8025 Feasibility reviews.

(a) 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 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 program feasibility must be fully supported and

communicated to the association in writing within 60 days of its

submission to the bank.

(b) Prior to a service corporation offering a service for the first

time or offering a service that it did not offer during the most

recently completed business cycle (generally 1 year), the owners of the

service corporation must verify that the service corporation has

performed a feasibility analysis pursuant to Sec. 618.8020. If the

owners all agree, one bank with a significant ownership interest can be

delegated this responsibility.

Sec. 618.8030 Out-of-territory related services.

(a) System banks and associations may offer related services

outside their chartered territories subject to the following

conditions:

(1) The System bank or association obtains consent from all

chartered institutions currently offering the same type of service in

the territory in which the service is to be provided; or

(2) If no System bank or association is currently offering the same

type of service in the territory, then the out-of-territory institution

must obtain the consent of at least one direct lender institution

chartered in the territory in which the related service is to be

provided.

(3) The consent obtained pursuant to paragraphs (a)(1) and (a)(2)

of this section shall be in the form of a written agreement with

specific terms and conditions including timeframes.

(b) System banks and associations providing out-of-territory

services must fulfill all requirements of subparts A and B of this part

618.

(c) 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. If a financial obligation exists, then the consenting

institution must comply with Secs. 618.8015, 618.8020 and 618.8025.

(d) Service corporations must follow the requirements of this

section in offering related services out-of-territory. A service

corporation cannot consent to an out-of-territory institution providing

services in its chartered territory.

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 new 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 any System bank or association, without regard to whether such

institution is the provider. 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 of a System bank or association. For the

purposes of this section, ``member'' means someone eligible to borrow

who is a stockholder or participation certificate holder and 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 and association personnel shall not benefit from insurance

sales by receipt of commissions or gifts from underwriting insurance

companies. However, employees may participate in an incentive plan

under which incentive compensation is provided based on the sale of

insurance.

(i) In any single year, for all employees except full-time

insurance personnel or full-time supervisors or managers of insurance

departments, incentive compensation attributable to sales of all types

of insurance cannot exceed an amount equivalent to 5 percent of the

recipient's annual base salary.

(ii) In any single year, for full-time insurance personnel and

full-time supervisors and managers of insurance departments, incentive

compensation for sales of credit life and similar types of insurance

(i.e. insurance that pays on a loan or mortgage upon the death or

disability of the debtor) cannot exceed an amount equivalent to 5

percent of the recipient's annual base salary.

(iii) No incentive compensation limit applies to sales of other

insurance (crop, title, etc.) by full-time insurance personnel or full-

time supervisors or managers of insurance departments.

* * * * *

[[Page 34102]]

PART 620--DISCLOSURE TO SHAREHOLDERS

7. 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]

8. 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: June 26, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

BILLING CODE 6705-01-P

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[FR Doc. 95-16097 Filed 6-29-95; 8:45 am]

BILLING CODE 6705-01-C