Eligibility and Scope of Financing; Loan Policies and Operations; General Provisions; Definitions; Nondiscrimination in Lending

FARM CREDIT ADMINISTRATION

12 CFR Parts 613, 614, 618, 619, and 626

RIN 3052-AB10

Eligibility and Scope of Financing; Loan Policies and Operations;

General Provisions; Definitions; Nondiscrimination in Lending

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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

SUMMARY: The Farm Credit Administration (FCA) through the Farm Credit

Administration Board (Board) proposes to amend the current regulations

that govern eligibility and purposes for financing from Farm Credit

System (Farm Credit, FCS, or System) banks and associations. This

proposal would incorporate recent statutory amendments that govern

eligibility and loan purposes from Farm Credit banks that operate under

title III of the Farm Credit Act of 1971, as amended (Act). The

proposed rule would also implement recently enacted sections 3.1(11)(B)

and 4.18A of the Act, which grant Farm Credit banks and associations

authorities to participate with non-System lenders in loans to similar

entities. At the same time, the FCA proposes to eliminate restrictions

in the current regulations that are not required by the Act. The FCA

proposes to substantially reorganize these regulations in order to

enhance their clarity. The FCA also proposes several technical

amendments to other regulations so they conform with this proposal. The

proposed rule would relocate the nondiscrimination in lending

regulations to a new part without change.

DATES: Comments should be received on or before December 11, 1995.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio,

Associate Director, Regulation Development, Office of Examination, Farm

Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-

5090. Copies of all communications received will be available for

review by interested parties in the Office of Examination, Farm Credit

Administration.

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Policy Development and Planning Division,

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. General

The FCA proposes to amend its regulations in part 613 to eliminate

unnecessary regulatory restrictions and implement statutory changes.

Several recent amendments to sections 3.7 and 3.8 of the Act expand

eligibility and purposes of financing for borrowers from BCs and ACBs.

Two new statutory provisions were enacted in 1992 and 1994, which

authorize Farm Credit banks and associations to participate with non-

System lenders in loans to borrowers who are functionally similar but

otherwise ineligible for direct FCS financing when the loans are for

purposes that are within the System's scope of financing (sections

3.1(11)(B) and 4.18A of the Act).

The FCA's approach in crafting new eligibility regulations is

guided by the Board's Policy Statement on Regulatory Philosophy (Policy

Statement).1 Pursuant to this Policy Statement, the FCA is

committed to adopting regulations only as necessary to: (1) Implement

or interpret the law; or (2) promote the safe and sound operations of

System institutions. Consistent with the Policy Statement, the FCA

proposes to remove regulatory provisions that prescribe operational

procedures, to simplify and clarify the regulations wherever possible,

and to delete existing regulatory restrictions that are not imposed by

law or necessary to interpret the law or promote safety and soundness.

The FCA's proposal should permit FCS institutions to more

[[Page 47104]]

effectively meet the credit needs of agricultural and aquatic

producers, farm-related businesses, rural homeowners, cooperatives, and

rural utilities in today's economic environment. Additionally, it

should help stimulate economic development in rural areas by increasing

the availability of affordable credit to eligible borrowers.

\1\See 60 FR 26034 (May 16, 1995).

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

The FCA believes that removing non-statutory restrictions in these

regulations will enable the FCS to compete appropriately in

agricultural and rural credit markets and ultimately enhance its safety

and soundness. In this context, the FCA's proposal will enable the FCS

to fulfill its statutory mission (as stated in the preamble to the Act)

to provide: (1) ``A farmer-owned cooperative System of making credit

available to farmers, ranchers, and their cooperatives;'' and (2) ``an

adequate and flexible flow of money into rural areas.''

II. Financing Under Titles I and II of the Act

The FCA proposes new eligibility regulations for Farm Credit banks

and associations that operate under titles I and II of the Act. These

rules are designed to clarify current eligibility criteria and the

scope or purposes for which System financing may be obtained. The FCA's

proposal eliminates provisions in existing subparts A and B of part 613

that prescribe management practices and procedures or unnecessarily

restrict the eligibility of persons authorized to borrow under the Act.

The FCA also proposes to reorganize and clarify these regulations

so they can be better utilized by the FCS, the FCA, and other

interested parties. The existing regulations in subparts A and B would

be replaced by four new regulations in subpart A of part 613, which

would authorize System banks and associations to extend credit to the

following classes of eligible borrowers: (1) Bona fide farmers,

ranchers, and producers or harvesters of aquatic products; (2)

processing or marketing operators; (3) farm-related businesses that

provide services to farmers and ranchers; and (4) rural homeowners. An

explanation of the proposed amendments follows.

A. Bona Fide Farmers, Ranchers, and Aquatic Producers and Harvesters

Sections 1.9(1) and 2.4(a)(1) of the Act state that ``bona fide

farmers, ranchers, and producers or harvesters of aquatic products''

are eligible to borrow from Farm Credit banks and associations that

operate under titles I or II of the Act, respectively. The term ``bona

fide farmer, rancher, or producer or harvester of aquatic products'' is

not defined in either the Act or its legislative history.

The FCA proposes to adopt a single regulation, Sec. 613.3000, that

will determine eligibility for financing for loans made to farmers,

ranchers, and aquatic producers and harvesters. As a result of this

consolidation, the FCA proposes to delete existing Secs. 613.3000,

613.3005, 613.3010, and 613.3020.

Proposed Sec. 613.3000(a)(2) defines a bona fide farmer, rancher,

and aquatic producer as an individual or legal entity that either: (1)

Produces agricultural products or produces or harvests aquatic products

to generate income; or (2) owns agricultural land. The definition in

the proposed regulation does not represent a significant departure from

the existing regulations. The FCA proposes to combine the separate

definitions of farmers and ranchers in existing Sec. 613.3010(a) and

aquatic producers and harvesters in Sec. 613.3010(d) into a single

provision, without substantive change. Agricultural land is defined by

proposed Sec. 613.3000(a)(1) as ``land that is devoted to or available

for the production of agricultural or aquatic products.'' This proposed

definition is more streamlined and would replace current Sec. 619.9025.

1. Elimination of Regulatory Restrictions on Eligibility

Although the regulatory definition of ``bona fide farmer'' remains

essentially unchanged, this proposal would reduce or eliminate

restrictions in the current regulations on financing to three types of

farmers: part-time farmers, certain legal entities, and certain foreign

nationals. The proposed regulation, consistent with the Act, eliminates

all distinctions among farmers regarding their eligibility for

agricultural and aquatic financing. The FCA proposes to place limits on

financing that eligible borrowers may obtain for certain purposes. For

the reasons explained below, limitations on financing of non-

agricultural credit needs have been retained.

A. Part-time Farmers

The FCA proposes to eliminate any distinction between full-time and

part-time farmers, ranchers, and aquatic producers and harvesters.

Although the eligibility provisions in titles I and II of the Act do

not distinguish full-time from part-time producers, current

Sec. 613.3005(a) establishes different lending policies and objectives

for full-time and part-time producers who are eligible to borrow. The

existing regulation requires Farm Credit Banks (FCBs), agricultural

credit banks (ACBs), and their affiliated associations to provide: (1)

``Full credit, to the extent of creditworthiness, to full-time bona

fide farmers;'' (2) ``conservative credit'' to part-time farmers for

agricultural enterprises; and (3) ``restricted credit for other credit

requirements as needed to ensure a sound credit package.''

System institutions have noted that Sec. 613.3005 is more

restrictive than the Act. Further, uniform and consistent application

throughout the FCS has been difficult to achieve. For these reasons,

the FCA proposes to repeal Sec. 613.3005 (a) and (c) and replace it

with a new Sec. 613.3000, which will be clear, concise, and easier to

implement.

Proposed Sec. 613.3000 does not differentiate between full-time and

part-time agricultural and aquatic producers. Moreover, the evolution

of agriculture has made part-time producers an increasingly important

sector of the agricultural industry and rural America,2 and

existing regulations restricting the scope of lending to them may not

serve the purposes of the Act, which does not distinguish between full-

time and part-time farmers. The applicant's creditworthiness, not

eligibility criteria, would determine the availability of System loans

to part-time farmers, as it does with full-time farmers. The broad

prescriptions for operational policies and procedures of current

Sec. 613.3005(c), which were designed to keep the focus on agricultural

lending would be replaced with limitations on the amount of other

business credit needs of farmers that could be financed. Although the

FCA is removing the policy and procedure requirements of

Sec. 613.3005(c), the FCA believes that FCS banks and associations

should continue to adopt and implement sound management practices and

policies to guide their operations.

\2\A recent report by the United States Department of

Agriculture, entitled Rural Conditions and Trends, Spring 1995,

reported 88 percent of a farm household's income comes from sources

off the farm, with farm (income) accounting for the rest.

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

B. Legal Entities

The FCA's proposed regulation also removes most distinctions

between individuals and legal entities. No restriction on lending to

legal entities appears in the Act, and a review of the legislative

history of the Act reveals that Congress, over an extended period of

time, deleted all statutory restrictions on loans to legal entities by

title I and II institutions or their predecessors. The FCA proposes to

update its regulations to conform with these changes.

[[Page 47105]]

Under an existing regulation, Sec. 613.3020(b), a legal entity is

ineligible for loans from Farm Credit banks and associations unless

more than 50 percent of: (1) Its equity or voting shares are owned by

individuals conducting an agricultural or aquatic operation; (2) the

value of its assets are related to the production of agricultural or

aquatic commodities; or (3) its income is derived from agricultural or

aquatic activities. Furthermore, the current regulation imposes

additional requirements on a legal entity that is owned or controlled

by another legal entity that is an ineligible borrower.

In 1993, the FCA solicited public comment on the burdens that

existing regulations impose on System institutions. See 58 FR 34003,

June 23, 1993. Several commenters responded that existing

Sec. 613.3020(b) limits the System's ability to finance legal entities

despite the removal of such restrictions in the Act. Some of the

comment letters also noted that the current regulation favors

individual borrowers over legal entities.

After considering these comments, the FCA proposes to adopt a

regulatory approach that equalizes the treatment of legal entities and

individual borrowers with respect to financing their agricultural and

aquatic needs. Section 1.1(b) of the Act states that one of the

objectives of the FCS is to ``be responsive to the credit needs of all

types of agricultural producers having a basis for credit.''

Accordingly, the FCA concludes that the eligibility requirements for

System institutions should not influence any borrower's decision about

whether to farm, ranch, or fish in an individual capacity or as a legal

entity.

The FCA proposes to eliminate the requirements in current

Sec. 613.3020(b) that most of the owners, assets, or income of an

eligible legal entity be related to an agricultural or aquatic

enterprise. Rather, any legal entity that engages in agricultural or

aquatic production to generate income or owns agricultural land would

become an eligible System borrower under proposed Sec. 613.3000(a)(2).

The FCA's proposal does not preempt State laws that prohibit or

otherwise restrict legal entities (other than closely held family farm

corporations) from owning agricultural land or conducting a farming,

ranching, or aquatic operation.

Under the proposed regulation, entities that are eligible under

title III of the Act would not qualify as legal entities for purposes

of financing under titles I or II of the Act. The FCA is aware that

some cooperatives now qualify for financing from FCBs and associations,

as well as from BCs and ACBs. In fact, some cooperatives have existing

financial relationships with associations. Although the FCA does not

desire to interfere with existing business relationships, it is

concerned that expanded competition within the FCS could be

detrimental. The FCA invites comments on whether this approach is

appropriate and on other alternatives for addressing this concern.

C. Nationality of the Borrower

Current FCA regulations permit System lenders to provide

agricultural financing to foreign nationals only if they are permanent

residents of the United States. This restriction derives from language

in section 1.1(a) of the Act, which states:

The farmer-owned cooperative Farm Credit System (is) designed to

accomplish the objective of improving the income and well-being of

American farmers and ranchers by furnishing sound, adequate, and

constructive credit and closely related services to them (and) their

cooperatives.

The FCA has viewed this provision as a basis for limiting the ability

of the System to lend to certain foreign nationals. Existing

Sec. 613.3010(c) states that only foreign nationals who are admitted

into the United States for permanent residence pursuant to 8 U.S.C.

1101(a)(20) are eligible for System financing. Legal entities that are

owned by foreign nationals who are permanent residents of the United

States also qualify for System financing under this provision.

The FCA is aware that non-resident foreign nationals and legal

entities owned by such persons have applied to FCS banks and

associations for agricultural or aquatic loans. System institutions and

members of Congress have made the Agency aware of applicants who own

and operate farms or processing and marketing operations in the United

States, but are ineligible for financing because they are not citizens

or permanent residents. FCS banks and associations are currently

required by current Sec. 613.3010(c) to reject automatically the loan

applications of such prospective borrowers solely on the basis of their

nationality and residency status. Many FCS banks and associations state

that the current regulation compels them to deny loans to otherwise

creditworthy farmers, ranchers, and aquatic producers and harvesters

who make significant contributions to American agriculture.

Furthermore, existing Sec. 613.3010 causes System lenders to forfeit to

competitors profitable business opportunities with entities that are

statutorily eligible to borrow from the System. Many FCS

representatives and some members of Congress have questioned the FCA's

decision to prohibit System institutions from financing those

agricultural and aquatic producers who are non-resident foreign

nationals or foreign national legal entities.

These comments have prompted the FCA to consider whether the

existing regulation is unnecessarily restrictive. In considering these

comments, the FCA examined the immigration and nationality laws of the

United States. As a general rule, foreign nationals are allowed to

enter the United States as either immigrants or non-immigrants.

According to 8 U.S.C. 1101(a)(20), persons who are lawfully admitted

for permanent residence in the United States have immigrant status. As

noted earlier, agricultural or aquatic producers who are admitted into

the United States as permanent residents are already eligible to borrow

from System institutions.

Non-immigrants generally are defined as foreign nationals who do

not intend to abandon their residence in their home countries and

settle permanently in the Untied States. Certain categories of non-

immigrants are allowed to conduct businesses and own property in the

United States. For example, non-immigrant foreign nationals may enter

the United States to conduct business as:

(1) Businesspersons under 8 U.S.C. 1101(a)(15)(B);

(2) Merchants or traders under 8 U.S.C. 1101(a)(15)(E); or

(3) Executives, managers, or specialists for a legal entity that

employs them, pursuant to 8 U.S.C. 1101(a)(15)(L).

The proposed regulation would expand eligibility provisions to

encompass all foreign nationals who are authorized by the laws of the

United States to engage in agricultural or aquatic production or to own

agricultural land in the United States. It would also cover domestic

legal entities in which foreign nationals have an ownership interest.

The FCA believes that this interpretation is consistent with section

1.1(a) of the Act and it provides FCS institutions with greater

flexibility to finance bona fide farmers, ranchers, and aquatic

producers and harvesters who actively contribute to the growth,

productivity, and prosperity of domestic agriculture and the rural

economy.

As a result of its consideration of this issue, the FCA proposes to

amend its eligibility regulations to enable Farm Credit banks and

associations to finance certain non-immigrant foreign nationals

[[Page 47106]]

who are bona fide farmers, ranchers, and aquatic producers or

harvesters, as defined by proposed Sec. 613.3000. More specifically,

proposed Sec. 613.3000 (a)(2) and (a)(3)(ii) would expand the

definition of ``individual'' to include foreign nationals who have been

admitted lawfully into the United States pursuant to any provision in 8

U.S.C. 1101(a)(15) that authorizes such individuals to own property or

operate or manage businesses. This would permit such persons to qualify

as a bona fide farmer, rancher, or aquatic producer or harvester if

they are engaged in production or own agricultural land.

The proposed regulation would afford the same treatment to legal

entities owned by citizens and permanent residents of the United

States, or controlled by non-resident foreign nationals, provided that

the entity is chartered domestically. The FCA observes, however, that

certain foreign nationals and foreign national legal entities have

registration and disclosure obligations under the Agricultural Foreign

Investment Act of 1978 (AFIDA), 7 U.S.C. 3508, and its implementing

regulation, 7 CFR Part 781. Because the Secretary of Agriculture is

authorized by section 3 of AFIDA, 7 U.S.C. 3502, to impose civil

penalties on non-resident foreign nationals and foreign national legal

entities who fail to comply with these disclosure provisions, System

institutions that lend to borrowers who are subject to the AFIDA should

ensure that the borrowers have complied with its requirements. The FCA

observes that the proposed regulation does not preempt State laws that

prohibit or otherwise restrict non-resident foreign nationals and

foreign national legal entities from owning agricultural land or

conducting a farming, ranching, or aquatic operation within their

jurisdiction.

The FCA notes that legal entities that are chartered by a foreign

government or headquartered outside the United States are also covered

by the AFIDA. The FCA seeks comment on whether foreign national legal

entities that do not have a domestic subsidiary should be eligible for

financing under the final regulation.

2. Limitations on Financing

The proposed regulations would impose no limitations on the

System's ability to finance the agricultural and aquatic needs of

farmers, ranchers, and aquatic producers. Proposed Sec. 613.3000(c)

would authorize FCS banks and associations to extend credit to all

eligible borrowers for any agricultural or aquatic purpose, including

refinancing pre-existing agricultural or aquatic debt.

Proposed Sec. 613.3000(d) would enable eligible farmers, ranchers,

and aquatic producers or harvesters to obtain System loans for their

other credit needs with certain limitations. Sections 1.11(a) and

2.4(a) of the Act expressly authorize System banks and associations to

finance the other credit needs of agricultural and aquatic producers.

This statutory authority has existed since 1955,\3\ when Congress

originally acknowledged that farmers and ranchers often require credit

for other ``sound and appropriate'' purposes so they can make ends meet

and remain on the farm.\4\ This longstanding Congressional policy is

currently codified in Sec. 613.3005(a).

\3\The former Federal land banks were granted this authority by

the Farm Credit Act of 1955, Pub. L. No. 347, section 304(a), 69

Stat. 655 (Aug. 11, 1955). The Farm Credit Act of 1956 granted this

authority to the PCAs, Pub. L. No. 84-809, section 105(i), 70 Stat.

665 (July 26, 1956).

\4\S. Rep. No. 1201, 84th Cong., 1st. Sess., (July 28, 1955), p.

21; H. Rep. No. 863, 84th Cong., 1st. Sess., (June 20, 1955), p. 20.

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

The FCA proposes a regulatory approach that grants FCS banks and

associations greater flexibility to finance the other credit needs of

bona fide farmers, ranchers, and aquatic producers and harvesters, but

simultaneously preserves the mission of System institutions as

agricultural lenders. The proposed regulation removes the existing

requirement that a borrower have an outstanding agricultural or aquatic

loan in order to receive financing for other credit needs. Today, many

agricultural and aquatic producers pursue non-farm business

opportunities as a matter of economic survival. A Farm Credit System

that is responsive to such other credit needs helps agricultural and

aquatic producers to remain on their farms and ranches and in America's

rural communities. Furthermore, System lenders fulfill their obligation

to ``provide for an adequate and flexible flow of money into rural

areas, and * * * to meet current and future rural credit needs'' when

they finance certain non-farm businesses owned by farmers in rural

areas. In this context, the Act expressly contemplates that Farm Credit

banks and associations will contribute to economic development in rural

areas by financing the other business needs of farmers, ranchers, and

aquatic producers and harvesters.

Lending for farmers' other credit needs also enables FCBs, ACBs,

and their affiliated associations to strengthen their viability by

diversifying their loan portfolios. A strong and competitive Farm

Credit System increases the availability of affordable credit in rural

America. Lending for other domestic and business needs allows System

banks and associations to offer a full array of quality credit services

to farmers, ranchers, and aquatic producers and harvesters at

competitive interest rates and to provide an incidental benefit to

rural communities.

Because the primary mission of the FCS is to finance agriculture

and aquaculture, the FCA's proposal would restrict loans for the other

credit needs of System borrowers. In the FCA's opinion, the

availability of credit for non-agricultural purposes should be

proportionally related to the borrower's involvement in farming,

ranching, or aquatic production or harvesting. For the reasons

explained below, proposed Sec. 613.3000(d) would grant borrowers who

engage in agricultural or aquatic production (``farmer-producers'')

greater access to the FCS for their other credit needs than it would

grant to borrowers who are eligible only because they own agricultural

land as an investment (``farmer-investors'') and non-resident foreign

nationals. The FCA's proposal is designed to permit family farm

corporations and other legal entities that are closely held by eligible

farmers, ranchers, and aquatic producers and harvesters to finance

their other credit needs at an FCS bank or association. However, the

proposed regulation would authorize System banks and associations to

finance only the agricultural or aquatic needs of publicly traded

corporations and conglomerates with significant assets unrelated to

agriculture.

Proposed Sec. 613.3000(d)(1) would enable farmer-producers to

obtain System financing for their housing and other domestic needs

without restriction (other than their creditworthiness). Proposed

Sec. 613.3000(d)(1) also allows farmer-producers to obtain limited

System financing for their other business needs in an amount that does

not exceed the market value of their agricultural or aquatic assets.

This regulatory approach would ensure that the amount of financing that

farmer-producers obtain from FCS banks and associations for non-farm

business needs would be proportionate to their investment in their

agricultural or aquatic activities.

For the purposes of proposed Sec. 613.3000(d), agricultural assets

include real estate, a home that is located on a farm or ranch,

equipment, chattel, and livestock. The proposed regulation contemplates

that the market value of agricultural assets would be determined at the

time of loan

[[Page 47107]]

application from the most credible source available to FCS

institutions. Because real estate, equipment, and livestock make up the

bulk of agricultural assets on most loan applications, appraisals and

collateral valuations would be the logical sources to support the

market value of the most material of these assets. Absent available

appraisals and valuations completed for the FCS institution, other

sources could serve as a basis for determining market value such as

county tax assessment values or real estate multiple listings. It is

not the FCA's intent to cause extra cost or regulatory burden on either

the FCS institution or the borrower in order to establish the market

value of agricultural assets for determining the level of financing

available from the System. Rather, a reasonable but credible valuation

performed by FCS institutions that can be supported and tested should

suffice for determining compliance with this subpart.

Proposed Sec. 613.3000(d)(2) would limit financing that farmer-

investors could obtain from the FCS for all of their other credit

needs, including housing and domestic needs, to the market value of

their agricultural assets. Such borrowers are not engaged in

agricultural production and own agricultural land as a passive

investment. As the FCA interprets the Act through its legislative

history, Congress did not intend that these farmer-investors have the

same access to the FCS for non-agricultural credit needs as farmer-

producers. Proposed Sec. 613.3000(d)(2) precludes farmer-investors from

obtaining FCS loans for their other credit needs in amounts that are

disproportionate to their investment in agriculture. The proposed

regulation imposes no restrictions on loans for agricultural or aquatic

purposes that farmer-investors may obtain from System banks and

associations, and therefore, farmer-investors would have increasing

access to the FCS for their other credit needs as their investment in

agriculture increases. Retired farmers, ranchers, and aquatic producers

and harvesters whose land is cultivated by others would be considered

farmer-producers, if they acquired their agricultural land originally

for agricultural production purposes rather than as an investment.

Non-resident foreign nationals are accorded the same treatment

under proposed Sec. 613.3000(d) as farmer-investors. Although such

borrowers are often active agricultural or aquatic producers, their

legal status imposes restrictions on their activities within the United

States. Prudence requires greater restrictions on these borrowers than

on farmer-producers who are citizens or permanent residents of the

United States.

Proposed Sec. 613.3000(d)(3) would continue to authorize System

banks and associations to finance the other credit needs of family farm

corporations and other small and medium sized legal entities that are

closely held by bona fide farmers, ranchers, and aquatic producers or

harvesters. Although all agricultural corporations would now become

eligible to borrow from Farm Credit banks and associations that operate

under titles I and II of the Act, the FCA intends that most large

agricultural borrowers could obtain System financing only for their

agricultural or aquatic needs. Under proposed Sec. 613.3000(d)(3),

legal entities could obtain System loans for their other credit needs

in an amount that does not exceed the market value of their

agricultural assets only if: (1) The securities of the borrower are not

traded on a public exchange; and (2) more than 50 percent of the assets

of the borrowing legal entity are used in agricultural or aquatic

production. The FCA believes that this approach would effectively

preclude System banks and associations from financing the other credit

needs of large agribusiness corporations and conglomerates.

The FCA requests comments on whether and how the final regulations

ought to distinguish among types of eligible farmers with respect to

financing other credit needs.

B. Financing of Processing or Marketing Operations

Sections 1.11(a) and 2.4(a) of the Act authorize FCBs, ACBs, and

their affiliated associations to finance the processing or marketing

operations of bona fide farmers, ranchers, and aquatic producers or

harvesters. According to the Act, the processing or marketing operation

must be ``directly related'' to the agricultural or aquatic activities

of the borrower. The Act also requires the borrower's agricultural or

aquatic activities to supply some portion of the throughput used in the

processing or marketing operations. The Act limits processing or

marketing loans to borrowers who supply less than 20 percent of the

throughput to 15 percent of the total outstanding loans, during the

preceding fiscal year, of: (1) The FCB or ACB; and (2) all associations

that are affiliated with the same funding bank.

The existing regulation, Sec. 613.3045, imposes certain

restrictions on financing for processing or marketing operations that

are not required by the Act or are no longer needed to ensure the

safety and soundness of the FCS. For example, additional compliance

thresholds presently exist for loans to borrowers who supply less than

50 percent of the throughput. A restriction that has been particularly

problematic relates to processing or marketing operations that have

different owners than the agricultural or aquatic operation providing

the throughput. Section 613.3045(b)(2)(iii) currently requires that the

entire ownership of the processing or marketing operation vest in

eligible borrowers. Many System banks and associations responded to the

Notice of Regulatory Burden by requesting relief from this 100-percent

ownership requirement. According to System commenters, processing or

marketing operations have become ineligible under the existing

regulation solely because of a slight change in ownership. FCS

institutions point out, for example, that a borrower who establishes an

employee ownership program can no longer borrow from the System.

The FCA now proposes to revise and redesignate this regulation, so

it more closely parallels the Act. The revised regulation,

Sec. 613.3010, will simply require that the processing or marketing

operation: (1) Be directly related to the borrower's agricultural or

aquatic activities; and (2) consistently process some throughput

produced by the borrower.

In an effort to reduce regulatory burden on FCS banks and

associations, the FCA proposes to repeal the additional requirements

that existing Sec. 613.3045(b)(2) imposes on borrowers who supply less

than 50 percent of the throughput to a processing or marketing

operation. The FCA believes that this regulatory requirement is no

longer necessary to interpret the Act since a statutory portfolio

limitation has replaced the statutory requirement that the borrower

supply at least 20 percent of the throughput.5 The FCA also

proposes to repeal Sec. 613.3045(e), which unnecessarily specifies

paperwork requirements for FCS institutions.

\5\Pub. L. No. 101-624, section 1832, 104 Stat. 3359 (1990).

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

The FCA's proposal would also relax the current requirement that

bona fide farmers, ranchers, and aquatic producers or harvesters own

100 percent of an eligible processing or marketing operation. Proposed

Sec. 613.3010(a)(1) clarifies that an eligible borrower includes a

legal entity in which a controlling interest is owned by individuals or

other legal entities that qualify as bona fide farmers, ranchers, or

aquatic producers or harvesters. The

[[Page 47108]]

controlling interest requirement in proposed Sec. 613.3010(a)(1)

implements sections 1.11(a)(1) and 2.4(a)(1) of the Act, which require

a processing or marketing operation to be directly related to the

agricultural or aquatic operations of the borrower. The FCA seeks

comments on whether the controlling interest requirement appropriately

implements the intent of the Act and provides sufficient guidance to

System lenders.

Proposed Sec. 613.3010(b) implements the portfolio restrictions

that sections 1.11(a)(2) and 2.4(a)(1) of the Act impose on loans to

borrowers who contribute less than 20 percent of the throughput used by

a processing or marketing operation. This provision would limit retail

loans that System banks and associations make to borrowers who supply

less than 20 percent of the throughput to 15 percent of outstanding

loans at the end of the preceding fiscal year for: (1) The funding

bank; and (2) all associations that are funded by the same FCB or ACB.

Proposed Sec. 613.3010(b) also retains the existing requirement in

Sec. 613.3045(d)(2) that each funding bank, in conjunction with its

affiliated associations, ensures that processing or marketing loans to

borrowers who supply less than 20 percent of the throughput are

equitably allocated among the associations.

The FCA believes the proposed regulation would better enable System

institutions to finance entities that contribute substantially to the

agricultural economy and rural communities and that increase the income

of America's farmers, ranchers, and aquatic producers or harvesters.

This proposal would ultimately benefit both producers and consumers by

providing competitive credit for this sector of the agricultural

economy and fostering economic development in rural areas.

C. Loans to Farm-Related Businesses

Sections 1.9(2), 1.11(c)(1), and 2.4(a)(3) of the Act authorize

FCBs, ACBs, and direct lender associations to finance ``persons

furnishing to farmers and ranchers farm-related services directly

related to their on-farm operating needs.'' Presently, Sec. 613.3050(a)

imposes an additional requirement that farm-related businesses furnish

``custom-type services'' that are directly related to on-farm operating

needs of farmers and ranchers. The term ``custom-type services'' is

defined by Sec. 619.9120 as the ``performance of on-farm functions on a

`for-hire' basis which farmers and ranchers typically have done for

themselves.'' Furthermore, to qualify under Sec. 613.3050(b)(2) a farm-

related business must sell only goods and inputs that ``are incident to

the services provided.'' Examples of farm-related services authorized

by this regulation include: (1) Spraying of crops; (2) harvesting; (3)

hauling agricultural commodities to grain elevators, livestock markets,

and other processing centers; (4) custom feed mixing operations; (5)

veterinary services; and (6) drying farm commodities.

The FCA has received numerous comments from the FCS about the

burdensome nature of Secs. 613.3050 and 619.9120. Many System

representatives have stated that the current regulatory requirements

too narrowly restrict the types of agricultural service businesses that

can qualify for FCS loans. Statistics about FCS loans to farm-related

businesses suggest that this may be true. Farm-related business loans

comprise less than 1 percent of all loans in the Farm Credit System,

and many FCS banks and their affiliated associations have no farm-

related business loans in their portfolios. These circumstances may

indicate that current Secs. 613.3050 and 619.9120 frustrate the ability

of System banks and associations to fund statutorily eligible and

creditworthy farm-related service businesses, and unnecessarily deny

many farm-related businesses competitive credit options.

To address this issue, the FCA is proposing a new regulation,

Sec. 613.3020, which would replace Secs. 613.3050(a), 613.3050(b), and

619.9120, with an eligibility standard for farm-related businesses that

is more closely aligned with the plain language of the Act. Under

proposed Sec. 613.3020(a), an individual or legal entity who furnishes

services to farmers and ranchers that are directly related to their

agricultural operations would be eligible to borrow from a Farm Credit

bank or association that operates under titles I or II of the Act.

Regulatory restrictions that are unnecessary to implement or interpret

sections 1.9(2), 1.11(c)(1), and 2.4(a)(3) of the Act would be

eliminated.

In 1979, the FCA acknowledged in the preamble to Sec. 613.3050 that

neither the literal language of the statute nor its legislative history

compel an eligible farm-related business to actually perform services

on the customer's property.6 At that time, however, the FCA did

not delete the ``on-farm'' requirement from the definition of ``custom-

type'' services in Sec. 619.9120. The FCA now proposes to delete the

definition of custom-type services which should dispel confusion

surrounding the ``on-farm'' requirement.

\6\44 FR 69631 (Dec. 4, 1979).

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

Furthermore, the Act does not specifically require eligible

borrowers to furnish only ``custom-type'' services to farmers and

ranchers. Although passages in the legislative history to the Farm

Credit Act of 1971 contain examples of various custom services that

farmers and ranchers may perform themselves, the FCA finds no evidence

that sections 1.11(c)(1) or 2.4(a)(3) of the Act actually preclude the

FCS from financing other types of services that are directly related to

agricultural production. In fact, agricultural producers today rely on

technologically advanced services that they cannot provide for

themselves, such as computer mapping of soil and crop conditions,

nutritional analysis for dairy production, and specialized animal

husbandry records and services. These technologically advanced services

enable farmers and ranchers to enhance their income by reducing costs,

increasing productivity, and meeting the growing demand of consumers

for improved food quality and specialty food products. The FCA believes

the ability of the FCS to finance such service providers strengthens

the agricultural economy of the United States.

A farm-related business is currently ineligible to borrow from a

Farm Credit bank or association under Sec. 613.3050(b)(2) unless

substantially all of the goods sold are consumed in the services that

the borrower provides to farmers and ranchers. As the FCA interprets

sections 1.11(c)(1) and 2.4(a)(3) of the Act and their legislative

history, a farm-related service business should not be automatically

ineligible for FCS loans simply because it also sells some goods that

are not incidental to its services. In the FCA's opinion, such a

disqualification defeats the statutory purpose of providing credit to

farm-related service businesses. For this reason, the FCA proposes to

repeal current Sec. 613.3050(b)(2).

The FCA proposes to rely on scope of financing provisions to ensure

that FCS banks and associations finance only farm-related businesses

that are eligible to borrow under sections 1.11(c)(1) and 2.4(a)(3) of

the Act. Proposed Sec. 613.3020(b) would require FCS banks and

associations to determine the extent of financing for an eligible farm-

related business by measuring the applicant's income on either a gross

sales or a net sales basis. More specifically, proposed

Sec. 613.3020(b)(1) would authorize financing of all the business needs

of an eligible farm-related business that derives more than 50 percent

of its

[[Page 47109]]

income, as determined on either a gross sales or net sales basis, from

furnishing agricultural services to farmers and ranchers. A borrower

who derives 50 percent or less of its income from furnishing

agricultural services could obtain System financing under proposed

Sec. 613.3020(b)(2) only for the agricultural services portion of its

business.

The FCA notes that this regulation would permit System banks and

associations to measure each borrower's income consistently on either a

gross sales or a net sales basis, as appropriate. System banks and

associations should experience no difficulty in complying with

Sec. 613.3020(b) because gross and net sales information is normally

provided in financial statements that a farm-related business submits

to support its credit request.

The FCA believes that proposed Sec. 613.3020 implements the

requirements of the Act without imposing unnecessary regulatory burdens

on the FCS or restricting its ability to offer competitive credit to

farm-related businesses. The FCA believes that this proposal would

provide System banks and associations and FCA examiners with clear and

appropriate regulatory guidance, and it would protect the interests of

System competitors by enforcing statutory restrictions.

The FCA proposes to delete Sec. 613.3015, which directs a Farm

Credit bank or association to determine the eligibility of an applicant

who both conducts agricultural or aquatic operations and owns a farm-

related business, using one or any combination of the criteria in the

existing regulations. The existing regulation is not needed to

interpret the Act nor to promote safety and soundness. Clearly,

sections 1.11(a) and 2.4(a) of the Act and proposed Sec. 613.3000

authorize FCS banks and associations to finance the ``other credit

needs'' of bona fide farmers, ranchers, and aquatic producers and

harvesters. For this reason, System banks and associations can finance

farm-related businesses that are owned by eligible agricultural or

aquatic producers under either proposed Secs. 613.3000 or 613.3020. The

FCA observes, however, that a System bank or association could not

finance the ``other credit needs'' of an eligible farm-related business

that is not owned by a bona fide farmer, rancher, or aquatic producer.

D. Non-farm Rural Home Loans

Sections 1.9(3), 1.11(b) and 2.4(b) of the Act authorize FCBs,

ACBs, and their affiliated associations to finance single-family,

moderately priced homes for residents of rural areas where the

population does not exceed 2,500 inhabitants. Sections 1.11(b)(2) and

2.4(b)(2) generally restrict non-farm rural home loans to 15 percent of

the total outstanding loans of each FCB, ACB, or association.

An existing regulation, Sec. 613.3040, implements this statutory

authority. The FCA now proposes to redesignate this regulation as

Sec. 613.3030 and revise it to provide greater flexibility to finance

non-farm rural homes to the extent allowed by the Act. This proposal

differs from the existing rural housing regulation in three ways.

First, it clarifies that rural housing loans do not encompass loans to

farmers and ranchers for their housing needs, because such loans are

properly classified as agricultural loans. Second, the regulation

revises and simplifies the criteria for determining whether a home is

moderately priced and located in a rural area, as the law requires.

Finally, the proposal eliminates regulatory restrictions that are not

needed for safety and soundness. The FCA also addresses specific issues

about non-farm rural home loans that commenters raised during the

Regulatory Burden comment period and in other forums.

1. Definition of Rural Homeowner

The FCA's proposal would clearly differentiate the authority of

System banks and associations to finance homes for agricultural and

aquatic producers from all other rural residents. Proposed

Sec. 613.3030(a)(1) would define an eligible rural homeowner as a

person who is not a bona fide farmer, rancher, or aquatic producer or

harvester within the meaning of proposed Sec. 613.3000(a)(2). The

definition of ``rural home'' in proposed Sec. 613.3030 would no longer

incorporate current Sec. 613.3040(e)(1), which requires either that

the: (1) Property lack the capacity to produce agricultural products on

a sustainable basis; or (2) borrower does not use the property for

agricultural purposes. These provisions were the regulatory mechanism

for ensuring that housing loans to farmers were considered agricultural

loans rather than rural home loans. The proposed regulations addresses

this issue by excluding farmers from the definition of rural homeowner.

The FCA also proposes to repeal existing Sec. 613.3040(e)(2), which

applies the price, locality, and portfolio restrictions in sections

1.11(b) and 2.4 (b)(1), (b)(2), and (b)(3) of the Act to home loans

that System banks and associations make to certain farmers, ranchers,

and aquatic producers and harvesters.

The FCA believes that this new approach will clarify the authority

of System lenders to finance homes for both agricultural and aquatic

producers and other rural residents and eliminate any confusion about

the scope of home lending authority. Under the FCA's proposal, Farm

Credit banks and associations would finance homes for both full-time

and part-time farmers, ranchers, and aquatic producers under proposed

Sec. 613.3000(d), while proposed Sec. 613.3030 would apply to home

loans that System lenders make to all other rural residents.

Because the Act affords certain benefits and applies certain

restrictions to agricultural loans and rural housing loans, it has been

important to classify home loans to farmers correctly. For example, the

homes of agricultural or aquatic producers are not required to be

moderately priced or located in communities where the population does

not exceed 2,500 inhabitants. In fact, neither the Act nor FCA

regulations require agricultural producers to live on the land that

they farm or ranch. As the FCA interprets the Act, home loans to

farmers are not subject to the portfolio limitations applicable to

rural housing loans.

The FCA notes that statutory borrower rights generally apply to all

loans to farmers, ranchers, and aquatic producers, including loans for

the purchase of a residence.\7\ Borrower rights do not, however, apply

to rural home loans.

\7\In some instances, the protections of another Federal law

will supplant the borrower rights provisions of the Act. For loans

covered by the Federal Truth in Lending Act (TILA), 15 U.S.C. 1601,

et seq., FCS lenders must provide the disclosures required by the

TILA in lieu of the effective interest rate disclosures that are

otherwise applicable to loans pursuant to subpart K of part 614. The

TILA applies to all loans for which the principal purpose is

residential housing, regardless of whether the loan is classified as

an agricultural or rural housing loan under FCA regulations.

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

All bona fide agricultural and aquatic producers are required by

section 4.3A(c)(1)(D)(i) of the Act to own voting stock in the FCS bank

or association that extends credit to them, including home loans. In

contrast, non-farm rural residents hold non-voting participation

certificates in FCS banks and associations.

2. Definition of Rural Home

Proposed Sec. 613.3030(a)(2) defines a ``rural home'' as a single-

family moderately priced dwelling located in a rural area that will

serve as the occupant's principal residence. Sections 1.11(b)(2) and

2.4(b)(1) of the Act explicitly limit the non-farm rural home financing

authority of FCS banks and associations to single-family moderately

priced houses. The proposed regulation deletes the requirement in

existing

[[Page 47110]]

regulations that System banks and associations finance only owner-

occupied homes, because this limitation does not appear in the Act. The

proposal retains, however, a requirement that the home be used as a

primary residence. This requirement would implement the Act's stated

intent that the System provide financing for housing for rural

residents. The FCA is concerned that an infrequently occupied vacation

home would not be compatible with Congressional intent. This change

will enable the System to finance moderately priced rural homes that

shall be used as the principal residence of either the borrower or

another rural resident. Thus, a borrower who intends to occupy the home

in the future, perhaps as a retirement residence, would be eligible for

financing so long as the house was leased to a tenant, in the interim,

as the tenant's principal residence.

The FCA proposes to remove the passage in Sec. 613.3040(a)(2) that

describes rural homes as ``conventional housing, modular housing, or

mobile homes which are related to a specific site.'' The FCA believes

that any type of dwelling that is moderately priced and located in a

rural area may be financed, so the passage is not necessary to

implement the Act. Section 613.3030(b) retains a provision that allows

a borrower to obtain financing from the System on only one home at any

one time. This limitation, which derives from the Act's legislative

history, prevents the System from financing rural housing developers.

The existing regulation, Sec. 613.3040(c), allows FCS banks and

associations to make loans to non-farm rural residents solely for the

purpose of buying, building, remodeling, improving, repairing a rural

home, and refinancing existing indebtedness thereon. System

representatives have frequently petitioned the FCA to remove this

restriction so that they can offer equity lines-of-credit loans to

rural homeowners.

The FCA observes that although home equity loans were not generally

available loan products when the rural home financing authority was

granted to the FCS in 1971, neither the Act nor FCA regulations

preclude revolving lines of credit secured by home equity. During the

intervening years, however, the residential mortgage markets have

developed so that home equity lines of credit are now standard loan

products that mortgage lenders routinely offer to their clientele. Home

equity loans would enable the rural home lending authority of the FCS

to reflect current market practices and would allow rural homeowners

who borrow from the FCS to have more flexibility in financing and

utilizing the equity in their homes.

The FCA believes line-of-credit loans are compatible with sections

1.11(b) and 2.4(b) of the Act and the current regulation, which

authorize System institutions to finance the housing needs of non-farm

rural residents. Furthermore, home equity loans would enable FCS banks

and associations to fulfill their mission of providing for an adequate

and flexible flow of credit for housing in rural areas. Homeowners in

rural communities often lack affordable credit options that are widely

available in metropolitan areas.

The FCA also observes that home equity loans are compatible with

the existing authority of production credit associations (PCAs) and

agricultural credit associations (ACAs) under section 2.4(b) of the Act

to take either a first or second lien on a rural home. Under existing

FCA regulations, FCBs, ACBs, Federal land credit associations (FLCAs),

and ACAs can, for certain purposes, make a line-of-credit loan that is

secured by a first lien on an unencumbered rural home that is occupied

by the borrower. Furthermore, an FCS long-term mortgage lender that

already holds the first lien on the property could take a second lien

to secure the home equity line-of-credit loan.

For these reasons, proposed Sec. 613.3030(b) would enable FCS banks

and associations to offer home equity loans to non-farm rural residents

in addition to the types of loans that are already authorized by

existing Sec. 613.3040(c). The FCA also proposes conforming revisions

to Sec. 614.4222. The FCA emphasizes that FCS lenders could only make

home equity line-of-credit financing on rural homes that comply with

the requirements of proposed Sec. 613.3030. The FCA fully expects home

equity loans to be prudently underwritten. The FCA notes that this

proposal would grant FCS institutions reasonable flexibility to make

rural home loans within the 15-percent portfolio limit that is imposed

by statute.

3. Definition of Rural Area

The FCA proposes to revise the regulatory definition of ``rural

area'' to provide a standard that is clear, consistent, and easy to

apply. The proposed definition will also eliminate the need for System

institutions to seek FCA guidance about whether a particular locality

is a ``rural area'' within the meaning of these regulations. Proposed

Sec. 613.3030(a)(3) defines a ``rural area'' as a designated territory

within a State or the Commonwealth of Puerto Rico, including

communities that have a population of not more than 2,500 inhabitants

based on the latest decennial census of the United States.

The United States Bureau of Census is an expert, official, and

neutral source for accurate and accessible information about the

demographics of rural areas. The United States census examines the

population density in each State and then classifies the territories

with 2,500 or fewer inhabitants as ``rural areas.'' The United States

Bureau of the Census does not utilize political boundaries to determine

whether an area is rural. The United States census often identifies

rural pockets (with 2,500 inhabitants or fewer) that are located inside

standard metropolitan statistical areas. The proposed regulation would

enable FCS banks and associations to finance non-farm housing in such

designated rural areas.

Proposed Sec. 613.3030(a)(3) would replace the definition of

``rural area'' in current Sec. 613.3040(a)(3). Census data satisfies

all of the criteria for ``rural areas'' that are specified by existing

Sec. 613.3040(a)(3). This proposal would also delete the current

regulatory requirement that the FCA approve rural areas that include

``towns'' where the population exceeds 2,500 people. Since 1971, the

FCA has acted on only a few requests to approve rural areas including

such towns. Moreover, the FCA believes that the Bureau of the Census

designation of a ``rural area'' may provide significantly more reliable

and flexible data for System institutions because it disregards

political boundaries and is updated to reflect changing conditions.

4. Definition of Moderately Priced

The FCA also proposes to replace the definition of ``moderately

priced'' housing in existing Sec. 613.3040(c)(2) with new

Sec. 613.3030(a)(4). The revised definition would provide System banks

and associations with a clear standard for determining whether a rural

home is ``moderately priced.'' The FCA proposes a two-part definition

for ``moderately priced'' rural homes. The first part is a safe-harbor

provision for rural home loans that qualify under section 8.0(1)(B) of

the Act for programs of the Federal Agricultural Mortgage Corporation

(Farmer Mac). Loans qualify as collateral for Farmer Mac securities if

they are secured by rural homes that are located in communities of

fewer than 2,500 inhabitants and have a purchase price of not more than

$100,000, as adjusted for inflation. Thus, a rural home would be

considered ``moderately priced'' for the purposes of

[[Page 47111]]

proposed Sec. 613.3030(a)(4)(i) if the loan complies with Farmer Mac's

underwriting standards.

The second alternative, proposed Sec. 613.3030(a)(4)(ii), allows

Farm Credit banks and associations to finance rural homes that are

below the 75th percentile of housing values, ranked from the lowest

value to the highest value in the rural area where it is located, as

published by the United States Bureau of the Census in the most recent

edition of the Census of Housing, General Housing Characteristics. This

provision will enable the FCS to finance homes valued in excess of

$100,000 in areas in which such homes are still properly considered as

moderately priced.

The FCS relied on a similar model until the early 1980's. At the

time, the FCA provided administrative guidance to the System by

annually publishing an upper limit for moderately priced housing. The

upper value of moderately priced housing was derived from housing

prices throughout the United States, stratified from the lowest to the

highest sales figures. The FCA's proposal provides a more appropriate

and accurate measure of ``moderately priced'' housing, because it

examines housing prices in the designated rural areas where the

property is located, rather than the entire United States.

In most designated rural areas with a population between 1,000 and

2,499 persons, the 75th percentile for housing prices does not exceed

the Farmer Mac threshold of $100,000, as adjusted for inflation. As a

result, most of the rural housing in the United States would satisfy

either provision of proposed Sec. 613.3030(a)(4). However, when the

75th percentile for home prices in designated rural areas exceeds

$100,000, as adjusted for inflation, System institutions could finance

homes that satisfy the criteria of proposed Sec. 613.3020(a)(4)(ii) and

still comply with Congressional intent that the System finance only

moderately priced homes.

The FCA proposes to delete Sec. 613.3040(c), and instead rely on

Sec. 614.4210(b), which authorizes System mortgage lenders to lend up

to 97 percent of the appraised value of the security property if the

loan is guaranteed by a Federal, State, or other government agency.

This would permit FCS mortgage lenders to finance low-equity rural home

borrowers when the loan is guaranteed by a Federal, State or other

government agency.

5. Portfolio Limitations

Both new Sec. 613.3030(c) and existing Sec. 613.3040(d)(2)

implement sections 1.11(b)(2) and 2.4(b)(2) of the Act, which limit

non-farm rural home loans to 15 percent of the total outstanding loans

of each FCS bank or association. Although the FCA has rewritten these

provisions to enhance their clarity, the substantive requirements of

existing Sec. 613.3040(d)(2) remain the same. Proposed

Sec. 613.3030(c)(1) continues to restrict the rural home portfolio of

each FCB or ACB to 15 percent of its total outstanding loans at any one

time. Under proposed Sec. 613.3020(c)(2), rural home loans by each

direct lender association could not exceed 15 percent of its total

outstanding loans at the end of its preceding fiscal year, except with

the prior approval of its funding bank. Proposed Sec. 613.3030(c)(3)

restricts the aggregate of rural home loans made by all direct lender

associations that are funded by the same Farm Credit bank to 15 percent

of the total outstanding loans of all such associations at the end of

the funding bank's preceding fiscal year.

6. Other Deletions

The FCA proposes to delete the existing program limitations in

Sec. 613.3040(d)(1) and (d)(3). Existing Sec. 613.3040(d)(1) is

obsolete because it prohibits rural home lending in each Farm Credit

district without the approval of the now-defunct district boards.8

Moreover, no provision of the Act requires associations to obtain

approval from their funding bank or the FCA before they can exercise

their statutory authority to make rural home loans.

\8\The district boards were abolished by Pub. L. No. 100-399,

section 409(d), 102 Stat. 989, 1003, (August 17, 1988).

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

Finally, the FCA proposes to delete Sec. 613.3040(d)(3), which

states that ``agricultural loans shall receive priority to the

exclusion of rural home loans'' if loan funds for the System are

curtailed. This provision derives from a commitment that the FCA gave

to Congress in 1971, when System banks and associations were first

granted authority to finance non-farm rural homes.9 The FCA

continues to adhere to this commitment. However, existing

Sec. 613.3040(d)(3) is a policy statement, rather than an enforceable

regulatory provision. If a crisis curtails the ability of the FCS to

meet the credit demands of agricultural and aquatic producers, the FCA

Board would use its statutory authorities to ensure that the credit

needs of agricultural and aquatic producers are given priority.

\9\ S.R. 92-307, 92nd Cong., 1st. Sess., (July 27, 1971), p. 6.

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

III. Eligibility and Scope of Financing Under Title III of the Act

The FCA proposes to revise and clarify regulations that govern

eligibility and scope of financing for BCs and ACBs. The proposed

regulations will implement provisions of the Farm Credit Banks and

Associations Safety and Soundness Act of 199210 (1992 Act) and the

Farm Credit System Agricultural Export and Risk Management Act11

(1994 Act) that expand the ability of BCs and ACBs to finance: (1)

Cooperatives; (2) their parents, subsidiaries, and other entities in

which eligible cooperatives hold an ownership interest; and (3) water

and waste disposal facilities. The FCA also proposes to amend these

regulations so that BC and ACB loans to rural electric and

telecommunication utilities are compatible with recent revisions to the

Rural Electrification Act of 1936, 7 U.S.C. 901 et seq.

\10\Pub. L. No. 102-552, 106 Stat. 4102, (Oct. 28, 1992).

\11\Pub. L. No. 100-376, 108 Stat. 3497, (Oct. 19, 1994).

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

This proposal retains the format in which the domestic lending

authorities and international lending authorities of these banks are

addressed in two separate regulations. The FCA proposes to redesignate

current Sec. 613.3110, however, as new Sec. 613.3100, and to rearrange

this regulation so it addresses eligibility, and when appropriate,

purposes for financing for each of the following classes of domestic

borrowers: (1) Cooperatives, their parents, subsidiaries, and other

related entities that serve farmers, ranchers, and aquatic producers

and harvesters; (2) electric and telecommunications utilities; (3)

water and waste disposal facilities; and (4) domestic lessors.

Similarly, the FCA proposes to redesignate Sec. 613.3120 as new

Sec. 613.3200, which will clearly delineate eligibility and purposes

for financing for the following categories of international loan

transactions: (1) Imports; (2) exports; and (3) international business

transactions.

Current Sec. 613.3005(b) will be deleted by this proposal because

it prescribes business objectives and management practices. From the

FCA's perspective, Sec. 613.3005(b) is not necessary to implement or

interpret the Act or to promote safety and soundness.

A. Eligibility and Scope of Financing for Domestic Loans

1. Cooperatives and Related Entities That Serve Agricultural and

Aquatic Producers

Proposed Sec. 613.3100 streamlines the provisions in current

Sec. 613.3110 which

[[Page 47112]]

authorize BCs and ACBs to lend to cooperatives and related entities

that serve farmers, ranchers, and aquatic producers and harvesters. The

eligibility provisions for this class of borrowers are scattered

throughout paragraphs (a), (b), (c) and (d) of the current regulation.

The FCA proposes to consolidate these requirements for agricultural and

aquatic cooperatives, their parents, subsidiaries, and other related

entities into Sec. 613.3100(b). Except to the extent that proposed

Sec. 613.3100(b) incorporates recent statutory amendments that expand

the authority of BCs and ACBs to lend to cooperatives and their

affiliates, this reorganization is not intended to alter the substance

of the current regulation.

Proposed Sec. 613.3100(a)(1) defines a cooperative as any

association of farmers, ranchers, producers or harvesters of aquatic

products, or any federation of such associations, which conducts

business for the mutual benefit of its members and has the power to:

(1) Process, prepare for market, handle, or market farm or aquatic

products; (2) purchase, test, grade, process, distribute, or furnish

farm or aquatic supplies; or (3) furnish business or financially

related services to their members.

The FCA proposes to revise the definition of service cooperative in

current Sec. 613.3110(a)(4) so that it more closely reflects the

language of the Act. Under the current regulation, an eligible service

cooperative is ``predominately involved in providing specialized

business services related to the agricultural or aquatic business

operation of farmers, ranchers, or producers and harvesters of aquatic

products, or cooperatives.'' This regulatory definition is more

restrictive than section 3.8(a) of the Act, which only requires such

cooperatives to furnish ``farm or aquatic business services or

services'' to their members. Because the Act does not require eligible

service cooperatives to serve only the agricultural or aquatic business

operations of their members, proposed (and redesignated)

Sec. 613.3100(a)(5) would enable BCs and ACBs to finance service

cooperatives that are predominately involved in providing both business

services and financially related services to farmers, ranchers, aquatic

producers and harvesters, or cooperatives. Cooperatives that satisfy

the criteria in proposed Sec. 613.3100(b)(1) are eligible to borrow

from a BC or ACB.

Proposed Sec. 613.3100(b)(1)(i) implements section 3.8(a)(4) of the

Act, which requires agricultural and aquatic producers to hold a

specified percentage of the voting control of an eligible cooperative.

Generally, both the Act and the regulation require agricultural and

aquatic producers to hold at least 80 percent of the voting control of

cooperatives that are eligible to borrow under title III of the Act.

However, section 3.8(a)(4) of the Act and Sec. 613.3100(b)(1)(i) reduce

the minimum voting control threshold of agricultural and aquatic

producers in service cooperatives and certain farm supply cooperatives

to 60 percent. Both the current and proposed versions of this

regulation allow the board of directors of a BC or ACB to adopt

resolutions that impose a higher voting control threshold on any type

of cooperative. The FCA proposes to delete the remainder of current

Sec. 613.3110(b)(2), which prescribes detailed procedures about how BCs

and ACBs should: (1) Treat all eligible cooperatives equitably; (2)

compel borrowers to make good faith representations about voting

control by agricultural and aquatic producers; and (3) document voting

control of eligible cooperatives in certain circumstances. Such

regulatory prescriptions are deemed unnecessary for the enforcement of

eligibility limitations.

Proposed Sec. 613.3100(b)(1)(ii) retains, with minor stylistic

revisions, the current statutory requirement that each cooperative deal

in farm or aquatic products or products processed therefrom, farm or

aquatic supplies, farm or aquatic business services, or financially

related services with or for members in an amount at least equal in

value to the total amount of such business that it transacts with or

for nonmembers. Transactions with the United States, its agencies and

instrumentalities, and public utilities are excluded from the amount of

business that a cooperative conducts with either members or nonmembers.

Redesignated Sec. 613.3100(b)(1)(iii) retains, without substantive

amendment, the requirements in section 3.8(a) of the Act and current

Sec. 613.3110(b)(4) that: (1) No member of an eligible cooperative has

more than one vote because of the amount of stock or membership capital

owned therein; or (2) an eligible cooperative restricts dividends on

stock or membership capital to 10 percent per year, or the maximum

percentage per year permitted by applicable State law, whichever is

less.

Proposed Sec. 613.3100(b)(2) enables legal entities that are

affiliated with eligible cooperatives to borrow from BCs and ACBs.

Under proposed Sec. 613.3100(b)(2)(i), any legal entity that holds more

than 50 percent of the voting control of any eligible cooperative may

borrow from a BC or ACB as long as it uses the loan proceeds to fund

the activities of its cooperative subsidiary on the terms and

conditions specified by the bank. Any legal entity in which an eligible

cooperative has an ownership interest would be eligible to borrow from

a BC or ACB under proposed Sec. 613.3100(b)(2)(ii). This provision of

the regulation reflects section 3(B) of the 1994 Act, which authorizes

BCs and ACBs to finance, for the first time, legal entities in which

the ownership interest of eligible cooperatives is less than 50

percent. However, the amount of financing that a BC or ACB can provide

to entities in which eligible cooperatives hold less than a 50-percent

ownership interest under section 3.7(b)(2)(A)(ii) of the Act and

proposed Sec. 613.3100(b)(2)(ii) cannot exceed the percentage that

eligible cooperatives own in the entity multiplied by the value of the

entity's total assets. For example, an entity with $100 million in

total assets that is 45-percent owned by eligible cooperatives could

receive financing from a BC or ACB that does not exceed $45 million.

Proposed Sec. 613.3100(b)(2)(iii) derives from section 506 of the

1992 Act, which authorizes BCs and ACBs to finance creditworthy, non-

profit service cooperatives and their subsidiaries, if they benefit

agriculture in furtherance of the welfare of the farmers, ranchers, and

aquatic producers and harvesters who are its members. Many of the

cooperative eligibility criteria in Sec. 613.3100(b)(1) apply to this

new class of borrowers. First, only eligible service cooperatives and

their subsidiaries qualify for loans under proposed

Sec. 613.3100(b)(2)(iii). The regulation requires farmers, ranchers,

and aquatic producers and harvesters to hold at least 60 percent of the

voting control in a service cooperative which is either the borrower,

or the borrower's parent. Second, eligibility under proposed

Sec. 613.3100(b)(2)(iii) is predicated upon compliance with proposed

Sec. 613.3100(b)(1)(iii), which requires cooperatives to either: (1)

Operate on the principle of one person, one vote; or (2) restrict

dividends on stock or membership capital to 10 percent per year, or the

maximum percentage per year permitted by applicable State law,

whichever is less. Neither section 3.8(b)(1)(D) of the amended Act, nor

Sec. 613.3100(b)(2)(iii) of the proposed regulations require this

category of borrowers to transact more business with members than non-

members.

2. Electric, Telecommunications, and Cable Television Utilities

The FCA proposes to update and consolidate the regulations that

authorize BCs and ACBs to finance

[[Page 47113]]

public utilities that provide electric, telecommunication, and cable

television services in rural areas. Section 1322 of the Food Security

Act of 198512 significantly expanded the authorities of the BCs

(and subsequently the ACBs) to finance rural utilities. Prior to 1985,

only electric and telephone cooperatives in which agricultural or

aquatic producers held 60 percent of the voting control were eligible

for loans under title III of the Act. After 1985, any rural electric or

telephone utility that qualifies for financing from either the former

Rural Electrification Administration (now the Rural Utilities Services

(RUS)), or the Rural Telephone Bank (RTB) of the United States

Department of Agriculture is eligible to borrow under section

3.8(b)(1)(A) of the Act. Section 3.8(b) of the Act allows the corporate

parents, subsidiaries, and other related entities of such rural

utilities to borrow from BCs and ACBs, as well.

\12\Pub. L. No. 99-198, section 1322, 99 Stat. 1534 (Dec. 23,

1985).

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

The statutory eligibility standards for rural electric and

telecommunication utilities are incorporated into Sec. 613.3100(c)(1)

of the proposed regulation, which consolidates all of the rural

utilities eligibility and scope of financing provisions that are now

scattered throughout paragraphs (c)(1), (c)(2), and (c)(3) of existing

Sec. 613.3110.

Utilities cooperatives in which at least 60 percent of the voting

control vests with agricultural or aquatic producers continue to

separately qualify for BC and ACB loans under section 3.8(a)(4)(A) of

the Act. State laws usually require utilities to provide electric or

telephone service to all inhabitants of a specific geographic

territory. As a result of the growth of the non-farm population in

rural areas, virtually no utility cooperative still satisfies the

statutory requirement that farmers, ranchers, and aquatic producers

comprise at least 60 percent of its membership. The FCA understands

that BCs and ACBs no longer receive loan applications from borrowers

who meet the criteria of section 3.8(a)(4)(A) of the Act. Therefore,

the FCA proposes to delete specific references in the regulations to

this class of borrowers. However, the FCA notes that utility

cooperatives in rural areas almost always satisfy the less stringent

eligibility criteria of the RUS or the RTB. As a result, BCs and ACBs

now lend exclusively to borrowers who are eligible for RUS or RTB

loans.

Redesignated Sec. 613.3100(c)(1)(ii) makes minor stylistic edits to

existing Sec. 613.3110(c)(3), which authorizes BCs and ACBs to finance

any legal entity that holds more than 50 percent of the voting control

of any eligible electric or telecommunication utility if the borrower

uses the proceeds of the loan to fund the activities of its subsidiary

on the terms and conditions specified by the bank. The subsidiaries and

other entities in which eligible utility borrowers hold an ownership

interest also qualify for BC and ACB loans under amended section

3.7(b)(2)(A)(ii) of the Act and proposed Sec. 613.3100(c)(1). However,

when eligible rural electric and telecommunication utilities own less

than 50 percent of another entity, section 3.7(b)(2)(A)(ii) of the Act

and proposed Sec. 613.3100(c)(3) limit bank financing to an amount that

does not exceed the ownership percentage multiplied by the total assets

of such entity.

The FCA proposes that Sec. 613.3100(a)(3) and (c) refer to

``telecommunication,'' rather than ``telephone'' services. This

proposed revision reflects the fact that Congress recently amended the

definition of ``telephone service'' in section 203(a) of the Rural

Electrification Act of 1936, 7 U.S.C. 924(a), to encompass new

telecommunication technologies.13 Whereas 7 U.S.C. 924(a)

previously defined ``telephone services'' as communications ``through

the use of electricity between the transmitting and receiving

apparatus,'' the statute now refers to communications ``by wire, fiber,

radio, light, or other visual or electromagnetic means.'' As a result,

cellular, facsimile, cable television, speed data services and other

technologically advanced communication services are increasingly

available in rural areas. Accordingly, proposed Sec. 613.3100(c)(2)

authorizes BCs and ACBs to finance these new telecommunication

technologies and services.

\13\Pub. L. No. 101-624, section 2354, 104 Stat. 4039, (Nov. 28,

1990).

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

Proposed Sec. 613.3100(c)(2) would authorize BCs and ACBs to extend

credit to eligible borrowers so they can provide electric or

telecommunication services in rural areas. Although the eligibility of

rural utilities to borrow from a BC or ACB is now based primarily upon

their eligibility for RUS or RTB loans, the purposes for financing for

utilities is not directly governed by the Rural Electrification Act of

1936 as amended. Section 203(a) of the Rural Electrification Act of

1936, as amended, 7 U.S.C. 924(a) expressly prohibits cable television

carriers from obtaining loans from the RUS or RTB. However, section

3.7(b)(2)(A)(ii) of the Act permits BCs and ACBs to finance affiliated

entities that facilitate the business operations of eligible rural

electric or telephone utilities. For this reason, proposed

Sec. 613.3100(c)(2) would authorize BCs and ACBs to finance an eligible

subsidiary of an electric or telecommunication utility that is licensed

to provide cable television services in a designated rural community.

3. Water and Waste Disposal Facilities

In 1990, Congress added section 3.7(f) to the Act,14 granting

BCs and ACBs new authorities to finance water and waste disposal

facilities in rural areas where the population does not exceed 20,000

inhabitants. The 1992 Act expanded the scope of financing so that BCs

and ACBs could also finance the maintenance and operations of such

water and waste disposal facilities.15 The FCA proposes to add a

provision to the regulation that will reflect this new statutory

authority.

\14\Pub. L. No. 101-624, section 2323(a), 104 Stat. 4013, (Nov.

28, 1990).

\15\Pub. L. 102-552, section 505, 106 Stat. 4131, (Oct. 28,

1992).

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

Under proposed Sec. 613.3100(d)(1), a cooperative, or a public,

quasi-public agency, body, or other public or private entity that under

the authority of State or local law establishes and operates water and

waste disposal facilities in a rural area would be eligible to borrow

from a BC or ACB. For the purposes of proposed Sec. 613.3100(d), a

rural area is defined by statute as all territory of a State that is

not within the outer boundary of any city or town having a population

of more than 20,000 inhabitants based on the latest decennial census of

the United States. Proposed Sec. 613.3100(d)(2) would authorize BCs and

ACBs to extend credit to these borrowers for the installation,

maintenance, expansion, improvement, or operation of rural water and

waste disposal facilities.

4. Loans to Domestic Lessors

The FCA proposes to redesignate existing Sec. 613.3110(c)(4) as new

Sec. 613.3100(e). Under this provision, a BC or ACB may extend credit

to domestic parties to finance the acquisition of facilities or

equipment that will be leased to shareholders of the bank for use in

their operations within the United States. The lease customers of

eligible borrowers include any cooperative, rural electric or

telecommunication utility, or water or waste disposal facility that is

a shareholder of the BC or ACB. The corporate parents and subsidiaries

of

[[Page 47114]]

cooperatives and rural electric and telecommunication utilities may

also lease from the borrower. The FCA observes that the authority of

BCs and ACBs to make loans to domestic lessors is separate and distinct

from the banks' authority to lease equipment to their shareholders

under section 3.7(a) of the Act.

5. Status of Certain Borrowers

Section 3.8(b)(4) of the Act preserves the eligibility of existing

BC or ACB borrowers despite adverse changes in the law. Existing

Sec. 613.3110(b)(5) ``grandfathers'' parties who were actual BC

borrowers on May 17, 1972. The FCA believes that it is no longer

necessary for this regulation to contain a ``grandfather'' clause

because the statute adequately protects such borrowers. The eligibility

of current BC and ACB borrowers will not be adversely affected by the

removal of this regulatory provision.

B. Eligibility and Scope of Financing for International Loan

Transactions

The FCA proposes new Sec. 613.3200, which implements the expanded

statutory authority of BCs and ACBs to finance the import, export, and

international business transactions of cooperatives and other eligible

borrowers. The FCA proposes substantial revisions to the existing

regulation in order to reflect the provisions in the 1994 Act and

enhance the regulation's clarity. The FCA also proposes several

conforming and technical amendments to Secs. 614.4010(d), 614.4020(a),

614.4233, and subpart Q of part 614 to reflect the expanded

international lending authorities of BCs and ACBs.

Proposed Sec. 613.3200(a) would define ``farm supplies'' only for

import and export loan transactions. Under this proposal, ``farm

supplies'' refers to inputs that are used in a farming or ranching

operation, but excludes agricultural processing equipment, machinery

used in food manufacturing, or other capital goods which are not used

in a farming or ranching operation. This definition of ``farm

supplies'' is consistent with the legislative history of the 1994 Act

which indicates that Congress did not intend the BCs and ACBs to use

their international lending authorities to finance the import or export

of capital equipment and machinery.16

\16\140 Cong. Rec. S14236 (daily ed. Oct. 5, 1994) (Colloquy

between Senators Leahy and Lugar).

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

1. Import Transactions

The 1994 Act did not alter the eligibility and scope of financing

requirements for agricultural, aquatic, and farm supply imports that

are financed by a BC or ACB. Although the FCA's proposal restructures

the existing regulation by consolidating all of the eligibility and

scope of financing requirements for import transactions into

Sec. 613.3200(b), the FCA has not changed the substance of current

Sec. 613.3120. The proposed regulation continues to authorize BCs and

ACBs to finance the import of agricultural commodities or products

therefrom, aquatic products, and farm supplies into the United States

for: (1) An eligible cooperative; (2) a counterparty with respect to a

specific import transaction with a voting stockholder of the bank for

the substantial benefit of the shareholder; and (3) any foreign or

domestic legal entity in which eligible cooperatives hold an ownership

interest.

2. Export Transactions

Section 3 of the 1994 Act expanded the authority of the BCs and

ACBs to finance parties who facilitate the export of agricultural and

aquatic products and farm supplies from the United States to foreign

countries. As amended, section 3.7(b)(2)(A) of the Act extends

eligibility for such export loans beyond eligible cooperatives, their

related entities and counterparties, to any domestic or foreign party,

provided that the BC or ACB gives priority, to the extent feasible, to

cooperatively sourced products, commodities, and supplies. The statute

imposes limits on BC and ACB financing of exports that are not both:

(1) Originally sourced from cooperatives; and (2) guaranteed or insured

in an amount that equals or exceeds 95 percent of the loan amount by an

entity of the United States Government.

These new statutory requirements are incorporated into proposed

Sec. 613.3200(c), which provides that the total amount of balances

outstanding on loans that are not originally sourced from cooperatives

and at least 95-percent guaranteed by the Federal government shall not,

at any time, exceed 50 percent of the bank's capital. Furthermore, both

the Act and the regulation require the board of directors of each BC

and ACB to adopt policies and procedures that ensure that exports of

agricultural products and commodities, aquatic products, and farm

supplies which originate from eligible cooperatives are financed on a

priority basis.

3. International Business Transactions

Prior to 1994, section 3.7(b) of the Act authorized BCs and ACBs to

finance only the domestic and foreign legal entities that facilitated

the import and export transactions of their cooperative owners. As

amended by section 3 of the 1994 Act, this statutory provision now

authorizes BCs and ACBs to extend credit to any domestic or foreign

legal entity that facilitates the foreign business operations of an

eligible cooperative that holds an ownership interest in it. This new

statutory authority is incorporated into proposed Sec. 613.3200(d). The

FCA observes that this new authority will enable BCs and ACBs to assist

their cooperative customers in developing overseas markets for American

agricultural and aquatic exports, which in turn, will ultimately

increase the income of America's farmers, ranchers, and aquatic

producers.

4. Restrictions

Proposed Sec. 613.3200(e) contains restrictions that the Act

imposes on the international lending authorities of BCs and ACBs. When

eligible cooperatives own less than 50 percent of a foreign or domestic

legal entity, section 3.7(b)(2)(A)(ii) of the Act and proposed

Sec. 613.3200(e)(1) limit the amount of financing that a BC or ACB may

provide to the affiliated entity for any import, export, or

international business transaction, to the percentage of ownership that

such cooperatives hold in such entity multiplied by the value of the

entity's total assets. Furthermore, section 3.7(b)(2)(B) and proposed

Sec. 613.3200(e)(2) prohibit BCs and ACBs from financing the relocation

of any plant or facility from the United States to a foreign country.

IV. Similar Entities

In 1992, Congress granted FCS banks operating under title III of

the Act new authority to participate in loans made by non-System

lenders to ``similar entities.''17 Section 2 of the 1994 Act

clarified this new authority,18 while section 5 of the 1994 Act

granted similar loan participation powers to Farm Credit banks

operating under title I of the Act and direct lender

associations.19 As amended, sections 3.1(11)(B) and 4.18A of the

Act grant System banks and associations broader authorities pertaining

to eligibility and loan

[[Page 47115]]

participations. The FCA proposes Sec. 613.3300 to provide FCS banks and

direct lender associations with guidance about the scope of their new

authorities.

\17\Pub. L. No 102-552, section 502, 106 Stat. 4130 (Oct. 28,

1992).

\18\Pub. L. No. 103-376, section 2, 108 Stat 3497, (Oct. 19,

1994).

\19\Pub. L. No. 103-376, section 5, 108 Stat 3497, (Oct. 19,

1994).

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

Both sections 3.1(11)(B)(iv) and 4.18A(a)(1) of the Act define

``participate'' and ``participation'' to mean ``multilender

transactions, including syndications, assignments, loan participations,

subparticipations, other forms of the purchase, sale, or transfer of

interests in loans, or other extensions of credit, or other technical

and financial assistance.'' The FCA proposes to incorporate this

statutory definition into Sec. 613.3300(a)(1). The FCA emphasizes that

this definition would apply only to loan participations between FCS and

non-System lenders under sections 3.1(11)(B) and 4.18A of the Act and

proposed Sec. 613.3300. For all transactions under sections 1.5(12),

2.2(13), and 3.1(11)(A) of the Act and subpart H of part 614, ``loan

participation'' is defined by Sec. 614.4325(a)(4) as a ``fractional

undivided interest in the principal amount of the loan.''

The proposed regulation would authorize FCS banks and associations

to provide related services to similar entities. The FCA observes that

the plain language of sections 3.1(11)(B)(iv) and 4.18A(a)(1) of the

Act permits FCS banks and associations to provide ``technical and

financial assistance'' to similar entities. Accordingly, the FCA

proposes a conforming amendment to Sec. 618.8005 to reflect this new

statutory authority. The FCA invites comments about whether the final

regulation ought to provide further guidance about this financially

related service authority.

Sections 3.1(11)(B)(ii) and 4.18A(a)(2) identify a ``similar

entity'' as a party that is ineligible for a loan from an FCS bank or

association, but has operations that are ``functionally similar'' to

the activities of eligible borrowers. An entity is functionally similar

to an eligible borrower if it derives a majority of its income from, or

a majority of its assets are invested in, the conduct of the activities

that are functionally similar to the activities that are conducted by

eligible parties. The FCA proposes in Sec. 613.3300(a)(2) a definition

of similar entity that is closely aligned with the statutory

definition.

Proposed Sec. 613.3300(b) reflects sections 3.1(11)(B)(ii) and

4.18A(a)(2) of the Act, which the FCA interprets to mean that the

borrower is ineligible under sections 1.9, 1.11, 2.4, 3.7 and 3.8 of

the Act to borrow directly from a System bank or association, but has a

credit need that an FCS lender could finance for an eligible borrower.

Section 4.18A(b)(4) of the Act expressly precludes Farm Credit banks

operating under title I of the Act and direct lender associations from

participating in rural home loans under this similar entity authority.

For illustration purposes, the parties who qualify as similar

entities under sections 3.1(11)(B) and 4.18A of the Act and the

proposed regulations are presented below. The FCA solicits comments

about whether the final regulation should provide a specific listing of

the parties who qualify as similar entities. Farm Credit banks and

direct lender associations that operate under titles I or II of the Act

would be authorized to participate with non-System lenders in loans to:

(1) Parties who are ineligible to borrow under Sec. 613.3000 but

require financing for any agricultural or aquatic purpose; (2) any

individual, cooperative, and other legal entity that processes or

markets agricultural or aquatic products, but supplies no throughput

from an agricultural or aquatic operation; (3) a processing or

marketing operation in which farmers, ranchers or aquatic producers do

not hold a controlling interest; and (4) parties who are ineligible to

borrow under proposed Sec. 613.3020, but operate farm or aquatic supply

businesses that furnish services, farm or aquatic equipment, and other

goods that are directly related to the agricultural or aquatic

operations of farmers, ranchers, and aquatic producers or harvesters.

The FCA believes that title III lenders could participate in loans

made by non-System lenders to four types of ``similar entities.''

First, BCs and ACBs could participate in loans to any legal entity that

is not part of a cooperative enterprise, but: (1) Processes, prepares

for market, handles, or markets farm or aquatic products; (2)

purchases, tests, grades, processes, distributes, or furnishes farm or

aquatic supplies; or (3) furnishes business and financially related

services primarily to farmers, ranchers, and aquatic producers or

harvesters. Second, BCs and ACBs could participate in loans to electric

utilities that provide some service in rural communities, but for some

reason are ineligible to participate in RUS programs. Third, BCs and

ACBs could participate in loans to independent power producers, so long

as they sell more than 50 percent of the electricity that they generate

to rural electric utilities that are eligible for RUS loans. Finally,

BCs and ACBs could participate in loans that finance the import of

agricultural commodities and products, aquatic products, and farm

supplies for borrowers who are not eligible cooperatives, their

subsidiaries, or their counterparties.

Section 4.18A(b) of the Act allows each FCB, ACB, and direct lender

association to ``participate in any loan of a type otherwise authorized

under title I or II made to a similar entity * * *.'' The FCA

interprets this passage to mean that similar entity loans should still

be compatible with the basic lending powers of each Farm Credit bank or

association. In other words, section 4.18A(b) of the Act would, for

example, authorize FLCAs to participate only in similar entity loans

that are: (1) Secured by a first lien on real estate; and (2) mature

within not fewer than 5 years, nor more than 40 years. Similarly, this

statutory provision would permit PCAs to participate only in operating

loans that mature within the time prescribed in section 1.10(b) of the

Act. Accordingly, Sec. 613.3300(c) reflects the FCA's interpretation of

section 4.18A(b) of the Act. In the FCA's opinion, the above-cited

passage in section 4.18A(b) of the Act is compatible with sections

1.5(12)(C) and 2.2(13) of the Act, which authorize FCS banks and direct

lender associations to participate with non-System lenders only in the

type of loans that such FCS institutions could originate.

Proposed Sec. 613.3300(d) implements the restrictions that sections

3.1(11)(B)(i) and 4.18A(b) of the Act impose on loan participations to

similar entities. Proposed Sec. 613.3300(d)(1) reflects statutory

lending limits for loan participations to similar entities. Under

proposed Sec. 613.3300(d)(1)(i)(A), the total amount of all loan

participations that any FCB, ACB, or direct lender association may have

outstanding under proposed Sec. 613.3300(b)(1) to a single credit risk

could not exceed 10 percent of its total capital. However, proposed

Sec. 613.3300(d)(1)(i)(B) would authorize the shareholders of any FCB,

ACB, or direct lender to approve a higher lending limit, provided it

does not exceed 25 percent of the institution's total capital. This

provision would implement section 4.18A(b)(1) of the Act, which

authorizes the FCA to permit a higher limit that would apply if

shareholders approve. This proposal is consistent with the lending

limits that FCA has established for loans to borrowers under titles I

and II of the Act. Under proposed Sec. 613.3300(d)(1)(ii), the total

amount of all loan participations that any BC or ACB may have

outstanding under proposed Sec. 613.3300(b)(2) to a single credit risk

could not exceed 10 percent of its total capital.

Under proposed Sec. 613.3300(d)(2), the participation interest in

the same loan

[[Page 47116]]

held by one or more Farm Credit bank(s) or association(s) could not, at

any time, equal or exceed 50 percent of the principal amount of the

loan. This regulatory provision would implement sections

3.1(11)(B)(i)(I)(bb) and 4.18A(b)(2) of the Act. Sections 3.1(11)(B)

and 4.18A of the Act also limit the amount of loan participations to

similar entities that each FCS bank or direct lender association may

hold at any time to 15 percent of its total outstanding assets.

Therefore, proposed Sec. 613.3300(d)(3) applies this 15-percent

portfolio limit to FCBs, BCs, ACBs, and direct lender associations.

Proposed Sec. 613.3300(e) would implement requirements of sections

3.1(11)(B) and 4.18A(c)(3) concerning approval by other FCS banks and

associations. Proposed Sec. 613.3300(e)(1) implements a statutory

provision that requires a direct lender association to obtain approval

from its funding bank before it participates with a non-System lender

in a loan to a similar entity. The FCA believes that a funding bank's

decision to grant or deny approval under section 4.18A(c)(3) of the Act

and proposed Sec. 613.3300(e)(1) should rest exclusively on safety and

soundness considerations that the transaction would have on the bank's

financial position. Direct lender associations have not previously

participated with non-System lenders in syndications and other

multilender transactions that provide credit to ineligible borrowers.

The FCA solicits comments from interested parties about how the final

regulation can best accord equitable treatment to both funding banks

and their affiliated associations.

Proposed Sec. 613.3300(e)(2) would require a Farm Credit bank

operating under title I of the Act or a direct lender association to

comply with Sec. 614.4070 before it participates in a similar entity

loan in the chartered territory of another FCS institution. These

provisions are designed to prevent intra-System competition without the

consent of affected institutions. Requiring consent for similar entity

participations would be consistent with the FCA's policy for out-of-

territory participations and loans to eligible borrowers. However, some

System institutions have informed the Agency that obtaining consent is

time-consuming and impedes their ability to engage in participation

transactions. As the Act is silent on this point, the FCA seeks public

comment on whether consent for out-of-territory participations to

similar entities ought to be required.

Proposed Sec. 613.3300(e)(3) would implement section 4.18A(c)(1) of

the Act by requiring a FCB or direct lender association to obtain BC or

ACB approval before it participates in a loan to a similar entity that

is eligible to borrow directly from a Farm Credit bank operating under

title III of the Act. Both the Act and the proposed regulation require

approval from the BC or ACB that, at the time of origination, has the

greatest volume of loans (made under title III of the Act) in the State

where the headquarters of the similar entity is located.

Similarly, proposed Sec. 613.3300(e)(4) implements section

3.1(11)(B)(iii) of the Act by requiring a BC or ACB to obtain FCB

approval before it participates with a non-System lender in a loan to a

similar entity that is eligible to borrow directly from an FCB or a

direct lender association under proposed Secs. 613.3010 or 613.3030.

The BC or ACB is required to obtain approval from the FCB(s) in whose

chartered territory the similar entity conducts operations. As the FCA

interprets section 3.1(11)(B)(iii) of the Act, approval by two FCBs

would only be required when both banks are chartered to fund mortgage

and short- and intermediate-term operating loans in the same chartered

territory. When one FCB discounts production loans in a territory where

another FCB funds solely mortgage loans, the BC or ACB would only be

required to obtain consent from the FCB with the authority to finance

the similar entity.

Pursuant to sections 3.1(11)(B)(iii) and 4.18A(c)(2) of the Act,

proposed Sec. 613.3300(e)(5) grants FCS institutions broad latitude to

negotiate agreements that confer intra-System consents required by the

Act and FCA regulations.

Proposed Sec. 613.3300(f) reflects the FCA's determination that

borrower rights do not apply to participation interests that FCBs,

ACBs, and associations hold in similar entity loans. Sections

4.14A(a)(5) and 4.14A(a)(6)(A) of the Act require Farm Credit banks

(operating under title I of the Act) and associations to accord

borrower rights on loans to eligible borrowers that they make to bona

fide farmers, ranchers, and aquatic producers and harvesters. Borrower

rights would not apply to similar entity loans because the borrower is

ineligible to borrow directly from an FCS bank or association and the

loan is originated by a non-System lender.

The capitalization requirements for similar entity loan

participations is addressed by proposed Sec. 613.3300(g). This

provision of the proposed regulation would require the capitalization

bylaws of each Farm Credit bank and association to address whether, and

to what extent, non-voting stock or participation certificates should

be required for participation interests in similar entity loans.

Proposed Sec. 613.3300(g) is consistent with section 4.3A of the Act

and Sec. 615.5220.

V. Miscellaneous

The FCA proposes to delete existing Sec. 613.3060, which simply

states that direct lender associations and other financing institutions

(OFIs) are eligible to borrow from FCBs and ACBs. Regulations in

subparts C and P of part 614 specifically implement the authority of

FCBs and ACBs to fund and discount loans for direct lender associations

and OFIs under section 1.7 of the Act rendering this section redundant.

The FCA also proposes to delete the following regulations:

Secs. 619.9025; 619.9030; 619.9040; 619.9065; 619.9080; 619.9090;

619.9100; 619.9120; 619.9150; 619.9160; 619.9190; 619.9220; 619.9270;

619.9280; 619.9300; and 619.9310. These regulations define certain

terms that pertain to eligibility and scope of financing. Many of these

definitions are not identical to either the existing or proposed

regulations in part 613. This deletion will reduce duplication and

potential for confusion.

Finally, the FCA proposes to relocate the nondiscrimination in

lending regulations in subpart E of part 613 to a new part 626.

Nondiscrimination is unrelated to eligibility and scope of financing,

and therefore, the FCA believes that this topic should be addressed in

a separate part of the regulations.

List of Subjects

12 CFR Part 613

Agriculture, Banks, Banking, Credit, Rural areas.

12 CFR Part 614

Agriculture, Banks, Banking, Foreign Trade, Reporting and

recordkeeping requirements, Rural areas.

12 CFR Part 618

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

Reporting and recordkeeping requirements, Rural areas, Technical

assistances.

12 CFR Part 619

Agriculture, Banks, Banking, Rural areas.

12 CFR Part 626

Advertising, Aged, Agriculture, Banks, Banking, Civil rights,

Credit, Fair housing, Marital status discrimination, Sex

discrimination, Signs and symbols.

For the reasons stated in the preamble, parts 613, 614, 618, 619,

and

[[Page 47117]]

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

proposed to be amended to read as follows:

PART 613--ELIGIBILITY AND SCOPE OF FINANCING

1. The authority citation for part 613 is revised to read as

follows:

Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1,

3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27 5.9, 5.17 of the Farm Credit

Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075, 2093, 2122,

2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).

2. Subparts A, B, C, and D of part 613 are revised to read as

follows:

Subpart A--Financing Under Titles I and II of the Farm Credit Act

Sec.

613.3000 Financing for farmers, ranchers, and aquatic producers or

harvesters.

613.3010 Financing for processing or marketing operations.

613.3020 Financing for farm-related businesses.

613.3030 Rural home financing.

Subpart B--Financing for Banks Operating Under Title III of the Farm

Credit Act

613.3100 Domestic lending.

613.3200 International lending.

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A

of the Act

613.3300 Participations and other interests in loans to similar

entities.

Subpart A--Financing Under Titles I and II of the Farm Credit Act

Sec. 613.3000 Financing for farmers, ranchers, and aquatic producers

or harvesters.

(a) Definitions. For purposes of this subpart, the following

definitions apply:

(1) Agricultural land means land that is devoted to or available

for the production of agricultural or aquatic products.

(2) Bona fide farmer, rancher, or producer or harvester of aquatic

products means an individual or legal entity that either:

(i) Produces agricultural products or produces or harvests aquatic

products to generate income; or

(ii) Owns agricultural land.

(3) Individual means a natural person who is either:

(i) A citizen of the United States; or

(ii) A foreign national who has been lawfully admitted into the

United States for permanent residency pursuant to 8 U.S.C. 1101(a)(20)

or on a visa pursuant to a provision in 8 U.S.C. 1101(a)(15) that

authorizes such individual to own property or operate or manage a

business.

(4) Legal entity means any partnership, corporation, trust, estate,

or other legal entity, excluding legal entities eligible under title

III of the Act, that is established pursuant to the laws of the United

States, any State thereof, the Commonwealth of Puerto Rico, or the

District of Columbia and is legally authorized to conduct a business.

(b) Eligible borrowers. A bona fide farmer, rancher, or producer or

harvester of aquatic products is eligible to borrow under either title

I or II of the Act.

(c) Financing for agricultural or aquatic needs. Any borrower who

is eligible under paragraph (b) of this section may obtain financing

for any agricultural or aquatic purpose.

(d) Financing for other credit needs.

(1) Individual eligible borrowers who are either citizens or

permanent residents of the United States and are actively engaged in

agricultural or aquatic production may also obtain financing for:

(i) Housing and domestic needs; and

(ii) Other business needs in an amount that does not exceed the

market value of their agricultural or aquatic assets.

(2) Individual eligible borrowers who either own agricultural land

as an investment, or are non-resident foreign nationals, may obtain

total financing for their housing, domestic and other business needs in

an amount that does not exceed the market value of their agricultural

or aquatic assets.

(3) Legal entities may obtain financing for their other credit

needs in an amount that does not exceed the market value of their

agricultural assets only if:

(i) The securities of the borrower are not traded on a public

exchange; and

(ii) More than 50 percent of the assets of the borrowing legal

entity are used in agricultural or aquatic production.

Sec. 613.3010 Financing for processing or marketing operations.

(a) Eligible borrowers. A borrower is eligible for financing for a

processing or marketing operation under titles I and II of the Act,

only if the borrower meets the following requirements:

(1) The borrower is either a bona fide farmer, rancher, or producer

or harvester of aquatic products or is a legal entity in which eligible

borrowers under Sec. 613.3000(b) hold a controlling interest; and

(2) The borrower or an owner of a borrowing legal entity

consistently produces some portion of the throughput used in the

processing or marketing operation.

(b) Portfolio restrictions for certain processing and marketing

loans. Processing or marketing loans to eligible borrowers who supply,

on a consistent basis, less than 20 percent of the throughput are

subject to the following restrictions:

(1) Bank limitation. The aggregate of such processing and marketing

loans made by a Farm Credit bank shall not exceed 15 percent of all its

outstanding retail loans at the end of the preceding fiscal year.

(2) Association limitation. The aggregate of such processing and

marketing loans made by all direct lender associations affiliated with

the same Farm Credit bank shall not exceed 15 percent of the aggregate

of their outstanding retail loans at the end of the preceding fiscal

year. Each Farm Credit bank, in conjunction with all its affiliated

direct lender associations, shall ensure that such processing or

marketing loans are equitably allocated among its affiliated direct

lender associations.

(3) Calculation of outstanding retail loans. For the purposes of

this paragraph, ``outstanding retail loans'' include loans, loan

participations, and other interests in loans that are either bought

without recourse or sold with recourse.

Sec. 613.3020 Financing for farm-related businesses.

(a) Eligibility. An individual or legal entity that furnishes

services to farmers and ranchers that are directly related to their

agricultural operations is eligible to borrow under titles I and II of

the Act.

(b) Purposes of financing. An eligible farm-related business may

obtain financing for its business needs, subject to the following

requirements:

(1) An eligible farm-related business that derives more than 50

percent of its income (as consistently measured on either a gross sales

or net sales basis) from furnishing services that are directly related

to the agricultural operations of farmers and ranchers may obtain

financing for all of its business needs.

(2) An eligible farm-related business that derives 50 percent or

less of its income (as consistently measured on either a gross sales or

net sales basis) from furnishing services that are directly related to

the agricultural operations of farmers and ranchers may obtain

financing only for those credit needs that are related to the provision

of farm-related services.

Sec. 613.3030 Rural home financing.

(a) Definitions.

(1) Rural homeowner means an individual who is not a bona fide

farmer, rancher, or producer or harvester of aquatic products.

(2) Rural home means a single-family moderately priced dwelling

located in a

[[Page 47118]]

rural area that will be the occupant's principal residence.

(3) Rural area means a designated rural area within a State or the

Commonwealth of Puerto Rico including communities that have a

population of not more than 2,500 inhabitants based on the latest

decennial census of the United States.

(4) Moderately priced means the price of any rural home that

either:

(i) Satisfies the criteria in section 8.0 of the Act pertaining to

rural home loans that collateralize securities that are guaranteed by

the Federal Agricultural Mortgage Corporation; or

(ii) Is below the 75th percentile of housing values, ranked from

the lowest value to the highest value in the rural area where it is

located in accordance with the most recent edition of the Census of

Housing, General Housing Characteristics published by the United States

Bureau of the Census. System institutions may obtain copies of this

document from the Superintendent of Documents, U.S. Government Printing

Office, Washington, DC 20402.

(b) Eligibility. Any rural homeowner is eligible to obtain

financing on a rural home. No borrower shall have a loan from the Farm

Credit System on more than one rural home at any one time.

(c) Portfolio limitations. (1) The aggregate of retail rural home

loans by any Farm Credit Bank or agricultural credit bank shall not

exceed 15 percent of the total of all of its outstanding loans at any

one time.

(2) The aggregate of rural home loans made by each direct lender

association shall not exceed 15 percent of the total of its outstanding

loans at the end of its preceding fiscal year, except with the prior

approval of its funding bank.

(3) The aggregate of rural home loans made by all direct lender

associations that are funded by the same Farm Credit bank shall not

exceed 15 percent of the total outstanding loans of all such

associations at the end of the funding bank's preceding fiscal year.

Subpart B--Financing for Banks Operating Under Title III of the

Farm Credit Act

Sec. 613.3100 Domestic lending.

(a) Definitions.

(1) Cooperative means any association of farmers, ranchers,

producers or harvesters of aquatic products, or any federation of such

associations, which conducts business for the mutual benefit of its

members and has the power to:

(i) Process, prepare for market, handle, or market farm or aquatic

products;

(ii) Purchase, test, grade, process, distribute, or furnish farm or

aquatic supplies; or

(iii) Furnish business and financially related services to its

members.

(2) Farm or aquatic supplies and farm or aquatic business services

are any goods or services normally used by farmers, ranchers, or

producers and harvesters of aquatic products in their business

operations, or improve the welfare or livelihood of such persons.

(3) Public utility means a cooperative or other entity that is

licensed under Federal, State, or local law to provide electric,

telecommunication, cable television, water, or waste treatment

services.

(4) Rural area means all territory of a State that is not within

the outer boundary of any city or town having a population of more than

20,000 inhabitants based on the latest decennial census of the United

States.

(5) Service cooperative means a cooperative that is predominately

involved in providing business and financially related services (other

than public utility services) to farmers, ranchers, aquatic producers

or harvesters, or their cooperatives.

(b) Cooperatives and other entities that serve agricultural or

aquatic producers. (1) Eligibility for cooperatives. A cooperative is

eligible to borrow from a bank for cooperatives or an agricultural

credit bank only if the following requirements are satisfied:

(i) Unless the bank's board of directors establishes by resolution

a higher voting control threshold for any type of cooperative, the

percentage of voting control of the cooperative held by farmers,

ranchers, producers or harvesters of aquatic products, or cooperatives

shall be 80 percent except:

(A) Sixty (60) percent for a service cooperative;

(B) Sixty (60) percent for local farm supply cooperatives that have

historically served the needs of a community that would not be

adequately served by other suppliers and have experienced a reduction

in the percentage of membership by agricultural or aquatic producers

due to changed circumstances beyond their control; and

(C) Sixty (60) percent for local farm supply cooperatives that

shall provide needed services to a community, and shall compete with a

cooperative specified in Sec. 613.3100(b)(1)(i)(B);

(ii) The cooperative deals in farm or aquatic products, or products

processed therefrom, farm or aquatic supplies, farm or aquatic business

services, or financially related services with or for members in an

amount at least equal in value to the total amount of such business it

transacts with or for nonmembers, excluding from the total of member

and non-member business, transactions with the United States, or any

agencies or instrumentalities thereof, or services or supplies

furnished by a public utility; and

(iii) The cooperative conforms with one of the following two

conditions:

(A) No member of the cooperative shall have more than one vote

because of the amount of stock or membership capital owned therein; or

(B) The cooperative restricts dividends on stock or membership

capital to 10 percent per year or the maximum percentage per year

permitted by applicable State law, whichever is less.

(2) Other eligible entities. The following entities are eligible to

borrow from banks for cooperatives and agricultural credit banks:

(i) Any legal entity that holds more than 50 percent of the voting

control of a cooperative that is an eligible borrower under paragraph

(b)(1) of this section, and it uses the proceeds of the loan to fund

the activities of its cooperative subsidiary on the terms and

conditions specified by the bank;

(ii) Any legal entity in which an eligible cooperative has an

ownership interest, provided that if such interest is less than 50

percent, financing shall not exceed the percentage that the eligible

cooperative owns in such entity multiplied by the value of the total

assets of such entity; or

(iii) Any creditworthy private entity operated on a non-profit

basis that satisfies the requirements for a service cooperative and

complies with the requirements of paragraphs (b)(1)(i)(A) and

(b)(1)(iii) of this section, and any subsidiary of such entity. An

entity that is eligible to borrow under this paragraph shall be

organized to benefit agriculture in furtherance of the welfare of the

farmers, ranchers, and aquatic producers and harvesters who are its

members.

(c) Electric, telecommunication, and cable television utilities.--

(1) Eligibility. A bank for cooperatives or an agricultural credit bank

may lend to:

(i) Cooperatives, other entities, or the subsidiaries of such

cooperatives or other entities that:

(A) Have received a loan, loan commitment, insured loan, or loan

guarantee from the Rural Utilities Service of the United States

Department of Agriculture to finance rural electric and

telecommunication services;

(B) Have received a loan or a loan commitment from the Rural

Telephone

[[Page 47119]]

Bank of the United States Department of Agriculture; or

(C) Have been certified by the Rural Utilities Service of the

United States Department of Agriculture to be eligible for a loan, loan

commitment, or loan guarantee; or

(ii) Any legal entity that holds more than 50 percent of the voting

control of any public utility that is an eligible borrower under

paragraph (c)(1)(i) of this section, and uses the proceeds of the loan

to fund the activities of the eligible subsidiary on the terms and

conditions specified by the bank for cooperatives or agricultural

credit bank.

(2) Purposes for financing. A bank for cooperatives or agricultural

credit bank may extend credit to entities that are eligible to borrow

under paragraph (c)(1) of this section in order to provide electric or

telecommunication services that are generally compatible with the Rural

Electrification Act of 1936, as amended, 7 U.S.C. 901 et seq., and

regulations that the Secretary of Agriculture promulgates in 7 CFR

parts 1610, 1710, 1712, 1714, 1735, 1737, 1739, and 1751. A subsidiary

that is eligible to borrow under paragraph (c)(1) of this section may

also obtain financing from a bank for cooperatives or agricultural

credit bank to operate a licensed cable television utility.

(3) Restriction. When an eligible utility, as defined in paragraph

(c)(1)(i) of this section, owns less than 50 percent of any legal

entity, the amount of financing provided by the bank for cooperatives

or agricultural credit bank to the entity shall not exceed the

percentage that the eligible cooperatives own in such entity multiplied

by the value of the total assets of such entity.

(d) Water and waste disposal facilities.--(1) Eligibility. A

cooperative or a public, quasi-public agency, body, or other public or

private entity that, under the authority of State or local law,

establishes and operates water and waste disposal facilities in a rural

area, as that term is defined by paragraph (a)(5) of this section, is

eligible to borrow from a bank for cooperatives or an agricultural

credit bank.

(2) Purposes for financing. A bank for cooperatives or agricultural

credit bank may extend credit to entities that are eligible under

paragraph (d)(1) of this section solely for installing, maintaining,

expanding, improving, or operating water and waste disposal facilities

in rural areas.

(e) Domestic lessors. A bank for cooperatives or agricultural

credit bank may lend to domestic parties to finance the acquisition of

facilities or equipment that will be leased to shareholders of the bank

for use in their operations located inside of the United States.

Sec. 613.3200 International lending.

(a) Definition. For the purpose of this section only, the term

``farm supplies'' refers to inputs that are used in a farming or

ranching operation, but excludes agricultural processing equipment,

machinery used in food manufacturing or other capital goods which are

not used in a farming or ranching operation.

(b) Import transactions. The following parties are eligible to

borrow from a bank for cooperatives or an agricultural credit bank

pursuant to section 3.7(b) of the Act for the purpose of financing the

import of agricultural commodities or products therefrom, aquatic

products, and farm supplies into the United States:

(1) An eligible cooperative as defined by Sec. 613.3100(b);

(2) A counterparty with respect to a specific import transaction

with a voting stockholder of the bank for the substantial benefit of

the shareholder; and

(3) Any foreign or domestic legal entity in which eligible

cooperatives hold an ownership interest.

(c) Export transactions. Pursuant to section 3.7(b)(2) of the Act,

a bank for cooperatives or an agricultural credit bank is authorized to

finance the export (including the cost of freight) of agricultural

commodities or products therefrom, aquatic products, or farm supplies

from the United States to any foreign country. The board of directors

of each bank for cooperatives and agricultural credit bank shall adopt

policies that ensure that exports of agricultural products and

commodities, aquatic products, and farm supplies which originate from

eligible cooperatives are financed on a priority basis. The total

amount of balances outstanding on loans made under this paragraph shall

not, at any time, exceed 50 percent of the capital of any bank for

cooperatives or agricultural credit bank for loans that:

(1) Finance the export of agricultural commodities and products

therefrom, aquatic products, or farm supplies that are not originally

sourced from an eligible cooperative; and

(2) At least 95 percent of the loan amount is not guaranteed by a

department, agency, bureau, board, or commission of the United States

or a corporation that is wholly owned directly or indirectly by the

United States.

(d) Transactions involving international business operations. A

bank for cooperatives or an agricultural credit bank may finance a

domestic or foreign entity which is at least partially owned by

eligible cooperatives described in Sec. 613.3100(b), and facilitates

the international business operations of such cooperatives.

(e) Restrictions. (1) When eligible cooperatives own less than 50

percent of a foreign or domestic legal entity, the amount of financing

that a bank for cooperatives or agricultural credit bank may provide to

the entity for any import, export, or international business

transaction shall not exceed the percentage of ownership that eligible

cooperatives hold in such entity multiplied by the value of the total

assets of such entity; and

(2) A bank for cooperatives or agricultural credit bank shall not

finance the relocation of any plant or facility from the United States

to a foreign country.

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and

4.18A of the Act

Sec. 613.3300 Participations and other interests in loans to similar

entities.

(a) Definitions.

(1) Participate and participation, for the purpose of this section,

refer to multilender transactions, including syndications, assignments,

loan participations, subparticipations, other forms of the purchase,

sale, or transfer of interests in loans, or other extensions of credit,

or other technical and financial assistance.

(2) Similar entity means a party that is ineligible for a loan from

a Farm Credit bank or association, but has operations that are

functionally similar to the activities of eligible borrowers in that a

majority of its income is derived from, or a majority of its assets are

invested in, the conduct of activities that are performed by eligible

borrowers.

(b) Similar entity transactions. A Farm Credit bank or a direct

lender association may participate with a lender that is not a Farm

Credit System institution in loans to a similar entity that is not

eligible to borrow directly under Secs. 613.3000, 613.3010, 613.3020,

613.3100, or 613.3200, for purposes similar to those for which an

eligible borrower could obtain financing from the participating FCS

institution.

(c) Compatibility with lending authorities under titles I and II of

the Act. Each direct lender association may participate in loans to

similar entities under paragraph (b) of this section only to the extent

that such loans are compatible with the association's applicable long-

term real estate lending

[[Page 47120]]

authority under sections 1.7(a) and 1.10(a) of the Act or its short-

and intermediate-term lending authorities under sections 1.10(b) and

2.4 of the Act.

(d) Restrictions. Participations by a Farm Credit bank or

association in loans to a similar entity under this section are subject

to the following limitations:

(1) Lending limits.

(i) Farm Credit banks operating under title I of the Act and direct

lender associations. The total amount of all loan participations that

any Farm Credit Bank, agricultural credit bank, or direct lender

association has outstanding under paragraph (b) of this section to a

single credit risk shall not exceed:

(A) Ten (10) percent of its total capital; or

(B) Twenty-five (25) percent of its total capital if a majority of

the shareholders of the respective Farm Credit bank or direct lender

association so approve.

(ii) Farm Credit banks operating under title III of the Act. The

total amount of all loan participations that any bank for cooperative

or agricultural credit bank has outstanding under paragraph (b) of this

section to a single credit risk shall not exceed 10 percent of its

total capital;

(2) Percentage held in the principal amount of the loan. The

participation interest in the same loan held by one or more Farm Credit

bank(s) or association(s) shall not, at any time, equal or exceed 50

percent of the principal amount of the loan; and

(3) Portfolio limitations. The total amount of participations that

any Farm Credit bank or direct lender association has outstanding under

paragraph (b) of this section shall not exceed 15 percent of its total

outstanding assets at the end of its preceding fiscal year.

(e) Approval by other Farm Credit System institutions. (1) No

direct lender association shall participate in a loan to a similar

entity under paragraph (b) of this section without the approval of its

funding bank. A funding bank shall deny such requests only for safety

and soundness reasons affecting the bank.

(2) No Farm Credit bank operating under title I of the Act or a

direct lender association shall participate in a loan under paragraph

(b) of this section to a similar entity that is located outside of its

chartered territory unless it complies with the requirements of

Sec. 614.4070 of this chapter.

(3) No Farm Credit Bank or direct lender association shall

participate in a loan to a similar entity that is eligible to borrow

under Sec. 613.3100(b) without the prior approval of the bank for

cooperatives or agricultural credit bank that, at the time the loan is

made, has the greatest volume of loans made under title III of the Act

in the State where the headquarters office of the similar entity is

located.

(4) No bank for cooperatives or agricultural credit bank shall

participate in a loan to a similar entity that is eligible to borrow

under Secs. 613.3010 or 613.3020 without the prior consent of the Farm

Credit Bank(s) in whose chartered territory the similar entity conducts

operations.

(5) All approvals required under paragraph (e) of this section may

be granted on an annual basis and under such terms and conditions as

the various Farm Credit System institutions may agree.

(f) Borrower rights. The borrower rights requirements in title IV

of the Act and Sec. 614.4336 and subparts K, L and N of part 614 of

this chapter do not apply to participations in loans to similar

entities under paragraph (b) of this section.

(g) Borrower stock requirements. Pursuant to section 4.3A of the

Act and Sec. 615.5220 of this chapter, the capitalization bylaws of

each Farm Credit bank and association shall determine whether, and to

what extent, non-voting stock or participation certificates shall be

required for participations in loans to similar entities.

Subpart E--Nondiscrimination in Lending

Secs. 613.3145, 613.3150, 613.3151, 613.3152, 613.3160, 613.3170,

613.3175 (Subpart E) [Redesignated]

3. Subpart E of part 613, consisting of Secs. 613.3145, 613.3150,

613.3151, 613.3152, 613.3160, 613.3170, and 613.3175 is redesignated as

new part 626, consisting of Secs. 626.6000, 626.6005, 626.6010,

626.6015, 626.6020, 626.6025, and 626.6030 respectively.

PART 614--LOAN POLICIES AND OPERATIONS

4. The authority citation for part 614 is revised to read as

follows:

Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; Secs.

1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,

2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,

4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 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, 2019, 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, 2206a, 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 A--[Amended]

5. Subpart A of part 614 is amended by removing the reference

``613.3020'' each place it appears and adding in its place

``613.3000''; by removing the reference ``613.3045'' each place it

appears and adding in its place ``613.3010''; by removing the reference

``613.3040'' each place it appears and adding in its place

``613.3030''; by removing the reference ``613.3050'' each place it

appears and adding in its place ``613.3020''; by removing the reference

``613.3110'' each place it appears and adding in its place

``613.3100(b)(1)''; and by removing the reference ``613.3110(c)'' each

place it appears and adding in its place ``613.3100(b)(2), (c), and

(d).''

6. Section 614.4010 is amended by removing the words ``export or''

each place they appear in paragraphs (d)(4) and (d)(5); by removing the

reference ``(d)(3)'' and adding in its place ``(d)(4)'' in paragraph

(d)(5); and by adding new paragraphs (d)(6) and (d)(7) to read as

follows.

Sec. 614.4010 Agricultural credit banks.

* * * * *

(d) * * *

* * * * *

(6) Any party, subject to the requirements in Sec. 613.3200(c) of

this chapter, for the export (including the cost of freight) of

agricultural commodities or products therefrom, aquatic products, or

farm supplies from the United States to any foreign country, in

accordance with Sec. 614.4233 and subpart Q of this part 614; and

(7) Domestic or foreign parties in which eligible cooperatives, as

defined in Sec. 613.3100 of this chapter, hold an ownership interest,

for the purpose of facilitating the international business operations

of such cooperatives pursuant to the requirements of Sec. 613.3200(d)

and (e) of this chapter.

* * * * *

7. Section 614.4020 is amended by removing the words ``export or''

each place they appear in paragraphs (a)(4) and (a)(5); by adding after

the words ``bank's board'', the reference ``, Sec. 614.4233,'' in

paragraph (a)(4); by removing the words ``board policy'' and adding in

their place, the words ``policies of the bank's board, Sec. 614.4233,''

in paragraph (a)(5); and by adding new paragraphs (a)(6) and (a)(7) to

read as follows:

Sec. 614.4020 Banks for cooperatives.

(a) * * *

* * * * *

[[Page 47121]]

(6) Any party, subject to the requirements in Sec. 613.3200(c) of

this chapter, for the export (including the cost of freight) of

agricultural commodities or products therefrom, aquatic products, or

farm supplies from the United States to any foreign country, in

accordance with Sec. 614.4233 and subpart Q of this part 614; and

(7) Domestic or foreign parties in which eligible cooperatives, as

defined in Sec. 613.3100 of this chapter, hold an ownership interest,

for the purpose of facilitating the international business operations

of such cooperatives pursuant to the requirements in Sec. 613.3200(d)

and (e) of this chapter.

* * * * *

Subpart E--Loan Terms and Conditions

8. Section 614.4222 is revised to read as follows:

Sec. 614.4222 Rural home loans.

A long-term real estate loan, including a revolving line of credit,

on a rural home shall be secured by a first lien on the property,

pursuant to Sec. 614.4210, except that it may be secured by a second

lien if the institution also holds the first lien on the property. A

short- or intermediate-term loan on a rural home, including a revolving

line of credit, must be secured by a lien on the property unless the

financing is provided exclusively for repairs, remodelling, or other

improvements to the rural home, in which case the credit may be secured

by other property or unsecured if warranted by the creditworthiness of

the borrower.

9. Section 614.4233 is amended by revising the introductory

paragraph to read as follows:

Sec. 614.4233 International loans.

Term loans made by banks for cooperatives and agricultural credit

banks under the authority of section 3.7(b) of the Act and

Sec. 613.3200 of this chapter to foreign or domestic parties who are

not shareholders of the bank shall be subject to following conditions:

* * * * *

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing

of Other Financing Institutions

Sec. 614.4610 [Amended]

10. Section 614.4610 is amended by removing the words ``a

association in the district'' and adding in their place, the words

``any association funded by the bank'' in the first sentence and

removing the reference ``Sec. 613.3040(d)(2)'' and adding in its place

the reference ``Secs. 613.3010(b)(1) and 613.3030(c)(2)''.

Subpart Q--Banks for Cooperatives Financing International Trade

11. The heading for subpart Q is amended by adding after the words

``Banks for Cooperatives'' the words ``and Agricultural Credit Banks''.

Sec. 614.4700 [Amended]

12. Section 614.4700 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place they appear in paragraphs (a), (b), and (h).

Sec. 614.4710 [Amended]

13. Section 614.4710 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place it appears in the introductory paragraph and paragraph (c); by

adding after the words ``bank for cooperatives''' the words ``or

agricultural credit bank's'' in paragraph (a)(1)(ii); by adding after

the words ``bank for cooperatives'' the words ``or an agricultural

credit bank'' each place they appear in paragraphs (a)(1), (a)(1)(i),

(a)(3), (a)(5) and (b)(1).

Sec. 614.4720 [Amended]

14. Section 614.4720 is amended by adding after the words ``Banks

for cooperatives'' the words ``and agricultural credit banks'' in the

first sentence of the introductory paragraph.

Sec. 614.4800 [Amended]

15. Section 614.4800 is amended by adding after the words ``A bank

for cooperatives'' the words ``or an agricultural credit bank'' in the

first sentence.

Sec. 614.4810 [Amended]

16. Section 614.4810 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place they appear in paragraphs (a) and (b).

Sec. 614.4900 [Amended]

17. Section 614.4900 is amended by adding after the words ``a bank

for cooperatives'' the words ``or an agricultural credit bank'' each

place they appear in paragraphs (a) through (d); and by adding after

the words ``banks for cooperatives'' the words ``and agricultural

credit banks'' in the first sentence of paragraph (i).

PART 618--GENERAL PROVISIONS

18. 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 A--Related Services

Sec. 618.8005 [Amended]

19. Section 618.8005 is amended by removing the reference

``Secs. 613.3010, 613.3020 (a)(1), (a)(2), (b), and 613.3045'' in

paragraph (a) and adding in its place, the reference ``Secs. 613.3000

(a) and (b), 613.3010, and 613.3300'' and by removing the reference

``Secs. 613.3110 and 613.3120'' and adding in its place, the reference

``Secs. 613.3100, 613.3200, and 613.3300'' in paragraph (b).

PART 619--DEFINITIONS

20. The authority citation for part 619 is revised to read as

follows:

Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6,

7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243,

2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).

Secs. 619.9025, 619.9030, 619.9040, 619.9065, 619.9080, 619.9090,

619.9100, 619.9120, 619.9150, 619.9160, 619.9190, 619.9220, 619.9270,

619.9280, 619.9300, and 619.9310 [Removed]

21. Sections 619.9025, 619.9030, 619.9040, 619.9065, 619.9080,

619.9090, 619.9100, 619.9120, 619.9150, 619.9160, 619.9190, 619.9220,

619.9270, 619.9280, 619.9300, and 619.9310 are removed.

PART 626--NONDISCRIMINATION IN LENDING

22. The authority citation for part 626 is added to read as

follows:

Authority: Secs. 1.5, 2.2, 2.12, 3.1, 5.9, 5.17 of the Farm

Credit Act (12 U.S.C. 2013, 2073, 2093, 2122, 2243, 2252); 42 U.S.C.

3601 et seq.; 15 U.S.C. 1691 et seq.; 12 CFR 202, 24 CFR 100, 109,

110.

Sec. 626.6025 [Amended]

23. Newly designated Sec. 626.6025 is amended by removing the

reference ``Sec. 613.3160(b)'' and adding in its place, the reference

``Sec. 626.6020(b)'' in paragraph (b).

* * * * *

Dated: September 5, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-22313 Filed 9-8-95; 8:45 am]

BILLING CODE 6705-01-P