Statement on Regulatory Burden

FARM CREDIT ADMINISTRATION

12 CFR Ch. VI

RIN 3052-AB53

Statement on Regulatory Burden

AGENCY: Farm Credit Administration.

ACTION: Final Statement on Regulatory Burden.

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

SUMMARY: This is the second phase of an ongoing effort by the Farm

Credit Administration (FCA) to reduce regulatory burdens on the Farm

Credit System (FCS or System). Many System institutions responded to

the FCA's request for comments by identifying regulations that they

consider to be burdensome. The FCA deleted several unnecessary or

obsolete regulations in the first phase of this project. This document

informs the public of those regulations that the FCA will retain

without amendment because they are necessary to: (1) Implement or

interpret the Farm Credit Act of 1971, as amended (Act), or (2) protect

the safety and soundness of the System. The FCA also identifies pending

or future actions that will respond to the remaining regulatory burden

issues.

EFFECTIVE DATE: November 24, 1995.

[[Page 57914]]

FOR FURTHER INFORMATION CONTACT:

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

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

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

or

Richard A. Katz, Senior Attorney, Regulatory Operations Division,

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

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

SUPPLEMENTARY INFORMATION:

I. Background

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

Burden (Statement) seeking public comment on the appropriateness of

requirements that the FCA regulations impose on the FCS. See 58 FR

34003 (June 23, 1993). More specifically, the FCA asked the public to

identify regulations that either duplicate other governmental

requirements, are not effective, or impose a burden that is greater

than the benefit derived. In response to the notice, System

institutions or their trade associations requested that the FCA repeal

or amend several regulations.

In the first phase of this project, the FCA reduced unnecessary

regulatory burdens on the FCS by repealing several regulations and two

Agency prior approval requirements. See 60 FR 20008 (Apr. 24, 1995); 60

FR 27401 (May 24, 1995).

Today, the FCA notifies the FCS and other interested parties of

those regulations that it will retain without amendment. Although

System institutions sought the repeal or modification of the

regulations identified below, the FCA, consistent with its Statement on

Regulatory Philosophy,\1\ concludes that these regulations are either

required by statute or are necessary for safety and soundness. For

these reasons, the FCA will not delete or amend the following

regulations: Secs. 611.1122; 614.4070; 614.4165; 614.4335; 614.4336;

614.4337; and 615.5172. An explanation of the FCA's rationale for these

particular regulatory requirements follows.

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

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

II. Regulations That Will Be Retained Without Revision

A. Merger Requirements

Two commenters suggested that the FCA revise Sec. 611.1122, which

establishes timing and disclosure requirements for the merger of FCS

institutions. One of the commenters asserted that the regulation

mandates excessive periods for review and consideration of merger

applications. As a result, the commenters believe that Sec. 611.1122

unnecessarily postpones the effective date of such mergers. The

commenters suggested that the FCA develop new procedures to expedite

mergers of FCS banks and associations. In addition, one of the

commenters advised the FCA to revise Sec. 611.1122 because it requires

too many disclosures to members.

Section 7.11 of the Act requires the FCA to act upon merger

applications within 60 days of their receipt. In the event that the FCA

fails to act within the 60-day period, the affected institutions are

authorized by section 7.11 of the Act to submit their merger or

consolidation plan directly to their shareholders. The 60-day period

provides the FCA with sufficient time to review: (1) Complex

transactions, or (2) multiple mergers or consolidations that are being

processed concurrently. Although the Act allows the FCA 60 days to

consider a proposed merger between System institutions, the Agency does

not always require 60 days to process each merger application. The FCA

acts upon the vast majority of corporate restructuring applications

within the prescribed time period. However, the FCA requires the

flexibility offered by section 7.11 of the Act and Sec. 611.1122 in

order to process complex transactions. Although the FCA will not repeal

the 60-day timeframe for processing corporate applications, it is

considering approaches that could shorten the time for processing

noncomplex or noncontroversial corporate applications.

Commenters claim that Sec. 611.1122 requires too many disclosures

to institution shareholders about pending consolidations and mergers.

These commenters suggest that the FCA amend the regulation so it would

require the merging or consolidating institutions to provide their

shareholders with a brief summary of the proposed transaction. However,

the commenters suggest that the regulation continue to require a

complete disclosure to the FCA about such corporate restructurings.

In the FCA's view, a brief summary of the proposed transaction does

not adequately protect the right of shareholders to make informed

decisions about the future of their institutions. When two or more

institutions combine, stockholders exchange their equity interest in

the original institution for stock in a larger institution. As owners

of each FCS bank or association, the shareholders/borrowers have a

right to make informed decisions about the future of their institution.

For this reason, the FCA will not amend the disclosure requirements in

Sec. 611.1122.

B. Chartered Territories

A Farm Credit Bank (FCB) and its Federal land bank associations

(FLBAs) have requested that the FCA repeal Sec. 614.4070 so that System

institutions no longer have the authority to make or participate in

loans outside their chartered territories. According to sections 1.5(6)

and 2.2(13) of the Act, the lending authorities of FCS banks and

associations are subject to FCA regulations. Furthermore, section

5.17(a)(9) of the Act authorizes the FCA to prescribe regulations that

are necessary or appropriate for carrying out the Act, while section

5.17(a)(5) allows FCA regulations to confer approval upon certain

actions of FCS institutions. In the absence of Sec. 614.4070, FCS banks

and associations would only be authorized to make or participate in

loans inside their chartered territories.

The repeal of Sec. 614.4070 would deprive System institutions of

the flexibility, under certain conditions, to finance borrowers who

conduct operations outside their chartered territories. The consent and

notification requirements in Sec. 614.4070 prevent unrestrained

competition between System institutions. At this time, the FCA declines

to modify or repeal Sec. 614.4070 because it balances the needs of

borrowers and System institutions.

C. Borrower Stock Requirements for Loans Sold Into Secondary Markets

Two commenters requested that the FCA repeal Sec. 614.4335(a),

which requires borrowers whose loans are destined for sale in a

secondary market to purchase stock in System institutions. These

commenters claim that this stock-purchase requirement places System

lenders at a disadvantage with their competitors.

The FCA responds that the stock-purchase requirement in

Sec. 614.4335 derives from section 4.3A(c) of the Act. Section 4.3A(c)

of the Act states that all System institutions must sell stock when

they make loans to new borrowers ``notwithstanding any other provision

of this Act.'' Furthermore, section 4.3A(g) of the Act states that

section 4.3A controls if it is inconsistent with any other provision of

the Act except section 4.9A.

Prior to 1987, former sections 1.16(c) and 2.13(f) of the Act

expressly waived the requirement that borrowers purchase stock for

loans that were destined for sale to, or participation

[[Page 57915]]

with, non-System lenders. However, sections 1.16(c) and 2.13(f) of the

Act were repealed by the Agricultural Credit Act of 1987 (1987 Act).\2\

Furthermore, section 301 of the 1987 Act consolidated the stock

capitalization requirements for all Farm Credit banks and associations

into section 4.3A of the amended Act, which indicates that all

borrowers are required, without exception, to purchase stock in the

System bank or association that makes their loans. The Act, as amended,

no longer contains any provision that explicitly exempts borrowers

whose loans are originated for sale from complying with the statutory

stock-purchase requirement. The committee reports and the congressional

debates to the 1987 Act are silent as to reasons why Congress amended

the Act so it no longer exempts loans that are destined to secondary

markets from the stock-purchase requirement. In fact, there is no

indication in the legislation that Congress considered the impact

section 4.3A of the Act would have on the: (1) Ability of FCS banks and

associations to sell loans to non-System lenders; and (2) development

of the Federal Agricultural Mortgage Corporation (Farmer Mac) as a

secondary market for agricultural and rural home loans.

\2\ Pub. L. 100-233, 101 Stat. 1568, (Jan. 6, 1988).

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

The FCA is aware that the stock-purchase requirement for loans

destined to secondary markets causes inconvenience to System lenders

and their borrowers. Nevertheless, Sec. 614.4335(a) is consistent with

the plain language of section 4.3A of the Act. However, the FCA

observes that FCS banks and associations have flexibility within the

confines of section 4.3A of the Act to devise practical solutions that

will minimize the difficulties associated with the borrower stock

requirements. For example, a recent FCA Bookletter, OE-403 (Dec. 23,

1994), concluded that FCS banks and associations are not required to

sell stock if they ``table fund'' loans for non-System lenders that are

certified Farmer Mac poolers.

D. Borrower Rights and Loan Sales

Two commenters requested that the FCA amend Sec. 614.4336 so that

borrower rights would not apply to loans that are sold to established

secondary markets or non-System lenders. These commenters assert that

borrower rights increase the transaction costs associated with the sale

of loans to other lenders. More importantly, non-System institutions

usually will not purchase loans that are subject to borrower rights

requirements.

In order to fully respond to the commenters, the FCA has examined

those provisions of the Act that govern borrower rights on FCS loans.

According to sections 4.14A(a) (5) and (6) of the Act, borrower rights

attach only to loans that System banks (other than banks for

cooperatives), associations, and other financing institutions make to

farmers, ranchers, and aquatic producers and harvesters. Furthermore,

the disclosure requirements in section 4.13 of the Act do not apply to

consumer loans that are subject to the Truth in Lending Act, 15 U.S.C.

1601 et seq. Thus, borrower rights requirements do not attach to home

loans that System banks and associations make to rural residents who

are not agricultural or aquatic producers. For this reason, the

borrower rights provisions in title IV of the Act do not impede the

sale of non-farm rural home loans to the Federal National Mortgage

Association, the Federal Home Loan Mortgage Corporation, Farmer Mac, or

non-System lenders.

According to section 8.9(a) of the Act, borrower rights do not

apply to agricultural mortgage loans that collateralize Farmer Mac

securities. Furthermore, section 8.9(b) of the Act prescribes specific

procedures for detaching borrower rights from agricultural mortgage

loans that FCS lenders sell to Farmer Mac poolers. Two regulations,

Secs. 614.4336(a)(1) and 614.4367(b), implement these statutory

authorities.

Some System institutions have expressed strong opposition to

Sec. 614.4336(a)(2), which prescribes two alternatives for resolving

borrower rights when loans are sold to non-System lenders that are not

Farmer Mac poolers. More specifically, Sec. 614.4336(a)(2) requires the

FCS lender to either: (1) Incorporate these statutory borrower rights

into the loan agreement so that the purchaser assumes these

obligations; or (2) obtain the borrower's signed, written consent to

the sale, including the relinquishment of borrower rights. As noted

earlier, System institutions assert that Sec. 614.4336(a)(2)

effectively precludes the sale of most loans to non-System lenders.

Some System lenders have opined that the sale of loans to non-

System institutions automatically extinguishes borrower rights. The FCA

fully responded to this claim when Sec. 614.4336(a)(2) was adopted as a

final regulation in 1992. See 57 FR 38237 (Aug. 24, 1992). From the

FCA's perspective, the rationale for Sec. 614.4336(a)(2) remains valid.

As explained in the preamble to Sec. 614.4336(a)(2), the FCA finds

no support in either the Act or its legislative history for the claim

that the loan sale authorities of FCS institutions supersede the

borrower rights provisions in title IV of the Act. In fact, the

System's loan sale authorities already existed at the time that the Act

was amended to guarantee certain protections to FCS borrowers. In this

context, Sec. 614.4336(a)(2) balances the statutory authority of System

lenders to sell their loans with the borrower rights provisions of the

Act. The FCA observes that Sec. 614.4336(a)(2) prevents potential

disputes that could erupt if borrower rights issues are left unresolved

when loans are sold to non-System lenders who are not Farmer Mac

poolers. Uncertainty over the status of borrower rights may also deter

an informed non-System lender from purchasing loans from FCS banks and

associations.

The approach advocated by the commenters would allow FCS

institutions to unilaterally deprive borrowers of their statutory

rights without their consent. Accordingly, the FCA will retain

Sec. 614.4336(a) because it implements the Act by equitably balancing

borrower rights with the authority of FCS banks and associations to

sell loans to non-System lenders.

Recently, the FCA has received inquiries about the application of

borrower rights to loans that are guaranteed by other Federal agencies.

This issue is currently under consideration at FCA.

E. Disclosures

Under Sec. 614.4337(a), an FCS bank or association that sells a

loan to another lender is required to disclose to the borrower

specified information about the purchaser, the servicing agent,

borrower rights, and changes in the loan terms. Two commenters

suggested that the disclosure of loan sales and the corresponding

reporting requirements in Sec. 614.4337(a) are unnecessary because they

should be handled by the purchaser of the loan, rather than the FCS

institution.

The FCA believes that the disclosure requirements in

Sec. 614.4337(a) are the responsibility of the seller, not the

purchaser, of System loans. As previously discussed, the Act imposes

borrower stock and borrower rights requirements on loans that are

originated by System banks and associations. These institutions are in

the best position to explain the impact of the sale on these matters.

Furthermore, disclosures concerning servicing rights were added to this

regulation after a General Accounting

[[Page 57916]]

Office report criticized certain System loan sale practices that

created hardships for many borrowers. See 57 FR 38237 (Aug. 24, 1992).

As Sec. 614.4337 addresses the obligations of System institutions that

originate and subsequently sell the borrowers' loans, the FCA will not

repeal this regulation.

F. Investment in Farmers' Notes

Several FCBs and associations requested that the FCA either

eliminate or modify the full-recourse requirement in Sec. 615.5172,

which authorizes PCAs and ACAs to invest in Farmers' Notes. This

regulation authorizes PCAs and ACAs, in accordance with the policies

prescribed by the boards of their funding banks, to invest in notes and

other obligations evidencing the purchase of farm equipment, machinery,

and supplies by farmers and ranchers from private dealers and

cooperatives. The regulation requires that the debtors on these

Farmers' Notes must be eligible to borrow from PCAs and ACAs. More

importantly, Sec. 615.5172(d) states that ``all notes in which the

association invests shall be endorsed with full recourse against the

cooperative or dealer.''

Commenters claimed that this full-recourse requirement adversely

impacts System competitiveness in the short-term credit market and

restrains their business opportunities.

The commenters asserted that: (1) The recourse requirement should

be a credit decision of the association, and (2) the full-recourse

requirement is unrelated to safety and soundness.

Although the FCA realizes that the full-recourse requirement in

Sec. 615.5172(d) may deprive PCAs and ACAs of some profitable business

opportunities, it implements several provisions of the Act. The

Farmers' Notes program derives from section 2.2(10) of the Act, which

authorizes associations to invest their funds, as approved by their

funding bank, pursuant to FCA regulations. Therefore, the regulation

implements the investment authorities, not the lending powers, of PCAs

and ACAs. Because the full-recourse requirement precludes PCAs and ACAs

from assuming any credit risk on Farmers' Notes, Sec. 615.5172(d)

ensures that these instruments are treated as investments rather than

loans.

The full-recourse requirement prevents PCAs and ACAs from extending

credit to an eligible borrower without complying with provisions of the

Act that govern their lending authorities and capitalization

requirements. Farm Credit banks and associations lack authority under

sections 1.5(16) and 2.2(11) of the Act, respectively, to purchase

operating loans from non-System lenders. Furthermore, the commenters'

recommendation is incompatible with provisions of the Act that require:

(1) System institutions to accord borrower rights on agricultural or

aquatic loans, and (2) farmers to purchase voting stock when they

obtain credit from a System lender. For these reasons, the FCA cannot

delete or modify the full-recourse requirement in Sec. 615.5172(d)

without an amendment to the Act to allow System banks and associations

to purchase loans from non-FCS lenders.

III. Future Efforts To Reduce Unnecessary Regulatory Burdens on FCS

Institutions

All remaining regulatory burden issues that System institutions

raised during the comment period are being addressed in separate

regulatory projects that have already been assigned to specific FCA

task forces. Within the past 2 years, the FCA has responded to some

System concerns about regulatory burdens by adopting final investment

and related services regulations. This summer, the FCA proposed new

eligibility regulations that are designed to relieve unnecessary

regulatory burdens on the FCS while simultaneously enforcing statutory

requirements and promoting safety and soundness. The FCA work groups

are considering possible amendments to existing regulations that

govern: (1) General Financing Agreements; (2) Agency prior approvals;

(3) quarterly reports to shareholders; (4) letters of credit for

international trade; (5) credit underwriting standards and independent

credit judgments on loan participation; and (6) the 10-day notification

requirement for changes in interest rates. Separately, the FCA will

review whether Sec. 611.330 could be amended so that FCS institutions

could, under certain conditions, use ballots containing identity codes

in non-weighted elections without compromising voter secrecy and the

integrity of the electoral process. The Agency also plans to reevaluate

the regulatory timeframes associated with the reconsideration of

mergers, consolidations, and other corporate restructurings that have

been approved by an institution's shareholders under Sec. 611.1122(k).

Sections 4.9 and 5.17(a)(3) of the Act specifically require reports

about young, beginning, and small farmer programs at FCS institutions.

The FCA has no latitude to grant relief from these statutory reporting

requirements. However, the Agency is currently considering whether

Sec. 614.4165(d) is still necessary because other methods may be

appropriate for ensuring compliance with the statutory reporting

requirements for young, beginning, and small farmer programs.

As part of its strategic plan, the FCA is considering comprehensive

revisions to the Loan Accounting and Reporting System (LARS) and Call

Report requirements. As results are achieved from this strategic goal,

unnecessary or duplicative LARS and Call Report requirements on System

institutions will be eliminated. However, changes to these reporting

requirements and further changes to regulatory requirements must be

accomplished without any adverse impact on the ability of the FCA to

discharge its safety and soundness responsibilities under the Act.

Except for the specific issues outlined above that may be addressed

in ongoing regulation projects, the FCA considers this its final

response to comments received pursuant to its regulatory burden

request.

Dated: November 17, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-28583 Filed 11-22-95; 8:45 am]

BILLING CODE 6705-01-P