Loan Policies and Operations

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB52

Loan Policies and Operations

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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

Administration Board (Board), proposes to amend the regulations

governing disclosure of loan information. The FCA proposes to remove

the requirement that Farm Credit institutions give borrowers 10 days

prior notification of a change in the interest rate on their variable

rate loans and replace it with a 10-day post notification. This action

would reduce the burden on institutions of a delay in interest rate

changes while still providing borrowers with timely notice of a change.

The proposed regulation would also make a technical amendment regarding

eligible borrower stock.

DATES: Comments should be received on or before December 26, 1995.

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

Associate Director, Regulation Development, Office of Examination, Farm

Credit Administration, McLean, Virginia 22102-5090. Copies of all

communications received will be available for examination by interested

parties in the Office of Examination, Farm Credit Administration,

McLean, Virginia.

FOR FURTHER INFORMATION CONTACT:

Robert Child, Policy Analyst, Regulation Development, Office of

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

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

or

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

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

22102-5090, (703) 883-4019, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: Section 614.4367(c)(3)requires qualified

lenders 1 to provide written notification to borrowers of a change

in the interest rates on their adjustable rate loans. For decreases in

rates, the notification must be provided not later than the effective

date of the decrease. For increases in rates, the notice must be

provided not later than 10 days before the effective date of the

increase in the rate.

\1\ A qualified lender is: (1) A Farm Credit institution that

makes loans as defined by Sec. 614.4366(e), except a bank for

cooperatives; and (2) each other entity described in section

1.7(b)(1)(B) of the Farm Credit Act of 1971, as amended (Pub. L. 92-

171), but only with respect to loans discounted or pledged under

section 1.7(b)(1) of the Act. See, Act, Sec. 614.4366(g).

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

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

the FCA could lessen the regulatory burden on Farm Credit institutions.

In response, three institutions commented that the 10-day prior

notification requirement was a burden that should be addressed by the

Agency. One institution commented that the prior notification was a

burden for variable rate loans that are tied to an external index, such

as the prime rate, because borrowers have ready access to timely

information about changes in such indexes. The other two commenters

objected to the requirement for advance notification of borrowers for

all variable rate loans, including those not tied to an external index.

The FCA is cognizant that delaying an adjustment in a variable

interest rate can result in losses to an institution in situations in

which an index increases or funding costs increase, but the institution

is prohibited from increasing the interest rate charged to borrowers

until a waiting period expires. In addition, the FCA recognizes that

there are costs associated with mailing written notification of changes

in interest rates. There may also be an unnecessary burden associated

with the prior notice requirement where increases and decreases in loan

rates are tied to indexes that are readily available in financial

publications. The FCA considered these factors in attempting to balance

the need of borrowers for timely information and the burden on Farm

Credit institutions.

[[Page 57963]]

In consideration of the competing aims of reducing burden and

providing timely information to borrowers, the FCA proposes to modify

the notification requirements in Sec. 614.4367. The proposed amendment

would require written notification to be provided to borrowers with

adjustable rate loans not later than 10 days after a change in the

interest rate on the loans. Thus, for decreases in rates, the proposal

would change the notification from not later than the effective date of

the change, to not later than 10 days after the decrease. More

significantly, the proposal would change the notification requirements

for increases in interest rates from 10 days advance notification to 10

days after the change in rates. The FCA is proposing to change the time

period applicable to both notices of increases and decreases in order

to have a single notification, and thus simplify the requirement for

all changes in adjustable interest rates.

The FCA believes that a 10-day post notification will provide

borrowers with timely information on rate changes and will

significantly reduce the burden on institutions, including the costs

associated with delaying interest rate changes. Savings to lenders

ultimately may be passed on to borrowers in the form of lower interest

rates; however, the absence of a prior notice is a disadvantage to

individual borrowers because they will not be in a position to react as

quickly to refinancing opportunities. The disadvantage should be

minimal, however, because borrowers have ready access to changes in

financial markets and trends in interest rates through the news media

and other sources. Administered rate loans have historically followed

changes in the prime rate because the costs of funds to the

associations generally follow shifts in market rates. Borrowers who

follow the interest rate market would seldom be surprised by a change

in interest rates charged by associations.

Although the FCA believes that the proposal is an appropriate

balance between the needs of the institutions and borrowers, the FCA

seeks comment on several issues. First, the FCA seeks comment on

whether notices of rate changes tied to publicly available external

indexes should be required within 30 days, rather than 10 days as

proposed. Specifically, would permitting a longer time for such notices

accrue additional cost-savings to System lenders that would exceed the

potential cost to borrowers of added delay in receiving notice of the

rate increase? Such cost savings may occur, for example, if lenders

regularly send monthly statements to a significant number of borrowers

having variable rate loans tied to an external index. In these

situations, the notification of rate increase could be incorporated in

the monthly statement, thereby eliminating the need for a separate

notice. Second, is a notice necessary for decreases in interest rates,

and if so, is 10 days or 30 days a more appropriate time limit?

The FCA is also proposing a technical amendment to

Sec. 614.4367(a)(4) which addresses disclosures to purchasers of

protected eligible borrower stock. Because only stock in existence at

the time of enactment of the Agricultural Credit Act of 1987 (Pub. L.

100-233, Jan. 6, 1988) or stock issued within 9 months of enactment

meets the definition of eligible borrower stock in section 4.9A of the

Act, no further eligible borrower stock may be issued. Thus, all stock

issued by Farm Credit institutions since 1988 is at risk. The proposal

would delete the reference to eligible borrower stock in

Sec. 614.4367(a)(4) as unnecessary.

List of Subjects in 12 CFR Part 614

Agriculture, Banks, banking, Foreign trade, Reporting and

recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, part 614 of chapter VI,

title 12 of the Code of Federal Regulations is proposed to be amended

to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

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

follows:

Authority: 42 U.S.C. 4012a, 4014a, 4104b, 4106, and 4128; Secs.

1.3, 1.5, 1.6, 1.7, 1.9., 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,

2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,

4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36,

4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5

of the Farm Credit Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017,

2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122,

2123, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202,

2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244,

2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1,

2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568,

1639.

Subpart K--Disclosure of Loan Information

Sec. 614.4367 [Amended]

2. Section 614.4367 is amended by removing the words ``Except with

respect to eligible borrower stock under section 4.9A of the Act,'' and

capitalizing the word ``a'' in paragraph (a)(4); and by removing the

words ``the effective date of a decrease in the interest rate and not

later than 10 days before the effective date of an increase'' and

adding in its place the words ``10 days after the effective date of a

change'' in the second sentence of paragraph (c)(3).

Dated: November 17, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-28586 Filed 11-22-95; 8:45 am]

BILLING CODE 6705-01-P