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

FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, and 618

RIN 3052-AB53

Loan Policies and Operations; Funding and Fiscal Affairs, Loan

Policies and Operations, and Funding Operations; General Provisions

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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

Board (Board), proposes to repeal several regulations as part of an

ongoing effort to reduce unnecessary regulatory burden on Farm Credit

System (FCS or System) institutions. Comments that the FCA solicited

through a notice of intent regarding regulatory burden identified most

of the regulations that the FCA now proposes to delete. The FCA concurs

with the commenters that these particular regulations should be

repealed because they are outdated or impose a burden that is greater

than the benefit derived.

DATES: Written comments must be received on or before February 9, 1995.

ADDRESSES: Comments may be mailed or delivered (in triplicate) to

Patricia W. DiMuzio, Associate Director, Regulation Development, Office

of Examination, 1501 Farm Credit Drive, McLean, VA 22102-5090. Copies

of all communications received will be available for examination by

interested parties in the Office of Examination, Farm Credit

Administration.

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 seeking public comment on the appropriateness of requirements

the FCA regulations impose on the FCS. More specifically, the FCA asked

the public to identify regulations that either duplicate other

governmental requirements, are not effective, or impose a burden that

is greater than the benefit derived. The notice of intent was published

in the Federal Register (58 FR 34003) on June 23, 1993. Although the

90-day comment period expired on September 21, 1993, the FCA considered

comments that were received subsequent to that date.

The FCA received a total of 28 responses. The FCA received nine

comment letters from individual Farm Credit associations and three

letters from groups of associations in particular Farm Credit

districts. Seven Farm Credit banks sent 12 comment letters to the FCA.

The Farm Credit Council (FCC) sent a comment letter on behalf of its

membership. Additionally, three separate work groups of the Farm Credit

System Presidents Planning Committee each sent the FCA a position paper

containing recommendations to relieve regulatory burdens pertaining to

capital, eligibility, and financially related services.

Many of the comments involve regulatory projects that the FCA Board

previously identified in the Unified Agenda of Federal Regulations

published in the Federal Register on October 25, 1993 (58 FR 57276).

The FCA work groups organized to develop revised regulations on these

issues will consider the comments as they evaluate various policy

options during the course of their regulatory projects. The analysis

and appropriate response to comments regarding topics under review by

these existing work groups will be included as part of any regulatory

action published in the Federal Register.

The remaining comments contained a number of recommendations for

eliminating or modifying specific regulations that are perceived as

imposing unnecessary regulatory burdens on the FCS. The FCA's review

and analysis of these comments was guided, in part, by the FCA Board's

Policy Statement on Regulatory Philosophy (Policy Statement).1

\1\59 FR 32189, June 22, 1994.

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The Policy Statement conveys that ``[t]he FCA will work to

eliminate outdated regulations and ensure that its regulations

implement the purposes of the law without unnecessary burden or cost.''

According to the Policy Statement, the FCA shall only adopt regulations

that: (1) Implement or interpret the law; or (2) are necessary to

promote the safe and sound operations of System institutions. The

Policy Statement also commits the FCA to replacing outmoded regulations

with new regulations that implement the purposes of the law without

imposing unnecessary costs or burdens on FCS institutions. Another

provision in the Policy Statement declares that the FCA will strive to

ensure that each regulation has a well-defined objective addressing

specific problems or risks. In this context, the FCA will seek to

establish a regulatory environment that grants FCS institutions the

business flexibility to offer a full range of high-quality, low-cost

credit services to borrowers. The Policy Statement also states that the

FCA, to the extent feasible, will seek to eliminate regulations that

prescribe specific operational or managerial practices to System

institutions. If appropriate, the FCA will consider the regulatory

approaches of other Federal financial institution regulators. Finally,

another provision in the Policy Statement pledges that when the need

arises, the FCA will draft new regulations so that they are clear, easy

to understand, and designed to minimize the potential for ambiguity,

uncertainty, and resultant litigation.

The FCA analyzed the commenters' recommendations, and determined

that many of the suggestions warranted the immediate repeal of certain

FCA regulations. Other suggestions will require additional research and

analysis before the FCA determines whether, and to what extent, changes

in the existing regulations should be proposed. Once a determination is

made, the public will be notified of the FCA Board's decisions

regarding the remaining issues in an appropriate manner.

The FCA is proposing to repeal the following regulatory provisions:

Secs. 615.5104; 615.5105(c); 615.5170(b) through (e); 615.5190;

615.5498; 615.5500; 615.5520; 615.5530; and 618.8220. In addition, the

FCA is proposing to repeal the FCA prior approval requirements in

Secs. 614.4470(b)(1) and (b)(3). An explanation of the FCA's reasons

for proposing the repeal of these regulations follows. The FCA invites

public comment on all aspects of the proposed rule.

II. Analysis of Changes and Comments by Section

A. Loans Subject to Bank Approval

A Farm Credit Bank (FCB) and a bank for cooperatives (BC) suggested

that the FCA eliminate all agency prior approvals of FCS institution

policies, procedures, and transactions that are not required by the

Act. The commenters stated that these prior approval requirements are

inconsistent [[Page 2553]] with the FCA's status as an arm's-length

regulator, and deny System institutions the opportunity to use their

business judgment. The commenters specifically indicated that the

agency should give priority to the removal of the prior approval

requirements for general financing agreements (GFAs), financially

related services (FRS), and certain insider loan transactions.

Since the enactment of the Agricultural Credit Act of 1987 (1987

Act),2 the FCA has eliminated from the regulations many of the

prior approval requirements that are not mandated by the Act. The FCA

is in the process of reviewing all the remaining non-statutory prior

approvals in order to determine whether they should be retained. The

FCA has already established regulatory projects to determine whether

the agency prior approvals of GFAs and FRS are still feasible. Another

work group is currently reviewing whether the FCA should continue to

pre-approve the retirement of protected stock outside the ordinary

course of business.

\2\Pub. L. No. 100-233, 101 Stat. 1568, (January 6, 1988).

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At this time, the FCA is proposing to eliminate from both

Secs. 614.4470(b)(1) and (b)(3) the requirement that the agency pre-

approve certain insider loan transactions at System associations.

Section 614.4470(a) requires funding banks to pre-approve loans that

their affiliated associations make to: (1) Their own directors or

employees; (2) directors or employees of a jointly managed association;

or (3) bank employees. Furthermore, Sec. 614.4470(b) requires FCA

approval of loans to any borrower whenever certain institution-

affiliated parties will: (1) Receive proceeds of a loan in excess of an

amount established by the funding bank; or (2) endorse, guarantee, or

comake a loan that is in excess of the amount established by the

funding bank.

The FCA agrees with the commenters that the prior approval

requirements in Secs. 614.4470 (b)(1) and (b)(3) are no longer

appropriate since the FCA has become an arm's-length regulator. An

existing regulation, 12 CFR 620.5, requires that System institutions

disclose in their annual reports to shareholders insider loan

transactions. In addition, the FCA has sufficient examination and

enforcement powers to ensure that loans to institution-affiliated

parties do not undermine the solvency of any FCS bank or association.

If the agency prior approval requirements in Sec. 614.4470(b) are

repealed, the FCA intends to rely upon its examination authority to

determine whether: (1) Bank policy adequately deters insider abuses at

institutions in its district; and (2) associations are complying with

bank policy.

B. Debt Policy and Consolidated Systemwide Notes

Two Farm Credit banks requested that the FCA repeal Secs. 615.5104

and 615.5105(c) because they are no longer necessary. Section 615.5104

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

Section 615.5105(c) requires each bank to identify in its debt

management policy the maximum amount of discount notes that can be

outstanding at any one time.

The FCA recently revised Sec. 615.5135 to require each FCS bank to

adopt an asset/liability management policy. See 58 FR 63034, November

30, 1993. This new regulation requires the policies of System banks to

address the management of both assets and liabilities in a more

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

require. Since the FCA agrees with the commenters that Secs. 615.5104

and 615.5105(c) are now obsolete, the agency proposes to delete these

two regulations. The new investment regulations in subpart E of part

615 enhance the ability of Farm Credit banks to control liquidity and

solvency risks in their portfolios.

C. Real and Personal Property

An FCB and a BC commented that Secs. 615.5170 (c) and (d) are

outdated and should be removed from the FCA regulations. These

commenters also asserted that the regulation improperly involves banks

in the real and personal property acquisitions of their affiliated

associations. After carefully evaluating the commenters' suggestions,

the FCA proposes to repeal Secs. 615.5170 (b) through (e).

The FCA has concluded that Secs. 615.5170 (b) through (d) prescribe

detailed operational standards, rather than performance criteria, for

ensuring the safe and sound operation of System banks and associations.

Furthermore, these provisions neither implement nor interpret

provisions in the Act that govern the acquisition of real or personal

property by FCS banks and associations. The FCA believes that these

regulatory provisions impose burdens on System institutions that

produce no corresponding benefits. The FCA also observes that

paragraphs (b), (c), and (d) of Sec. 615.5170 are obsolete because they

impose responsibilities on the ``district boards'' that were abolished

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

of 1988.3

\3\Pub. L. No. 100-399, Section 409(d), 102 Stat. 989, 1003,

(August 17, 1988).

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The FCA also believes that Sec. 615.5170 (d) and (e) are no longer

necessary because the safety and soundness concerns posed by

information system processing technology are now adequately addressed

in FCA Information Systems Bulletins. Additionally, Information Systems

Bulletin 92-1 addresses information system risks in mergers and

acquisitions.

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

provision implements the applicable sections of the Act. Sections

1.5(5) and 3.1(5) of the Act authorize each bank, subject to regulation

by the FCA, to acquire, hold, dispose, and otherwise exercise all the

usual incidents of ownership of real and personal property necessary or

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

provide associations with similar authorities subject to the

supervision by the district bank and regulation by the FCA. Section

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

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

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

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

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

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

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

For safety and soundness reasons, Sec. 615.5170(a) also prohibits banks

and associations from directly investing in real estate because such

extraneous business activities may increase the exposure of System

institutions to loss.

D. Deposits of Funds

The FCA proposes to repeal Sec. 615.5190. The FCA did not receive

any comments concerning Sec. 615.5190(a), but it proposes to repeal

this provision. The FCA has determined that Sec. 615.5190(a) is

unnecessary because sections 1.5(14), 2.2(10), 2.12(18) and 3.1(12) of

the Act provide the requisite authority for FCS institutions to deposit

current funds in commercial banks that are either members of the

Federal Reserve System, or are insured by the Federal Deposit Insurance

Corporation (FDIC).

Two Farm Credit banks recommended that the FCA repeal

Sec. 615.5190(b) because there is no statutory basis for requiring the

National Bank for Cooperatives (CoBank) to make foreign

[[Page 2554]] deposits for the other BCs. The commenters also assert

that Sec. 615.5190(b) unnecessarily restricts other BCs from becoming

active in the international arena.

Section 615.5190(b) was originally adopted in 1981 (46 FR 51881,

October 22, 1981), when there were 12 BCs and the Central Bank for

Cooperatives (CBC). After section 304 of the Farm Credit Act Amendments

of 19804 granted international lending authorities to the BCs, the

FCA decided that the CBC should conduct all international banking

transactions on behalf of the district BCs. At the time, only the CBC

had the expertise to reduce the safety and soundness risks that derive

from currency exchange transactions. After the CBC and 10 district BCs

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

CoBank to assume the CBC's function. See 56 FR 2671, January 24, 1991.

\4\Pub. L. No. 96-592, Section 304, 94 Stat. 3437, 3444,

(December 24, 1980).

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After careful reflection on this issue, the FCA has determined that

the safety and soundness risks inherent in currency exchange

transactions should not be controlled by a regulation which flatly

prohibits a BC or an agricultural credit bank (ACB), other than CoBank,

from independently exercising its international banking authorities

under section 3.7(a) of the Act. The existing regulation unduly

restricts the business flexibility of BCs and ACBs, other than CoBank,

to offer a full range of high-quality, low-cost international financial

and credit services to their customers.

If Sec. 615.5190(b) is repealed, the FCA will rely upon its

examination and enforcement powers to ensure that all BCs and ACBs

conduct their currency exchange transactions in a safe and sound

manner. The FCA emphasizes that each BC and ACB is responsible for

employing personnel who have the competency and expertise to conduct

its international banking operations. In the alternative, a BC or an

ACB may contract with commercial banks, other FCS banks operating under

title III of the Act, or other qualified institutions for the

management of its currency exchange transactions.

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

holding certificates of deposit that are denominated in foreign

currencies as investments under Sec. 615.5140. This provision predates

the revisions to Sec. 615.5140, which now requires System banks to

acquire investments that are denominated only in United States dollars.

The duplicative nature of Sec. 615.5190 supports FCA's decision to

repeal this regulation.

E. Farm Credit Securities as Illustrations

The FCA is proposing to repeal Sec. 615.5498, which regulates the

illustration of Farm Credit securities that are used for educational or

illustrative purposes. The FCA proposes to delete Sec. 615.5498

although it received no comments about this regulation. The purpose of

this regulation is to deter counterfeiting of definitive FCS

securities. Since virtually all FCS securities are now issued in book-

entry form, Sec. 615.5498 is obsolete. The Federal Farm Credit Banks

Funding Corporation and individual System banks can implement adequate

safeguards to minimize the risk of counterfeiting of the few securities

that are still issued in definitive form.

F. Open Registered Mail and Express Policy

The FCA is proposing to repeal subpart P of part 615, which

consists of Secs. 615.5500, 615.5520, and 615.5530. These three

regulations govern the shipment of negotiable securities through the

United States Postal Service. The regulations of subpart P of part 615

were designed to eliminate the System's exposure to loss at a time when

FCS negotiable securities were routinely shipped by mail between the

Bureau of Printing and Engraving and the Federal Reserve Bank of New

York. The practice of shipping negotiable securities through the mail

was discontinued several years ago. The advent of electronic and

computer technology for transferring negotiable securities through the

book-entry system has rendered subpart P of part 615 obsolete.

G. Contributions and Membership in Other Organizations

Two FCBs petitioned the FCA either to delete or amend

Sec. 618.8220. This regulation requires the boards of directors of FCS

banks and associations to approve: (1) Charitable contributions; and

(2) the payment of membership dues in any voluntary association, club,

or society. The regulation further requires boards of directors, during

the approval process, to consider the business benefits and tax

consequences of such contributions and memberships for the bank or

association.

The commenters contend that Sec. 618.8220 prohibits an

institution's board of directors from delegating responsibility for

such matters to management. The commenters also assert that board

approval often prevents a Farm Credit bank or association from honoring

unforeseen charitable requests in a timely manner. In this context, the

commenters expressed concern that an FCS institution's reputation in

its community will suffer damage if it does not respond to requests

from charities and benevolent societies in a prompt and prudent manner.

The FCA agrees with the commenters that Sec. 618.8220 unnecessarily

interferes in the business operations of System institutions.

Furthermore, Sec. 618.8220 unnecessarily prescribes management

practices to System banks and associations. The FCA observes that

Sec. 618.8220 imposes requirements on FCS institutions that are not

commensurate with the safety and soundness risks posed by System

charitable and social activities. The FCA's examination and enforcement

powers can adequately deter System institutions from conducting these

activities in an unsafe and unsound manner. For these reasons, the FCA

is proposing to remove Sec. 618.8220 to provide FCS institutions the

additional flexibility they are seeking.

List of Subjects

12 CFR Part 614

Agriculture, Banks, Banking, Foreign trade, Reporting and

recordkeeping requirements, Rural areas.

12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,

Investments, Rural areas.

12 CFR Part 618

Agriculture, Archives and records, Banks, Banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

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

chapter VI, title 12 of the Code of Federal Regulations are 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: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3,

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

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

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

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

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

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

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

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

[[Page 2555]] 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L.

100-233, 101 Stat. 1568, 1639.

Subpart M--Loan Approval Requirements

Sec. 614.4470 [Amended]

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

by the Farm Credit Administration'' from paragraphs (b)(1) and (b)(3).

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

AND FUNDING OPERATIONS

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

follows:

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

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

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

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

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

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

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

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

Obligations

Sec. 615.5104 [Removed]

4. Section 615.5104 is removed.

Sec. 615.5105 [Amended]

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

Subpart F--Property and Other Investments

Sec. 615.5170 [Amended]

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

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

Subpart G--[Removed and reserved]

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

Subpart O--Issuance of Farm Credit Securities

Sec. 615.5498 [Removed and reserved]

8. Section 615.5498 is removed and reserved.

Subpart P--[Removed and reserved]

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

is removed and reserved.

PART 618--GENERAL PROVISIONS

10. The authority citation for part 618 continues to read as

follows:

Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7,

4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12

U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183,

2200, 2211, 2218, 2243, 2244, 2252).

Subpart F--Miscellaneous Provisions

Sec. 618.8220 [Removed and reserved]

11. Section 618.8220 is removed and reserved.

Dated: January 4, 1995.

Floyd Fithian,

Acting Secretary, Farm Credit Administration Board.

[FR Doc. 95-489 Filed 1-9-95; 8:45 am]

BILLING CODE 6705-01-P