Loan Policies and Operations; Other Financing Institutions

SUMMARY: The Farm Credit Administration (FCA) requests public comment

through an Advance Notice of Proposed Rulemaking (ANPRM) concerning

potential revisions to the regulations in subpart P of part 614 that

govern the funding and discount relationship between Farm Credit System

(Farm Credit, FCS, or System) banks that operate under title I of the

Farm Credit Act of 1971, as amended (Act), and non-System other

financing institutions (OFIs). Farm Credit Banks (FCBs) and

agricultural credit banks (ACBs) are authorized to fund and discount

certain short- and intermediate-term loans for non-System lenders, such

as commercial banks, savings associations, credit unions, trust

companies, agricultural credit corporations, and other agricultural and

aquatic lenders as part of their mission to finance agriculture,

aquaculture, and other specified rural credit needs. External

developments, such as the consolidation of the commercial banking

industry, the advent of interstate banking and branching, the gradual

reduction of Federal assistance to agriculture and rural communities,

and the increased interest of non-System financial institutions in

additional sources of funding and liquidity may necessitate revisions

to the regulations in subpart P of part 614 so that System banks can

fulfill their obligation to meet demands in rural communities for

short- and intermediate-term credit. The purpose of any future

rulemaking would be to ensure that eligible and creditworthy farmers,

ranchers, aquatic producers and harvesters, processing and marketing

operators, farm-related businesses, and rural homeowners will continue

to have access to affordable, dependable, and stable short- and

intermediate-term credit through both System and non-System lenders.

Specifically, this ANPRM seeks comments regarding the FCA's OFI

regulations and how they may be revised to better implement the

statutory provisions.

DATES: Written comments should be received on or before July 16, 1996.

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 or sent by facsimile transmission to the FAX number at (703) 734-

5784. 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:

Eric Howard, Policy Analyst, Regulation Development, Office of

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

883-4498, or

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

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

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

SUPPLEMENTARY INFORMATION: The Agricultural Credit Act of 1923 1

created 12 Federal intermediate credit banks (FICBs) to discount

agricultural production loans for national and State banks, trust

companies, savings associations, credit unions, agricultural credit

corporations, incorporated livestock loan companies, and other

specified lenders. In 1930, Congress authorized the former FICBs to

make secured loans and advances directly to such institutions

(hereinafter OFIs).2 As a result, OFIs could borrow from and

discount production agricultural loans with System banks before the

Farm Credit Act of 1933 3 created production credit associations

(PCAs) as an alternative source of financing the operating needs of

farmers and ranchers.

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\1\ Pub. L. No. 503, 42 Stat. 1454, (Mar. 4, 1923).

\2\ Pub. L. No. 439, 46 Stat. 816, (June 26, 1930).

\3\ Pub. L. No. 75-73D, title II, 48 Stat. 257, 259, (June 16,

1933).

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The legislative history to the Act reveals that Congress originally

granted OFIs discount privileges at System banks in order to redress

the scarcity of operating credit for farmers and ranchers.4 During

the past 73 years, Congress has responded to the changing demands of

agricultural producers and other rural residents for affordable short-

and intermediate-term credit by updating the statutory authorities of

the FICBs and their successor FCBs and ACBs 5 to provide funding

and financial assistance to both System and non-System lenders.

Currently, section 1.7(b) of the Act authorizes OFIs to obtain funding

from FCBs or ACBs for any loan that a PCA could make under section 2.4

of the Act to eligible farmers, ranchers, aquatic producers and

harvesters, processing and marketing operators, farm-related

businesses, and rural homeowners.

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\4\ See H. R. Rep. No. 1712, 67th Cong., 1st. Sess. (Feb. 25,

1923), P. 17.

\5\ Section 410 of the Agricultural Credit Act of 1987 (1987

Act) created the FCBs through the mandatory merger of the Federal

Land Bank and the FICB in each Farm Credit district. See Pub. L. No.

100-233, Sec. 410, 101 Stat. 1568, 1637, (Jan. 6, 1988). Section 7.0

of the Act allows a FCB to merge with a bank for cooperatives in

order to form an ACB. Section 7.0 of the Act derives from section

416 of the 1987 Act. Section 7.0 was further amended by section

408(b) of the Agricultural Credit Technical Corrections Act of 1988.

See Pub. L. No. 100-233, Sec. 416, 101 Stat. 1568, 1645, (Jan. 6,

1988); Pub. L. No. 100-399, Sec. 408(b), 102 Stat. 989, 1001, (Aug.

17, 1988).

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Section 1.7(b)(4) of the Act requires the FCA to enact regulations

that assure that funding from Farm Credit banks operating under title I

of the Act will be ``available on a reasonable basis'' to any national

bank, State bank, trust company, agricultural credit corporation,

incorporated livestock loan company, savings association, credit union,

association of agricultural producers engaged in making loans to

farmers and ranchers, or corporation engaged in making loans to

producers or harvesters of aquatic products that: (1) Is significantly

involved in lending for agricultural or aquatic purposes; (2)

demonstrates a continuing need for supplementary sources of funds to

meet the credit requirements of its agricultural or aquatic borrowers;

(3) has limited access to national or regional capital markets; and (4)

does not use the services of System banks to extend

[[Page 24908]]

credit to persons and for purposes that cannot be financed by a PCA

under title II of the Act. According to the legislative history to

section 1.7(b)(4) of the Act,6 Congress intended that Farm Credit

banks act as a primary funding and liquidity source for small, local

OFIs so they in turn could meet certain short- and intermediate-term

credit needs in their rural communities.7 However, the legislative

history to section 1.7(b)(4) of the Act also indicates that Congress

did not intend to exclude other agricultural creditors from funding or

discounting loans with System banks,8 so long as they have a need

for supplementary funds that cannot be met through access to national

or regional capital markets.

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\6\ Current section 1.7(b)(4) derives from section 203 of the

Farm Credit Act Amendments of 1980 (1980 Act). See Pub. L. No. 96-

592, Sec. 203, 94 Stat. 3437, 3441, (Dec. 24, 1980). Section 203 of

the 1980 Act substantially revised former section 2.3 of the Act,

which set forth the lending authorities of the FICBs. The new OFI

eligibility criteria in section 203 of the 1980 Act were

incorporated into former section 2.3(d) of the Act. Section 401 of

the 1987 Act, which set forth the powers and obligations of the

FCBs, recodified the requirements in former section 2.3(d) as

section 1.7(b)(4) of the Act. See Pub. L. No. 100-233, Sec. 401, 101

Stat. 1568, 1625 (Jan 6, 1988).

\7\ See H.R. 96-1287, 96th Cong., 2d. Sess., (1980), 21, 32-34.

See also 126 Cong. Rec. H 10960-64 (daily ed. Nov. 19, 1980).

\8\ Id.

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Section 1.7(b) of the Act requires FCBs and ACBs to extend credit

to qualified OFIs (within the confines of safety and soundness) as part

of their mission to finance agriculture, aquaculture, and other

specified rural credit needs. While many OFIs often compete directly

with PCAs and agricultural credit associations (ACAs) that own voting

stock in the FCB or ACB, the Act requires Farm Credit banks to extend

funding on a safe and sound lending basis to any qualified OFI so that

farmers, ranchers, aquatic producers and harvesters, farm-related

businesses and rural homeowners have access to affordable and

dependable credit.

The number of OFIs that fund or discount loans with System banks

has declined from a peak of 327 in 1982 to 22 on December 31, 1995.

Furthermore, the amount of credit that System banks have extended to

OFIs has decreased from almost $914 million in 1981 to $230.8 million

as of December 31, 1995. The farm crisis of the 1980s caused a decline

in overall agricultural debt, which in turn, substantially reduced the

number of OFIs and their demand for System financing. The FCS also

experienced significant financial stress between 1984 and 1989, and

many OFIs terminated their discounting relationship with System banks

because: (1) They sought to reduce their exposure to loss by retiring

their investments in FCS banks; (2) the FCS no longer offered

competitive rates; or (3) several OFIs ceased operations as a result of

merger or closure. Many rural commercial banks, including some OFIs,

merged with regional banks or bank holding company networks that did

not qualify for OFI status because they were no longer significantly

engaged in agricultural lending.

The financial strength of Farm Credit banks has significantly

improved in the past several years. As a result, FCBs and ACBs are

better positioned to help increase the availability of reasonably

priced and dependable credit in many of America's rural communities.

Efforts by Federal and State governments to balance their budgets may

reduce direct assistance to agriculture and rural development in future

years. As rural areas require greater private sector investment to

sustain their economic viability, local financial institutions are

seeking alternative means to provide affordable credit to their

communities on a sustainable basis. Rural lenders also face liquidity

problems from time-to-time. Loan-to-deposit ratios at rural depository

institutions are now at historically high levels.9 As the

commercial banking industry continues to consolidate into large

national and regional networks it is unclear how the credit needs in

rural communities will be affected.

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\9\ A recent study indicates that loan-to-deposit ratios at

commercial banks of all sizes that substantially engage in

agricultural lending have risen from 53.6 percent in 1987 to 86.2

percent as of June 30, 1995. See Economic Research Service, U.S.

Dep't of Agriculture, (AIS-60), Agricultural Income and Finance

Situation and Outlook Report, 11, 53. (Feb. 1996).

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Today, several non-System financial institutions are once again

expressing interest in obtaining FCS funding for their short- and

intermediate-term loans to agricultural and other rural borrowers.

However, many of these non-System institutions perceive barriers that

impede their access to System funding. Although a variety of factors

may have contributed to the historical decline in the OFI lending

program, the FCA wants to eliminate any regulatory restrictions that

are not required by the Act and its legislative history or do not

promote safety and soundness of the FCS.

The FCA wants to ensure that the relationship between Farm Credit

banks and OFIs provides another means for meeting the short- and

intermediate-term credit needs of agricultural producers and other

rural borrowers, as Congress intended. The existing regulations were

enacted in 1981, after Congress amended the OFI provisions in the Act.

See 46 FR 51886 (Oct. 22, 1981). As a result of external developments

over the past 15 years, the FCA believes that it is now time to review

these regulations in subpart P of part 614 to determine whether they

are appropriately addressing the credit needs of non-System

institutions that lend to agriculture and rural communities. An ANPRM

will give all interested parties an opportunity to provide the FCA with

information to assist it in developing proposed regulations that will

be responsive to the credit needs of OFIs and their borrowers.10

Furthermore, the FCA seeks guidance about how new regulations can best

promote equitable treatment of OFIs and System associations by FCBs and

ACBs. Comments from non-System lenders are encouraged so that the FCA

can consider the needs and concerns of eligible financial institutions

that the Agency does not examine or regulate.

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\10\ The FCA is aware that Congress is considering proposals

that would provide non-System financial institutions greater access

to funding and discount relationships with System banks. These

legislative proposals go substantially beyond what the existing

statute allows. Should any of these proposals be enacted, the FCA

would review the regulations in light of the new statutory

provisions.

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The Act establishes certain requirements that OFIs must meet in

order to initiate and maintain a relationship with the FCS. For

example, section 1.10(b) of the Act authorizes FCBs and ACBs to extend

credit to OFIs so they can make short- and intermediate-term loans to

persons who would be eligible to obtain credit from PCAs.11

Additionally, each OFI is required by section 4.3A(c)(1)(D)(iii) of the

Act to purchase non-voting equity in its funding FCB or ACB. Finally,

the same borrower rights that PCAs must provide also apply to OFI loans

that are funded by a Farm Credit bank.

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\11\ Section 1.10(b) of the Act allows FCBs and ACBs to extend

financial services to PCAs, ACAs, and OFIs so they can make: (1)

Aquatic loans that mature within 15 years; and (2) loans to farmers,

ranchers, farm-related businesses, and non-farm rural homeowners

that mature within 7 years, unless the bank's board, under the

regulations of the FCA, approve loans that are repayable within 10

years.

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Safety and soundness issues will also be addressed when the FCA

proposes new OFI regulations. OFIs may pose different safety and

soundness considerations for the FCA than direct lender associations.

For example, OFIs may merit a different regulatory treatment than

System associations for questions relating to collateral and lien

perfection because, in contrast to System associations, OFIs can borrow

[[Page 24909]]

from other lenders without the permission of their System funding

banks. In contrast to the authorities vis-a-vis FCS institutions, the

FCA lacks broad authority to: (1) Appoint a conservator or receiver for

insolvent OFIs; 12 or (2) determine the priority of claims against

OFIs in liquidation.13

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\12\ Section 4.12(b) of the Act grants the FCA ``exclusive power

and jurisdiction to appoint a conservator or receiver'' for FCS

banks and associations.

\13\ For the past 65 years, the Federal courts have interpreted

various Farm Credit Acts as authorizing the FCA to determine the

priority of claims for System institutions in liquidation. See

Wheeler v. Greene, 280 US 49 (1929); Knox National Farm Loan

Associations v. Phillips, 300 US 194 (1937); Little v. First South

Production Credit Association, CA No. J890021 (W) (S.D. Miss. May

16, 1990).

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The FCA requests comments and information that address the

following questions:

I. Eligibility for OFI Status

A. Significant Involvement in Agricultural or Aquatic Lending

1. What criteria (such as assets, income, composition of the loan

portfolio, or other factors) best determine whether an OFI is

significantly involved in agricultural or aquatic lending as required

by section 1.7(b)(4)(B)(i) of the Act and what specific threshold, if

any, should new regulations use? Please explain your recommendation.

2. How should the FCA define an agricultural lender? Would the

profiles of agricultural lenders established by other Federal agencies

be useful? Please explain your recommendation.

B. An OFI's Need for Supplemental Sources of Funds

What criteria should be used to determine whether depository and

non-depository OFIs demonstrate a continuing need for supplementary

sources of funds to meet the credit requirements of their agricultural

or aquatic borrowers, as required in section 1.7(b)(4)(B)(ii) of the

Act? Please explain your recommendations.

C. OFI Access to National or Regional Capital Markets

1. Has the existing regulatory definition of ``national or regional

capital markets'' in Sec. 614.4540 become outmoded? If so, what factors

in today's financial environment demonstrate that an OFI has limited

access to ``national or regional capital markets?''

2. The Riegle-Neal Interstate Banking and Branching Efficiency Act

of 1994 will enable bank holding companies and their commercial bank

affiliates to expand, over time, their interstate banking and branching

networks. How will this law affect the concept of limited access to

``national or regional capital markets'' in section 1.7(b)(4)(B)(iii)

of the Act?

D. Mergers, Consolidations, and Acquisitions of OFIs

When an OFI merges, consolidates, or is acquired by another

financial institution, the eligibility of the successor entity to

borrow from an FCB or an ACB must be established anew. Under what

conditions, if any, should a successor to an existing OFI be entitled

to ``grandfather'' rights?

E. Parent and Affiliate Relationships

1. What factors should determine whether an OFI applicant is

considered together with its parents and affiliates as a single entity?

2. Section 1.7(b)(4)(D) of the Act establishes specific criteria

for FCA review of OFI application denials based on the OFI's subsidiary

or affiliate relationships. Under Secs. 614.4550 and 614.4555, the FCA

creates a review procedure when an FCB or ACB rejects an OFI's request

for financing for any reason. In the interest of eliminating

unnecessary prior approvals and case-by-case reviews, the FCA requests

comments on whether there is a compelling need for the regulations to

continue to require an FCA review of all OFI applications that have

been denied. Please explain your recommendation.

F. Eligibility of Major Financial Institutions

The statute and the legislative history indicate that agricultural

lenders that do not meet the criteria of sections 1.7(b)(4)(B) (ii) and

(iii) of the Act could still fund or discount certain loans with System

banks. What restrictions, if any, should the regulations impose on

System funding to these types of institutions?

II. Place of Discount

1. Should new regulations continue the territorial restrictions in

existing Sec. 614.4660 which require that an OFI must obtain financing

from the FCB or ACB (designated System bank) in whose territory: (1)

The OFI maintains its headquarters; or (2) more than 50 percent of the

OFI's borrowers is concentrated? If not, what criteria should determine

which Farm Credit bank should finance an OFI? Please explain your

recommendation.

2. Under what circumstances, if any, should new regulations allow

an FCB or ACB to extend financing to an OFI that does not operate in

its chartered territory if the designated System bank does not approve

the OFI's application?

3. Are there any aspects of the Riegle-Neal Interstate Banking and

Branching Efficiency Act of 1994 that the FCA should consider as it

develops new regulatory provisions that determine the place of discount

for commercial banks and nonbank affiliates of bank holding companies

whose networks operate in the chartered territories of more than one

Farm Credit bank? Please explain your recommendation.

III. Safety and Soundness

A. Supplemental Collateral

Under what circumstances, if any, should OFIs be required by the

new regulations to pledge cash and readily marketable securities or

other assets as additional collateral for their loans from System

banks?

B. OFI Lending Limit

Current regulations at Sec. 614.4565 impose a lending limit on

OFIs. Is this limit appropriate? If not, what alternatives do you

suggest and why? How should concentration risk be addressed in a

general financing agreement between an OFI and a Farm Credit bank?

C. Insolvency of an OFI

How should new regulations safeguard the interests of an FCB or ACB

when an OFI is liquidated?

IV. Fair Treatment Between OFIs and Direct Lender Associations

1. Do current regulations adequately and appropriately ensure that

FCBs and ACBs accord impartial and equitable treatment to both FCS

associations and OFIs? If not, what changes should be made and why?

2. The regulations currently require, with certain limited

exceptions, that OFIs must be treated in a manner that is comparable to

direct lender associations. To the extent feasible, the FCA seeks to

ensure that OFIs and FCS associations are treated equitably by their

funding banks. What circumstances, if any, justify different standards

concerning equity investment in the funding bank, interest rate

charges, and servicing fees?

V. Other Issues

Are there other regulatory changes, not addressed above, that would

improve an FCS bank's ability to serve an OFI and its agricultural

customers? Please explain your recommendations.

Dated: May 13, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 96-12411 Filed 5-16-96; 8:45 am]

BILLING CODE 6705-01-P