Eligibility and Scope of Financing; Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; General Provisions; Definitions; Disclosure to Shareholders; Nondiscrimination in Lending; Capital Adequacy and Customer Eligibility

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

(Board) publishes for comment proposed amendments (reproposed rule) to

the current regulations governing the capital adequacy provisions and

the customer eligibility provisions for Farm Credit System (Farm

Credit, FCS, or System) institutions. This rule adds core surplus and

total surplus standards for banks, associations, and the Farm Credit

Leasing Services Corporation (Leasing Corporation); adds a collateral

ratio for banks; and adds procedures for setting higher capital

standards for individual institutions and for issuing capital

directives, when warranted. This rule also incorporates recent

statutory amendments to the Farm Credit Act of 1971, as amended (Act),

which govern the eligibility rules for lending under title III of the

Act and provide Farm Credit banks and associations new authorities to

participate with non-System lenders in loans to similar entities.

Subsequent to the closing of the comment period for the original

proposal, the Farm Credit System Reform Act of 1996 (1996 Reform Act)

was enacted, necessitating certain conforming changes in the rule. The

reproposal eliminates restrictions in the current eligibility

regulations that are not required by the Act and makes other technical,

clarifying, and conforming changes. This rule relocates the

nondiscrimination in lending regulations to a new part without change.

DATES: Written comments should be received on or before September 12,

1996.

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

Associate Director, Regulation Development, Office of Examination, Farm

Credit Administration, McLean, VA 22102-5090 or sent by facsimile

transmission to FAX number at (703) 734-5784. 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:

Dennis K. Carpenter, Senior Policy Analyst, and John J. Hays, Policy

Analyst, Office of Examination, Farm Credit Administration, McLean, VA

22102-5090, (703) 883-4498, TDD (703) 883-4444,

or

Rebecca S. Orlich, Senior Attorney, and Richard A. Katz, Senior

Attorney, Office of General Counsel, Farm Credit Administration,

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

SUPPLEMENTARY INFORMATION: The FCA published proposed amendments to the

capital provisions of its regulations for Farm Credit institutions on

July 25, 1995. See 60 FR 38521. Proposed amendments to the eligibility

and scope of financing provisions of its regulations were published on

September 11, 1995. See 60 FR 47103. The 90-day comment periods expired

on October 25 and December 11, 1995, respectively. The FCA received

over 300 comment letters from a wide audience in response to these

proposed amendments. In response to the concerns of the commenters, the

FCA has decided to repropose the amendments. Additionally, the

proposals regarding System capital adequacy and customer eligibility

requirements have been combined in a single rulemaking.

I. Summary of the Reproposed Rule

A. The capital provisions of the reproposed regulations incorporate

the following provisions:

1. The 7-percent total surplus ratio remains unchanged from the

originally proposed regulations.

2. The unallocated surplus ratio contained in the originally

proposed rule has been renamed the core surplus ratio and has been

expanded to include other equities that are perpetual in nature and

function. The minimum core surplus ratio would remain at 3.5 percent

and include an institution's:

Undistributed earnings/unallocated surplus;

Perpetual stock; and

Nonqualified allocated equities.

The aforementioned stock and equities could not be subject to an

established practice or plan of retirement or distribution. For an

association, the core surplus ratio would be calculated net of its net

investment in its affiliated bank.

3. The computation of the net collateral ratio for banks excludes

the effect of market fluctuations on the value of eligible investments,

and the minimum standard is revised from the 104-percent standard in

the original proposal to 103 percent of total liabilities.

4. The use of risk-sharing agreements or similar contractual

arrangements would be permitted on a temporary basis as part of an

association's initial effort to reach the 3.5-percent core surplus

ratio. After building its core surplus to 3.5 percent, each association

would be required to maintain capital at this level net of its bank

investment.

5. The remaining provisions of the originally proposed regulations

setting forth procedures for establishing individual institution

capital ratios and for issuing capital directives are reproposed in

substantially the same form as originally proposed.

B. The eligibility provisions applicable to title I and title II

lenders have been substantially narrowed from the original proposal and

incorporate the following changes:

1. All bona fide farmers, ranchers, and aquatic producers or

harvesters remain eligible to borrow from the FCS for any agricultural

or aquatic purpose. However, the reproposed regulation imposes

additional restrictions on System loans for other credit needs. Under

this reproposal, non-resident foreign nationals, farm owners who do not

engage in agricultural production or farm management, and only legal

entities meeting certain farmer ownership and agricultural activity

tests could not obtain FCS financing for non-agricultural business

needs. The reproposed regulation, however, permits individuals who are

citizens and permanent residents of the United States and certain legal

entities to obtain limited FCS financing for a non-agricultural

business purpose if they actively farm, ranch, or fish. Non-

agricultural business purposes could not exceed the market value of the

borrower's agricultural assets. Under the reproposed regulation, active

farmers could obtain System financing for their housing and domestic

needs without restriction, but owners of agricultural land could borrow

for their housing and domestic needs only in an amount that does not

exceed the value of their agricultural assets. Non-resident foreign

nationals could borrow for housing and domestic needs that are

reasonably related to their agricultural operations. Finally, the FCA

rescinds its original proposal to prohibit Farm Credit Banks (FCBs) and

direct lender associations from extending credit to cooperatives and

other entities that are eligible to borrow from a title III bank.

[[Page 42093]]

2. The reproposed regulation would permit a legal entity to obtain

financing for a processing or marketing operation only if a majority of

ownership is held by eligible borrowers.

3. The reproposed regulation clarifies that farm-related businesses

can receive System financing only if they provide farm-related services

that are directly related to the agricultural production of farmers and

ranchers. No business activities unrelated to agriculture may be

financed under this authority.

4. The reproposed regulation pertaining to rural housing would

repeal a provision in the existing regulation that permits System

lenders to finance non-farm rural homes in open country that has been

annexed by a municipality of more than 2,500 persons. The FCA also

would withdraw its original proposal to permit System lenders to offer

home equity lines of credit without limitation on the borrower's use of

the credit proceeds.

C. The reproposed regulations governing domestic and international

lending by title III banks would implement the relevant provisions of

the 1996 Reform Act and make other clarifying changes.

D. The reproposed regulation pertaining to the authority to

participate in loans made to similar entities reflects two significant

changes from the proposed regulation. First, the reproposed regulation

would rescind a restriction in the original proposal that would have

enabled a System institution to participate only in those similar

entity loans that were compatible with its lending authority. Second,

this reproposal would delete the non-statutory out-of-territory

concurrence requirement in the proposed rule.

II. Public Comments Received

The FCA received 126 comments in response to the proposed capital

adequacy regulations. Six were telephone inquiries from System

institutions requesting clarification of specific provisions or

providing general impressions of the proposed regulations. The FCA

received 120 comment letters, including a comment letter from the

System's Presidents' Finance Committee, which reflected the views of

many System banks and associations (System joint comment). Of the

remaining comments, three were from System banks (AgFirst FCB, Western

FCB, and St. Paul Bank for Cooperatives (St. Paul BC)), one was from

the Leasing Corporation, 37 were from System associations, 26 were from

cooperatives that were borrowers/shareholders of a System bank, 46 were

from borrowers/shareholders of a single agricultural credit association

(ACA), five were from various state and national cooperative councils

(the National Council of Farmer Cooperatives, the North Carolina State

Grange, the Minnesota Association of Cooperatives, the Cooperative

Council of North Carolina, and the Virginia Council of Farmer

Cooperatives (VCFC)), and one was from the American Bankers Association

(ABA) on behalf of its commercial bank members. In addition, several

groups of System representatives made oral presentations of their views

to Agency staff.

These commenters supported the general goals of the proposed

capital regulations. The System, in its joint comment, stated that it

was prepared to embrace regulations that encourage the building of a

sound capital structure in System institutions and that promote

confidence in the System by borrowers/shareholders, investors, and the

public. The commenters noted specific areas of agreement with the FCA

on a number of requirements. As described more fully below, however,

each of the commenters objected to various provisions of the proposal.

The ABA supported the proposed regulations to the extent that they

``stiffened'' capital requirements for System institutions but did not

believe the proposal was sufficiently stringent.

The 191 comments received on the eligibility proposals included

letters from seven Farm Credit banks: the FCB of Wichita; AgFirst FCB;

the St. Paul BC; CoBank, Agricultural Credit Bank (CoBank); AgAmerica,

FCB; the FCB of Texas; and AgriBank, FCB. Letters were also received

from 70 Farm Credit associations, 29 commercial banks, 13 credit

unions, 17 trade associations, 45 System borrowers, six members of

Congress, and four government agencies. Trade association commenters

were: the Farm Credit Council (FCC) on behalf of the eight banks and

approximately 230 associations comprising the FCS; the Tenth District

Federation of Production Credit Associations (Tenth District PCAs)

representing the 17 production credit associations (PCAs) in Louisiana,

New Mexico, and Texas; the Western District FCC representing the System

lenders in Arizona, California, Hawaii, Idaho, Nevada, and Utah; the

ABA, the Independent Bankers Association of America (IBAA), the

Community Bankers of Kansas, the North Dakota Bankers Association

(NDBA), the South Dakota Bankers Association, the Community Bankers

Association of North Carolina (CBANC), each representing their member

banks; the Credit Union National Association, representing more than

12,300 credit unions through their State league affiliates; the New

York Credit Union League, the North Dakota Credit Union League (NDCUL),

the Indiana Credit Union League, each on behalf of their member credit

unions; the VCFC on behalf of 80 member cooperatives in Virginia; the

Farmers' Legal Action Group, Inc. (FLAG), a non-profit law center of

the National Family Farm Coalition, which represents 38 farm and rural

advocacy organizations in over 30 States; and the Maine Potato Board

(MPB).

Letters from government agencies included the North Dakota

Department of Agriculture; the Vermont Department of Agriculture, Food

and Markets; the Ohio Department of Commerce, Division of Financial

Institutions; and the Federal Reserve Board. Six of the letters

received from members of Congress transmitted letters on behalf of

their constituents.

All of these commenters approved of the FCA's goals of

consolidating, streamlining, and clarifying the eligibility

regulations, and no commenter objected to regulatory relief for FCS

banks and associations. Individual commercial banks, their trade

associations, and FLAG, however, asserted that many of the proposed

regulations exceed the FCA's objective of reducing regulatory burdens

on the FCS and would expand System financing beyond the mandate of the

Act. Some of these commenters recommended that the FCA withdraw the

proposed eligibility regulations and refer these issues to Congress for

hearings on rural credit.

III. The Reproposed Rule

After considering the comments received on the proposed regulations

and further deliberating on the issues, the FCA reproposes a rule

governing capital adequacy and customer eligibility for FCS financing

as one. The FCA responds to the specific concerns of the commenters as

it explains the provisions of the reproposal.

A. Core Surplus Ratio Capital Standard

The FCA originally proposed that institutions have unallocated

surplus of at least 3.5 percent of risk-weighted assets. For this

purpose, unallocated surplus included common stock and noncumulative

perpetual preferred stock held by nonborrowers, provided that the

institution adhered to a policy of not retiring the stock. For

associations, the net investment in the affiliated bank would have been

subtracted from the unallocated surplus.

[[Page 42094]]

A number of respondents (primarily agricultural cooperatives,

cooperative councils, System associations, and association borrowers)

commented on the proposed unallocated surplus ratio. They challenged

the concept of differentiating between allocated and unallocated

capital on the ground that it created a bias against cooperative

principles. They argued that patron ownership, as characterized by

allocated capital, provides the same protection to the institution as

unallocated capital and should not be given a lower priority. Borrowers

from the System that were themselves cooperatives expected this

requirement of the originally proposed regulation to result in lower

patronage distributions and, accordingly, to increase the effective

interest rates of their loans. They were concerned that the regulations

conveyed a message that allocated capital is of lower quality than

unallocated. These groups provided the following comments:

Allocated and unallocated capital provide the same level

of institution protection.

Cooperative principles are diluted if patron ownership is

discouraged. Cooperative principles encourage matching of current

earnings or losses with current patrons through earnings or loss

distributions and discourage accumulation of high levels of unallocated

capital. Unallocated surplus as defined in the proposed regulation

would conflict with these principles.

Subchapter T tax treatment under the Internal Revenue Code

could be threatened if significant levels of earnings are diverted to

unallocated surplus. The commenters viewed this as being detrimental to

capital accumulation in the System and believed that such a treatment

could result in double taxation of System earnings.

The commenters countered the FCA's statement that unallocated

surplus provides a buffer to protect owners of allocated capital by

stating that cooperative principles promote sharing the risks and

rewards of the organization with patrons. Furthermore, some respondents

stated that retaining substantial earnings that could otherwise be

distributed to patrons might cause some business to move to

competitors.

Forty-six (46) comments on this issue were from borrowers/

shareholders of a single ACA. These borrowers expressed their view that

the proposed unallocated surplus ratio requirement would greatly reduce

patronage in their association. They objected to this result, stating

that patronage allocations save taxes, enable the association to build

capital, and have encouraged many borrowers who left their association

in the 1980s to return.

Several of the associations and a bank suggested that all of the

allocated surplus be counted in the 3.5-percent surplus requirement.

However, some of the commenters also acknowledged that the FCA might be

reluctant to include the entire amount of allocated equities and,

therefore, suggested, at a minimum, counting nonqualified allocated

equities. Nonqualified allocated equities are patronage allocations on

which the institution generally pays no cash to patrons at the time of

the allocation and which are included in the institution's taxable

income. Should the institution make distributions of the allocations to

the patrons/borrowers at some future date, the patrons/borrowers

recognize taxable income at that time, and the institution may then

recapture a substantial portion, if not all, of the taxes paid

previously. One System association commented that nonqualified

allocated surplus ``carries a much lower degree of sensitivity with

members because they do not incur any tax liability until it is

revolved.'' Numerous commenters, including the System in its joint

comment, made similar statements regarding borrowers' reduced

expectations of distributions with respect to nonqualified allocated

equities.

Two commenters described classes of stock that they believe merit

treatment as unallocated surplus. One association described a class of

non-voting stock it has issued as patronage, rather than in connection

with making a loan to a borrower. The association asserted that,

because no shares have ever been retired, the stock has the same

features of permanence and stability as unallocated surplus and thus

should be included in the unallocated surplus ratio calculation. The

association stated that it has informed the recipients of the stock

that the stock will not be retired except in the unlikely event of

liquidation of the association and that the value of the stock springs

from the prospect of dividends that may be paid in the future, not from

the prospect of retirement. The Leasing Corporation also asserted that

the Class A stock and the Class C stock it has issued to Farm Credit

banks have features of permanence and should likewise be included in

the unallocated surplus ratio. Class A stock totaling $1.7 million is

held equally by all Farm Credit banks, and such stock has been retired

only in connection with bank mergers. Class C stock is issued and

retired based on the amount of the net lease investments allocated to

each bank.

Many System banks and associations objected to the requirement that

an association deduct its net investment in its affiliated bank when

computing its unallocated surplus ratio calculation. The following is a

summary of the comments made by the commenters:

The proposal would reduce the amount of earnings on which

taxes could be minimized.

The proposal could result in the elimination of noncash

patronage distributions and provide an undesirable incentive to operate

at or just above cost for the institutions. This could damage the

financial position of the entire System.

The proposal violates the provisions of the Farm Credit

Banks and Associations Safety and Soundness Act of 1992 (1992

amendments) and is contrary to the FCA Board's policy statement on

regulatory burden.

A significant tax consequence will be incurred and reduced

retained earnings will result because of some possible future financial

difficulty. This does not make good business sense.

There is no evidence that the potential increased tax

liability is offset by any safety and soundness benefits.

A number of commenters qualified their assertions that bank-equity

assets should be included in an association's unallocated surplus ratio

calculation. For example, one commenter stated that bank-equity assets

should be counted as the same quality as other investments if the

``control issue'' were adequately addressed. Another commenter stated

that there is no evidence that accumulating earnings at the bank has a

negative impact on association survival, as long as earnings remain

accessible to the association.

The System in its joint comment proposed an alternative method for

calculating the unallocated surplus ratio for associations. It proposed

that an association be permitted to count the after-tax value of its

investment in its funding bank, so long as the bank would continue to

meet all regulatory capital standards after a pro forma retirement of

the association's allocated investment. Only if the bank would fail to

meet one or more capital requirements, would the association be

required to deduct the entire value of its allocated bank investment.

Several institutions also suggested that a portion of the

investment in the bank be deducted from the unallocated surplus and the

rest of the investment be deducted from the allocated surplus. This

would, according to the commenters, accomplish what they

[[Page 42095]]

described as the FCA's goal of requiring adequate capital that is

``interchangeable'' or ``fungible.''

In response to all of these comments, the FCA has made a number of

revisions in the reproposed rule. The term ``unallocated surplus

ratio'' has been replaced with the term ``core surplus ratio,'' and the

types of equities or accounts that may be included in the ratio have

been expanded. The core surplus ratio minimum is 3.5 percent of the

risk-adjusted asset base, unchanged from the minimum in the originally

proposed rule, and includes all of the equities in the proposed rule's

unallocated ratio, which are: Unallocated surplus, perpetual common

stock held by non-borrowers, and noncumulative perpetual preferred

stock held by non-borrowers, provided that the institution has no

established plan or practice of retiring such stock. Core surplus

includes three additional categories of equities or accounts that are

considered by the FCA to be as permanent and stable as unallocated

surplus. These equities or accounts are:

1. Nonqualified patronage allocations, allocated to institution

borrowers other than other System institutions, made from earnings that

the institution has included in its gross taxable income at the time of

allocation and that are not subject to distribution according to an

established plan or practice. An institution operating on a Subchapter

T basis would not be able to take a tax deduction for these allocations

until they are distributed, at which time the tax liability would be

passed to the recipient. In the event that a nonqualified patronage

allocation is distributed, other than as a part of a pro rata

distribution of all nonqualified allocations that were allocated in the

same year, any remaining nonqualified allocations allocated in the same

year will be disallowed from treatment as core surplus.

2. Perpetual stock held by borrowers other than other System

institutions that was not purchased as a condition of obtaining a loan,

provided that the institution has no established plan or practice of

retiring the stock. In the event that any such stock is retired other

than on a pro rata basis, all other stock of the same class or series

that was issued in the same year that the retired stock was issued will

be disallowed from treatment as core surplus.

3. Newly developed or modified capital instruments or balance sheet

entries or accounts that the FCA determines are the functional

equivalent of a component of core surplus. The FCA may permit one or

more System institutions to include all or a portion of such

instrument, entry, or account as core surplus, permanently or on a

temporary basis.

The reproposed rule also provides that, with respect to equities

that are included in core surplus, if the FCA finds that a particular

equity has characteristics or terms that diminish its contribution to

an institution's ability to absorb losses, the FCA may require the

deduction of all or a portion of such equity from core surplus.

The purpose of the conditions pertaining to retirement and

distribution of equities held by borrowers is to assure that amounts

treated as core surplus are not retired, canceled, or applied against a

borrower's indebtedness on a defaulted loan or at the request of

individual borrowers. These conditions would not prevent an institution

from exercising its statutory right to make such retirements or

cancellations. However, should such retirements or cancellations occur,

the remaining allocated amounts and stock could not be counted in the

core surplus ratio. They could, however, continue to be counted in the

total surplus ratio and permanent capital of the institution. The

conditions placed on the equities' inclusion in core surplus merely

recognize that this practice negates the desired stability features of

these types of equities. The provision would not apply to borrower

equities canceled in connection with a restructured loan, if an

association is required to cancel the equities pursuant to section

4.14B of the Act. If an association is statutorily required to cancel

the equities, the remaining equities of the same class or series and

issued in the same year as the canceled stock or equities will continue

to be treated as core surplus.

The core surplus requirement would replace the current requirement

in Sec. 615.5330 that the BC and the agricultural credit bank (ACB) add

at least 10 percent of net earnings after taxes to unallocated surplus

until the unallocated surplus ratio reaches half of the minimum

permanent capital requirement.

The reproposed rule adds a definition of ``perpetual stock or

equity'' as stock or equity that does not have a maturity date, cannot

be redeemed at the option of the holder, and has no other provisions

that will require the future redemption of the issue.

The FCA continues to believe that institutions need a certain

amount of capital that is not subject to regular distribution or

retirement according to an established plan or practice. It is the

FCA's position that such capital is necessary to protect institutions

during periods of stress, which are part of the cyclical nature of the

System institutions' business. In addition, System institutions are

vulnerable to industry-wide or regional problems due to the high

concentrations of certain commodities and loan volume in the

agricultural sector. Consequently, in the reproposed rule the Agency

excludes from the core surplus ratio any allocated equities that the

recipient has included in his or her gross income and that the

recipient can reasonably expect the institution to revolve in the near

future.

The FCA is persuaded that the included types of equities are

sufficiently permanent and stable and should qualify as core surplus

when: No tax liability has yet been incurred by the recipient, there is

no plan or practice of distributing or retiring them on an established

or fixed basis, and there is no reasonable expectation by the recipient

regarding when the equities will be distributed or retired. Several

System institutions have issued such stock or nonqualified allocations.

In those cases where the borrowers have been notified of such

allocations, it is the FCA's understanding that the institutions have

informed their borrowers that such equities may only be distributed or

stock retired, if ever, at an unspecified date in the future and solely

at the discretion of the institution's board of directors. None of

these equities have been retired by the institutions, and, as one such

institution stated, there is a much lower degree of ``sensitivity''

with members because they do not incur tax liability until the equity

is revolved.

The FCA believes that permitting the inclusion of nonqualified

equities meeting the reproposed rule's distribution conditions would

eliminate most of the disincentives believed by several commenters to

be embedded in the originally proposed rule for an institution to

operate on a Subchapter T basis. The FCA believes that the revisions in

the reproposed rule strike the appropriate balance between cooperative

principles and safety and soundness objectives. The reproposed rule

permits an institution to allocate its patronage-based income (using

nonqualified allocations) and increase its core surplus ratio at the

same time.

Although the reproposed rule does not limit the amount of

nonqualified allocations that can be included in the core surplus, the

FCA expects that institutions would retain a healthy portion of the

core surplus in unallocated surplus. This completely uncommitted

capital is especially important to the institution during periods of

stress, when operating losses or provisions to the allowance for loan

[[Page 42096]]

losses may result. Accordingly, should the regulations be adopted,

future FCA examinations would include an assessment of the composition

of core surplus, which will be reflected in the evaluation of the

institution's capital and operating performance.

The Class A stock issued by the Leasing Corporation and held by

Farm Credit banks would qualify as core surplus. Class A stock

represents the owner Farm Credit banks' initial investment in the

Leasing Corporation, and retirement has occurred only with bank

mergers. This stock has demonstrated a high degree of permanence and

exhibits similar attributes to unallocated surplus. Accordingly, it

would be eligible to satisfy the 3.5-percent core surplus and the 7-

percent total surplus requirements. The Leasing Corporation's Class C

stock, however, represents stock purchased by the owner banks based on

lease activity in their respective trade/geographic territories. As a

result, Class C stock fluctuates with lease volume (much the same as

the level of borrower stock in associations fluctuates with the amount

of outstanding loans), and the stock level is adjusted quarterly. Due

to steadily increasing lease volume, Class C stock has increased over

the past 5 years. Since Class C stock fluctuates with lease volume,

however, it does not, as currently structured, have the stability and

permanence attributes of surplus and consequently cannot be included in

either surplus ratio.

The reproposed rule requires deduction of the association's net

investment in its funding bank from core surplus for the purpose of

computing the core surplus ratio for associations. This provision is

unchanged from the proposed rule. The FCA required this deduction

because of its strong belief that the retention of at least a minimum

amount of capital that is not invested in (and therefore at risk and

controlled by) the association's funding bank is critical to the

financial health and autonomy of an association. When capital is

retained at the bank, it is vulnerable to losses due to bank

operations, as well as assistance programs for troubled associations in

the district, and these are matters beyond the association's control.

In a circumstance where most or all of the associations in a district

become stressed, their investments in the bank could become most

vulnerable at the time they are most needed.

The FCA considered proposals of commenters, including the proposals

in the System's joint comment, to revise the calculation in the

proposed rule to include a portion of the net investment in the bank.

These proposals do not provide assurance that the association would be

able to survive independently in the event of a bank's financial

adversity or failure. Because one of the primary reasons for

establishing the minimum core surplus requirement is to assure

association access to stable capital at all times, the commenters'

proposals do not fully achieve the purpose of the core surplus ratio

standard. The FCA believes that the ``control issue'' cannot be

adequately addressed.

Further, an association cannot have guaranteed access to its

investment in the bank without the occurrence of a taxable event, the

very situation some commenters seek to avoid by accumulating earnings

at the bank.

The FCA does not favor the commenters' proposal to deduct the net

investment in the bank partly from the core surplus and partly from the

total surplus of an association. The proposal does not meet the FCA's

goal to ensure that each institution holds a minimum level of capital

that is neither at risk at another System institution nor subject to

expected regular revolvement to borrowers.

As in the originally proposed rule, the reproposed rule will not

permit inclusion of an association's net investment in its bank in the

core surplus ratio calculation of either institution. The FCA has

excluded the amount of the investment in the bank from both the bank's

and the association's core surplus ratios because of the uncertainty of

its accessibility by either institution. If an association were to

fail, its investment in the bank would be offset against the bank's

direct loan and thus eliminate that portion of capital on the bank's

balance sheet. If the bank were to fail, the association's entire

investment would become vulnerable to loss.

The FCA does not agree with comments that the originally proposed

unallocated surplus ratio computation, including deduction of the net

investment in the bank, is inconsistent with the provisions of the 1992

amendments to the Act. Those amendments provided that a bank and an

association may, for the purpose of computing their permanent capital,

agree on which institution could count as permanent capital the

earnings of the bank that have been allocated to the association. The

originally proposed rule did not make any changes to the permanent

capital computation regarding the treatment of these allocated earnings

to which the 1992 requirement relates, and neither would the reproposed

rule. Measures such as the surplus ratios and the collateral ratio for

banks are proposed to be added to better ensure the financial health of

System institutions.

Furthermore, as described below, the total surplus ratio

computation would include the association's investment in the bank in

either the association's or the bank's allocated surplus, in conformity

with the institution's allotment agreement. As importantly, the

investment is counted in the net collateral ratio for banks, a critical

ratio reflecting liquidity and access to financial markets by the

System as a whole, to the same extent that it is included in bank

permanent capital. However, the FCA believes that a measurement of

capital not committed to the borrower and not available to absorb loss

at another System institution is needed to adequately evaluate the

ability of a direct lender association to survive independently of its

funding bank.

The FCA notes that, despite some commenters' objections that the

unallocated surplus ratio computation would inappropriately dissipate

association capital by requiring that there be taxable earnings at the

association level, nearly every taxable association in the System has

had taxable earnings at the association level in the past 8 years. The

FCA does not expect these associations to have to change their own

capital adequacy plans significantly in order to achieve or maintain

the minimum core surplus ratio standard (or, for that matter, the total

surplus standard).

One of the frequently cited objections to the core surplus ratio

calculation--that the requirement would result in higher interest rates

or lower patronage distributions to borrowers--would be the result of

any requirement that an institution accumulate and retain additional

capital. Nevertheless, the goals of an institution to provide the

lowest possible prices or the highest possible patronage distributions

must be balanced against the obligation to maintain necessary reserves.

The FCA has concluded, based on its experience as the regulator of

System institutions as well as its knowledge of the problems that other

types of financial institutions have faced, successfully and

unsuccessfully, that a certain amount of the highest quality of

uncommitted, accessible capital is critical to the long-term health and

survival of institutions. The FCA believes that strong core surplus

capital levels are necessary to ensure a viable System and minimize

risk to its creditors and investors, including shareholders.

[[Page 42097]]

Under the reproposed rule, the core surplus ratio must be

calculated by the institution as of each monthend as follows:

The ratio numerator:

Undistributed earnings/unallocated surplus (as defined in the FCA

Call Report instructions);

Plus: Certain perpetual common or noncumulative preferred stock

(held by entities other than System institutions) that was not

purchased as a condition of obtaining a loan, provided that the

institution has no established plan or practice of retiring the stock;

Plus: Nonqualified patronage allocations held by persons or

entities other than other System institutions, provided that the

institution has no established plan or practice of retiring such

nonqualified patronage;

Less: For associations only, the net investment in its affiliated

bank, which is--

Total investment in bank:

Less: Investment in association by bank;

Less: Agency/servicing investment in bank;

Less: Participations investment in bank;

Divided by--

The ratio denominator:

Risk-adjusted asset base per the permanent capital regulations,

excluding the net impact of unrealized gains or losses on available-

for-sale securities;

Less: For associations only, the net investment in its affiliated

bank.

B. Total Surplus Ratio

The FCA originally proposed a requirement that each institution

hold at least 7-percent total surplus, adjusted according to the

permanent capital allotment agreement. Total surplus included the

capital treated as unallocated surplus for the proposed unallocated

surplus ratio, as well as certain allocated equities and stock.

No specific objections to the total surplus ratio were received.

Accordingly, the total surplus ratio minimum of 7 percent of the risk-

adjusted asset base and calculation of the ratio are reproposed without

substantive change from the proposed rule. Equities that could be

included in this ratio would be all of those equities that are included

in core surplus for the core surplus ratio, as well as: (1) Allocated

surplus and stock subject to a discretionary revolvement plan of 5

years or more; and (2) term stock with an original maturity of at least

5 years which is not retirable prior to its maturity (reduced by 20

percent in each of the last 5 years of the life of the instrument).

Double-counting of capital would be eliminated according to applicable

allotment agreements.

The calculation of the total surplus ratio, calculated by the

institution as of each monthend with a minimum requirement of 7

percent, is as follows:

The ratio numerator:

Undistributed earnings/unallocated surplus per FCA Call Report;

Plus: Certain perpetual common or noncumulative perpetual preferred

stock not purchased as a condition of obtaining a loan;

Plus: Certain nonqualified and qualified allocated equities;

Plus: Term stock with an original maturity of at least 5 years;

Less: For associations only, an amount equal to the amount of

allocated bank equities counted as permanent capital by the bank;

Less: For banks only, an amount equal to the amount of bank

equities counted as association capital.

Divided by--

The ratio denominator:

Risk-adjusted asset base per the permanent capital regulations,

excluding the net impact of any unrealized gains or losses on

available-for-sale securities;

Less: For associations only, allocated bank equities counted as

permanent capital by the bank;

Less: For banks only, an amount equal to the amount of bank

equities counted as association capital.

C. Collateral Ratio

The FCA originally proposed that all System banks should maintain a

net collateral ratio of 104 percent of eligible assets (described in

existing Sec. 615.5050), less an amount equal to the amount of bank

equities counted as association permanent capital, divided by total

liabilities.

The FCA received numerous comments regarding the originally

proposed 104-percent net collateral ratio requirement. All of the

commenters on this issue took exception to the 104-percent level,

asserting that the 103-percent level established by the System's Market

Access Agreement (MAA) was sufficient. Commenters further asserted that

the FCA had endorsed the MAA. They alleged that the higher regulatory

requirement was inconsistent with the FCA's ``endorsement'' of MAA.

One commenter expressed concern that the 104-percent collateral

ratio requirement was counterproductive to building capital at the

association level. This commenter stated that the thrust of the FCA's

proposed rule was to encourage associations to build higher levels of

capital. However, the high bank collateral requirement would result in

the banks accumulating more capital through higher direct loan rates,

which would reduce the association's ability to be competitive and

accumulate higher levels of capital.

The System's joint comment highlighted several perceived weaknesses

in the wording of the originally proposed collateral requirement.

Specifically, it said that the proposed rule incorrectly referred to a

``collateral position'' required by FCA regulations and the Act. The

System pointed out that neither Sec. 615.5050 nor the Act uses the term

``collateral position'' but rather compares certain assets defined as

collateral with certain obligations requiring collateralization. The

System added that the proposed regulation ``incorrectly'' used total

liabilities as the denominator, rather than ``obligations requiring

collateralization.'' The System recommended revising the proposed net

collateral ratio definition to explicitly eliminate the application of

FAS No. 115, in accordance with a statement in the proposed rule's

supplementary information that the effect of FAS No. 115 was intended

to be excluded from all of the proposed ratios. FAS No. 115 is a

statement of generally accepted accounting principles (GAAP) requiring

financial statements to include the net effect of unrealized gains and

losses resulting from available-for-sale securities.

The FCA notes that its approval of the System banks' MAA did not

constitute, and should not be interpreted as, a restriction on the

FCA's authority to establish appropriate minimum capital or collateral

standards. Moreover, any comparison of the rule's collateral ratio

standard to the 103-percent collateral level in the MAA or the

collateral calculation that is set forth for funding purposes in

Sec. 615.5050 is inappropriate because the standards are calculated

differently. The MAA standards and funding requirement do not include a

deduction for a bank's equities that are not counted as permanent

capital by that bank according to its allotment agreement. The

reproposed rule's collateral standard would require this deduction.

Furthermore, the rule's denominator is total liabilities, not

``collateralized debt obligations'' as currently required by the MAA

and Sec. 615.5050.

The FCA reproposes a net collateral ratio requirement with

substantially the same calculation as in the originally proposed rule.

The FCA believes that the net collateral ratio in this rule would be a

more precise measure of the

[[Page 42098]]

financial health of System banks than the collateral ratio in the MAA.

A collateral ratio net of any bank assets counted as permanent capital

by associations eliminates the double-leveraging of capital in System

institutions. Using total liabilities as the denominator instead of

``collateralized obligations'' makes the ratio more meaningful as a

safety and soundness measure and prevents a bank from leveraging its

balance sheet by obtaining funds from non-System sources, which are not

classified as ``collateralized obligations.'' The FCA strongly believes

that the net collateral ratio is a critical measure of financial health

and provides an early measure of a bank's ability to obtain funds from

the market place. Severe safety and soundness concerns arise if

sufficient collateral is not available for banks to offer investors who

purchase System debt instruments. The net collateral ratio in this rule

is intended to provide an early ``tripwire'' to help avoid such severe

situations.

The FCA reproposes a minimum net collateral ratio standard of 103

percent, reduced from the 104-percent requirement in the originally

proposed rule. In light of the increased capital requirements of the

two surplus standards for both banks and associations that the FCA is

reproposing, a collateral standard of 103 percent will be sufficient in

most cases to ensure the maintenance of a minimum level of protection

and implementation of supervisory measures should market forces cause a

decline in the underlying value of collateral. This standard generally

provides additional assurance that a bank will maintain sufficient

collateral for continued access to capital markets, because the System

banks' MAA does not limit access to the capital markets until a bank's

collateral ratio, as defined in the MAA, drops below 102 percent.

The reproposed rule's net collateral requirement provides an

earlier trigger for supervisory involvement than the MAA computation or

the collateral requirement for funding purposes. It would provide a

level of protection for operating and other forms of risk at the bank,

and it is similar to the leverage ratios required by other regulators.

The FCA has determined that the exclusion of the effect of FAS No.

115 from the computation of the net collateral ratio could result in a

differential treatment of eligible investments, according to whether

they are designated as available for sale or held to maturity. Under

Sec. 615.5050, a bank's entire investment portfolio must be valued at

the lower of cost or market. Accordingly, applying the exclusion of the

effect of FAS No. 115 will not negate the effect of temporary

fluctuations in the market value against a bank's entire investment

portfolio, because unrealized holding gains and losses under FAS No.

115 apply only to the portion of a bank's investments classified as

available for sale, not to investments classified as held to maturity.

To ensure that the objective of this ratio is uniformly attained, the

reproposed rule would require all eligible investments held by a bank

to be valued based on their amortized costs for the purposes of

calculating its net collateral ratio.

Under the reproposed rule, the net collateral ratio is calculated

as follows:

The ratio numerator is a bank's net collateral, which equals:

A bank's total eligible collateral as defined by Sec. 615.5050

(except that eligible investments as described in Sec. 615.5140 are to

be valued at their amortized cost),

Less: An amount equal to that portion of the allocated investments

of affiliated associations that is not counted as permanent capital of

the bank.

Divided by--

The ratio denominator, which equals:

The bank's total liabilities.

D. Compliance Issues

The originally proposed rule required institutions below applicable

minimum surplus and collateral standards to develop and submit a

capital plan acceptable to the FCA for achieving minimum standards. An

association below the unallocated surplus standard on the effective

date of the rule had the option of including a Risk-Sharing Agreement

with its affiliated bank as part of its capital plan. An association

falling below the minimum standard after the rule's effective date

could include a Risk-Sharing Agreement only with FCA approval.

Institutions meeting the goals of FCA-approved capital plans would be

deemed to be in compliance with minimum surplus and collateral

standards. In addition, the FCA sought comment on whether the Risk-

Sharing Agreement should be a permanent option for associations.

Two issues pertaining to compliance were raised by commenters. The

first issue concerned how much time institutions will have to come into

compliance with the ratios. The originally proposed rule required an

institution not meeting applicable surplus or collateral requirements

to submit to the FCA a capital plan for achieving and maintaining the

standards, with appropriate annual progress toward meeting the

standards. In the supplementary information to the proposed rule, the

FCA stated that it expected capital plans submitted by institutions

below the minimum surplus or collateral requirements to include a

reasonable timeframe for achieving the minimum surplus or collateral

standards.

The St. Paul BC expressed significant concern about the

``subjective nature'' of the reasonable timeframe ``requirement'' for

achieving the minimum capital standards. The BC stated that a timeframe

set by the FCA could restrict the bank from adequately serving its

membership, require the accelerated restructuring of the balance sheet

(apparently by having to reduce assets), and require a significant

amount of patronage earnings to be retained as unallocated surplus. The

BC said that the impact would be to: (1) Reduce earnings and patronage

refunds; (2) dissipate capital; (3) significantly weaken its

competitive position; and (4) potentially jeopardize the advantages of

operating on a Subchapter T basis for tax purposes. Over two dozen of

the bank's stockholders sent letters with essentially the same comment

as the bank. One respondent stated that the FCA would appear to have

``absolute discretion'' in determining what constitutes a reasonable

timeframe. Two Farm Credit associations also expressed concern with the

subjective nature of a ``reasonable timeframe.''

The System in its joint comment stated that the FCA has an

obligation to document in the regulation, and provide opportunity for

comment on, the standard of care that should uniformly be employed by

FCA staff for determining the ``reasonable timeframe.'' Furthermore,

the System said that, due to the very sensitive nature of the System's

cooperative relationship with its stockholders, the determination of a

reasonable timeframe should be specified or outlined in FCA policy or

regulation rather than being potentially applied judgmentally by the

FCA staff, which may result in an uneven application of the criteria.

The second compliance issue concerned whether an association could

employ a Risk-Sharing Agreement as a permanent alternative to reaching

a core surplus level of 3.5 percent. Some of the commenters stated that

risk-sharing, if permitted on a permanent basis, would address the

safety and soundness concerns raised by the FCA without an

association's incurring a tax liability. Nevertheless, the proposed

Risk-Sharing Agreement was criticized as too complicated and also as

being a poor vehicle to recapture previously paid taxes. The proposed

rule required risk-sharing to begin when losses exceeded

[[Page 42099]]

the current year's earnings. Commenters noted that this might prevent

an association from recouping some of the taxes that might be

recoverable from previous years and recommended that some mechanism be

implemented to delay the risk-sharing trigger until all available taxes

have been recouped.

The System's joint comment included a description of a

``contractual conversion mechanism'' that was, in its view, simpler

than the proposed rule's Risk-Sharing Agreement and that contained

activation provisions that would maximize tax benefits due to operating

losses and help to mitigate an association's economic adversity. The

System suggested that an association be permitted to include such a

conversion provision in its capital plan until the end of 2006 without

FCA approval.

In the reproposed rule, the FCA has made several significant

changes to the compliance provisions from the originally proposed rule.

First, the FCA believes that the use of a capital plan (which is

referred to as a ``capital restoration plan'' in the reproposed rule to

distinguish it from other capital plans) to achieve minimum surplus or

collateral ratios should be an option only for those institutions that

are below a minimum standard on the effective date of this rule. For

institutions that fall below a minimum surplus or collateral standard

subsequent to the effective date of this rule, the FCA would address

the noncompliance in the same way it treats other instances of

noncompliance with FCA regulations. The Agency would decide on a case-

by-case basis what supervisory action, if any, to take with respect to

the violation--from simply requiring the institution to submit a

capital restoration plan to a more formal action. Any decision in this

regard would depend on the level of an institution's capital and the

severity of its problems. The FCA has proposed this change in order to

have greater flexibility to impose requirements commensurate with the

seriousness of the situation, or to take no formal action if the

noncompliance appears minor, not due to mismanagement of the

institution, and likely to be short-lived.

Second, the FCA has deleted from the reproposed rule the definition

of ``Risk-Sharing Agreement'' in order to give associations more

latitude in devising mechanisms to achieve initial compliance with the

core surplus requirement. The FCA agrees with commenters that different

types of contractual arrangements, including arrangements that enable

an association to take advantage of tax provisions for distressed

institutions, could be an acceptable part of an association's plan to

restore capital.

Third, the FCA has added a requirement to report noncompliance with

the surplus or collateral ratios to the FCA within 20 calendar days of

the end of the month as of which the noncomplying ratio was computed.

Fourth, the FCA has placed a limit of 180 days from the effective

date of the rule for an institution not in compliance on the effective

date to submit, and the FCA to approve, a capital restoration plan. The

FCA believes that placing a limit on the time during which an

institution has to submit an acceptable plan adds certainty and

finality to the initial approval process.

Finally, in response to commenters' suggestions, the FCA has added

to the compliance provision in the reproposed rule a list of factors to

be considered by the Agency in approving compliance plans. The factors

include, as applicable:

1. The conditions or circumstances leading to the institution's

falling below minimum levels (and whether or not they were caused by

actions of the institution or were beyond the institution's control);

2. The exigency of those circumstances or potential problems;

3. The overall condition, management strength, and future prospects

of the institution and, if applicable, affiliated System institutions;

4. The institution's capital, adverse asset (including nonaccrual

and nonperforming loans), allowance for loss, and other ratios compared

to the ratios of its peers or industry norms;

5. How far an institution's ratio is below the minimum;

6. The estimated rate at which the institution can reasonably be

expected to generate additional earnings;

7. The effect of the business changes required to increase capital;

8. The institution's previous compliance practices, as appropriate;

9. The views of the institution's directors and senior management

regarding the plan; and

10. Any other facts or circumstances that the FCA deems relevant.

Notwithstanding the concerns of commenters regarding the

``reasonable timeframe'' in which noncomplying institutions would be

expected to achieve all minimum surplus and collateral standards, the

FCA is not persuaded that the rule should specify a single timeframe in

which institutions must meet the standards. The Agency continues to

believe that not specifying a timeframe would allow maximum flexibility

and latitude to determine the best course for building capital ratios

to at least the minimum levels. In view of the wide range in both the

amount of shortfall and the reasons for that shortfall among

institutions not meeting the proposed requirements, the FCA concludes

that no specific timeframe would be suitable in every case. The FCA

anticipates that it would approve capital restoration plans that

project appropriate annual progress toward compliance. The Agency

recognizes that capital restoration plans must be realistic and that

long-term plans may be appropriate in some circumstances.

E. Stock Retirement Provisions

The FCA originally proposed to permit institution boards of

directors to delegate discretion in the retirement of borrower stock to

management as long as, after retirement, an institution would meet all

of its applicable surplus and collateral requirements and its permanent

capital ratio would remain above 9 percent. The FCA received two

comments on the proposal. The ABA was troubled by the possibility that

System institutions would be able to continue to retire stock, albeit

with the specific approval of the board of directors, if the

institution's permanent capital were below 9 percent. The trade

association's particular concern was apparently the potential for

insider abuse. The ABA recommended that stock retirements be prohibited

when permanent capital is below 9 percent and that the proposal be

revisited by the FCA to prevent conflicts of interest with insiders. A

System association criticized the FCA's proposal as eliminating any

flexibility on the part of management with respect to stock retirements

and as setting too high a standard that would result in inappropriate

involvement by a regulator at a point where an institution still has a

relatively strong permanent capital position. The association suggested

that management be allowed to retire ``de minimis'' amounts of stock as

long as the permanent capital remains above 8 percent.

The FCA reproposes the originally proposed stock retirement

provisions without change. Accordingly, as long as after retirement an

institution's core surplus and total surplus ratios (and, for banks,

the collateral ratio) would meet or exceed applicable minimum

standards, and the permanent capital position would remain above 9

percent, the retirement of borrower stock could be delegated by the

institution's board of directors to its management.

The FCA notes that the ABA's proposal that no redemption of

borrower stock be permitted if the association's capital falls below 9

[[Page 42100]]

percent is inconsistent with System institutions' statutory right to

retire stock at the sole discretion of the board, as long as the

institution meets its permanent capital standard. Although the FCA

recognizes that there is a potential for abuse of discretion by

institution board members in the retirement of their own equities, the

FCA monitors retirements of stock owned by directors in the examination

process and has never yet found this kind of abuse.

The System association's suggestion that institution management be

allowed to retire ``de minimis'' amounts of stock under delegated

authority until the institution's permanent capital falls to 8 percent

was also not accepted because, as the FCA interprets this suggestion, a

stock retirement in an amount equal to as much as 1 percent of

permanent capital would be considered to be ``de minimis.''

Furthermore, the FCA does not believe that the restrictions the

reproposed regulation would place on delegation of stock retirements

would be onerous or would significantly affect the institution's

ability to operate in a flexible manner.

F. Individual Institution Capital Ratios and Capital Directives

Subpart L, Establishment of Minimum Capital Ratios for an

Individual Institution, and subpart M, Issuance of a Capital Directive,

are reproposed in substantially the form in which they were originally

proposed. The FCA does not agree with the suggestion of a commenter to

eliminate the application of civil money penalties in cases where an

individual institution capital ratio was not met but the otherwise

applicable ratios were met, because the FCA's reason for setting a

higher ratio in the first place would be its judgment that the

institution would not be operating in a safe and sound manner if it

were below the individually set ratio. The FCA also has not included a

commenter's suggestion to establish an office of ombudsman. Should

concerns arise regarding the fair application of individual institution

ratios or capital directives to different institutions in the System,

the FCA would address those concerns on a case-by-case basis.

G. Other Capital Issues

1. Nine commenters, including the System's joint comment, raised

concerns with the current practice of risk-weighting unused loan

commitments with remaining maturities in excess of 1 year. Because this

issue requires further study, it will be considered by the FCA in the

next phase of its review of capital regulations.

2. One commenter suggested that the surplus standards should not be

applicable to Federal land bank associations (FLBAs) that do not have

exposure to loan losses, as provided for in Sec. 615.5210(e)(9). The

reproposed rule would make no changes in the application of surplus

requirements to all FLBAs, because the Agency believes that these

requirements would be minimal and would pose no hardship on any FLBA.

Furthermore, FLBAs with no exposure to loan losses have very minimal

levels of risk-adjusted assets to capitalize. The FCA believes that it

is appropriate for every institution to have at least some level of

positive surplus funds based on the level of operations. For this

reason, the FCA has concluded that it is appropriate to have the same

requirement apply to all associations, including FLBAs. The FCA notes

that funds that are earned at the bank and distributed to the FLBAs are

not taxable, adding no tax burden to the FLBAs.

3. Other provisions of the proposed rule pertaining to the

exclusion of the impact of unrealized gains and losses on available-

for-sale securities, as well as technical and conforming changes, are

reproposed in the same form in which they were proposed.

H. Limitations on Financing Non-Agricultural Credit Needs of Bona Fide

Farmers, Ranchers, Aquatic Producers or Harvesters

Under reproposed Sec. 613.3000, all bona fide farmers, ranchers,

and aquatic producers or harvesters would be eligible for FCS financing

of their agricultural or aquatic needs. The reproposal would place

limitations on all other credit to farmers, however, using criteria

that are more specific and appropriate than those in the existing

regulation. The reproposed regulation would distinguish individual

farmers who actively produce agricultural products or manage a farming

operation from passive farm owners, who meet the definition of a bona

fide farmer only because they own agricultural land. Retired farmers

who have been engaged in agricultural production, including

incapacitated farmers, who own agricultural land and assume some

portion of their tenant's production risk, would also be considered

active farmers. Under the reproposed rule, active farmers would be

given limited access to FCS financing for their other credit needs, but

access becomes more limited or completely precluded for passive farm

owners and non-resident foreign nationals.

1. Non-Agricultural Business Needs of the Borrower

The reproposed regulation would allow FCS banks and associations to

finance the non-agricultural business needs of citizens and permanent

residents of the United States who are eligible under

Sec. 613.3000(a)(3)(i). This financing would be limited to an amount

that does not exceed the market value of the borrower's agricultural

assets. The reproposed regulation does not permit System lenders to

offer non-agricultural business financing to non-resident foreign

nationals or individuals who are eligible because they own agricultural

land as a passive investment pursuant to Sec. 613.3000(a)(3)(ii).

The reproposed regulation does not represent a substantial change

from the existing regulation on this point. The reproposal continues to

link a borrower's access to FCS financing to his or her involvement in

agriculture. The existing regulation views a farmer's involvement in

agriculture as a continuum, ranging from full-time, to part-time, to a

person ``whose business is essentially other than farming.'' It states

as a guiding principle that the purposes for which credit may be

extended ought to become more restricted as a borrower's status becomes

further away from being a full-time farmer. The reproposal

distinguishes instead between a farmer who actively engages in

agricultural production or farm management and one who simply owns farm

land. Only the active farmer is permitted to borrow for non-

agricultural business needs. Moreover, the reproposal contains a

precise limit on the amount of such credit that may be extended.

Although both the existing and reproposed regulations ensure that the

System retains its focus on agricultural lending, the new approach

relies on exact and objective standards that are more meaningful and

easier to apply.

2. Housing and Domestic Needs

Reproposed Sec. 613.3000(d)(1) would authorize citizens and

permanent residents of the United States who are active farmers to

obtain System financing for their housing and domestic needs without

restriction other than their creditworthiness. Such borrowers have

strong ties to agricultural or aquatic production and FCS financing for

their housing and domestic needs should not alter their status as

farmers, ranchers, and aquatic producers or harvesters.

Reproposed Sec. 613.3000(d)(3) would allow individuals who own

agricultural

[[Page 42101]]

land as a passive investment to obtain System financing for their

housing and domestic needs in an amount that does not exceed the market

value of their agricultural assets. Persons who are eligible solely

because they own farm land are primarily engaged in vocations other

than agriculture.

In addition, reproposed Sec. 613.3000(d)(2) would allow non-

resident foreign nationals who actively engage in agricultural or

aquatic production in the United States to obtain System financing for

housing and domestic needs that are reasonably related to their

agricultural or aquatic operations located in the U.S.A.

More specifically, active farmers who are non-resident foreign

nationals could obtain System financing only for a house that is

located on or near their farm or ranch. Additionally, the FCA intends

that the FCS extend credit to non-resident foreign nationals only for

those housing and domestic needs that enable the borrower to conduct a

farming operation in the United States. The FCA believes that non-

resident foreign nationals who are active farmers should not be allowed

unrestricted System financing for their housing and domestic needs

because they lack a permanent presence in the United States.

Like the existing regulation, this proposal allows active farmers

to obtain credit for their housing and domestic needs. It would

expressly permit certain other farmers to borrow from the FCS for their

housing and domestic needs but with the restrictions described above,

which are intended to ensure that such credit is generally appropriate

to their farming operations.

3. Definition of Agricultural Assets

Because the amount of financing to an eligible borrower for other

credit needs is limited to the market value of the borrower's

agricultural assets, this term was the subject of a number of comments.

The FCA's originally proposed regulation did not define ``agricultural

assets,'' although the preamble to proposed Sec. 613.3000(a) stated

that agricultural assets included ``real estate, a home that is located

on a farm or ranch, equipment, chattel, and livestock.''

System commenters asked the FCA to define ``agricultural assets''

in the regulation. They proposed a more expansive definition of

``agricultural assets'' that, in their view, would reflect the

diversity of agriculture. The FCC's comment suggested that

``agricultural assets'' include ``all tangible and intangible assets

reasonably necessary to, derived from, used in, or available for use in

the borrower's agricultural or aquatic operation, including the

borrower's personal residence, regardless of its location.'' The

comment recommended that tangible and intangible assets include all

personal property and financial assets used in the borrower's operation

and the proceeds that are derived from the sale of agricultural assets.

Under the System's proposal, receivables, cash, investments purchased

with proceeds from the sale of agricultural assets, trademarks, motor

vehicles, aircraft, seagoing vessels, and other personal property would

be agricultural assets. System commenters also believed that off-farm

residences should qualify as agricultural assets because farmers and

producers in the fishing, timber, and nursery industries often live

off-site.

As requested by the commenters, the FCA has incorporated a

definition of ``agricultural assets'' into the reproposed regulation.

The definition in reproposed Sec. 613.3000(a)(1), however, is more

narrow than the FCC's recommendations. The FCA has excluded

intangibles, such as goodwill and trademarks, from the definition of

``agricultural assets'' because the establishment of a definitive

market value prior to sale is difficult to derive and, therefore,

oftentimes unreliable. Personal property such as motor vehicles,

aircraft, and seagoing vessels qualify as agricultural assets if the

borrower uses them for agricultural or aquatic production. Similarly,

cash, investments, and sale proceeds are not agricultural assets until

they are reinvested in the borrower's farming, ranching, or aquatic

operations. However, reproposed Sec. 613.3000(a)(1) does classify

working capital as an agricultural asset. Working capital includes

accounts receivables from agricultural sales, inventory used in the

borrower's agricultural or aquatic business, and cash proceeds that are

reinvested in the farming, ranching, or aquatic enterprise.

Under the reproposed regulation, the principal residence of a

farmer who is eligible under reproposed Sec. 613.3000(a)(3)(i) would be

considered an agricultural asset regardless of whether it is located on

agricultural land. This approach treats all active farmers equitably

irrespective of where they live or type of their agricultural endeavor.

Because the value of agricultural assets will determine the amount of

funds available for other credit needs, these assets must be valued

appropriately. Documentary support for the value should be included in

the loan file.

I. Financing for Legal Entities

The FCA proposed to allow any legal entity that is chartered in the

United States to qualify as an eligible System borrower if it met the

definition of a bona fide farmer, rancher, aquatic producer or

harvester. Such legal entities would be able to obtain financing for

any of their agricultural needs. The FCA proposed, however, to limit

System financing of the non-agricultural credit needs of legal

entities. Under the original proposal, legal entities would not have

been eligible for financing for their other credit needs if they were

publicly traded or less than 50 percent of the borrower's assets were

used in agricultural or aquatic production. The FCA's original proposal

would have allowed all other legal entities to receive financing for

non-agricultural purposes in an amount that did not exceed the market

value of their agricultural assets. The FCA reasoned that this approach

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. The restrictions in

proposed Sec. 613.3000(d)(3) were designed to ensure that previously

ineligible agribusiness corporations and conglomerates could obtain FCS

financing only for their agricultural or aquatic needs.

The FCA received 17 comments about its proposed limitations on the

financing of legal entities. All System commenters supported the FCA's

proposal to repeal the existing eligibility restrictions on legal

entities because they believe that the organizational structure of the

borrower should not determine eligibility. However, System commenters

opposed various aspects of the proposed restrictions on their ability

to finance the non-agricultural credit needs of certain legal entities.

In contrast, commercial banks, their trade associations, and FLAG

opposed the FCA's proposal to revise the eligibility and scope of

financing criteria for legal entities. These comments addressed whether

certain legal entities should be eligible for agricultural credit and

the extent to which they should be permitted to borrow from the System

for their other credit needs. One commenter asserted that family farm

corporations are the only legal entities that should qualify for System

financing. Others believed a legal entity should be eligible for

agricultural credit only if agriculture is its primary focus. Another

commenter favored retaining the three-pronged

[[Page 42102]]

eligibility test in former Sec. 613.3020(b). Two other commenters

suggested that legal entities should be ineligible to borrow from Farm

Credit banks and associations unless they are owned by farmers,

ranchers, or aquatic producers or harvesters who actively engage in

agricultural or aquatic production.

Both System and non-System commenters opposed the FCA's proposal to

deny publicly traded corporations access to System funding for their

non-agricultural credit needs. Some System commenters opposed excluding

publicly traded corporations from such financing because they believe

that current and potential System borrowers will, in the future, raise

capital by selling their equities on public exchanges.

Other commenters opposed the FCA's approach toward publicly traded

corporations because, in their view, it was not sufficiently

restrictive. They expressed concern that a privately owned conglomerate

would be able to obtain System financing for its non-agricultural

activities by simply restructuring its subsidiaries so that 50 percent

of their assets would be used in agricultural production.

After considering all the comments, the FCA has decided to: (1)

Retain the eligibility criteria for legal entities in proposed

Sec. 613.3000(a)(4); and (2) revise proposed Sec. 613.3000(d)(3), which

addresses the authority of FCS banks and associations to finance the

non-agricultural credit needs of legal entities. Under reproposed and

redesignated Sec. 613.3000(a)(5), a legal entity will qualify as a bona

fide farmer if it meets the eligibility criteria in reproposed

Sec. 613.3000(a)(3)(i). Reproposed Sec. 613.3000(a)(5) includes a

technical correction that adds tribal authorities to the list of

governmental units under whose laws legal entities can be organized.

Reproposed Sec. 613.3000(c) authorizes System banks and associations to

extend credit to an eligible legal entity for any agricultural or

aquatic purpose.

Reproposed Sec. 613.3000(d)(4) would continue to restrict which

legal entities could obtain financing for non-agricultural business

needs and the amount of such credit. A legal entity could obtain non-

agricultural financing only if more than 50 percent of its equity is

owned by individuals who actively engage in agricultural or aquatic

production to generate income and either more than 50 percent of its:

(1) Assets are used in agricultural or aquatic production; or (2)

income is derived from agricultural or aquatic activities. Moreover,

the credit would be limited to an amount that does not exceed the

market value of its agricultural assets at the time the loan is closed.

Because the reproposed regulation would require the borrower to meet

these requirements at the time the loan is closed, a System lender

would not be able to finance the other credit needs of a legal entity

unless its agricultural activities, after the extension of credit,

would exceed its non-agricultural activities.

The FCA believes that the reproposed regulation will strike an

appropriate balance among the concerns of all commenters. In response

to System concerns, reproposed Sec. 613.3000 would repeal all

regulatory restrictions that previously prevented System banks and

associations from providing agricultural credit to corporate farmers.

The reproposed regulation permits all bona fide farmers, including all

legal entities, to obtain System financing for any agricultural or

aquatic purpose. However, both individual and corporate farmers must be

eligible under Sec. 613.3000(a)(3)(i) before they can borrow from the

FCS for their non-agricultural business needs, and then only in an

amount that does not exceed the market value of their agricultural

assets. This ensures that only farmers who actively engage in

agricultural or aquatic production could obtain System financing for

their non-agricultural business needs.

The reproposed regulation effectively prevents publicly traded

corporations from obtaining System financing for their non-agricultural

needs unless more than 50 percent of the equity is held by active

farmers, ranchers, and aquatic producers or harvesters are allowed to

borrow from the FCS for such purposes. Additionally, these changes

would keep lending to legal entities agriculturally focused because:

(1) A majority of the income or assets of such borrowers must be

related to agricultural or aquatic production; and (2) the amount of

non-agricultural credit may never exceed the market value of any

borrower's agricultural assets.

The FCA disagrees with commenters who favor enabling the System to

finance the other credit needs of all legal entities engaged in

agriculture. Because the primary mission of the FCS is to finance

agriculture and aquaculture, FCA regulations have consistently imposed

restrictions of some type on non-agricultural loan purposes to System

borrowers. The FCA believes the availability of non-agricultural credit

for both individuals and legal entities should be proportionally

related to the borrower's involvement in agricultural or aquatic

production. Farmer ownership, combined with agricultural assets or

agricultural income, are the best measures of whether a legal entity

focuses on agriculture. Accordingly, the reproposed regulation would

ensure that such lending is proportional, while giving the FCS ample

flexibility to respond to the evolving needs of all agricultural

producers in a rapidly changing economic environment.

The FCA also disagrees with commenters who suggest that the

regulation should favor individual borrowers over legal entities. The

FCA observes that the Act does not accord individuals preference over

legal entities. For this reason, FCA regulations should not influence

the decision whether to conduct agricultural or aquatic operations in

an individual capacity or as a legal entity.

J. Nationality of the Borrower

The FCA received ten comments about proposed

Sec. 613.3000(a)(3)(ii), which governs the eligibility of non-resident

foreign nationals who have been admitted into the United States

pursuant to a provision in 8 U.S.C. 1101(a)(15) that authorizes such

individuals to own property, or to operate or manage a business in this

country. System commenters generally supported the FCA's original

proposal while other commenters opposed it. System commenters opined

that the proposed regulation was consistent with the Act, which imposes

no eligibility restriction on foreign nationals. Some System commenters

suggested that the FCA extend eligibility to foreign national legal

entities that have not established a domestic subsidiary because no

Federal law precludes System banks or associations from lending to such

parties.

In contrast, a commercial bank opined that the FCA's proposal was

``unfair and unwarranted'' because American citizens would compete with

foreign nationals for funding from the FCS. Three commenters asserted

that loans to non-resident foreign nationals are inherently unsafe and

unsound. One commenter believes that System loans to non-resident

foreign nationals slow the national economy and worsen the trade

deficit between the United States and other countries. Two other

commenters claimed that FCS financing to non-resident foreign nationals

forces small family farms out of business. A trade association

questioned whether the Act authorizes the FCS to finance foreign

nationals.

The FCA disagrees with the argument that the FCS lacks the legal

authority to extend credit to farmers, ranchers, and aquatic producers

and harvesters who

[[Page 42103]]

are not American citizens. Section 1.1(a) of the Act states that the

mission of the FCS is to improve the ``income and well-being of

American farmers and ranchers.'' Neither that provision or any other

provision of the Act explicitly or implicitly restricts eligibility for

System loans to American citizens. The general rulemaking provisions of

section 5.17(a)(9) of the Act allow the FCA to enact regulations that

govern the eligibility of foreign nationals to borrow from FCS

institutions.

Since 1976, FCA regulations have allowed certain foreign nationals

who have been lawfully admitted into the United States for permanent

residence and conduct agricultural or aquatic operations within its

territory to borrow from System banks and associations that operate

under titles I or II of the Act. Legal entities that are owned or

controlled by eligible foreign nationals also qualify for System

financing under existing FCA regulations.

Foreign nationals and foreign national legal entities that lawfully

engage in agricultural or aquatic production in the United States

invest their capital, labor, time, and effort in the American

agricultural economy. In this context, these persons contribute

primarily to the economy of the United States, not their country of

origin. Contrary to the comments of commercial bankers, the United

States benefits from the endeavors of these farmers, just as it does

from any other farmer who helps supply abundant and affordable food to

the American consumer.

The FCA also rejects arguments that loans to foreign nationals are

inherently unsafe and unsound. Although loans to non-resident foreign

nationals may expose System banks and associations to different risks,

the FCA notes that the FCS, like all lenders, should have the

capability to identify and manage the risks associated with lending to

non-resident foreign nationals.

The reproposed regulation, however, further restricts the access of

non-resident foreign nationals to the System for their other credit

needs. The original proposal would have authorized non-resident foreign

nationals to obtain System financing for their housing, domestic, and

non-agricultural business needs in an amount that does not exceed the

market value of their agricultural assets in the United States. In

contrast, reproposed Sec. 613.3000(d)(2) prohibits such borrowers from

obtaining System financing in any amount for non-agricultural business

needs. The FCA believes that the additional restriction on loans to

non-resident foreign nationals is justified because their legal status

limits their activities within the United States. As a general rule,

the visas of non-resident foreign nationals do not allow them wide

latitude to change their business activities within the United States.

Accordingly, the reproposed regulation ensures that FCS lending to

foreign nationals is limited to agricultural purposes and housing and

domestic needs that are reasonably related to the borrower's farming

operation in the United States.

The FCA does not agree with the commenters' recommendation that the

regulation allow System lenders to finance foreign national legal

entities that have not established a domestic subsidiary. Reproposed

Sec. 613.3000(b) treats all United States corporations exactly alike

regardless of the nationality of their owners. This approach simplifies

the regulation and avoids any safety and soundness issues that could

arise from the absence of a domestic charter by the borrower. Because

foreign corporations that produce agricultural products in the United

States are able to establish a subsidiary under domestic laws, any such

creditworthy enterprise that desires financing from an FCS lender will

be eligible to obtain it.

One System association suggested that Mexican or Canadian farmers

or ranchers who obtain farm-related services in the United States

should be eligible for FCS financing. More specifically, the commenter

recommended that the FCA authorize System banks and associations to

finance Mexican ranchers who periodically bring their cattle into Texas

to use local feedlots. The commenter believes that such an approach

would be consistent with the spirit of the North American Free Trade

Agreement (NAFTA).

The FCA does not accept this suggestion. Doing so would require the

FCA to expand the definition of a bona fide farmer or rancher to

individuals who neither conduct an agricultural operation inside the

United States nor own agricultural land in the United States. Such

parties farm or ranch outside of the United States, where the FCS has

no authority to lend under titles I and II of the Act.

K. Legal Entities Eligible To Borrow From a BC or ACB

Under the FCA's original proposal, legal entities that are eligible

to borrow from a BC or ACB would not have qualified for financing from

an FCB or FCS association. Although the FCA acknowledged that some

cooperatives have outstanding loans with FCBs and associations, the

Agency expressed concern that the revised eligibility standard for

legal entities might significantly expand competition within the FCS.

Accordingly, the FCA invited comment on the appropriateness of a

regulatory prohibition on FCB and association loans to cooperatives and

asked commenters to offer alternative solutions.

The FCA received 84 letters of comment on its proposal to deny

eligible title III borrowers access to financing at FCBs and direct

lender associations. Although the St. Paul BC, CoBank, and a pair of

jointly managed associations favored this proposal, six FCBs, 49

associations, the Tenth District PCAs, 16 agricultural cooperatives and

one individual opposed it.

Most FCBs and direct lender associations contended that titles I

and II of the Act permit them to lend to agricultural cooperatives and

related entities that are also eligible BC or ACB borrowers. Many

commenters claimed that a regulatory prohibition on FCB and association

loans to cooperatives and their related entities is contrary to the

language and intent of the Act. Many commenters asserted that this

proposal was contrary to the FCA's Regulatory Philosophy Statement,

because a ban on FCB and association loans to eligible title III

borrowers is not necessary to implement or interpret the Act or promote

safety and soundness. Some FCS associations claimed that the FCA's

original proposed regulation lacked balance because it would allow a BC

or ACB to serve FCB and association customers.

As requested by the FCA, several commenters offered alternatives

that address the Agency's concerns about intra-System competition. Many

commenters suggested that the FCA delete this prohibition from the

regulation and initiate a negotiated rulemaking, or impanel an Advisory

Committee pursuant to section 5.12 of the Act, to address all intra-

System competition issues. Several associations suggested that the

regulation require FCBs and their associations to obtain consent from a

title III lender before they extend credit to a cooperative or related

entity.1 A jointly managed FLCA and PCA advised the FCA to allow

an FCB or direct lender association to make loans below a specified

dollar amount to cooperatives without the consent of a title III

lender. If the loan exceeded this

[[Page 42104]]

threshold, the FCB or direct lender would be required to either: (1)

Obtain consent from a title III lender; or (2) sell a participation

interest in the loan to the St. Paul BC or CoBank. An FCB and one of

its affiliated associations suggested that the regulation authorize

FCBs and associations to lend only to those cooperatives that engage in

or finance agricultural production.

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

\1\ Former regulations in subpart B of part 616 controlled

intra-System competition by allowing title I and II lenders to lend

to small cooperatives with the concurrence of the district BC. 12

CFR 616.6040 was originally adopted by the FCA in 1979. See 44 FR

69633 (Dec. 4, 1979). It was repealed in 1990. See 55 FR 24888 (June

19, 1990).

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

The FCA has decided to withdraw the proposal to prohibit lending by

FCBs and associations to borrowers also eligible under title III. The

removal of this prohibition from the regulation acknowledges the status

quo within the FCS. Currently, titles I and II lenders finance certain

cooperatives and their related entities under their statutory powers.

The FCA finds that permitting this continued overlap is preferable to

the alternative approaches suggested by some commenters. The consent

requirement could unacceptably burden the loan approval process for

both System lenders and their borrowers. The FCA has no basis for

setting a specific dollar limit for loans to cooperatives that would be

responsive to smaller cooperatives' needs.

The FCA is aware that intra-System competition causes deep concern

within the FCS and can have significant implications for the FCS as a

whole. As noted earlier, many commenters have suggested that the FCA

address intra-System competition issues, using a participatory

approach, such as a negotiated rulemaking or an Advisory Committee. The

FCA believes this recommendation merits further consideration. It will

continue to monitor competition among System institutions and consider

methods to address these issues. The FCA continues to encourage System

institutions to resolve specific issues regarding intra-System

competition by mutual agreement.

L. Other Issues Raised by Commenters

1. Definition of Bona Fide Farmer, Rancher, and Aquatic Producer or

Harvester

Proposed Sec. 613.3000(a)(2) would define a bona fide farmer,

rancher, or aquatic producer or harvester 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 preamble to the proposed regulation noted that this

definition does not represent a significant departure from the existing

regulation.

One FCB and several of its affiliated associations sought

modification to this definition. First, these commenters recommended

that the FCA change the term ``produces agricultural products'' to

``engages in the production of agricultural products,'' to clarify that

eligibility is not determined by farmer's actual crop yield. These

commenters expressed concern that proposed Sec. 613.3000(a)(2) could

result in a bona fide farmer becoming ineligible for an operating loan

due to a crop failure in a previous year. Although the FCA has not

incorporated the commenters' recommendation into the reproposed

regulation, the Agency reaffirms its position that crop failures do not

affect borrower eligibility.

The same FCB and an affiliated association requested that the FCA

revise proposed Sec. 613.3000(a)(2)(i) to encompass parties who provide

for the husbandry of wild and domesticated animals. The FCA has always

regarded husbandry of farm and ranch animals as an agricultural

activity and believes that no additional regulatory changes are needed.

The FCB and many of its affiliated associations also asked the FCA

to clarify whether the term ``eligible borrower'' in proposed

Secs. 613.3000(b) and 613.3010 refers to parties who already have

outstanding System loans. The FCA responds that eligibility is not

determined by whether the applicant is a current FCS borrower. Instead,

``eligible borrower'' refers to bona fide farmers, ranchers, and

aquatic producers or harvesters who qualify for System financing under

Secs. 613.3000(b) and 613.3010.

2. GSE Status

Many commercial banks and credit unions questioned whether System

financing for the other credit needs of agricultural and aquatic

producers is compatible with GSE status because they believe GSE status

gives the FCS unfair competitive advantages over commercial banks,

credit unions, and other lenders. Some commenters asserted that the FCS

should be allowed to compete with other lenders for non-agricultural

loans to farmers only when such System lending will fulfill a market

need that has been neglected by non-GSE lenders.

The FCA disagrees and observes that the Act expressly authorizes

System lenders to finance a farmer's other credit needs. Section 1.1(c)

of the Act reflects Congress' expectation that the FCS will be a

competitive source of loans to agricultural and aquatic producers. It

is precisely this competition that achieves the express objectives of

Congress of increasing the availability and reducing the cost of credit

to agriculture, aquaculture, and other rural needs that are specified

by the Act. These comments overlook the primary purpose of the FCS,

which is to provide reliable credit to agriculture at all times,

including those periods when commercial lenders find it unprofitable or

too risky to lend to agriculture. To continue to perform this function

as the methods and modalities of agriculture change, the FCS must be

free of unnecessary regulatory restrictions that impede its flexibility

to meet the credit needs of agricultural producers.

3. Need for Outstanding Agricultural Loans

Two commercial bank trade associations objected to permitting

System lenders to finance a farmer's other credit needs unless the

borrower has an outstanding agricultural loan from the FCS.

The FCA believes that allowable financing for other credit needs

should be related to the borrower's involvement in agriculture, rather

than whether there is an agricultural loan outstanding to the borrower.

Therefore, the FCA has responded to the commenters' concern by limiting

FCS financing for a non-agricultural business need to active farmers

eligible under Sec. 613.3000(a)(3)(i). As in the proposed regulation,

the amount of such credit would be limited to the market value of the

borrower's agricultural assets. The reproposed regulation would not

allow the FCS to extend non-agricultural business credit to passive

owners of agricultural land.

The Act does not require that a borrower have an outstanding

agricultural loan from a System lender in order to obtain financing for

another purpose. Rather, it grants the FCA discretion to determine the

limitations on non-agricultural lending to farmers and ranchers. The

reproposed regulation would preserve the System's agricultural focus by

limiting the amount of credit available for non-agricultural business

purposes and would make it available only to active farmers. This

approach ensures that non-agricultural business lending is proportional

to each borrower's commitment to agriculture.

4. Partnership With Commercial Lenders

A State agency suggested that the regulation require System lenders

to participate with commercial banks in non-agricultural business loans

and use commercial bank underwriting standards for such loans. The FCA

does not agree that this should be a requirement.

[[Page 42105]]

5. Asset Limitation for Non-Agricultural Lending

Two commercial bank commenters opposed the FCA's proposal to link

the amount of non-agricultural credit to the market value of the

borrower's agricultural assets. One commenter claimed that this

proposal would establish a credit union bond for the FCS. This comment

seems to indicate that any borrower who meets the regulatory definition

of a ``bona fide farmer'' can obtain System financing for any credit

need. The FCA disputes this allegation because the amount of a farmer's

agricultural assets does not establish eligibility for a System loan,

but rather limits the borrower's access to the FCS for non-agricultural

business loans.

These commenters urged the FCA to use agricultural income, not

agricultural assets, as the standard for limiting a farmer's access to

the FCS for non-agricultural business credit because they believe that

income is a better barometer of a borrower's relationship to

agriculture. The commenters noted that an income test would more

effectively ensure that System lending for non-agricultural purposes is

not concentrated on older and wealthier part-time farmers, who may have

substantial agricultural assets, but derive a small amount of income

from these assets.

After considering this suggestion, the FCA continues to believe

that agricultural assets, not agricultural income, provide a more

useful and readily available measure of a borrower's involvement in

agriculture. Agricultural income is too volatile to be an accurate

measure of a borrower's overall commitment to agriculture because

income tends to fluctuate from 1 year to the next. Further,

agricultural income as a sole measure may not provide the FCS with

sufficient flexibility to provide financing that enables farmers to

remain on the farm, as Congress intended. In contrast, ownership of

agricultural assets tends to increase gradually over time because a

significant capital investment is needed to acquire agricultural land,

equipment, and chattel. Assets generally collateralize debt and provide

the financial means to borrow during periods of low income.

6. Loans to Certain Classes of Borrowers

Several commercial bank commenters favored retaining eligibility

restrictions on part-time farmers and other types of farmers who they

believe have tenuous ties to agriculture. For example, some comments

stated that farmers with minimal agricultural production should be

precluded from obtaining System financing for non-agricultural

purposes. These commenters generally believed that Congress did not

intend for the FCS to extend credit to passive owners of agricultural

land, part-time farmers, or farmers with minimal production.

The Act does not require a minimum level of involvement in

agriculture for a farmer to qualify for FCS financing. Section 1.1(b)

of the Act specifically states that the objective is to provide ``[a]

permanent system of credit for agriculture which will be responsive to

the credit needs of all types of agricultural producers having a basis

for credit.'' The FCA's proposal to update its eligibility regulations

so they respond to the changes in agriculture is fully supported by the

Act and its legislative history.

The reproposed regulation would implement sections 1.1(b), 1.9(1),

1.11(a), and 2.4(a) of the Act by enabling the FCS institutions to be

responsive to the credit needs of all types of agricultural producers

while diversifying repayment sources of its agricultural loan

portfolios. The reproposal would ensure that the FCS can continue to

fulfill its statutory mission to meet the credit needs of agriculture,

which is undergoing significant restructuring and consolidation.

Diversification of lending within the agricultural sector also promotes

safety and soundness by reducing risks and increasing earnings and

capital.

The FCA recognizes the increasingly important role that off-farm

income plays in allowing farmers to stay on their farms. For this

reason, reproposed Sec. 613.3000 would grant Farm Credit banks and

associations additional flexibility to finance part-time farmers than

is allowed by existing regulations. Because the reproposed regulation

limits the funds available for the borrower's non-agricultural business

needs, FCS lending to such borrowers is kept well within the boundaries

of the Act.

Other commercial banking interests expressed concerns about FCS

loans to borrowers who plan to convert land to a non-agricultural use.

They favor retaining a provision in existing Sec. 613.3005(a), which

states that ``credit shall not be extended where investment in

agricultural assets for speculative appreciation is a primary factor.''

The FCA shares the commenters' concerns about loans to a party who

purchases agricultural land with the intent to eventually convert it to

a higher-valued, non-agricultural use. The reproposed regulation should

effectively control this activity because it would prohibit a passive

investor in agricultural land from obtaining System loans for a non-

agricultural business purpose.

After considering the comments of all interested parties, the FCA

has revised Sec. 613.3000, and reproposes it for further comment. The

FCA's approach is responsive to the credit needs of agriculture in

today's environment, and it eliminates unnecessary paperwork

requirements and reduces other regulatory burdens on System

institutions. It balances the needs of System institutions and their

borrowers with the concerns of commercial banks and credit unions. The

reproposed regulation clearly recognizes that the primary mission of

the FCS is to finance agricultural credit needs, while allowing limited

financing of other credit needs, of farmers, ranchers, and aquatic

producers or harvesters as specified by the Act.

M. Processing or Marketing Regulation

The FCA originally proposed to redesignate, restructure, and revise

the regulation that enables FCBs, ACBs, and direct lender associations

to finance the processing or marketing activities of bona fide farmers,

ranchers, and aquatic producers or harvesters under titles I and II of

the Act, simplifying and clarifying existing Sec. 613.3045 and

eliminating unnecessary regulatory burdens.

As originally proposed by the FCA, Sec. 613.3010(a)(1) would have

relaxed a regulatory requirement that bona fide farmers, ranchers, and

aquatic producers or harvesters own 100 percent of an eligible

processing or marketing operation. Instead, the FCA's original proposal

would have required farmers, ranchers, and aquatic producers or

harvesters to own a ``controlling interest'' in a processing or

marketing operation, and the Agency sought input from interested

parties about how this term should be defined.

Comments on proposed Sec. 613.3010 were received from the FCC,

three Farm Credit banks, 17 Farm Credit associations, seven Farm Credit

borrowers, and the CBANC, IBAA, and MPB. Seven System borrowers and the

MPB offered comments in general support of the amendments. One borrower

stated that removing existing restrictions would strengthen the

System's ability to finance emerging needs, and another borrower stated

that the amendments would allow the financing of more value-added

agricultural products. CoBank expressed concern that the proposed

regulation would expand the authorities of FCBs and FCS associations to

finance

[[Page 42106]]

processing or marketing enterprises and thereby increase intra-System

competition. The CBANC opposed proposed Sec. 613.3010 because it would

broaden the authority of System banks and associations to finance

processing or marketing operations.

The commenters identified three specific areas of concern related

to proposed Sec. 613.3010. First, System commenters and the IBAA

responded to the FCA's request for guidance about how the term

``controlling interest'' should be defined in Sec. 613.3010(a)(1).

Second, System commenters questioned whether the Act requires borrowers

to ``consistently'' supply throughput. Finally, the IBAA objected to

the repeal of the documentation requirements of Sec. 613.3045(e)

raising a question about whether the paperwork obligations of

Sec. 613.3045(e) are required by law.

1. Farmer Control

The FCA requested guidance about how the regulation should define

``controlling interest'' in a separate processing or marketing unit

that is eligible to borrow from an FCB, ACB, or direct lender

association. Several FCS respondents urged the FCA to adopt the FCC's

suggested definition of ``controlling interest,'' which is patterned

after section 2(a)(2) of the Bank Holding Company Act, (BHCA), 12

U.S.C. 1841(a)(2), and section 10 of the Homeowners' Loan Act (HOLA),

12 U.S.C. 1467a. Although the St. Paul BC and CoBank did not oppose the

FCC's recommendation, they expressed concern about intra-System

competition for processing or marketing loans. These commenters cited

passages in the legislative history to sections 1.11(a) and 2.4(a) of

the Act to suggest that Congress may not have intended to expand

eligibility beyond bona fide farmers, ranchers, and aquatic producers

or harvesters to a new class of ``agribusiness'' borrower. The IBAA

claimed that the Act requires bona fide farmers, ranchers, and aquatic

producers or harvesters to own 100 percent of the processing or

marketing unit, in order for the enterprise to be ``directly related''

to the borrowers' farming operations. Several respondents also asked

the FCA to clarify whether Sec. 613.3010(a)(1) requires a processing or

marketing operator to have an outstanding FCS agricultural or aquatic

loan.

Rather than define ``controlling interest,'' Sec. 613.3010(a)(1)

would require bona fide farmers, ranchers, and aquatic producers or

harvesters to own more than 50 percent of the voting stock or equity of

an eligible processing or marketing operation. This approach balances

the needs of titles I and II lenders for greater flexibility to finance

processing or marketing operations with the limitations in sections

1.11(a) and 2.4(a) of the Act. Sections 1.11(a) and 2.4(a) of the Act

allow titles I and II lenders to lend only to processing or marketing

operations that are ``directly related'' to the borrowers' agricultural

or aquatic activities. According to several passages in the legislative

history, Congress intended that titles I and II lenders would finance

only the processing or marketing operations of farmers, ranchers, and

aquatic producers or harvesters who are already eligible to borrow from

these institutions for their agricultural or aquatic activities.2

Another passage in the legislative history indicates that current

sections 1.11(a) and 2.4(a) of the Act do not authorize FCBs and their

affiliated associations to ``finance a new class of borrowers,'' 3

while a colloquy between two Senators suggests that the intent was to

prohibit ``agribusiness marketers and processors'' from borrowing from

titles I and II institutions.4

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\2\ S.R. No. 96-837, 96th Cong., 2d. Sess. 47 (June 26, 1980).

\3\ Id.

\4\ Colloquy between Senators Stewart and Zorinsky, 126 Cong.

Rec. 16560 (Dec. 13, 1980).

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

The FCA disagrees with the view that the Act requires agricultural

or aquatic producers to own all of the equity of a separate processing

and marketing operation. Nothing in the plain language of sections

1.11(a) and 2.4(a) of the Act or their legislative history supports

this position. In fact, a passage in the legislative history indicates

that Congress expressly contemplated joint processing or marketing

ventures between agricultural or aquatic producers and investors as

long as ineligible parties do not ``exercise substantial control of the

facility or activity financed by the loan.'' 5 The 100-percent

ownership requirement in existing Sec. 613.3045(b)(2)(iii) is a

regulatory policy, which the FCA has discretion to change.

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

\5\ Id.

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The FCA believes that the 100-percent ownership requirement in

existing Sec. 613.3045(b)(2)(iii) is overly restrictive. For example,

it denies otherwise eligible farmer-owned processing or marketing

operations alternative credit options merely because employees or

investors own a minority interest in the business. Agriculture and

aquaculture would benefit from the relaxation of this ownership

requirement because the reproposed regulation is designed to increase

the availability of affordable and dependable credit for businesses

that add value to farm products and commodities.

The FCA declines to adopt the System's suggestion that it define

``controlling interest'' units by importing provisions of the BHCA and

the HOLA into Sec. 613.3010(a)(1). Under the System's proposal,

eligible borrowers would be deemed to hold a controlling interest in a

processing or marketing unit if they: (1) Directly or indirectly or

acting through one or more other persons own, control, or have power to

vote 25 percent or more of the voting shares of the legal entity; (2)

control in any manner the election of a majority of the directors,

trustees, general partners, or managers of the legal entity; or (3)

they own, control, or have power to vote at least 5 percent or more of

the voting shares of the legal entity and directly or indirectly

exercise a controlling influence over the management or policies of the

legal entity. System commenters have not explained why the ``control''

standards in the BHCA and the HOLA are suitable for processing and

marketing operations that would qualify for financing under sections

1.11(a) and 2.4(a) of the Act.

The FCA believes that the definition of ``control'' in the BHCA and

the HOLA are inappropriate for Sec. 613.3010, because it would enable

System banks and associations to finance processing or marketing

operations that are substantially controlled by parties who are not

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

In response to the inquiry from an FCB and some of its affiliated

associations, the FCA confirms that this regulation would not require

an applicant for a processing or marketing loan to have an outstanding

agricultural or aquatic loan with a System bank or association.

2. Throughput Requirements

Fifteen System commenters objected to the proposed requirement for

borrowers to ``consistently'' produce some of the throughput used in

the processing or marketing operation. The FCC and most System banks

and associations stated that neither the current regulation's use of

the word ``sustained,'' nor the proposed regulation's use of the term

``consistently,'' are justified by the plain language of the Act. These

commenters claim that sections 1.11(a)(1) and 2.4(a)(1) of the Act only

require borrowers to ``supply some portion'' of the total throughput.

Two commenters suggested the FCA amend Sec. 613.3010(a)(2) so it would

allow FCBs and associations to finance borrowers

[[Page 42107]]

who are ``capable of producing some portion of the throughput.''

Several commenters suggested that the FCA remove this requirement

because it implied that the borrower would cease being eligible for

financing when market conditions dictated that they process crops

through another processor/marketer. All commenters, except the BC and

ACB, would prefer to have the regulations restate the statutory

language.

The FCA disagrees with the commenters. Although the words

``consistently'' or ``sustained basis'' do not appear in the text of

sections 1.11(a) and 2.4(a) of the Act, such a term is needed in the

regulation in order to implement the statutory requirement that

eligible processing or marketing operations be ``directly related'' to

the borrowers' agricultural or aquatic production activities. The

legislative history explains that the Act requires ``a demonstrated

relationship between the total processing and marketing activities and

the applicant's own production.'' 6

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\6\ S.R. No. 96-837, supra.

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In order to provide FCBs, ACBs, and direct lender associations with

greater flexibility to finance processing or marketing operations under

the scope of sections 1.11(a) and 2.4(a) of the Act, reproposed

Sec. 613.3010(a)(2) would require the borrower or its owners to

``regularly'' supply throughput. The term ``consistently'' implies that

there can be no variation in the level or timing of the borrower's

throughput contribution, whereas the term ``regularly'' provides the

borrower with greater flexibility to address unexpected problems in

supplying throughput.

The FCA does not accept the suggestion of several System commenters

that the regulation confer eligibility on processing or marketing

borrowers who are ``capable'' of producing throughput because the mere

capacity to contribute throughput, without more, does not satisfy the

Act's requirement that borrowers ``supply'' throughput.

3. Regulatory Burdens

The IBAA opposes the repeal of the documentation requirements in

existing Sec. 613.3045(e), asserting that this provision is necessary

to implement statutory eligibility requirements. The FCA disagrees.

Compliance with eligibility requirements is adequately assured through

the lenders' internal policies and the examination and enforcement

powers of the FCA. Existing Sec. 613.3045(e) dictates detailed

management and operational procedures to System institutions. Such

``command and control'' requirements are incompatible with the FCA's

Regulatory Philosophy Statement and the President's initiative to

reduce regulatory burdens under the National Performance Review.

Accordingly, the FCA continues to propose the repeal of

Sec. 613.3045(e).

No comments were received on the provisions in paragraph (b)

addressing the portfolio limitations and, therefore, the FCA has not

revised this provision in its reproposal.

N. Farm-Related Business Regulation

The FCA originally proposed to redesignate and revise the

regulation that authorizes FCBs, ACBs, and direct lender associations

to make loans to farm-related businesses. Existing Secs. 613.3050 and

619.9120 would have been replaced with a new regulation, Sec. 613.3020,

which is closely aligned with the plain language of sections 1.9(2),

1.11(c)(1), and 2.4(a)(3) of the Act. This change would have repealed

existing regulatory requirements that are not required by the Act. The

FCA proposed these revisions because existing Secs. 613.3050 and

619.9120 are unnecessarily restrictive and appear to frustrate the

ability of System banks and associations to finance statutorily

eligible and creditworthy farm-related businesses, needlessly denying

many farm-related businesses a competitive credit option. The preamble

to the FCA's original proposal noted that farm-related business loans

comprise less than 1 percent of all System loans, and many FCS banks

and associations have no farm-related business loans in their

portfolios.

The FCA received 58 comments about proposed Sec. 613.3020. Of this

total, 26 comments were received from System banks, associations, and

the FCC. The FCA also received comments from three commercial banks and

four banking trade associations, four credit unions and one of their

trade associations, three State government agencies, 17 individuals,

and FLAG.

Most of the comment letters from commercial banks, credit unions,

and their trade association pertained to competition between private

sector lenders and the FCS. FLAG opposed the proposed regulation

because it would create opportunities for outside investors, who do not

contribute to the prosperity of local farm communities, to obtain FCS

funding for farm-related businesses. The FCA has already responded to

these concerns in earlier sections of this preamble.

The individual commenters and three State government agencies

supported proposed Sec. 613.3020 because it would bolster the

agricultural economy by enabling FCS banks and associations to provide

affordable credit to local farm-related businesses that serve farmers

and ranchers. These commenters stated that farm-related businesses

provide essential services to production agriculture and rural America.

One State Government agency asserted that the FCS should only finance

businesses (other than farming, ranching, and aquatic operations) that

add value to agricultural products.

A number of commenters requested clarifications or modifications to

this regulation.

1. Types of Services

Under Sec. 613.3020(a) of the original proposal, 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 System lenders. Two commenters claimed that the language of

proposed Sec. 613.3020(a) is too broad and ambiguous because virtually

any business in an agriculture community, including a gas station or

accounting firm, could argue that it is an eligible farm-related

business.

To prevent any such misinterpretation, the FCA revises proposed

Sec. 613.3020(a) to clarify that a business must furnish ``farm-related

services'' in order to qualify for System financing. Businesses that

offer non-agricultural services to farmers and ranchers do not qualify

as eligible farm-related businesses under sections 1.11(c)(1) and

2.4(a)(3) of the Act. Some examples of ``farm-related services'' that

would be covered by the reproposed regulation are: (1) Spraying crops;

(2) harvesting; (3) transporting agricultural commodities to grain

elevators, livestock markets or other markets, and other processing

centers; (4) custom feed mixing operations; (5) veterinary services;

(6) drying or preserving farm commodities or products; (7) repairing

and servicing farm implements, equipment and machinery; (8) computer

and aerial mapping of soil and crop conditions; (9) nutritional

analysis for livestock production; and (10) specialized animal

husbandry services. Reproposed Sec. 613.3020 would no longer require an

eligible farm-related business to furnish services on the farms or

ranches of its customers because the plain language of sections

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

not impose an ``on-farm'' requirement.

2. Custom-type Services

Commercial bank commenters opposed the FCA's proposal to repeal

[[Page 42108]]

Sec. Sec. 613.3050(a) and 619.9120, which required eligible farm-

related businesses to furnish ``custom-type services'' to farmers and

ranchers. ``Custom-type services'' are functions that farmers and

ranchers can perform for themselves, but instead hire outside

contractors to perform these tasks. One commenter suggested that an

amendment to the Act would be necessary before the FCA could repeal

this regulatory requirement.

The FCA disagrees that sections 1.11(c)(1) and 2.4(a)(3) of the Act

limit eligibility for financing to those businesses that furnish

``custom-type services'' to their customers. Although passages in the

legislative history to the Act contain examples of ``custom-type

services'' that farmers and ranchers may perform for themselves, these

examples appear illustratory. The FCA finds no evidence to support the

contention that sections 1.11(c)(1) and 2.4(a)(3) of the Act preclude

System banks and associations from financing farm-related services that

are directly related to agricultural production. Under the

circumstances, the repeal of Secs. 613.3020(a) and 619.9120 would

advance the purpose and objectives of the Act because farmers today

rely on technologically advanced services that they cannot perform for

themselves. Such services enable farmers and ranchers to: (1) Increase

their income; (2) reduce their operating costs; (3) improve farm

productivity; and (4) satisfy consumer demands for improved food

quality and specialty food products.

3. Financing Other Purposes

Several commercial bank trade associations asserted that proposed

Sec. 613.3020(b)(1) would actually enable an eligible borrower who

derives more than 50 percent of its income from furnishing farm-related

services to obtain System financing for non-agricultural purposes.

The FCA proposed Sec. 613.3020(b)(1) so that FCS banks and

associations could, to the extent allowed by sections 1.11(c)(1) and

2.4(a)(3) of the Act, finance farm-related businesses that sell some

agricultural goods or inputs that are not consumed in its services to

farmers and ranchers. The FCA intended that proposed

Sec. 613.3020(b)(1) would allow FCBs, ACBs, and direct lender

associations to provide ``whole firm'' financing to businesses that

primarily furnish farm-related services to farmers and ranchers. Under

the FCA's proposal, the following farm-related businesses, for example,

could become eligible for System loans because they derive more than

half of their income from providing farm-related services separately

from selling farm goods or inputs: (1) Veterinary services that sell

medications and supplemental feed mixes directly to farmers and

ranchers; (2) farm equipment repair and maintenance services that also

sell spare parts to their customers; and (3) crop fertilizing services

that sell mixtures that farmers will apply to the soil between routine

service calls. Because the borrower must derive more than 50 percent of

its income, as measured on a gross sales or net sales basis, from

furnishing farm-related services, the proposed regulation was designed

to ensure that System banks and associations extend ``whole firm''

financing only to a farm-related business that primarily provides

services, rather than goods or inputs, to its customers.

Sections 1.11(c)(1) and 2.4(a)(3) of the Act do not authorize FCBs,

ACBs, and direct lender associations to finance the non-agricultural

activities of farm-related businesses, and this was not the intent of

the FCA. The FCA has revised this provision to ensure that financing

under this section is provided only for farm-related business purposes.

Reproposed Sec. 613.3020(b) would authorize an FCB, ACB, or direct

lender association to finance: (1) All of the farm-related business

activities of an eligible borrower who derives more than 50 percent of

its annual income (as consistently measured on either a gross sales or

net sales basis) from furnishing farm-related services that are

directly related to the agricultural production of farmers and

ranchers; or (2) only the farm-related services activities of an

eligible borrower who derives 50 percent or less of its annual income

(as consistently measured on either a gross sales or net sales basis)

from furnishing farm-related services that are directly related to the

agricultural production of farmers and ranchers. This revision will

prevent System banks and associations from financing the borrower's

non-agricultural enterprises.

4. Income Test

The FCC and most System commenters suggested that the FCA revise

proposed Sec. 613.3020(b) so that a farm-related business could obtain

System financing for all of its needs if some minimum percentage of its

operations, as measured either on an income or asset basis, consists of

furnishing farm-related services to farmers and ranchers. The FCC and

most System institutions suggested that the FCA authorize System

lenders to finance all of the needs of a business that derived at least

20 percent of income from furnishing farmers and ranchers with farm-

related services. Two other commenters suggested that the FCA set the

threshold at 10 percent or lower.

These commenters urged the FCA to lower the 50-percent threshold in

proposed Sec. 613.3020(b) because they assert that System banks and

associations will be unable to compete in this segment of the

agricultural credit market unless they can finance all of the

borrower's operations. These commenters note that farm-related

businesses usually conduct diversified operations that include farm

supply and other types of business in addition to farm-related

services. The commenters believe that the proposed approach may be

unworkable because these diversified operations experience seasonal

fluctuations in demand and are unlikely to segregate their diversified

operations in their financial statements.

The FCC and one FCS association suggested an alternative to the

income percentage test that would prevent System banks and associations

from becoming concentrated in loans to businesses that do not primarily

furnish farm-related services to farmers and ranchers. Under this

alternative, the total outstanding loans of each FCB, ACB, or direct

lender association to farm-related businesses that devote less than 50

percent of their operations to farm-related services would be limited

to 15 percent of the institution's total outstanding loans at the end

of the preceding fiscal year.

Although a portfolio limitation could achieve this policy result,

the FCA has not adopted this suggestion because it does not believe

that safety and soundness concerns require such controls or that such a

limitation would be consistent with Congressional intent. The

reproposed regulation maintains the threshold for whole firm financing

at 50 percent. Allowing whole firm financing to a business that derives

only a minority of its income from providing agricultural services is

difficult to reconcile with sections 1.11(a)(1) and 2.4(a)(3) of the

Act.

The FCA also declines requests to include assets as an additional

measure of whether a borrower primarily furnishes services or sells

supplies because it is virtually impossible to distinguish whether

certain assets are consumed in providing farm-related services or sold

as supplies.

5. Intra-System Competition

The BC and ACB expressed concern about intra-System competition for

farm-related business loans. Although these two commenters did not

[[Page 42109]]

specifically object to proposed Sec. 613.3020 or the FCC's

recommendations, they supported a provision in proposed

Sec. 613.3000(a)(4) that would prohibit FCBs and direct lender

associations from extending credit to legal entities that are eligible

to borrow from a BC or an ACB. As discussed earlier, reproposed

Sec. 613.3000 would not prohibit FCBs and direct lenders from lending

to certain cooperatives and their related entities. Although the FCA

acknowledges the small overlap of the authorities of System

institutions that operate under titles I, II, or III of the Act to

finance farm-related businesses, neither the Act nor the regulations

permit FCBs and their affiliated direct lender associations to extend

whole firm financing to entities that sell primarily farm supplies.

Therefore, intra-System competition should be limited. The FCA intends

to review this issue again when it considers all aspects of intra-

System competition.

O. Rural Home Regulation

The FCA originally proposed to redesignate and substantially revise

the regulations that govern System loans to non-farm rural homeowners.

The FCA received general comments on rural home lending from 22

parties, including FCS associations, credit unions, commercial banks,

trade associations, borrowers, and a State agency.

Many FCS commenters offered general support for the proposed

revisions to the rural home financing regulations. Borrowers stated

that the amendments would have a positive effect on the rural economy

and may keep more people living in rural America. The FCC stated that

the proposed regulations clarify the authority of the FCS to finance

both non-farm rural homes and the housing needs of agricultural

producers. The FCC also supported the repeal of several regulatory

requirements that are not required by the Act, but restrict the ability

of the FCS to finance the housing and domestic needs of rural home

borrowers. Three borrowers, one trade organization, and one

governmental agency supported the provisions allowing home equity

loans.

Non-System lenders and their trade associations opposed the

proposed amendments. Their comments addressed such topics as potential

customers, the geographic areas where loans could be made, and other

matters. A credit union stated that the proposed regulations would hurt

credit unions because it believed that non-farmers could borrow from

the FCS to build homes, condominiums, and duplexes in non-rural areas.

Another credit union objected to the possibility of increased

competition from FCS rural home financing. Several commercial banking

interests commented that the proposed amendments would expand the

number of non-farmer mortgage borrowers expected to use System

resources, loosening the bond between farmers and ranchers and the FCS.

These comments reflect incorrect assumptions about the rural home

provisions of the Act and FCA regulations. Sections 1.11(b) and 2.4(b)

of the Act allow FCS banks and associations to finance single-family,

moderately priced dwellings in rural areas where the population does

not exceed 2,500 inhabitants for rural residents who are not

agricultural or aquatic producers. The Act also limits such loans to 15

percent of the outstanding loans of System banks and associations.

The proposed regulations distinguished housing loans for farmers

under sections 1.11(a) and 2.4(a) of the Act from home loans for non-

farmers under sections 1.11(b) and 2.4(b) of the Act. Because rural

home loans are limited to 15 percent of outstanding loans and because

only farmer borrowers are voting stockholders of FCS institutions, the

clear separation provided for in the proposed amendments would not

dilute the agricultural focus of the FCS, as some commenters suggest.

1. Loan-to-Value Ratio

Two commercial banking interests commented that the proposed

regulation would permit higher loan-to-value ratios on rural home

loans.

Loan-to-value limitations are set by the Act and not altered by the

regulation. Section 1.10(a) of the Act and Sec. 614.4210(b) require a

long-term mortgage loan to be secured by a first lien interest in real

estate that does not exceed 85 percent of the appraised value of the

mortgaged property, except that FCS banks and associations may finance

up to 97 percent of the appraised value of the property if the loan is

guaranteed by a governmental agency. In addition, section 12 of the

1996 Reform Act 7 recently amended section 1.10(a) of the Act so

that System mortgage lenders can rely on private mortgage insurance

when the loan-to-value exceeds 85 percent. Under these circumstances,

the repeal of the loan-to-value ratio in existing Sec. 613.3040(c) is

compatible with section 1.10(a) of the Act.

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\7\ Pub. L. 104-105, 110 Stat. 162 (Feb. 10, 1996).

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2. Owner-Occupied Dwellings

Two commenters objected to the proposed elimination of the

regulatory requirement that the dwelling be owner-occupied. The FCA's

original proposal retained the existing requirement that the home be

used as the primary residence of a rural resident but it would permit

the owner to lease the property to another rural resident. The FCA

believes that eliminating the regulatory owner-occupancy requirement

advances the rationale for this authority, which is to ensure the

availability of housing for rural residents. Therefore, the reproposal

would also repeal the existing regulatory requirement that the borrower

occupy the dwelling.

3. Consumer Protection Laws

A commercial banker questioned whether consumer protection laws

apply to FCS rural home loans. The FCS's rural home lending practices

are subject to the same Federal consumer protection laws and

implementing regulations of the Board of Governors of the Federal

Reserve System and the Department of Housing and Urban Development as

are commercial banks. The FCA proposed to relocate the

nondiscrimination in lending regulations in subpart E of part 613 to a

new part 626 to give them more prominence. These regulations address

the prohibitions of the Equal Credit Opportunity Act (15 U.S.C. 1601 et

seq.) and the Fair Housing Act (42 U.S.C. 3601 et seq.). In addition,

rural home lending transactions are subject to the requirements of the

Truth-in-Lending Act (implemented at 12 CFR 226) and the Real Estate

Settlement Procedures Act (implemented at 24 CFR 3500).

4. Agricultural Loan Priority

One commenter objected to the FCA's decision to delete existing

Sec. 613.3040(d)(3), which reflects the Agency's policy commitment to

Congress that agricultural loans will have priority over non-farm rural

home loans.

The FCA is not rescinding its policy commitment to Congress that

agricultural loans will always have priority over rural home loans.

Indeed, the preamble discussing the proposed deletion of

Sec. 613.3040(d)(3) stated that ``the FCA continues to adhere to this

commitment.'' The FCA's decision to propose deletion

Sec. 613.3040(d)(3) is unchanged because it is a policy statement

rather than an enforceable regulation. The deleted provision added

nothing to the FCA's statutory powers to ensure that the credit needs

of

[[Page 42110]]

agricultural or aquatic producers received priority during a financial

crisis. For these reasons, no party should be concerned by the repeal

of former Sec. 613.3040(d)(3).

5. Definition of Rural Area

The FCA originally proposed to define a ``rural area'' as ``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.'' The FCA received comments from 17 parties on the definition

of rural area in proposed Sec. 613.3030(a)(3).

No commenters supported the FCA's proposal to rely on the Census to

identify rural areas where the population does not exceed 2,500

inhabitants. Both System and non-System commenters stated that sparse

population is not the sole determinant of a rural area. These

commenters claimed that reliance on the Census ignores the social and

economic characteristics of a rural area. Commercial banks, credit

unions, and their trade associations opposed the FCA's original

proposal because it would allow System banks and associations to

finance housing in the rural pockets of metropolitan areas, where the

commenters claim credit from other lenders is readily available. System

commenters asserted that the Census designations would increase their

regulatory burdens, but decrease their flexibility to offer home

financing to residents of communities that are rural in nature. Some

FCS associations claimed that the proposed regulation would require

them to consult a Census map for each loan application to determine if

the borrower's home is located in a designated rural area. Other FCS

commenters advised the FCA that Census data is not updated frequently

enough to reflect the changing demographics of rural areas. All

commenters advised the FCA that the existing Sec. 613.3040 provides the

most workable definition of a rural area.

These comments have persuaded the FCA that Census information may

not adequately implement the provision of the Act that defines a rural

area. For this reason, the FCA withdraws its original proposal to rely

solely on the Census for determining rural areas.

Reproposed Sec. 613.3030(a)(3) would define a rural area as ``open

country within a State or the Commonwealth of Puerto Rico, and may

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

persons.'' The FCA has decided to delete the passage in

Sec. 613.3040(a)(3) that authorized Farm Credit banks and associations

to make loans in open agricultural areas within ``towns'' where the

population exceeds 2,500 inhabitants, subject to Agency prior approval.

This provision addressed special situations where a municipality

annexed the surrounding countryside or two municipalities merged, and

as a result, the population of the new political entity exceeded 2,500

inhabitants. The FCA has rarely used this prior approval authority

during the past 25 years. The reproposed regulation would delete this

provision because it creates unnecessary confusion.

6. Definition of Moderately Priced Housing

The FCA originally proposed a two-part definition for moderately

priced housing. The first part was a safe harbor provision, and it

would have applied to the price of any home that 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 (Farmer Mac). Under the second part

of the original proposal, FCS banks and associations would be

authorized to finance ``moderately priced'' rural homes that have a

value no higher than the 75th percentile of housing values in the rural

area where the dwelling is located in accordance with the most recent

edition of the Census of Housing.

The FCA received several comments criticizing this proposed change.

Two FCS associations commented that the amendment would impose

restrictions not found in the Act or in existing regulations and would

limit FCS's ability to serve rural residents. Some FCS associations

commented that proposed Sec. 613.3030(a)(4) is flawed because they

believe that it is neither possible nor desirable to devise a clear

single standard for moderately priced housing in rural areas across the

United States. Although the FCC agreed with FCA's objective of

establishing a clear standard, it stated that the proposal does not

meet this objective because the proposed regulation would provide the

FCS with less flexibility than the former regulation to finance

moderately priced homes.

A commercial bank trade association objected to the definition of

``moderately priced'' homes in proposed Sec. 613.3030(a)(4) because it

allows System lenders to make home loans in rural pockets of

metropolitan areas where the population does not exceed 2,500 persons

pursuant to the latest Census of the United States. This commenter

expressed concern that the proposal would allow the FCS to finance

moderately priced housing on the fringes of urbanized areas, and could

redirect the System away from lending to rural America, farmers and

ranchers.

The FCA received comments from four parties, including three FCS

associations and one trade organization about the use of Farmer Mac

criteria as a safe harbor provision. The FCC supported this provision

because the Farmer Mac criteria have a Congressionally mandated

relationship to the FCS's rural home authorities and are thus suitable

as one possible measure of moderately priced housing. This commenter

urged the FCA to allow additional standards, as well, that would take

into account geographical differences in housing values. Several

associations shared the view that an additional standard is needed that

would recognize higher housing costs in certain areas. As an example,

one association noted that a 2000 square foot home in its territory

would exceed the Farmer Mac criteria.

The FCA also received comments from 22 parties objecting to the use

of Census data to determine the value of moderately priced housing.

Many System institutions commented that the use of Census data is not

required by the Act or the existing regulations. Moreover, they

observed that Census data are not useful for a number of reasons,

including: (1) They are based on subjective estimates of the homeowners

rather than market transactions; (2) the Census survey is conducted

every 10 years and thus the data are soon outdated; and (3) the data

cut across market boundaries which leads to wide and arbitrary

differences in the definition of moderate price between counties or

census blocks.

Six FCS associations provided examples of the adverse effects of

using the Census housing data to determine the value of moderately

priced housing. They commented that using Census data would: (1)

Restrict the market, competitiveness, and spreads; (2) reduce the

current maximum limit the FCS institutions use for moderately priced

housing in some areas by 50 percent or more; and (3) result in a

significant increase in administrative work.

Most System commenters offered specific recommendations for how the

FCA could revise this regulation to determine the value of moderately

priced housing. Fourteen commenters recommended that the Federal Home

Loan Mortgage Corporation (Freddie Mac) or Federal National Mortgage

Association (Fannie Mae) limits determine the moderately priced

[[Page 42111]]

standard for System rural home lending. These commenters believed that

the Freddie Mac and Fannie Mae thresholds would avoid the defects of

the Census data and would provide for a level playing field with

competitors. Other commenters suggested that FCA retain the definition

in the existing regulation to provide System lenders with greater

flexibility to use other reasonable methods to determine moderately

priced values. Another frequent suggestion was to authorize System

institutions to rely on any accepted independent study or formula from

a credible regional or national source.

The FCC offered two approaches. First, the Farmer Mac limit would

be used as a safe harbor provision and a higher limit could be adopted

if it were supported by a study that established local standards for

moderately priced housing, based on actual sales. In the alternative,

the FCC suggested that the System could use any combination of Farmer

Mac criteria, Freddie Mac or Fannie Mae guidelines, information

provided by the Department of Housing and Urban Development,

information on income provided by the Census, local sales data, or

market studies.

The FCA continues to believe that the Farmer Mac standard for the

value of a rural home is a useful method for determining moderately

priced housing because the criteria in section 8.0 of the Act are

directly related to home financing in rural areas of 2,500 inhabitants

and the System's rural housing authorities. For this reason, homes that

satisfy the Farmer Mac criteria would be considered moderately priced

under reproposed Sec. 613.3030(a)(4)(i). In response to System comments

that Farmer Mac criteria ignore variations in housing costs in

different rural areas, the FCA points out that section 101 of the 1996

Reform Act clarifies that the Farmer Mac limit of $100,000 (as adjusted

for inflation since 1988) refers to the value of the dwelling only,

exclusive of the value of the land on which it is situated.8 This

statutory clarification provides flexibility for lending in areas where

land values are higher.

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\8\ Ibid.

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Reproposed Sec. 613.3030(a)(4)(ii) would also allow FCS lenders to

finance rural homes that are below the 75th percentile of housing

values for the rural area where it is located, as determined by data

from a credible, independent, and recognized national or regional

source, such as a Federal, State, or local government agency, or an

industry source. Each System bank or association will bear the burden

of demonstrating that the price range it selects reflects moderately

priced housing in the specific locale where its rural home loans are

made. FCS institutions may use the Census of Housing data for their

studies but are not be required to do so. If this reproposal is adopted

as a final regulation, the FCA will review the methods used during

examinations of FCS institutions.

The FCA has decided not to incorporate the maximum loan amount used

by Freddie Mac or Fannie Mae into the reproposed regulation. The FCA

believes that the Freddie Mac and Fannie Mae maximum loan amounts may

not be representative generally of moderately priced housing in rural

areas because they include housing values in urban and suburban

communities. Furthermore, the Freddie Mac and Fannie Mae maximum loans

amounts are not necessarily a measure of moderately priced housing.

7. Home Equity Lending

The FCA's original proposal would have allowed non-farm rural

homeowners to obtain home equity loans and lines of credit from System

lenders, secured by the rural home, without a restriction on the

borrower's use of the proceeds.

The FCA received comments from seven parties, including one

commercial bank, five trade associations, one borrower, and one

governmental body on the eligibility requirements for rural home

lending. A Farm Credit borrower supported home equity loans because the

commenter believes that this authority would enhance the ability of the

FCS to finance the agricultural community. The FCC, commenting

generally on the amendments to the rural home lending regulations,

stated that the proposed regulations clarify that FCS institutions may

offer equity line-of-credit loans to rural homeowners. The FCC agreed

that equity line-of-credit loans would enable FCS to better fulfill its

statutory mission of providing an adequate and flexible flow of credit

into rural areas.

The NDCUL and a commercial banker stated without explanation that

the FCS should not be allowed to make home equity loans for consumer

purposes to rural residents who are not farmers, ranchers, or aquatic

producers or harvesters. A State governmental agency opposed the FCA's

proposal as presenting unfair competition with commercial banks and

credit unions. Another commenter contended that home equity consumer

loans to borrowers who are not farmers, ranchers, or aquatic producers

or harvesters are not within the System's statutory mission.

Three banking trade associations also opposed this proposal. One

stated that it does not believe that ``home equity lending comports

with this GSE's statutory reasons for existence.'' It expressed concern

that home equity lending may be used for consumer purposes rather than

housing purposes and that home equity lending would reduce available

FCS funds for rural housing loans because of the portfolio limitation.

The commenter stated that the FCA presents no evidence that such home

equity lending is an unmet need in a very competitive home equity

lending market. Another commenter objected because it does not believe

that there is express authority for home equity lending and that being

a full-service lender to rural residents does not comport with the

System's reason for existence. A third trade association stated that

several of its members questioned the advisability of FCS making home

equity loans because they believe that such loans are risky. This

commenter asked that the FCA provide a detailed explanation of the

underwriting standards that are envisioned for home equity lending. It

also noted that loan proceeds could be for consumer goods, which it

deems as inappropriate for the FCS.

In response to the comments from banking interests, the FCA

rescinds its original proposal regarding home equity lending and

restores the purpose restrictions contained in existing

Sec. 613.3040(c) as reproposed Sec. 613.3030(c). The FCA notes that

System lenders are not precluded from extending authorized credit to

rural homeowners through revolving lines of credit. The reproposal

would, however, require that such credit extensions be limited to the

purposes specified. This change to the proposed rule on home equity

lending makes unnecessary the proposed conforming amendments to

Sec. 614.4222, and those proposed amendments are now withdrawn.

No comments were received on proposed Sec. 613.3030 (a)(1) or

(a)(2), and it is included in the reproposed regulation without

revision. No comments were received on proposed Sec. 613.3030(c), and

it is redesignated as reproposed Sec. 613.3030(d).

P. Allowable Real Estate Security

The FCA received 12 comments about the requirements for the type of

allowable real estate security for long-term mortgage loans in

Sec. 614.4210(a). Most commenters requested that the FCA clarify that

housing for agricultural producers is not subject to the

[[Page 42112]]

limitations on location, type of housing, or price for rural home

lending. Many commenters also supported increased flexibility in the

types of real estate collateral that could be counted toward the

statutory 85-percent loan-to-value limitation.

The FCA reaffirms that the limitations for the type of house and

the value of the house for rural home lending apply only to housing for

individuals who are not farmers, ranchers, or aquatic producers or

harvesters. As stated in the discussion of financing a farmer's housing

and domestic needs, such housing can be financed under farm lending

authorities for a bona fide farmer, rancher, or aquatic producer or

harvester.

The FCA has considered the issue of allowable collateral for long-

term mortgage lending under title I of the Act when it proposed

amendments to the loan underwriting regulations on March 12, 1996. See

61 FR 16403 (April 15, 1996). Under that proposed rule, the FCA would

continue to limit the types of collateral that can secure a mortgage

loan, but it allows flexibility so that the collateral remains

primarily agricultural in nature. The rule also would continue the

requirement that the loan-to-value ratio not exceed 85 percent. The FCA

will consider comments to its proposal of March 12, 1996, before it

adopts final amendments to Sec. 614.4210(a) and other regulations that

govern loan underwriting and collateral standards.

Q. Title III Domestic Lending Regulation

The FCA's original proposal would significantly restructure and

clarify the regulations that govern eligibility and scope of financing

for BCs and ACBs. More specifically, the FCA initially proposed to

redesignate existing Sec. 613.3110 as Sec. 613.3100, and rearrange this

regulation so it addresses the authority of BCs and ACBs to finance the

following class of borrowers: (1) Cooperatives, their parents,

subsidiaries and other related entities that serve agricultural or

aquatic producers; (2) electric, telecommunication, and cable

television utilities; (3) water and waste disposal facilities; and (4)

domestic lessors.

As noted in the preamble to the original proposal, many proposed

revisions reflect provisions of the 1992 amendments 9 and the Farm

Credit System Agricultural Export and Risk Management Act (1994

Act).10 After the comment period for this proposed rulemaking

expired, the 1996 Reform Act was enacted into law. The 1996 Reform Act

amended two provisions in section 3.8 of the Act that govern the

eligibility of certain cooperatives and rural utilities to borrow from

banks that operate under title III of the Act. Accordingly, the FCA has

incorporated these statutory amendments into reproposed Sec. 613.3100.

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\9\ Pub. L. 102-552, 106 Stat. 4102 (Oct. 28, 1992).

\10\ Pub. L. 103-376, 108 Stat. 3497 (Oct. 19, 1994).

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Comments were received from the St. Paul BC, CoBank, ABA, IBAA and

NDBA. In general, the comments from the St. Paul BC and CoBank

supported the proposed regulation. These commenters, however, requested

clarification or modification of certain provisions of the original

proposal. CoBank and the St. Paul BC supported the FCA's proposal to

repeal existing Secs. 613.3005 and 613.3110(b)(2), which prescribe

business objectives and management practices for title III banks.

The three commercial bank trade associations endorsed all revisions

that implement amendments to the Act. Otherwise, these three commenters

opposed revisions concerning service cooperatives that provide

financially related services and cable television utilities.

1. Definitions

CoBank objected to the FCA's decision to delete the words ``a

combination of such associations and farmers, ranchers, or producers or

harvesters of aquatic products'' from the definition of a cooperative

in proposed Sec. 613.3100(a)(1). The commenter claimed that this

revision is a ``step backwards'' for certain cooperative combinations.

Because of the commenter's concern, the previous wording is reinserted

into the reproposed regulation with minor stylistic revisions.

The comments from bank trade associations opposed

Sec. 613.3100(a)(5) as proposed, because it would allow a BC or ACB to

finance cooperatives that provide business and financially related

services to their members. These commenters claim that Congress

intended that the BCs and ACBs only finance cooperatives that aid

production agriculture and that such service cooperatives should be

served exclusively by commercial lenders.

CoBank objected that proposed Sec. 613.3100(a)(5) would require an

eligible service cooperative to be ``predominantly'' involved in

providing business and financially related services to farmers,

ranchers, and aquatic producers or harvesters. The commenter observes

that the word ``predominantly'' does not appear in section 3.8(a) of

the Act. CoBank asserted that including it in the definition converts a

scope of financing question into an eligibility issue.

The arguments against permitting title III lending to cooperatives

that provide business and financial services to farmers are not

supported by the Act and its legislative history. Section 3.8(a) of the

Act expressly authorizes BCs and ACBs to finance eligible cooperatives

that furnish ``business services or services'' to farmers, ranchers,

aquatic producers or harvesters, or their cooperatives. This authority

to finance service cooperatives has its origins in the Farm Credit Act

of 1935.11 The legislative history to this provision reveals that

Congress contemplated that these System banks would lend to service

cooperatives that offered financially related services, such as

insurance, to their members.12 In 1980, Congress amended section

3.8(a)(4) of the Act so that service cooperatives would continue to

qualify for FCS loans so long as 60 percent of their members are

farmers, ranchers, or aquatic producers or harvesters. The 1996 Reform

Act enables existing cooperative borrowers to retain their eligibility

for BC or ACB loans if more than 50 percent of their members are

agricultural or aquatic producers. Thus, the Act and its legislative

history clearly refute the belief that BCs and ACBs lack authority to

finance business and financially related service cooperatives.

Furthermore, nothing in the Act or its legislative history supports the

commenters' contention that a BC or ACB is authorized to finance only

cooperatives that assist ``on-farm'' agricultural production. For these

reasons, the FCA rejects the view that FCS banks operating under title

III of the Act lack authority to finance cooperatives that furnish

business and financially related services to agricultural and aquatic

producers.

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\11\ P.L. No. 87-74, 49 Stat. 317 (June 3, 1935).

\12\ H.R. 155, 74th Cong., 1st Sess. (Feb. 18, 1935) p. 9; Farm

Credit Act of 1935: Hearings on S. 1384 Before the Senate Committee

on Banking and Currency, 74th Cong., 1st Sess. p. 22 (Jan. 29,

1935).

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The FCA agrees with the comment that the word ``predominantly'' in

proposed Sec. 613.3100(a)(5) is more restrictive than the statute,

since section 3.8(a) of the Act, as amended, establishes specific

thresholds for farmer membership in an eligible service cooperative.

Thus, the FCA deletes the word ``predominantly'' from reproposed

Sec. 613.3100(a)(5).

2. Cooperatives and Other Entities Serving Other Agricultural or

Aquatic Producers

Section 613.3100(b) governs the eligibility of agricultural or

aquatic

[[Page 42113]]

cooperatives and their related entities to borrow from title III

lenders. Other eligible entities include: (1) The parent of an eligible

cooperative; (2) a subsidiary or other legal entity in which an

eligible cooperative has an ownership interest; and (3) a non-profit

entity that satisfies the criteria in section 3.8(b)(1)(D) of the Act.

Section 14 of the 1996 Reform Act amended section 3.8(a) of the Act

to permit the continued eligibility of pre-existing cooperative

borrowers as long as at least 50 percent of the voting control is held

by farmers, ranchers, aquatic producers or harvesters, or their

cooperatives. Section 14 of the 1996 Reform Act also amended section

3.8(b)(1)(D) of the Act so that eligible non-profit entities and their

subsidiaries also benefit from this statutory change. Accordingly,

reproposed Sec. 613.3100(b)(1)(i) and (b)(2)(iii) incorporates these

statutory provisions of the 1996 Reform Act.

Both System commenters expressed support for proposed

Sec. 613.3100(b)(2)(ii), which allows a title III bank to extend credit

to an entity in which an eligible cooperative is a minority owner. Such

financing is limited to the cooperative's percentage of ownership

multiplied by the borrowing entity's total assets. CoBank asked for

clarification on three questions about how title III banks should

measure the borrower's total assets: (1) Are the entity's total assets

measured at the beginning or the end of a capital project? (The

commenter suggested that the end of a project is the better measure.)

(2) How should assets be measured for borrowers with wide seasonal

fluctuations in assets? (The commenter recommended that the seasonal

peak in assets be the appropriate measure.) (3) Should the borrower's

assets be measured according to their book or market value? (The

commenter believes that book value, as the more conservative standard,

is appropriate.)

The FCA believes each of the suggested clarifications is reasonable

and consistent with the intent of section 3.7(b)(2)(A)(ii) of the Act.

However, a uniform method of calculating total assets cannot be

developed for all three scenarios. Thus, the FCA believes that each

title III lender should establish in its lending policies the most

appropriate measure of the borrower's assets depending on the nature of

the credit request. For this reason, the FCA makes no modification to

the reproposed regulation at this time. However, the FCA may issue

regulatory guidance on asset measurement practices in the future.

3. Electric and Telecommunication Utilities

Section 613.3100(c) of the original proposal and the reproposal

contains rural utility lending authorities. The FCA received comments

from CoBank, the St. Paul BC, and the IBAA on proposed

Sec. 613.3100(c). One comment suggested that the FCA retitle the

section to read ``Electric and telecommunications utilities,'' because

cable television is widely recognized as a subset of

telecommunications. The FCA accepts this recommendation and has

incorporated this change into the title of reproposed Sec. 613.3100(c).

CoBank objected to the FCA's proposal to delete from the

regulations explicit reference to farmer-owned utility cooperatives

that are eligible to borrow from a BC or ACB under section 3.8(a) of

the Act, instead of the Rural Utilities

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