Loan Policies and Operations; Definitions; Loan Underwriting

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

Administration Board (Board), proposes amendments to the regulations

relating to loan underwriting in response to comments received from the

Board's initiative to reduce regulatory burden, streamline the

regulations, and set clear minimum regulatory standards where

practicable. The proposed regulations would require each institution to

adopt loan underwriting policies and standards, eliminate unnecessary

regulations, and make other changes to the regulations governing

prudent credit administration, the lending authority of production

credit associations, and collateral evaluations.

DATES: Comments should be received on or before May 15, 1996.

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

Associate Director, Regulation Development, Office of Examination, Farm

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

communications received will be available for review by interested

parties in the Office of Examination, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Regulation Development, Office of

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

or

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

Office of General Counsel, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: On June 10, 1993, the FCA Board approved a

notice seeking public comment on the appropriateness of requirements

that the FCA regulations impose on the Farm Credit System (System or

FCS). See 58 FR 34003 (June 23, 1993). The FCA has addressed many of

those comments in previous rulemakings. Of the comments received in

response to the notice, 24 were related to loan underwriting and the

independent credit judgment rule for loan sale and purchase

transactions through agents. This rulemaking addresses those issues. In

addition to responding to the regulatory burden comments, the FCA is

also proposing other amendments to refocus regulatory requirements for

loan underwriting, make the regulations more understandable and useful

to the reader, set minimum regulatory standards, and make conforming

amendments.

In response to regulatory burden comments and in an attempt to

achieve consistency throughout the regulations in subparts C through E

of part 614, the FCA is proposing a substantial revision to the

structure and content of the regulations. In addition, some areas that

were addressed in loan underwriting are more properly the focus of

subpart A, Lending Authorities, and the FCA is proposing relocating

those items from subpart E to subpart A. The explanation of proposed

amendments to subpart A is contained in the discussion of the proposed

amendments to subpart E, Loan Terms and Conditions. Accordingly, the

following discussion begins with subparts C and D.

In order to provide readers with a guideline for the changes

proposed, the following is a list of changes for the proposed revisions

in parts 614 and 619:

Subpart A--Lending Authorities

Secs. 614.4000 through 614.4050--Revised.

Subpart C--Bank/Association Lending Relationship

Secs. 614.4100, 614.4110, and 614.4130--No changes proposed.

Sec. 614.4120--Revised.

Secs. 614.4135 through 614.4145--Deleted.

Subpart D--General Loan Policies for Banks and Associations

Sec. 614.4150--Revised.

Sec. 614.4160--Deleted.

Sec. 614.4165--Revised.

Subpart E--Loan Terms and Conditions

Sec. 614.4200--Revised.

Secs. 614.4210 through 614.4230--Deleted.

Sec. 614.4231--Revised.

Secs. 614.4232 and 614.4233--No changes proposed.

Subpart F--Collateral Evaluation Requirements

Secs. 614.4245 and 614.4250--Revised. No other amendments proposed.

Subpart H--Loan Purchases and Sales

Sec. 614.4325--Revised. No other amendments proposed.

Subpart J--Lending Limits

Secs. 614.4355 and 614.4358--Revised. No other amendments proposed.

Subpart Q--Banks for Cooperatives Financing International Trade

Sec. 614.4810--Revised. No other amendments proposed.

Part 619--Definitions

Secs. 619.9165 and 619.9290--Removed. No other amendments proposed.

I. Subparts C and D--Bank/Association Lending Relationship and General

Loan Policies for Banks and Associations

In response to the request for comments on regulatory burden, one

association commented that most Farm Credit Banks (FCBs) have changed

their relationship with associations from a supervisory to a wholesale

lending relationship. The association stated that the FCA examiners

encourage direct lender associations to adopt their own policies and

procedures. FCA regulations, however, continue to contemplate a

supervisory role for FCBs over association lending operations as if all

banks retained direct (retail) lending authorities without recognizing

the role of many banks as wholesale or discount lenders to Farm Credit

associations. The association stated that operational policies for

direct lenders should be developed by the associations rather than the

banks, but noted that this practice is inconsistent with existing

regulations and that clarifying language from the FCA would be helpful.

The criticized regulations, Secs. 614.4135, 614.4140, and 614.4145,

were promulgated in 1972 to implement the Farm Credit Act of 1971.

These regulations, addressing credit supervision, have not been amended

since their adoption. At that time, the banks in the Farm Credit System

[[Page 16404]]

performed many supervisory functions over associations, including

conducting credit reviews. The FCA's primary focus at the time was to

regulate the banks' own operations, including their supervision of

associations and did not emphasize the agency's present practice of

exercising its regulatory and enforcement authorities directly over

associations.

Since 1972, the importance of direct lender associations in the

Farm Credit System has increased substantially. As a result, many banks

are becoming wholesale lenders rather than direct lenders. Statutory

changes since 1972 in FCA's structure and authorities and in the

relationship of associations with their funding banks result in a

greater need for accountability of direct lender associations. The FCA

believes that autonomy in association operations promotes

accountability in many areas including prudent lending operations.

Therefore, the FCA proposes to delete existing Secs. 614.4135,

614.4140, and 614.4145 and clarify the role of Farm Credit Banks (and

Agricultural Credit Banks) in supervision of association's credit

operations. However, the FCA does not intend to minimize the importance

of general bank oversight of association credit activities that may

have a material impact on the bank and on the association's ability to

perform on its direct loan(s) from the bank. These issues, however, can

be appropriately addressed in the agreements governing the lending

relationship between a bank and an association.

The FCA believes that each direct lender, through its board of

directors, should adopt and follow its own policies and procedures for

operations. The FCA agrees with the commenter that duplication and

possibly conflict may result when an association is required by

regulation to abide by district policies and at the same time is

encouraged to develop its own local policies and procedures.

In order to emphasize that the responsibility for developing

prudent loan policies and underwriting standards rests with each

institution, the FCA proposes to delete certain existing regulations.

For example, Sec. 614.4150 currently defines ``sound loan.'' Rather

than define ``sound loan'' by regulation, the FCA proposes to require

each institution to adopt loan underwriting policies and standards that

contain measurable criteria appropriate for the type of loan and the

institution's risk-bearing capacity, which criteria can be used to

determine whether the applicant's operational, financial, and

management resources are sufficient to ensure repayment of the debt

from cashflow, taking into account the borrower's other debt

obligations.

Existing Sec. 614.4160 requires that each bank adopt policies to

ensure that lending practices result in sound loans and specifies five

credit factors that must be analyzed and documented in evaluating the

creditworthiness of each loan applicant. The five credit factors

listed, however, need not be given the same weight in every transaction

and may be only a portion of the variables that should be considered in

some transactions. The FCA believes that each institution should have

the responsibility and the flexibility to adapt its loan underwriting

program to its particular circumstances without regulatory mandates for

the basic and well understood principles of prudent lending. Therefore,

existing Sec. 614.4160 would be deleted under the proposed regulations,

and the mandate for an appropriate analysis of creditworthiness would

be included in proposed Sec. 614.4150(g) governing loan underwriting

standards.

To implement the requirement that each institution must develop its

own policies, the FCA proposes a new regulation that addresses credit

supervision by each institution's board of directors and the

establishment of loan policies and underwriting standards by each

direct lending institution. In instances where direct lending authority

has not been transferred to the Federal land bank associations (FLBAs),

FCBs must still develop lending policies and standards that all FLBAs

within their respective districts must follow in making credit

decisions for the bank. Additionally, in certain circumstances where

loss exposure accrues to individual FLBAs through loss sharing

agreements with the FCB, loan policies and standards may be needed by

FLBAs to augment and supplement those established by their supervisory

banks.

The proposed rule, Sec. 614.4150, addresses the responsibility of

each institution's board of directors to adopt policies to guide

lending. Under these policies, each direct lending institution would be

required to adopt written standards for lending and issue written

policies, operating procedures, and control mechanisms that reflect

those standards for guidance in the extension and administration of

sound credit. These requirements parallel the current requirements in

existing Sec. 614.4145, which address each bank's responsibilities to

supervise credit operations in its district. This regulation would

clearly establish that each direct lending institution's board of

directors is not only accountable for providing policy direction for

credit operations, but also is responsible for more specific guidance

in the extension and administration of sound credit.

The FCA proposes to leave the prescription of specific credit

policies and underwriting standards to each direct lender institution's

board rather than to prescribe them by regulation. However, the

proposed regulation would require certain minimum standards that must

be addressed in the institution's policies. Proposed Sec. 614.4150

would require that the institution's policies and procedures address

minimum standards for credit information and verification, credit

analysis, loan disbursement and servicing, collateral requirements,

loan approval delegations and requirements for board reporting, loan

pricing requirements, prudent loan underwriting standards, loan terms

and conditions that are appropriate for a loan's purpose, and other

areas necessary for the professional conduct of a lending organization.

Under the proposed rule, the FCA would evaluate the adequacy of

each institution's policies to ensure that its board is providing

sufficient direction, guidance, and internal controls for the

institution's credit operations. The procedures implementing these

policies should be in sufficient detail to properly manage and control

risk in the institution's portfolio consistent with the institution's

risk-bearing capacity. Each lending program should be guided by

policies and underwriting standards that address the specific types of

risks associated with the types of loans within an institution's

overall lending program. The FCA believes that institutions should have

the flexibility to develop different lending programs for the types of

customers within their chartered territory. The FCA's primary concern

is whether or not the programs are conducted in a safe and sound manner

in compliance with the statute and the regulations.

The FCA is aware that some System institutions are making increased

use of credit scoring techniques in the evaluation of certain types of

loans. Credit scoring and other techniques used in minimum information

programs, when fully understood and well managed by an institution and

its board of directors, can be a valuable tool in making credit

decisions. These proposed regulatory changes will allow System

institutions the flexibility to use credit scoring and enhance minimum

information programs in credit delivery decisions.

[[Page 16405]]

Proposed Sec. 614.4150(g) would require each direct lending

institution to develop written, measurable loan underwriting standards

to be used to determine whether the applicant has the operational,

financial, and management resources necessary to ensure repayment of

the debt from cashflow, taking into consideration all other

obligations. Such standards would be required to be applied to each

loan transaction as appropriate, taking into consideration the amount

of the loan, the loan's purpose, the nature and type of credit risk and

enterprise being financed. The measurements should be quantitative to

the extent feasible (as for financial information), but may be

qualitative for factors that do not lend themselves to quantification,

but are considered important to the credit decision. Such standards and

their application would be required to be related to the institution's

risk-bearing ability and to take into account future credit risk

uncertainties. Under proposed Sec. 614.4150(g), each institution would

be required to embody the concepts underlying existing Secs. 614.4150

and 614.4160 in a comprehensive, written loan policy. In addition, the

proposed regulations would require that for any loans made that do not

meet the loan underwriting standards, the written credit analysis must

document the compensating factors or extenuating circumstances that

demonstrate repayment capacity. The FCA recognizes that even among

acceptable credits the level of perceived risk will vary. Accordingly,

a well capitalized institution with strong capital and sound earnings

potential will be better positioned to extend credit to a borrower who

appears to have the capacity to repay but nonetheless presents a higher

risk. A weaker institution will need to establish higher standards

until it improves its risk-bearing capacity.

Proposed Sec. 614.4150(h) would require that loan terms and

conditions are appropriate for the purpose of a loan. In this regard,

assets with a useful life of 5 to 10 years would not be financed with a

loan that has a 30-year repayment obligation. This provision is added

in order to retain the existing regulatory requirement in

Sec. 614.4160(e) that the institution has to consider the

constructiveness and practicality of the loan amount, purpose, and

terms and conditions.

Existing Sec. 614.4165 requires that bank lending policies give

special consideration to the credit needs of young, beginning, or small

farmers, ranchers, and producers or harvesters of aquatic products. The

regulation also defines terms and requires associations to make annual

reports to the banks regarding the operations and achievements in these

lending programs. The banks, in turn, are required to make annual

reports to the FCA. Although two institutions commented that the FCA

should eliminate the reporting requirements in Sec. 614.4165, these

requirements are statutory and cannot be eliminated. Section 4.19 of

the Act obligates each institution to take the needs of young,

beginning, and small farmers and ranchers into consideration and report

annually on its progress. However, the reporting instructions can be

eliminated as a regulatory requirement and be implemented instead

through the Agency's call report instructions. The FCA proposes to

retain the regulatory requirement to have a lending program for this

segment of the market, as required by section 4.19 of the Act, but to

transfer the instructions for reporting to the call report. The call

report instructions will provide specific direction and timing for

consistent reporting from System institutions to the FCA. The FCA will

continue to report to the Congress as the Act requires.

II. Subpart E--Loan Terms and Conditions

Existing Sec. 614.4200 requires institutions to set forth the terms

and conditions of each loan in a written loan agreement between the

borrower and the lender. Seven institutions commented that the FCA

should eliminate the requirement that loan terms and conditions be set

forth in a written loan agreement. Some of the commenters suggested

that the reference to a loan agreement should be changed to reference a

written instrument, thus permitting institutions to document loans in

the most appropriate fashion. Other commenters requested that the FCA

eliminate the loan agreement requirement for loans below a de minimus

level, such as $250,000. Finally, one commenter noted that the

requirement that loan terms and conditions be adequately disclosed to

the borrower prior to closing is unclear and troublesome and should be

deleted.

The FCA originally adopted the requirement for a loan agreement

between the lender and borrower in order to ensure that borrowers have

the requisite information in order to meet all loan conditions and to

provide institutions with a means of imposing a legal obligation on

borrowers to provide certified financial statements. See 55 FR 24861

(June 19, 1990). Because the FCA is proposing amendments to its

financial statement collection requirements and wishes to provide

institutions with more flexibility, the FCA is proposing to delete the

requirement that there be a loan agreement for each loan. Instead,

proposed Sec. 614.4200(a)(1) would require institutions to set forth

the terms and conditions of each loan in a written instrument. Such

written instrument could be a loan agreement, promissory note, or other

instrument appropriate to the type and amount of the credit extended.

The FCA notes that continued use of loan agreements is a prudent

practice for complex loans, loans of above average risk, and loans with

conditions that are not standard or that contain elements that the

borrower must fulfill prior to loan closing or during the term of the

loan. The FCA also notes that when periodic financial statements are

required, the written instrument used to convey terms and conditions or

the promissory note should create a legal obligation on the part of the

borrower to provide the statements.

Proposed Sec. 614.4200(a)(2) also would replace the current rules

with a simple requirement that the borrower be given notice of the

terms and conditions of the loan prior to loan closing. Existing

Sec. 614.4200 requires that if the loan closing will occur more than 15

days after notification of the approval is provided to the borrower,

the notice of approval must set forth the terms and conditions on which

credit will be extended. One institution commented that the regulator

should not prescribe the contents of the notice of approval. The FCA

does not wish to dictate to institutions what may be contained in its

notice of approval to borrowers. However, the FCA continues to believe

that it is important that borrowers receive prompt written notice of

all terms and conditions on which credit will be extended. It is

especially important that the borrower receive prompt written notice in

situations where the borrower must take certain actions prior to loan

closing. Therefore, the proposed regulations would require institutions

to provide prompt written notice of approval of the loan and ensure

that loan terms and conditions are properly and promptly disclosed to

the borrower not later than loan closing. In addition, copies of all

documents executed by a borrower in connection with the closing of a

loan under titles I or II of the Act must be provided to the borrower

at the time of execution and any time thereafter that the borrower

requests copies. This is a requirement of section 4.13A of the Act for

each

[[Page 16406]]

qualified lender and is restated in the regulation as a matter of

convenience.

The FCA also notes that System institutions are subject to the

requirements of the Federal Equal Credit Opportunity Act (ECOA), 15

U.S.C. 1691 et seq., with respect to the timing and content of

notification of action taken on credit applications. The ECOA generally

requires creditors to provide applicants with notice that their credit

request has been approved or denied within 30 days after receiving a

completed application and entitles rejected applicants to learn the

principal, specific reasons for the adverse decision. Proposed new

Sec. 614.4200(a)(3) incorporates by reference the requirements

contained in the ECOA's implementing Regulation B, 12 CFR 202.9.

The FCA received comments from nine institutions regarding the

requirements in existing Sec. 614.4200 and the former requirement in

section 1.10(a)(5) of the Act regarding obtaining financial statements

from borrowers. Section 1.10(a)(5) of the Act, which required financial

statements for long-term real estate loans at least every 3 years or

sooner as determined by the FCA through regulation, was removed from

the statute by the Farm Credit System Reform Act of 1996 (1996

Amendments)(Pub. L. 104-105, Feb. 10, 1996).

Several institutions commented that the requirement for obtaining

annual financial statements from borrowers was excessive. One

institution stated that institutions should obtain financial statements

from borrowers based upon an institution's assessment of risk with

respect to categories of loans. Another stated that the need for

periodic financial information should be determined according to loan

size, complexity, and performance history as well as the institution's

risk-bearing ability. One commenter stated that the requirement to

obtain periodic financial statements should be changed from obtaining

statements annually to obtaining them every 3 years as required in the

Act. Finally, one institution stated that there should be an annual

requirement only for loans in excess of one million dollars.

The FCA agrees that as long as institutions have in place

sufficient loan underwriting standards that include requirements for

obtaining necessary financial information, annual submission of a

verifiable balance sheet and an income statement is not needed for many

loans. As a result, the FCA is proposing significant amendments to the

existing financial information requirements in Sec. 614.4200, including

a proposed separation of the provisions requiring that financial

statements be obtained when making or renewing a loan from the

requirement for requiring periodic financial statements during the term

of a loan. The FCA believes it is essential, for safety and soundness

reasons, that appropriate financial information be required when making

every loan, and that certain loans, i.e. those with larger balances and

those not classified acceptable, should be supported with more detailed

financial information, which is provided by a balance sheet and income

statement.

The FCA proposes to retain the general requirement that when

making, renewing, or taking a material servicing action, such as a

release of a significant portion of the collateral, institutions obtain

a verifiable balance sheet and income statement, certified true and

correct by the borrower, for certain categories of loans made under

title I or II of the Act. However, rural home loans and loans of

$500,000 or less that are amortized monthly would be exempt from this

regulatory requirement, and institutions would be given the flexibility

to address this need through their own credit standards and lending

policies. A borrower's monthly payment record on such a loan provides

an ongoing indication to a lender of the borrower's financial condition

and repayment capacity. The FCA is also proposing that all other loans

and commitments with an aggregate outstanding balance of $100,000 or

less per borrower be exempt from the requirement to obtain financial

statements when making and servicing such loans. Under each exemption,

however, institutions would be required to have adequate procedures and

controls in place to obtain and verify sufficient financial information

to establish repayment capacity and assess the risk in the loan.

The requirement for obtaining periodic financial statements is also

modified in the proposed regulations. The regulation would require

annual financial statements for all loans, except: (1) Rural home

loans; (2) loans (other than rural home loans) amortized monthly of

$500,000 or less; (3) loans classified acceptable that have an

aggregate outstanding balance and commitment per borrower of $200,000

or less; and (4) loans that have an aggregate outstanding balance and

commitment per borrower of $100,000 or less, regardless of credit

classification.

The FCA believes that obtaining verifiable balance sheets and

income statements is a necessary tool for managing adversely classified

credit. As the credit risk in a particular loan increases, identified

through its assigned credit classification, it is imperative that the

lender have complete and accurate borrower financial information to

appropriately monitor and service the account. For loans classified

acceptable under $200,000, the FCA believes that institutions should

have the flexibility to forego reviews of annual financial statements,

but encourages institutions to require financial statements for loans

under this threshold in which the risk level warrants closer

monitoring. Such financial information would permit lenders to learn of

any potential changes in the borrower's repayment capacity. The FCA

acknowledges that there are no industrywide standards for the size or

complexity of loans warranting current and complete financial

information. However, prudent credit practices dictate that risk be

assessed in each loan. The FCA believes that the best method for

assessing risk in certain loans is through an analysis of a balance

sheet and income statement and incorporates such practices in its

proposed amendments to Sec. 614.4200. The FCA proposes $200,000 as an

appropriate threshold to require balance sheets and income statements,

even for acceptable loans.

The FCA received four comments regarding the security requirements

for long-term real estate loans. Existing Sec. 614.4210(a) requires

that long-term real estate mortgage loans must be secured by a first

lien on an interest in real estate comprising agricultural property, an

eligible farm-related business, an eligible rural residence, or real

estate used as an integral part of an eligible aquatic operation.

Additional security may be taken for long-term real estate loans, but

it may not be included in meeting the requirement in Sec. 614.4210(b)

that funds only be advanced if the outstanding loan balance after the

advance would not exceed 85 percent of the appraised value of the real

estate taken as primary security.

One commenter requested that the FCA remove the requirement that

the primary security for a loan be agricultural land and suggested that

the requirement creates an eligibility test for both the borrower and

the collateral. Another commenter suggested that any additional

security taken should be considered toward meeting the loan-to-value

limitation in Sec. 614.4210(b). Two commenters suggested that the FCA

eliminate the existing requirement to report regularly to the

institution's board any advance of funds by an

[[Page 16407]]

institution to protect the institution's collateral position.

In response to the commenters and in order to achieve the goal of

adequately collateralized loans and safe and sound lending activities

with a minimum of regulatory burden, the FCA is proposing to delete

existing Sec. 614.4210. Requirements relating to security for long-term

loans would be placed in revised Sec. 614.4200, General requirements.

Under the proposal, Sec. 614.4200(c)(1) would continue to require long-

term real estate mortgage loans to be secured by a first lien on real

estate. The proposed regulation would also maintain the existing

requirement regarding the agricultural nature of the real estate

security and continue to permit other real estate to be taken as

additional security. The proposal would, however, delete the

requirement in existing Sec. 614.4210(b) that only the value of the

agricultural property be considered for the purpose of meeting the

loan-to-value ratio. When both agricultural and nonagricultural

property is taken as security, the total value of the real estate may

be considered, provided that the security is primarily agricultural, in

that the value of the agricultural property is greater than the other

real estate security.

The FCA believes that this modification preserves the rural focus

of long-term mortgage lenders contemplated by section 1.7 of the Act

and also implements the safety and soundness concern reflected in the

loan-to-value requirements of section 1.10. At the same time, the

proposal would offer institutions greater flexibility to take the type

of real estate collateral that best secures each loan. If the proposed

regulations are adopted, the FCA will require institutions to include

standards for real estate collateral that ensure safe and sound lending

practices in their loan policies and underwriting standards, pursuant

to proposed Sec. 614.4150 and subpart F of part 614.

The FCA is also proposing to delete the requirement to report

periodically to the institution's board of directors in situations in

which the institution has advanced funds in order to protect its

collateral position. Instead, the FCA expects the board of directors of

each institution to direct management to establish appropriate

procedures and reporting requirements for monitoring and controlling

the advance of funds to protect collateral. Institutions should

document that the advance is in the institution's best interest despite

the fact that the real estate may not fully secure the advance.

The FCA is proposing another modification to implement a provision

of the 1996 Amendments regarding the loan security requirements.

Existing Sec. 614.4210(b) requires that no funds can be advanced if the

outstanding loan balance after the advance exceeds 85 percent (or 97

percent if guaranteed by a Government agency) of the appraised value of

the real estate taken as primary security. Section 202 of the 1996

Amendments provides that a loan on which private mortgage insurance

(PMI) is obtained may exceed 85 percent of the appraised value of the

real estate security to the extent that the loan amount in excess of 85

percent is covered by PMI. The proposed regulations would incorporate

this change in revised Sec. 614.4200(c)(1).

The FCA also received a comment relating to the requirements for

intermediate-term loans in existing Sec. 614.4220. The commenter stated

that the FCA should eliminate the requirement that intermediate-term

loans be specifically identified and have a regular level amortization

schedule (i.e., no graduated schedules, balloons, or bullet

maturities). The institution asserts that good credit sense should

dictate loan terms, rather than limiting them through regulation.

In response, the FCA notes that loans that currently must be

amortized and specifically identified are loans that are made for major

capital items, such as new equipment and new or remodeled buildings and

facilities. Existing Sec. 614.4220(b)(2) requires that the maturity of

such loans must be shorter than the useful life of the item, and the

amount outstanding must at all times be less than the value of the item

after normal depreciation.

The FCA believes that existing Sec. 614.4220(b)(2) contains an

important credit philosophy that should be maintained by Farm Credit

lenders. However, the FCA believes that matters such as loan

amortization and maturity for short-term loans are more appropriately

addressed in each lender's loan underwriting policies and standards and

that prudent underwriting standards would reflect such a philosophy.

Therefore, the FCA proposes to delete the requirements in

Sec. 614.4220(b)(2). The items in Sec. 614.4220 that address loan terms

would be relocated to Sec. 614.4040 in subpart A, and the items

addressing loan underwriting standards and loan security requirements

are contained in the proposed amendments to Sec. 614.4200. As a result

of incorporating the provisions relating to short- and intermediate-

term loans in Secs. 614.4040 and 614.4200, existing Sec. 614.4220 is

proposed to be deleted. In addition, the proposed regulations would

codify guidance that the FCA has provided to institutions regarding

loans made by production credit associations (PCAs) that have

amortization schedules longer than 7 years.

Proposed Sec. 614.4200(c)(3) would continue the provision in

existing Sec. 614.4220(b)(1) that short- and intermediate-term loans

may be secured or unsecured as the documented creditworthiness of the

borrower warrants. Institutions would be expected to include collateral

standards for short-and intermediate-term loans in the loan

underwriting standards adopted pursuant to proposed Sec. 614.4150.

Existing Sec. 614.4040 would be amended to specify the terms for which

PCAs can make loans. Authority would continue for PCAs to make loans

with maturities of up to 7 years and make loans with maturities in

excess of 7, but not more than 10 years, if authorized in policies

adopted by the funding bank. The FCA is proposing to add flexibility

for PCAs to make loans with maturities of 10 years or less having

amortization schedules of up to 15 years when such loans are authorized

in policies approved by the funding bank.

The FCA notes that neither the Act nor FCA regulations prohibit

PCAs from offering borrowers a loan amortization period greater than

the term of the loan with a balloon payment at maturity. Nor are PCAs

precluded from refinancing such loans when safety and soundness

conditions are met and the circumstances warrant such action.

Therefore, the FCA is clarifying in the proposed regulations that PCAs

may make loans with maturities of 10 years or less that are amortized

over a period of up to 15 years, the longest period that Congress has

considered appropriate for production lenders. This authority is

subject to the following restrictions:

(1) The loan may be refinanced only if the lender determines at

maturity that the loan meets its current loan policy and loan

underwriting criteria;

(2) Any refinancing of the loan may not extend beyond 15 years from

the date of the original loan; and

(3) The loan must be for refinancing or acquisition of a capital

asset or other permissible purpose and may not be made solely to

finance the acquisition of real estate.

The FCA notes that in making loans with an amortization in excess

of 10 years, institutions cannot include an explicit or implicit

guarantee or promise of refinancing. However, prudent lending criteria

dictate that PCAs should determine whether a borrower's circumstances

are likely to warrant refinancing of the balloon payment at

[[Page 16408]]

the maturity date. Also, the FCA clarifies that although loans cannot

be made solely for the purpose of acquiring real estate, loans may be

made for facility expansions that include the purchase of real estate

on which to build the facilities. Finally, the FCA reiterates that any

loans made by PCAs with an amortization in excess of 7 years must be

authorized in policies adopted by the funding bank. In adopting such

policies, the FCA expects the bank boards to consider the competitive

impact on other chartered System institutions operating in the district

territory and minimize any disruptive impact of new lending programs to

the extent possible, consistent with the authority to make loans with

an amortization of up to 15 years.

The PCAs will continue to have the authority to make loans with

terms of up to 15 years to producers and harvesters of aquatic products

for major capital expenditures. Such loans are not subject to the

restrictions delineated above.

The FCA also proposes to continue the requirement that all short-

and intermediate-term loans be made with maturities that are

appropriate for the purpose of the loan and comply with the

institution's loan underwriting standards. This requirement would be

moved to Sec. 614.4040.

III. Other Proposed Amendments

The FCA is proposing a clarifying amendment to Sec. 614.4050 that

would recognize the authority of agricultural credit associations

(ACAs) to make long-term real estate mortgage loans of not less than 5

nor more than 40 years, rather than not less than 10 nor more than 40

years as stated in the existing regulation. The current provision was

adopted in order to recognize that ACAs have the option to make loans

under their short- and intermediate-term lending authority without

requiring a first lien on real estate if the term is 10 years or less.

The proposed amendment would clarify that an ACA has the option of

making loans with maturities between 5 and 10 years under either its

long-term or its short- and intermediate-term lending authority as

appropriate.

The FCA received a comment relating to regulatory burden that

pertains to the independent credit judgment requirements of

Sec. 614.4325(e). The commenter states that this regulation eliminates

the ability of FCS institutions to fully utilize an agent in the

administration of loan participations. The regulation requires that

independent credit judgment be applied by an employee of the purchasing

participant, and does not allow the authority to be delegated to an

agent who is not an employee.

The FCA agrees that an institution may sometimes find it

advantageous to use an agent in connection with its loan purchase

authorities. The FCA observes, however, that the institution's board

remains fully accountable for transactions through agents and fully

responsible for the sound administration of all loans, whether made

directly by the institution or purchased through the institution's

participation authority. Therefore, the FCA proposes, by adding a new

Sec. 614.4325(h), to allow transactions through agents as long as the

institution remains accountable for all the agent's actions by ensuring

that the agent complies with the institution's specific underwriting

and other criteria for the purchase of loans. The FCA proposes that

these types of transactions are permissible, only if: (1) The

institution's board establishes the necessary criteria in a written

agency agreement that outlines the scope of the agent relationship and

obligates the agent to follow the institution's loan underwriting

standards; and (2) the agent relationship is reviewed periodically by

the institution's board to determine if the agent's actions are in the

best interest of the institution. In order to maintain the independent

judgment of the institution, the proposed regulation also requires that

the agent must be independent of the seller or any intermediate broker

in the transaction.

The FCA Board believes that these actions represent the minimum

practices that will not only outline the authority of the agent, but

also establish how the institution will hold the agent accountable for

compliance with the institution's loan policies and underwriting

standards. The FCA Board expects an agent agreement to outline the type

of business that is acceptable to the board and specific authorities

with respect to approval levels, reporting requirements, and other

performance elements that the board of directors could utilize to

ensure that the agent relationship is in the institution's best

interest. Given the supervisory role of a bank and its control over the

association's funding, the FCA believes it would not be practical for

an association to attempt to hold its funding bank accountable.

Therefore, under proposed Sec. 614.4325(h)(3), a funding bank will be

specifically prohibited from being an agent for an association it

funds.

The FCA Board is also proposing amendments that are not a result of

the regulatory burden comments, but are nonetheless consistent with

FCA's initiatives to reduce burden and clarify existing regulations

where necessary.

The FCA proposes to delete Sec. 614.4222, non-farm rural home

loans, and relocate the provisions to Sec. 614.4200(c)(4) that pertain

to general security requirements for such rural home loans. This action

is proposed to achieve more consistent and concise regulations. The FCA

notes that there is an outstanding proposed amendment to Sec. 614.4222,

and this proposal will be in addition to the amendment proposed at 60

FR 47121 (September 11, 1995).

The FCA proposes to delete Sec. 614.4230 and include the provisions

on security for title III loans in a new Sec. 614.4200(c)(5), in the

same manner as is proposed for Sec. 614.4222. The provisions in

Sec. 614.4230(a) pertain to loan underwriting and must be considered by

the institution pursuant to proposed Sec. 614.4150.

The FCA proposes to significantly revise Sec. 614.4231, which

contains the specific requirements outlined for different commodity

programs, and instead require that loans on commodities covered by

government programs comply with the criteria established for those

programs. This revision is proposed because of the changing nature of

the government programs for the listed commodities.

Since their publication in 1995, the FCA has received several

requests to review certain provisions of the collateral regulations

contained in this subpart. Specifically, Farm Credit institutions and

examiners have pointed out two potentially burdensome areas: (1) The

applicability of the collateral evaluation requirements in

Sec. 614.4250 within an institution's small loan program; and (2) the

income capitalization approach to valuing collateral and related

provisions of Sec. 614.4265.

Comments received suggest the amount of documentation specifically

required by Sec. 614.4250 (a)(4), (a)(5), and (a)(6) is burdensome and

yields little extra risk protection for loans that qualify under an

institution's small loan program. In addition to comments received from

System institutions, FCA examiners have observed some instances in

which these particular collateral evaluation requirements may be

impeding prudent underwriting of certain loans in some institutions.

Some lending officials have made unsecured loans in the institution's

small loan program rather than taking available collateral to avoid the

documentation burden of Sec. 614.4250. The FCA now recognizes that

certain elements of

[[Page 16409]]

collateral evaluations required in the existing regulation may not be

conducive to the effective and efficient delivery of credit demanded by

the current market place for certain small, low risk loans. The FCA

believes such programs can be structured to ensure prudent lending

practices are imposed and remain in place while alleviating the burden

of the existing regulations.

The FCA proposes to amend Secs. 614.4245 and 614.4250 by making

parts of Sec. 614.4250 requirements inapplicable to an institution's

small loan program. However, each System institution must establish

appropriate procedures for the valuation of collateral taken to secure

loans under any small loan program. At a minimum, these procedures

should require documentation and certification of the value of the

collateral taken for small loans by an individual sufficiently skilled

to assign values to the collateral taken. The FCA believes certain

minimum requirements for collateral evaluations will sufficiently

document valuations for loans qualifying under an institution's small

loan program and meet the central, but not all, requirements of the

Uniform Standards of Professional Appraisal Practice (USPAP)

guidelines. The FCA, through this proposal, seeks to ensure that the

most essential requirements of Sec. 614.4250 for small loan programs,

namely paragraphs (a)(1), (a)(2), (a)(3), and (a)(7), are retained. To

accomplish this change, a new paragraph Sec. 614.4245(d) is proposed to

permit an institution to adopt policies and standards for a small loan

program that exclude documentation requirements presently existing in

Sec. 614.4250 (a)(4) through (a)(6). A corresponding modification is

proposed for Sec. 614.4250. This proposal would allow greater

flexibility to institutions and require that policies and standards be

adopted that address small loan program collateral criteria.

Requirements contained in (a)(1), (a)(2), (a)(3), and (a)(7) of

Sec. 614.4250 would continue to apply to an institution's small loan

program. These provisions require all collateral evaluations to be

based on the property's market value, be in a written format, consider

the property's use or intended use, and contain a certification by a

competent appraiser/evaluator. The FCA further observes that the use of

a limited or restricted appraisal, completed in accordance with USPAP

Standard 2.2, is a valid statement of value under the revisions to this

section. While the FCA is proposing to exempt certain requirements

contained in Sec. 614.4250(a), institutions are reminded that if real

estate is taken as collateral and State-sanctioned (certified or

licensed) appraisers are used for the valuation process, the proposed

exclusion of the provisions contained in Sec. 614.4250 (a)(4) through

(a)(6) may cause the resulting evaluations not to comply with USPAP and

State certification or licensing standards in certain instances. In

such cases, appraisers/evaluators may not meet terms and conditions

under which those States have certified or licensed them. This,

however, is considered a professional issue and institutions may

include the provisions of Sec. 614.4250(a)(4) through (a)(6) as they

deem appropriate.

The second area concerning the Agency's collateral regulations

centers on the clarification of requirements of the departure

provisions and income capitalization approach to valuing collateral

found in Sec. 614.4265. The FCA has received several comments and

suggestions to reconsider the appropriate use of, or exclusion of, one

or more of the three recognized approaches to valuation of real estate.

Most comments focused on Sec. 614.4265(b) and the intent and purpose of

the requirements of Sec. 614.4265 (d) and (e). Upon review and

consideration of comments received and the changes proposed herein, the

FCA concludes that no revisions to the existing requirements of

Sec. 614.4265 should be made. However, the FCA believes it is necessary

to clarify the purposes of, and alternatives provided by, Sec. 614.4265

(d) and (e), and the FCA intends to make this clarification through its

bookletter process.

Finally, the FCA proposes to clarify that Sec. 614.4325, purchase

and sale of interests in loans, also applies to transactions involving

pools of loans in the same manner as they apply to transactions

pertaining to individual loans. The FCA proposes an expanded definition

of the term ``interests in loans'' in Sec. 614.4325(a)(1) to include

transactions involving a pool of loans. The FCA is proposing this

amendment to relieve any potential regulatory burden and clarify how

pool transactions are to be handled.

The FCA proposes many conforming amendments within subparts A, C,

H, J, and Q of part 614, and in part 619 so that affected regulations

are consistent with the substantive changes proposed. Certain

conforming amendments in subpart A are in regulation sections that are

proposed to be revised as conforming amendments in the proposed rule

addressing eligibility and scope of financing. See 60 FR 47103

(September 11, 1995). The conforming amendments in this rulemaking are

in addition to those proposed on September 11, 1995, and include

Secs. 614.4000, 614.4010, 614.4020, 614.4030, 614.4040, 614.4050,

614.4222, and 614.4810.

List of Subjects

12 CFR Part 614

Agriculture, Banks, banking, Flood insurance, Foreign trade,

Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 619

Agriculture, Banks, Banking, Rural areas.

For the reasons stated in the preamble, parts 614 and 619 of

chapter VI, title 12 of the Code of Federal Regulations are proposed to

be amended to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

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

follows:

Authority: 42 U.S.C. 4012a, 4104a, 4101b, 4106, and 4128; Secs.

1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,

2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13,

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

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

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

2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121,

2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201,

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

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

2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat.

1568, 1639.

Subpart A--Lending Authorities

2. Section 614.4000 is amended by removing the words ``agricultural

credit association of a Federal land credit association'' and adding in

its place, the words ``agricultural credit association or a Federal

land credit association'' in the introductory text of paragraph (f),

and revising paragraph (a) to read as follows:

Sec. 614.4000 Farm Credit Banks.

(a) Long-term real estate lending. Except to the extent such

authorities are transferred pursuant to section 7.6 of the Act, Farm

Credit Banks are authorized to make, subject to the requirements in

Sec. 614.4200 of this part, real estate mortgage loans with maturities

of not less than 5 years nor more than 40 years and continuing

commitments to make such loans.

* * * * *

3. Section 614.4010 is amended by removing the reference

``Sec. 614.4230''

[[Page 16410]]

and adding in its place, the reference ``Sec. 614.4200'' in paragraphs

(d)(1) and (d)(2); and revising paragraph (a) to read as follows:

Sec. 614.4010 Agricultural credit banks.

(a) Long-term real estate lending. Except to the extent such

authorities are transferred pursuant to section 7.6 of the Act,

agricultural credit banks are authorized to make, subject to the

requirements of Sec. 614.4200, real estate mortgage loans with

maturities of not less than 5 years nor more than 40 years and

continuing commitments to make such loans.

* * * * *

Sec. 614.4020 [Amended]

4. Section 614.4020 is amended by removing the reference

``614.4230'' and adding in its place, the reference ``614.4200'' in

paragraphs (a)(1) and (a)(2).

5. Section 614.4030 is amended by revising paragraph (a) to read as

follows:

Sec. 614.4030 Federal land credit associations.

(a) Long-term real estate lending. Federal land credit associations

are authorized to make, subject to the requirements of Sec. 614.4200,

real estate mortgage loans with maturities of not less than 5 years nor

more than 40 years and continuing commitments to make such loans.

* * * * *

6. Section 614.4040 is amended by removing paragraph (b);

redesignating paragraphs (c) and (d) as new paragraphs (b) and (c),

respectively; removing the reference ``paragraph (c)(2)'' and adding in

its place, the reference ``paragraph (b)(2)'' in newly designated

paragraph (b)(1) introductory text; and by revising paragraph (a) to

read as follows:

Sec. 614.4040 Production credit associations.

(a) Loan terms.

(1) Production credit associations are authorized to make or

guarantee loans and other similar financial assistance for the

following terms:

(i) Repayable in not more than 7 years;

(ii) Repayable in more than 7 years, but not more than 10 years,

subject to authorization in policies approved by the funding bank;

(iii) Repayable in not more than 15 years to producers or

harvesters of aquatic products for major capital expenditures,

including but not limited to the purchase of vessels, construction or

purchase of shore facilities, and similar purposes directly related to

the producing or harvesting operation; 'and

(2) Subject to policies approved by the funding bank, production

credit associations may make loans authorized under paragraph (a)(1) of

this section that are amortized over a period not to exceed 15 years,

provided that:

(i) The loan may be refinanced only if the lender determines, at

the time of maturity, that the loan meets its loan policy and

underwriting criteria;

(ii) Any refinancing may not extend repayment beyond 15 years from

the date of the original loan; and

(iii) The loan is not being made solely for the purpose of

acquiring real estate;

(3) Short- and intermediate-term loans shall be made with

maturities that are appropriate for the purpose of the loan and that

comply with the institution's loan underwriting standards adopted

pursuant to Sec. 614.4150 and the general requirements of Sec. 614.4200

of this part.

* * * * *

7. Section 614.4050 is amended by adding introductory text and by

revising paragraphs (a) and (b) to read as follows:

Sec. 614.4050 Agricultural credit associations.

Agricultural credit associations are authorized to make, subject to

the requirements of Sec. 614.4200 of this part:

(a) Long-term real estate mortgage loans with maturities of not

less than 5 nor more than 40 years, and continuing commitments to make

such loans; and

(b) Short- and intermediate-term loans and provide other similar

financial assistance for a term not more than 10 years (15 years for

aquatic producers and harvesters).

* * * * *

Subpart C--Bank/Association Lending Relationship

Sec. 614.4120 [Amended]

8. Section 614.4120 is amended by removing the words ``the factors

set forth in Secs. 614.4150 and 614.4160'' and adding in their place,

the words ``the loan underwriting policies and standards adopted

pursuant to Sec. 614.4150'' in the last sentance of paragraph (a).

Secs. 614.4135, 614.4140, and 614.4145 [Removed]

9. Sections 614.4135, 614.4140, and 614.4145 are removed.

Subpart D--General Loan Policies for Banks and Associations

Secs. 614.4150, 614.4160 [Removed]

10. Sections 614.4150 and 614.4160 are removed.

11. New section 614.4150 is added to read as follows:

Sec. 614.4150 Lending policies and loan underwriting standards.

Under the policies of its board, each institution shall adopt

written standards for prudent lending and shall issue written policies,

operating procedures, and control mechanisms that reflect prudent

credit practices and comply with all applicable laws and regulations.

Written policies and procedures shall, at a minimum, prescribe:

(a) The minimum supporting credit information, frequency for

submission of information, and verification of information required in

relation to loan size, complexity and risk exposure;

(b) The procedures to be followed in credit analysis;

(c) The minimum standards for loan disbursement, servicing and

collections;

(d) Requirements for collateral and methods for its administration;

(e) Loan approval delegations and requirements for reporting to the

board;

(f) Loan pricing practices;

(g) Loan underwriting standards that include measurable standards

for determining that an applicant has the operational, financial, and

management resources necessary to repay the debt from cashflow, are

appropriate for each loan program and the institution's risk-bearing

ability, and consider the nature and type of credit risk, amount of the

loan, and enterprise being financed;

(h) Requirements that loan terms and conditions are appropriate for

loan purposes; and

(i) Such other requirements as are necessary for the professional

conduct of a lending organization, including documentation for each

loan transaction of compliance with the loan underwriting standards or

the compensating factors or extenuating circumstances that establish

repayment capacity notwithstanding the failure to meet any single loan

underwriting standard.

12. Section 614.4165 is amended by removing paragraphs (b) and (c);

redesignating paragraphs (d) and (e) as new paragraphs (b) and (c); and

revising paragraph (a) to read as follows:

Sec. 614.4165 Special credit needs.

(a) The board of each direct lender institution shall adopt

policies to establish programs to provide credit and related services

to young, beginning, and small farmers, ranchers, and producers or

harvesters of aquatic products.

* * * * *

Subpart E--Loan Terms and Conditions

13. Section 614.4200 is revised to read as follows:

[[Page 16411]]

Sec. 614.4200 General requirements.

(a) Terms and conditions. (1) The terms and conditions of each loan

made by a Farm Credit bank or association shall be set forth in a

written document, such as a loan agreement, promissory note, or other

instrument appropriate to the type and amount of the credit extension,

in order to establish loan conditions and performance requirements and,

where appropriate, to obligate the borrower to provide financial

statements, certified true and correct by the borrower, as required or

requested during the term of the loan. Copies of all documents executed

by the borrower in connection with the closing of a loan made under

titles I or II of the Act shall be provided to the borrower at the time

of execution and at any time thereafter that the borrower requests

additional copies.

(2) The terms and conditions of all loans shall be adequately

disclosed in writing to the borrower not later than loan closing. For

loans made under titles I and II of the Act, the institution shall

provide prompt written notice of the approval of the loan.

(3) Applicants shall be provided notification of the action taken

on each credit application in compliance with the requirements of 12

CFR 202.9.

(b) Obtaining borrower financial statements. As part of the loan

underwriting policies adopted pursuant to Sec. 614.4150, each direct

lender institution must adopt policies and procedures for obtaining

sufficient financial information from all borrowers in order to

establish repayment capacity and assess the risk inherent in each loan.

In addition, for loans, except rural home loans, made under titles I or

II of the Act:

(1) Farm Credit banks and associations shall require from each

borrower a verifiable balance sheet and income statement that has been

certified true and correct as a condition precedent to making, renewing

or extending the terms of a loan or taking any material servicing

action for the following loans:

(i) Monthly payment loans with an aggregate outstanding balance of

loans and commitments per borrower greater than $500,000; and

(ii) Loans, except monthly payment loans, with an aggregate

outstanding balance of loans and commitments per borrower greater than

$100,000.

(2) Farm Credit banks and associations shall require annually from

each borrower a verifiable balance sheet and income statement that has

been certified true and correct for the following loans:

(i) Monthly payment loans with an aggregate outstanding balance of

loans and commitments per borrower greater than $500,000;

(ii) Loans, except monthly payment loans, with an aggregate

outstanding balance of loans and commitments per borrower greater than

$200,000; and

(iii) Loans, except monthly payment loans, that are classified as

less than acceptable and that have an aggregate outstanding balance of

loans and commitments per borrower greater than $100,000.

(c) Security. (1) Long-term real estate mortgage loans must be

secured by a first lien interest in real estate. No funds shall be

advanced, under a legally binding commitment or otherwise, if the

outstanding loan balance after the advance would exceed 85 percent (or

97 percent as provided in section 1.10(a) of the Act) of the appraised

value of the real estate, except that a loan on which private mortgage

insurance is obtained may exceed 85 percent of the appraised value of

the real estate to the extent that the loan amount in excess of 85

percent is covered by such insurance. Real estate securing long-term

mortgage loans must be comprised primarily of agricultural or rural

property, including agricultural land, a farm-related business, a

marketing or processing operation, a rural residence, or real estate

used as an integral part of an aquatic operation.

(2) Notwithstanding the requirements of paragraph (c)(1) of this

section, the lending institution may advance funds for the payment of

taxes or insurance premiums with respect to the real estate, reschedule

loan payments, grant partial releases of security interests in the real

estate, and take other actions necessary to protect the lender's

collateral position. Any action taken that results in exceeding the

loan-to-value limitation shall be in accordance with a policy of the

institution's board of directors and adequately documented in the loan

file.

(3) Short- and intermediate-term loans may be secured or unsecured

as the documented creditworthiness of the borrower warrants.

(4) In addition to the requirements in paragraph (c)(1) of this

section, a long-term, non-farm rural home loan, including a revolving

line of credit, shall be secured by a first lien on the property,

except that it may be secured by a second lien if the institution also

holds the first lien on the property. A short- or intermediate-term

loan on a rural home, including a revolving line of credit, must be

secured by a lien on the property unless the financing is provided

exclusively for repairs, remodeling, or other improvements to the rural

home, in which case the credit may be secured by other property or

unsecured if warranted by the documented creditworthiness of the

borrower.

(5) Except as provided in Sec. 614.4231, loans made under title III

of the Act may be secured or unsecured, as appropriate for the purpose

of the loan and the documented creditworthiness of the borrower.

Secs. 614.4210, 614.4220, 614.4222, 614.4230 [Removed]

14. Sections 614.4210, 614.4220, 614.4222, and 614.4230 are

removed.

15. Section 614.4231 is revised to read as follows:

Sec. 614.4231 Certain seasonal commodity loans to cooperatives.

Loans on certain commodities that are part of government programs

shall comply with the criteria established for those programs. Security

taken on program commodities shall be consistent with prudent lending

practices and ensure compliance with the government program. The bank

shall provide for periodic review by bank officials of any custodial

activities and shall provide notice to the custodians that their

activities are subject to review and examination by the Farm Credit

Administration.

Subpart F--Collateral Evaluation Requirements

16. Section 614.4245 is amended by adding a new paragraph (d) to

read as follows:

Sec. 614.4245 Collateral evaluation policies.

* * * * *

(d) An institution's board of directors may adopt modified

collateral evaluation requirements, consistent with Sec. 614.4250(b),

for loans designated as part of a small loan program, which shall be

limited to loans to borrowers with aggregate outstanding balances to

the institution of $100,000 or less.

* * * * *

17. Section 614.4250 is amended by removing the words

``Specifically, all collateral evaluations must:'' and adding in their

place, the words ``Except for security taken on loans that are

designated as part of an institution's small loan program, all

collateral evaluations must:'' in paragraph (a) introductory text;

redesignating paragraph (b) as new paragraph (c) and adding new

paragraph (b) to read as follows:

Sec. 614.4250 Collateral evaluation standards.

* * * * *

[[Page 16412]]

(b) Collateral evaluations of property that secures a loan

designated as part of an institution's small loan program must comply

only with the requirements of paragraphs (a)(1), (a)(2), (a)(3), and

(a)(7) of this section.

* * * * *

Subpart H--Loan Purchases and Sales

18. Section 614.4325 is amended by removing the reference

``Sec. 614.4160'' and adding in its place, the words ``the loan

underwriting standards adopted pursuant to Sec. 614.4150'' in the

fourth sentence of paragraph (e); revising paragraph (a)(1); and adding

new paragraph (h) to read as follows:

Sec. 614.4325 Purchase and sale of interests in loans.

(a) * * *

(1) Interests in loans means ownership interests in the principal

amount, interest payments, or any aspect of a loan transaction and

transactions involving a pool of loans, including servicing rights.

* * * * *

(h) Transactions through agents. Transactions pertaining to

purchases of loans, including the judgment on creditworthiness, may be

performed through an agent, provided that:

(1) The institution establishes the necessary criteria in a written

agency agreement that outlines, at a minimum, the scope of the agency

relationship and obligates the agent to comply with the institution's

underwriting standards;

(2) The institution periodically reviews the agency relationship to

determine if the agent's actions are in the best interest of the

institution;

(3) Restrictions.

(i) An association's funding bank cannot act as its agent; and

(ii) The agent must be independent of the seller or intermediate

broker in the transaction.

Subpart J--Lending Limits

Sec. 614.4355 [Amended]

19. Section 614.4355 is amended by removing the word ``seasonal''

and adding in its place, the word ``commodity'' the second place it

appears in paragraphs (a)(6) and (b)(1) respectively, and in paragraph

(a)(8).

Sec. 614.4358 [Amended]

20. Section 614.4358 is amended by removing the words ``on the

credit factors set forth in Sec. 614.4160'' and adding in their place,

the words ``under the loan underwriting standards adopted pursuant to

Sec. 614.4150'' in paragraph (a)(1)(ii).

Subpart Q--Banks for Cooperatives Financing International Trade

Sec. 614.4810 [Amended]

21. Section 614.4810 is amended by removing the words ``credit

factors listed in Sec. 614.4160'' and adding in their place, the words

``the loan underwriting standards adopted pursuant to Sec. 614.4150''

in paragraph (b).

PART 619--DEFINITIONS

21. The authority citation for part 619 continues to read as

follows:

Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6,

7.7, 7.8 of the Farm Credit Act (12 U.S.C. 2015, 2075, 2160, 2243,

2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2).

Secs. 619.9165 and 619.9290 [Removed]

22. Sections 619.9165 an 619.9290 are removed.

* * * * *

Dated: April 9, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 96-9155 Filed 4-12-96; 8:45 am]

BILLING CODE 6705-01-P