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

[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]

[Rules and Regulations]

[Pages 4429-4451]

From the Federal Register Online via the Government Publishing Office [www.gpo.gov]

[FR Doc No: 97-2058]

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Rules and Regulations

Federal Register

________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents

having general applicability and legal effect, most of which are keyed

to and codified in the Code of Federal Regulations, which is published

under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

Prices of new books are listed in the first FEDERAL REGISTER issue of each

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Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 /

Rules and Regulations

[[Page 4429]]

FARM CREDIT ADMINISTRATION

12 CFR Parts 613, 614, 615, 618, 619, 620, and 626

RIN 3052-AB10

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

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

(Board) adopts amendments (final 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. The

rule also incorporates recent 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 with new authorities to participate with non System

lenders in loans to similar entities. The final rule eliminates

restrictions in the current eligibility regulations that are not

required by the Act and makes other technical, clarifying, and

conforming changes. The final rule relocates the nondiscrimination in

lending regulations to a new part without change.

DATES: This regulation shall become effective 30 days after publication

in the Federal Register during which either or both houses of Congress

are in session. Notice of the effective date will be published in the

Federal Register.

FOR FURTHER INFORMATION CONTACT:

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

Analyst, Office of Policy Development and Risk Control, 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 proposed amendments to the capital

provisions of its regulations for FCS institutions on July 25, 1995 (60

FR 38521) and to the customer eligibility provisions on September 11,

1995 (60 FR 47103). In response to comments received, the FCA combined

the two proposals and published proposed amendments to the capital

adequacy and customer eligibility provisions of its regulations for

Farm Credit institutions on August 13, 1996 (reproposed rule). See 61

FR 42092. The 30-day comment period expired on September 12, 1996.

I. Summary of the Changes in the Final Rule

A. The capital provisions of the final rule contain the following

changes from the reproposed rule:

1. Associations may include in their core surplus allocated

equities that are includible in their total surplus and that are not

scheduled to be revolved in the next 3 years. Such equities may

comprise up to 2 percentage points of an association's 3.5-percent

minimum core surplus to risk-adjusted assets requirement, with the

remaining 1.5 percent in unallocated surplus and includible perpetual

stock.

2. Banks for cooperatives (BCs) and agricultural credit banks

(ACBs) may include nonqualified allocated equities that are issued to

non-System entities and that do not have an established plan or

practice of revolvement. Such equities may comprise up to 2 percentage

points of a BC's or ACB's 3.5-percent minimum core surplus requirement,

with the remaining 1.5 percent in unallocated surplus and includible

perpetual stock.

3. If specifically provided for in an institution's capital

adequacy plan, the institution may retire or cancel purchased and

allocated equities includible in core surplus for application against

the indebtedness on a defaulted loan without causing similar remaining

equities to be excluded from the core surplus ratio. The institution

may also pay out allocated equities in the event of the death of a

former borrower whose loan has been repaid. In both cases, the

institution board must determine that retirement or revolvement is in

the best interest of the institution.

4. Retirement of less than an entire class or series of equities

includible in core surplus, other than in the circumstances described

in item 3 above, will result in the disallowance of remaining similar

equities from core surplus.

5. If approved by the FCA, a capital instrument or a particular

balance sheet account issued to or related to another System

institution may be included in an institution's core or total surplus.

6. The Leasing Corporation may include its C Stock issued to Farm

Credit banks in the total surplus ratio.

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

lenders incorporate the following changes from the reproposed rule:

1. The final regulation retains the existing definition of bona

fide farmer or rancher in Sec. 613.3010(a). This and the other

definitions in Sec. 613.3010 are redesignated as Sec. 613.3000(a) in

order to replace the reproposed definitions. The reproposed definitions

for agricultural assets and agricultural land, Sec. 613.3000(a)(1) and

(2), are withdrawn. The existing definition of agricultural land is

retained without change in Sec. 619.9025. Reproposed Sec. 613.3000(d),

addressing limitations on financing a farmer's other credit needs under

the reproposed definitions, is also withdrawn.

2. Existing Sec. 613.3005(a) is retained as final Sec. 613.3005 to

determine the scope of financing for farmers, ranchers, and producers

or harvesters of aquatic products.

[[Page 4430]]

3. The final rule offers some flexibility in the use of the 75th

percentile of local housing values to establish what constitutes

moderately priced housing. It requires each FCS institution to support

its determination with appropriate documentation whenever the

institution adopts a value above the 75th percentile of housing values

in the rural area where it is located.

II. Public Comments Received

The FCA received 1591 comment letters in response to the reproposed

rule concerning capital adequacy and customer eligibility provisions.

There were 1079 comments addressing the customer eligibility rules and

580 comments addressing the reproposed capital adequacy

provisions.1

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\1\ The total number of comments received on the individual

provisions of the final rule does not total 1591 because several

commenters responded to both capital and customer provisions in a

single comment letter.

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

The FCA received 881 comments from System institutions and their

members/borrowers, including a comment letter from the System's

Presidents' Finance Committee, which reflected the views of System

banks and associations (System joint comment) concerning the capital

adequacy rules, as well as a letter from the Farm Credit Council (FCC),

also on behalf of the System institutions, on the customer eligibility

provisions. Of the remaining comments, 723 were from commercial banks,

26 from trade associations, 22 from members of Congress who transmitted

constituent letters, and three from State government agencies. The

national trade associations, in addition to the FCC, that commented

included: the American Bankers Association (ABA), the Independent

Bankers Association of America (IBAA), the Credit Union National

Association (CUNA), and the National Farmers Union (NFU). The States

from which banking chapters and affiliates of their national

associations submitted comments included Virginia, Wisconsin, Nebraska,

Pennsylvania, Arizona, California, Alaska, Hawaii, Montana, New Mexico,

Nevada, Oregon, Utah, Washington, Idaho, Colorado, Michigan, New York,

Indiana, Georgia, Maine, Louisiana, and South Dakota. In addition to

the written comments received, a group of System representatives made

an oral presentation of its views to Agency staff concerning the

capital adequacy provisions.

III. The Final Rule

After carefully considering the comments received on the reproposed

rule and further deliberation, the FCA adopts a rule governing capital

adequacy and customer eligibility for FCS financing. The FCA responds

to the specific concerns of the commenters as it explains the

provisions of the rule.

A. Capital Adequacy Provisions

Of the 580 written comments received on the capital provisions, six

were from System banks (AgFirst FCB (two letters), Western FCB,

AgriBank FCB, CoBank ACB, and St. Paul BC), one was from the Leasing

Corporation, 35 were from System associations, 532 were from borrowers/

shareholders of several agricultural credit associations (ACAs), one

was from the System's Presidents' Planning Committee on behalf of

System institutions (System joint comment), four were from various

State and national cooperative councils, and one was from the ABA on

behalf of its commercial bank members.

Responses to the capital provisions varied widely. Of the five

System banks that commented, one bank fully supported the reproposal

and urged the FCA not to diminish required levels by lowering ratios or

widening the definition of eligible capital. Two System banks supported

the reproposal as revised by minor changes suggested in the System

joint comment. Those changes are more fully described below. The other

two System banks suggested changes to the reproposal primarily as it

affected associations operating on a Subchapter T basis for tax

purposes. Of the System associations that submitted comments, a few

supported the reproposal, but the majority asked for changes in the

core surplus requirement. Likewise, the cooperative councils and the

association borrowers opposed the core surplus ratio components as

applied to associations. The ABA commented that it supported the

stiffening of capital requirements for System institutions and offered

a general opinion that the reproposal was not stringent enough.

1. Core Surplus Ratio Capital Standard

The majority of the comments on capital pertained to the core

surplus ratio in the reproposed rule. A System bank, the Leasing

Corporation, and several associations supported the core surplus ratio

as reproposed, and other System institutions generally supported the

ratio with minor revisions.

Many other respondents, including System associations, made the

same criticisms of the core surplus ratio that they had made of the

unallocated surplus ratio in the originally proposed capital

regulations. They asserted that the core surplus ratio was contrary to

cooperative principles, unfairly differentiated between unallocated

surplus and allocated surplus, and discouraged institutions from

operating as Subchapter T cooperatives. They stated their belief that

an institution with allocated equities in addition to a minimum level

of unallocated surplus was a stronger institution than one with the

same amount of unallocated surplus but no allocated equities. For a

detailed description of these comments, see 61 FR 42092, 42094 (Aug.

13, 1996). Most of these respondents did not address specifically the

inclusion of nonqualified allocated equities in the core surplus ratio.

A System bank that did address the inclusion of nonqualified

allocated equities disagreed with the FCA's statement that inclusion of

such equities would eliminate most of the disincentives to operate on a

Subchapter T basis and stated that single taxation is an extremely

important tool for managing tax liabilities on association earnings.

An association objected to the requirement that associations deduct

the net investment in the affiliated bank from the core surplus ratio.

Another association stated that an association should not have to

deduct this investment unless the bank does not meet its minimum

capital requirements.

A respondent questioned the meaning of the statement in the

reproposal preamble that the FCA expected a ``healthy portion'' of core

surplus to be made up of unallocated surplus. See 61 FR 42095-96 (Aug.

13, 1996). The respondent stated that ``healthy'' appeared to be a

subjective evaluation and asserted that ``[t]he requirement of a

`healthy' sum of unallocated surplus runs contrary to the cooperative

nature of the System.''

Two System associations stated that the risk monitoring systems

already in place--the Farm Credit System Insurance Corporation, the

Market Access Agreement, the Contractual Interbank Performance

Agreement, general financing agreements, and ``a very aggressive

regulator''--were sufficient to control risk.

A System bank recommended that the core surplus of associations be

calculated by means of two separate ratios: first, measure unallocated

retained earnings (URE) with no deduction for the investment in the

bank; second, measure total surplus with a deduction for the investment

in the bank. The bank pointed out that ``[t]he only situation in which

the member's investment would be impaired at the point in which losses

exceeded association unallocated surplus net of its investment in the

bank

[[Page 4431]]

would be one in which the association's investment in the bank was

impaired at the same time.'' The bank also stated that tax

considerations, not capital requirements, should be the basis on which

an institution should decide whether to allocate equities on a

nonqualified or a qualified basis. Several associations recommended

that the core surplus for associations be calculated on a more broadly

defined basis by including all permanent capital less the investment in

the bank.

The System, in its joint comment, recommended that the FCA permit a

call on preferred stock when a bank is overcapitalized or in a

declining rate environment. It also recommended that the FCA include in

core surplus, on a case-by-case basis, newly developed or modified

equities or accounts held by other System institutions.

One commenter requested that the FCA permit revolvements of

nonqualified allocated equities as long as the revolvements do not

result in failure to meet the core surplus requirement. Another

commenter stated that it agreed with the FCA's rationale for including

nonqualified allocated equities in core surplus but suggested that

redemptions be permitted when a borrower dies or defaults on a loan.

The commenter also stated that nonqualified allocations between System

institutions ought to be includible by one institution in core surplus

and suggested that the allocations be included in the core surplus of

the issuing institution.

In response to the comments, and upon further deliberation about

the components and quality of core surplus, the FCA has made several

changes to the core surplus requirement in the final rule. The

principal change is that associations with allocated equities, which

are primarily associations that operate as Subchapter T cooperatives,

may include certain longer-term qualified as well as nonqualified

allocated equities. However, allocated equities may comprise no more

than 2 percentage points of the association's minimum 3.5-percent core

surplus requirement. Includible longer-term equities are allocated

equities not subject to a revolvement plan or subject to a revolvement

plan of at least 5 years and not scheduled for distribution during the

next 3 years. The remaining 1.5 percentage points of the minimum core

surplus requirement must be made up of unallocated retained earnings

and perpetual stock not subject to a revolvement plan or practice.

This decision reflects the FCA's judgment that a formula including

allocated equities that are not scheduled for retirement within the

next 3 years provides a method for achieving a stable capital base for

associations without discouraging patronage distributions. Longer-term

allocated equities, while they may not be perpetual in nature, do

provide important capital protection for as long as they are held, and

an institution's board can delay a scheduled distribution when it is in

the best interest of the institution. By counting allocated equities

only when they are not within 3 years of revolvement, institutions are

less likely to have to interrupt scheduled revolvements to meet their

capital standards in times of adversity because they have 3 years in

which to adjust continuing allocations or take other protective

measures. Similarly, if an institution suffers because many of its

borrowers are experiencing adverse economic circumstances, a sufficient

amount of unallocated surplus will better enable the institution to

continue to make planned distributions during the next 3 years, at a

time when its borrowers may need cash distributions most. In addition,

permitting an association to count both qualified and nonqualified

allocations in the core surplus ratio gives an association flexibility

to select which type of allocation to make based primarily on business

considerations rather than regulatory considerations.

For the BC and any ACB which, like Subchapter T associations, also

have equities allocated to non-System borrowers, the Agency decided not

to allow inclusion in core surplus of any qualified allocated equities

or of nonqualified allocated equities scheduled for revolvement for

several reasons.\2\ Such banks have higher lending limits--from 35 to

50 percent of the lending limit base for certain BC loans compared to a

25-percent limit for all other Farm Credit institutions. The BC and any

ACB carry greater interest rate risk than associations and carry

certain forms of operational risk from which associations are largely

insulated. Unlike associations, these banks are jointly and severally

liable on Systemwide obligations. In addition, the existing BC and ACB

have made a significant portion of their credit extensions to

relatively few borrowers, a situation that results in a concentration

of risk. Finally, the BC and ACB have only the single exclusion of

qualified and revolving nonqualified allocated equities from their core

surplus ratio, whereas associations must also deduct their net

investment in their affiliated bank. Therefore, the FCA has determined

that it is appropriate that such banks maintain a core surplus ratio of

at least 3.5 percent, comprised of unallocated surplus and nonqualified

allocated equities with no plan or practice of retirement. Nonqualified

allocated equities may comprise no more than 2 percentage points of the

institution's minimum 3.5-percent core surplus requirement. As with

associations, the remainder must be comprised of unallocated retained

earnings and perpetual stock.

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

\2\ This same rule by its language also applies to the FCBs;

however, the effect of this rule on FCBs is expected to be minimal.

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

When an institution's ratio of unallocated surplus together with

any perpetual stock includible in core surplus to risk-adjusted assets

amounts to less than 1.5 percent, the institution may not count more

than 2 percentage points of allocated equities in determining

compliance with the 3.5-percent core surplus requirement. For example,

if an institution's unallocated surplus and includible perpetual stock

were 1.4 percent of risk-based assets, and its ratio of long-term

allocated equities were 5 percent, its core surplus ratio would be 3.4

percent, because allocated equities could be counted only up to 2

percentage points. If the institution's ratio of unallocated surplus

and perpetual stock were 1.6 percent and its ratio of long-term

allocated equities were 5 percent, however, its core surplus ratio

would be 6.6 percent. In this instance, the entire amount of long-term

allocated equities would be included in the core surplus ratio because

at least 1.5 percent of the institution's minimum requirement was

comprised of unallocated surplus and perpetual stock. The FCA notes

that the restriction on the use of allocated equities in the

computation of the core surplus ratio applies only to the components in

the computation of the core surplus ratio and is not intended to limit

the use of such allocated equities in building and maintaining other

required capital levels.

In establishing the minimum core surplus requirement at 3.5

percent, the FCA expects institutions to treat the core surplus

requirement and its components as a regulatory minimum and to establish

a target or goal for adequate capital based on their particular

circumstances. There may be circumstances where the FCA considers the

institution's component levels of surplus to be inadequate, even when

its core surplus ratio is at or above 3.5 percent (because the

operations of the institution are of higher risk), and may take

supervisory action, as warranted.

The final rule permits all institutions to retire equities and

apply the proceeds against indebtedness on a defaulted loan

[[Page 4432]]

without disallowance of remaining equities of the same class or series

from treatment as core surplus, subject to the following conditions:

(1) The institution must specifically provide for such retirements in

the capital adequacy plan approved by its board of directors and the

circumstances under which they may occur; (2) the institution must

charge off an amount of the indebtedness on the loan equal to the

amount of the equities that are retired or canceled; and (3) the

institution board must determine that each such retirement is in the

best interest of the institution. Retirable equities include purchased

stock as well as allocated stock and surplus. The Agency made this

change to accommodate foreclosure laws of States that preclude the

recovery of a deficiency in certain situations. In these cases, it may

be more advantageous to the institution to retire a borrower's

equities. In other cases, it will be in the best interest of the

institution not to retire equities. Institutions are required to make

this determination before the equities are retired.

The final rule also permits institutions to retire allocated stock

and equities in the event of the death of a holder of such equities who

did not have a loan outstanding with the institution at the time of his

or her death, without disallowing remaining equities from treatment as

core surplus, provided that the institution's capital adequacy plan

specifically authorizes such retirements and that the institution

determines that these retirements are in the best interest of the

institution. This provision enables institutions to make retirements to

help liquidate a former borrower's estate, especially in cases where

the allocated equities may not be transferable. The provision, however,

does not apply to retirements of purchased stock, which the statute

requires to be transferable. Title to such stock and the accruing

benefits thereto, including dividends, can be transferred by the estate

executor to the heirs of the former borrower's estate. Although these

provisions allow an institution to retire equities in these

circumstances without disqualifying equities of the same class, they do

not relieve the institution of its obligation to meet its regulatory

capital standards and to maintain such higher levels of capital as may

be needed in its particular circumstance.

The FCA has deleted from the final rule provisions that would have

enabled an institution to retire a pro rata amount of a class or series

of stock or equities without causing the remaining class or series of

stock or equities to be disallowed from treatment as core surplus. The

Agency reconsidered those provisions and determined that the partial

retirements or revolvements would raise an implication that the

equities are not considered to be a permanent source of capital by the

institution. If partial retirements of includible perpetual stock were

commonplace, the FCA believes that this practice would undermine

stockholders' perception of the perpetual character of the stock or

equities. Therefore, if an institution retires includible stock or

equities other than in connection with a section 4.14B restructuring or

the death or default of a borrower, the remaining equities of the same

class or series will be disallowed from treatment as core surplus.

The FCA has expanded a reproposed provision, permitting inclusion

of a newly developed or modified capital instrument or particular

balance sheet account with FCA approval, to include existing capital

instruments and balance sheet accounts as well. Existing equities

issued or allocated to other System institutions will continue to be

excluded from an institution's core surplus as a general principle. But

the FCA will consider including existing equities as well as any newly

developed or modified capital instrument or a particular balance sheet

account related to another System institution in core surplus on a

case-by-case basis. The FCA is not presently aware of any existing

equities held by other System institutions that it believes would be

appropriate to include in an institution's core surplus, but it may

consider the appropriateness of including any such equities in the

future.

The FCA did not make any other changes recommended by commenters to

the core surplus ratio. The final rule continues to require

associations to deduct the net investment in the bank from core

surplus, for the reasons set forth in the preamble to the reproposed

rule at 61 FR 42096 (Aug. 13, 1996). With respect to the comment that

current risk monitoring systems are sufficient to control risk, the FCA

was not convinced that the current risk monitoring systems assure that

institutions have adequate high quality capital. The FCA believes this

final rule does provide such assurances. The suggestion that the core

surplus ratio for associations be replaced by ratios that separately

measure local surplus and unallocated surplus was rejected because

compliance with the ratios could be achieved by an association that has

no local unallocated surplus (and equivalent perpetual equities) and,

as the commenter observes, would not assure sufficient capital in the

event that the bank is financially stressed at the same time the

affiliated association is stressed. For a fuller explanation of the

need for local unallocated surplus, see 60 FR 38523 (July 25, 1995).

With respect to the suggestion in the System joint comment that a call

on preferred stock would be prohibited, the FCA notes that redemption

of perpetual preferred stock was neither strictly prohibited in the

reproposed rule nor prohibited in the final rule.

In the final rule, the core surplus ratio must be calculated by the

institution as of each monthend. A summary of the core surplus

computation follows:

The ratio numerator:

Undistributed earnings/unallocated surplus (as defined in the FCA

Call Report instructions) less: for associations only, the net

investment in its affiliated bank, which is--

Total investment in a System bank:

Less: Investment in association by such bank, up to an amount equal

to the association's investment in the bank;

Less: Agency/servicing investment in such bank;

Less: Participation investment in such bank;

Plus: Perpetual common or noncumulative preferred stock held by

non-System entities and not purchased as a condition of obtaining a

loan, provided that the institution has no established plan or practice

of retiring the stock;

Plus: any other equities or accounts approved by the FCA for

inclusion in core surplus;

Plus: for banks only, nonqualified patronage allocations held by

persons or entities other than System institutions, provided that the

institution has no established plan or practice of retiring such

allocations;

Plus: for associations only, nonqualified and qualified patronage

allocations held by persons or entities other than other System

institutions, provided that either the allocations are subject to a

revolvement plan of at least 5 years and will not be distributed within

the next 3 years, or the institution has no established plan or

practice of retiring such patronage;

Less: investments in the Leasing Corporation and goodwill as

required in the computation of the institution's permanent capital

ratio (Sec. 615.5210(e)(6) and (7)); Divided by--

The ratio denominator:

Risk-adjusted asset base per the permanent capital regulations.

2. Total Surplus Ratio Capital Standard

Commenters raised two issues with regard to the reproposed total

surplus

[[Page 4433]]

ratio: the treatment of the Leasing Corporation's C Stock and the

inclusion of certain subordinated debt. The preamble to the reproposed

regulations stated that the Class C Stock issued by the Leasing

Corporation could not be included in the Leasing Corporation's total

surplus because the level of stock fluctuates, somewhat similarly to

borrower stock, based on lease volume. The Leasing Corporation

commented that its C Stock should be included in the total surplus

calculation because it is held by System banks, which also fund the

leases. Because a customer of the Leasing Corporation has no equity at

risk in the corporation, any decision either to conduct additional

business with the corporation or to terminate existing leasing

relationships does not involve a consideration by the customer of the

capital level of the corporation. Therefore, the risk of borrower

flight based on concerns about stock impairment is non-existent.

The FCA concludes that the basic characteristics of the C Stock

have many similarities to other FCS institutions' stock and equities

that are includible in total surplus. Therefore, the C Stock should be

included in the Leasing Corporation's total surplus computation.

In its joint comment, the System requested that subordinated debt

with characteristics of preferred stock be included in permanent

capital and total surplus, on the ground that commercial banks and

thrifts are permitted to include this type of subordinated debt in

their Tier 2 capital. The issue of the treatment of subordinated debt

in any capital ratios for System institutions was not addressed in the

reproposal or in the 1995 capital proposal, and the FCA believes that

it would be inappropriate to include this in the final rule. The Agency

is considering this issue as part of the next phase of its review of

the capital regulations.

Upon reaching these conclusions, the FCA determines the total

surplus ratio will be calculated by the institution as of each month

end, with a minimum requirement of 7 percent. A summary of the

computation is as follows:

The ratio numerator:

Undistributed earnings/unallocated surplus per FCA Call Report;

Plus: certain perpetual common or noncumulative perpetual preferred

stock held by non-System entities and not purchased as a condition of

obtaining a loan;

Plus: certain nonqualified and qualified allocated equities with

revolvement cycles, if any, of at least 5 years;

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

(reduced by 20 percent per year during the last 5 years of its term);

Plus: any other equities or accounts approved by the FCA for

inclusion in total surplus;

Less: any equities or accounts required by the FCA to be deducted

from total surplus;

Less: any deductions for goodwill and investments in the Leasing

Corporation as required in the computation of the institution's

permanent capital ratio pursuant to Sec. 615.5210(e) (6) and (7);

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 permanent capital.

Divided by--

The ratio denominator:

Risk-adjusted asset base per the permanent capital regulations.

3. Collateral Ratio Capital Standard for Banks

A System bank opposed a collateral ratio that excludes allocated

capital counted by associations for two reasons: the allotment

agreement does not change the actual liquidity position of the bank,

and the deduction appears to be premised on the belief that the

allotment agreements are enforceable and that every association will

call on the bank to retire such capital at the same time.

As explained in the preamble to the reproposal, the exclusion of

allocated capital counted as association permanent capital is intended

to eliminate the double-leveraging of shared capital and is not based

on assumptions about the enforceability of the allotment agreements.

Inclusion of this capital would enable banks and associations to

double-leverage the same capital for the permanent capital and

collateral ratios. The FCA has decided to adopt the collateral ratio as

reproposed without changes for the reasons expressed here and as found

in 61 FR 42097-98 (Aug. 13, 1996). Under the final 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.

4. Borrower Stock Retirement Provisions

The FCA received no comments on the reproposal's provisions

enabling institutions to delegate the retirement of borrower stock

under certain conditions. However, the final rule clarifies the board's

obligation to determine that the institution's capital position will

remain adequate after any stock retirements made under delegated

authority.

5. Individual Institution Capital Ratios and Capital Directives

The FCA received no comments on the reproposal's provisions

establishing procedures for setting individual institution capital

ratios and issuing capital directives. The FCA adopts these provisions

without change.

6. Other Capital Issues

The System, in its joint comment, recommended that the existing

permanent capital regulations be harmonized with the reproposal to

include term preferred stock in permanent capital. The FCA agrees that

term preferred stock, which is includible in total surplus, should also

be permanent capital on the same basis as it is considered to be total

surplus. That is, the stock must have an original maturity of 5 years

or more, and in each of the last 5 years before maturity will be

counted in permanent capital at a discount of 20 percent. Thus, at the

beginning of 5 years before maturity the discount will be 20 percent;

at the beginning of 4 years prior to maturity the discount will be 40

percent; and so forth until there is a 100-percent discount at the

beginning of one year prior to maturity. The FCA has added a

stipulation that the institution must have the option to defer payment

of dividends on such preferred stock. This qualification is consistent

with the qualification placed on the type of preferred stock that may

be included in the regulatory capital (Tier 2) of national banks.

In addition, the FCA added language to the definitions of total

surplus and core surplus to clarify that deductions required in the

computation of an institution's permanent capital ratio must also be

made in the computation of the institution's surplus ratios. Goodwill

and the investment by a Farm Credit bank in the Leasing Corporation

must be deducted from a bank's surplus ratios just as they are deducted

from the bank's permanent capital.

Several System associations inquired regarding the inclusion in

core surplus of a tax-deferred asset representing taxes

[[Page 4434]]

paid on nonqualified allocated equities. The FCA notes that, based on

generally accepted accounting principles (GAAP), in circumstances where

redemption is sufficiently ascertainable, the tax benefits associated

with nonqualified allocations may be recorded as an asset. In the final

rule, this tax-deferred asset is includible in the core surplus of

institutions if the related nonqualified allocated equities are

included in core surplus. The FCA notes that it is presently reviewing

the treatment of this and all other types of tax-deferred assets in the

minimum capital requirements and will address this issue in the next

phase of its review of the capital regulations.

A System association inquired whether a purchase of stock by a

System bank in its affiliated association would have the effect of

reducing an association's ``net investment in the bank,'' thereby

increasing the association's core surplus correspondingly. The FCA

agrees that this is a correct interpretation of the reproposal and

notes that the Agency would treat such an investment as financial

assistance or paid-in capital subject to prior FCA approval under

Sec. 615.5171.

7. Basis for Conclusions and Positions Taken in the Final Capital

Adequacy Provision

The FCA believes that the changes in the final rule are consistent

with its views of the purposes of capital and the need for high quality

capital, as set forth in the supplementary information to the

originally proposed capital amendments. See 60 FR at 38522-27 (July 27,

1995). The FCA incorporates that information herein by reference. At

that time, the Agency explained its position that a mixture of capital

components is necessary to achieve a sound capital structure and that

each institution should have a minimum amount of secure capital,

exclusive of borrower stock, that is not at risk at another System

institution. Compliance with the permanent capital and total surplus

ratios may be achieved with a variety of components--most types of

capital meet the definition of permanent capital, and the total surplus

measurement includes both perpetual and preferred stock, as well as

both unallocated and allocated surplus. The need for a minimum amount

of secure capital is addressed by the core surplus ratio, which

generally excludes capital at risk at other System institutions.

The additions made to the components of core surplus in the final

rule reflect the FCA's recognition that some equities allocated to non-

System entities are close to unallocated surplus as a source of quality

capital. Nonqualified allocated equities with no plan or practice of

retirement are considered highly stable and have low borrower

expectations of distribution. Revolving allocated equities, being

somewhat less stable, are only partially included, and the associations

that may include them are required to maintain a positive level of

local unallocated surplus in order to meet the 3.5-percent requirement.

The FCA believes that the core and total surplus and bank

collateral standards embody the principles set forth in the 1988

international Basle Accord that provide for minimum levels of risk-

based high quality and supplementary capital. Capital standards for

commercial banks and thrifts were adopted by their Federal banking

regulators in 1989 based on Basle Accord recommendations, and

subsequent studies have shown that such standards, which also include a

leverage ratio, are an improvement over the previous flat-rate

standards alone.3 In the FCA's view, the capital requirements in

the final rule in their overall effect are very similar to the

standards applied to the commercial banks and thrifts.

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

\3\ See John P. O'Keefe, Risk-Based Capital Standards for

Commercial Banks: Improved Capital Adequacy Standards? FDIC Bank

Review, Spring/Summer 1993, vol. 6, no. 1, 1-13. More recently,

economists at the Federal Reserve Bank of Boston reviewed the

capital ratios used to trigger regulatory intervention. They

concluded that the current bank risk-based and leverage ratios are

lagging indicators of a bank's financial health and suggested that a

workable solution would be to raise the capital thresholds for

taking prompt corrective action. See Joe Peek and Eric A. Rosengren,

The Use of Capital Ratios to Trigger Intervention in Problem Banks:

Too Little, Too Late, The New England Economic Review, September/

October 1996, 49-58.

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

The FCA believes that the capital provisions in the final rule

establish standards that encourage the building of a sound capital

structure in System institutions, which will improve the likelihood of

an institution's survival during periods of economic stress and thereby

improve the safety and soundness of the System as a whole. The FCA

believes that these regulations provide a meaningful measure of capital

adequacy and are appropriate for all System institutions to which they

apply.

B. Customer Eligibility Provisions

1. General Comments

Generally, FCS institutions and their borrowers endorsed the FCC's

comment letter, which favored the reproposed rule but recommended

certain modifications. One State agency supported the reproposed rule

while another opposed it. All other non-System commenters and one FCS

borrower opposed the reproposed regulations. Many commercial bank

commenters and their trade associations urged the FCA to abandon all

efforts to amend the existing eligibility regulations.

Some commenters suggested that the FCA postpone rulemaking action

on customer regulations until such time that Congress might address

this issue. The FCA has consulted with the Senate and House Agriculture

Committee staff about these customer regulations during the past 6

months. Based on these discussions and comments received during two

public comment periods, the FCA has determined that it is appropriate

to proceed with the final customer regulations.

While many comments focused on specific provisions of the

reproposed regulations, other comments raised public policy issues

about the role of government-sponsored enterprises (GSEs) and the

extent to which they should be allowed to compete with other credit

providers. All comments were categorized and will be addressed

according to topics that follow.

a. Role of the FCS. The role of the FCS, as a GSE, and the extent

to which it should be allowed to compete with other non-GSE credit

providers were issues that were frequently raised by commercial bankers

in opposition to the reproposed regulations. These commenters asserted

that the FCS should provide credit only to certain segments of the

agricultural and rural economy that are not served adequately by other

lenders. These same commenters also state that the FCA should allow the

FCS to expand only into certain rural credit markets that have been

neglected by the private sector.

The FCA finds that these customer regulations enable FCS banks and

associations to exercise their express statutory powers appropriately.

Neither the Act nor its legislative history support claims by

commercial bankers that the FCS is a lender of last resort that may

serve only those rural credit markets that have been abandoned by other

lenders. Rather, the Act requires the FCS to maintain a presence in

rural credit markets at all times, thereby assuring the availability of

adequate credit for agriculture, aquaculture, and other specified

sectors of the rural economy. The FCS fulfills this function by

financing agriculture, farm-related businesses, non-farm rural

homeowners, cooperatives, and rural utilities in both good and bad

economic times. The presence of the System promotes

[[Page 4435]]

competitive behavior among other lenders that serve these markets and

contributes to the preservation of a well functioning capital market

for agriculture and other rural credit needs. The FCA believes that

farmers would not continue to have ready access to reliable and

competitive credit if the FCS ceased to exist.

The comment letters reveal a widespread misunderstanding about the

System's purpose and relationship to the Federal government and to the

public. Contrary to the beliefs of many commenters, the Farm Credit

System is not a taxpayer-funded, government loan program. The Federal

government: (1) Holds no capital stock in FCS institutions; (2)

appoints no members to the boards of directors of any FCS bank or

association; and (3) appropriates no funds to the System. Rather, FCS

banks and associations are cooperatives that are owned and controlled

by their member-borrowers.

In response to claims that commercial bankers face significantly

greater regulatory burdens than the FCS, the FCA observes that its

examination, enforcement, and regulatory powers over the FCS are

comparable to the authorities of other Federal bank regulatory

agencies. Additionally, FCS lenders are subject to regulatory capital

requirements, lending limits, and loan underwriting requirements. FCS

lenders are also generally subject to the same consumer credit laws as

commercial bankers, such as the Truth-In-Lending Act, Real Estate

Settlement Procedures Act, Equal Credit Opportunity Act, and the Home

Mortgage Disclosure Act. The requirements of section 4.19 of the Act to

implement specific programs to assist small, beginning, and young

farmers are not dissimilar from the obligations imposed on commercial

banks under the Community Reinvestment Act. Finally, the Act requires

titles I and II lenders to comply with numerous borrower rights

requirements for agricultural loans, which are compliance obligations

unique to FCS institutions.

Comments focused on Federal guarantees of System debt and the tax

status of FCS institutions also reflected many misconceptions. Certain

liabilities of both FCS banks and commercial banks are insured. The

financial obligations of FCS banks are insured by the Farm Credit

System Insurance Corporation (FCSIC), while the deposit liabilities, up

to $100,000 per depositor, of commercial banks and savings associations

are insured by the Federal Deposit Insurance Corporation (FDIC). The

FCA observes that the FDIC insurance fund is backed by the full faith

and credit of the United States whereas the FCSIC Insurance Fund is

not. Thus, there is no express Federal guarantee of System debt. In

contrast, commercial banks have an explicit Federal guarantee of their

deposit liabilities.

Although many commenters assume that the FCS is tax-exempt, System

institutions that are chartered under sections 2.0, 3.0, 7.0, and 7.8

of the Act (PCAs, BCs, ACBs, and ACAs) are subject to Federal taxation.

Thus, FCS institutions holding 63 percent of total System assets, as of

September 30, 1996, are subject to Federal taxation.

b. Safety and Soundness. Many commercial bank commenters assert

that the new customer regulations will undermine the solvency of the

FCS and expose the taxpayers to risk by encouraging System lenders to

expand rapidly into credit markets in which they lack expertise. The

FCA has found no factual basis for this concern. The FCS has 40 years

of experience in making loans for housing and other non-agricultural

purposes. Strict capital requirements and improved loan underwriting

standards, as well as effective regulatory oversight, will ensure that

System lenders appropriately manage the risks associated with their

loans. The capital provisions of this rule impose strict capital

requirements on all FCS lenders which will prevent unchecked growth in

System loan portfolios. The FCA has proposed new loan underwriting

regulations that will require each System institution to adopt specific

underwriting standards that contain measurable criteria appropriate for

the type of loan and the institution's risk-bearing capacity. In

addition to the strengthened capital requirements contained in this

rule, the FCSIC Insurance Fund (which currently exceeds $1 billion) and

the joint and several liability of all System banks on System

obligations further insulate investors in System obligations.

2. Financing for Bona Fide Farmers and Ranchers

Reproposed Sec. 613.3000 contained new definitions and provisions

that addressed the System's authorities to finance the housing,

domestic, and non-agricultural business needs of bona fide farmers,

ranchers, and aquatic producers and harvesters. It would have

established specific limitations on the amount of credit FCS

institutions could provide for housing and domestic needs and for non-

agricultural business purposes depending on whether the borrower was

actively engaged in agricultural or aquatic production and other

factors.

The reproposed definition of a bona fide farmer, rancher, or

aquatic producer or harvester would have distinguished ``active

farmers'' from those who owned agricultural land but are not engaged in

cultivating it. The FCA received comments about this definition from

the FCC, five commercial bank trade associations, and 342 commercial

banks. All commenters sought modifications to Sec. 613.3000(a)(3).

The FCC asserted that the reproposed rule defined bona fide farmer

and rancher more restrictively than current Sec. 613.3010(a). More

specifically, the commenter claimed that the active/passive concept in

reproposed Sec. 613.3000 would unduly limit the System's ability to

finance all classes of farm owners and operators. The FCC asserted that

the active/passive distinction ignores the current economic realities

of agriculture because it would favor parties who conduct agricultural

operations over those who own land where agricultural operations take

place. The FCC suggested specific revisions to Sec. 613.3000(a)(3) that

would address System concerns.

Many commercial bank commenters and their trade associations urged

the FCA to abandon all efforts to amend the existing regulations. Two

commercial bank trade associations objected to reproposed

Sec. 613.3000(a)(3)(i) because it would not impose a minimal amount or

percentage of income that a farmer must generate from agricultural

production in order to become an eligible FCS borrower. Many commercial

bank commenters expressed concern that this definition would allow

farmers with minimal agricultural production to borrow from the FCS for

non-agricultural purposes. Two commercial bank commenters offered

specific recommendations for revising the definition of a bona fide

farmer so that only farmers who derived a significant amount of their

income from agricultural production would be eligible to borrow from

the FCS.

The extent to which FCS institutions could finance the other credit

needs of bona fide farmers and ranchers generated more comments than

any other provision of the reproposed regulations. Commercial banks and

their trade associations asked the FCA to withdraw its proposal and

retain the existing regulation. These commenters asserted that

reproposed Sec. 613.3000(d) would convert FCS banks and associations

into full-service financial institutions that would primarily extend

non-agricultural credit to a vastly increased number of borrowers.

These

[[Page 4436]]

commenters state that Congress never intended for the FCS to supplant

commercial banks as the principal provider of non-agricultural credit

to farmers. Two commercial bank trade associations asserted that the

reproposed regulation would be incompatible with Congressional intent

unless, at a minimum, it required each borrower to have an outstanding

agricultural or aquatic loan with a System lender.

In the event that the FCA chose to adopt the reproposed regulation,

some commercial bank commenters sought revisions to Sec. 613.3000(d)

that would address their concerns about the System's ability to finance

the other credit needs of farmers. Several commenters suggested that

the FCA impose specific restrictions of the System's authority to

finance housing for both active and passive farmers. Many commercial

bank commenters suggested that only active farmers should be allowed to

borrow from the FCS for their domestic needs. One commercial bank

commenter stated that System institutions should be permitted to

finance only basic necessities for families that live and work on

farms, and suggested that the final regulation should specifically

forbid farmers from borrowing from the FCS for luxuries that are

unrelated to their agricultural activities.

System comments focused on the provisions of the reproposed

regulation that authorize FCS banks and associations to finance the

non-agricultural business needs of eligible farmers. The FCC asserted

the proposed limitation on non-agricultural business financing

unreasonably restricts farmer access to a reliable source of credit and

the ability of the System to meet its mission. This commenter stated

that the reproposed regulation would ignore the importance of off-farm

employment and off-farm income to the viability and continuity of most

farming operations. In the FCC's view, the limitation also conflicted

with the plain language of the Act, which places no limitation on the

financing of a borrower's other credit needs. The FCC suggested that

the final regulation authorize System institutions to finance the non-

agricultural business needs of eligible farmers to the full extent of

creditworthiness.

In view of the widespread negative response to the proposed change

in definitions and the accompanying limitations on financing other

credit needs, the FCA has decided not to proceed with its proposed

changes to the definitions or to the rules governing System financing

of farmers' other credit needs. The FCA has decided to retain the

definition of bona fide farmer or rancher in existing Sec. 613.3010(a),

redesignated as Sec. 613.3000(a)(1) and the scope of financing

provisions of Sec. 613.3005(a), redesignated as Sec. 613.3005.

The final regulation will continue to define a ``bona fide farmer

or rancher'' as ``a person owning agricultural land, or engaged in the

production of agricultural products, including aquatic products under

controlled conditions.'' The FCA also retains the existing definition

of ``producer or harvester of aquatic products'' in Sec. 613.3010(d),

but it has redesignated this provision as final Sec. 613.3000(a)(4).

Existing Sec. 613.3005(a) will continue to govern the scope of

financing for both agricultural and non-agricultural purposes. The FCA

recognizes that the proper role of the System in providing credit to

farmers is an important policy issue on which there are different

views. The Agency will continue to consider how this regulation can

address both the appropriate scope of FCS lending and the significant

changes in the agricultural environment, and this issue may be the

subject of future rulemakings.

The FCA has deleted Sec. 613.3005 (b) and (c) and redesignated

Sec. 613.3005(a) as final Sec. 613.3005. Paragraphs (b) and (c) of

Sec. 613.3005 pertain to banks for cooperatives and loan policy

development, respectively, and are not necessary in the final

regulation. As a conforming amendment, the FCA adopts final

Sec. 613.3000(b), which clarifies (in accordance with sections 1.11 and

2.4 of the Act) that FCBs, ACBs, and direct lender associations are

authorized to finance the agricultural, aquatic and other credit needs

of bona fide farmers, ranchers and aquatic producers or harvesters.

Final Sec. 613.3000(b) replaces reproposed Sec. 613.3000(b), (c) and

(d), and it connects the definition and eligibility provision in final

Sec. 613.3000 to the scope of financing provisions in Sec. 613.3005.

Because commercial bank commenters have indicated that existing

Sec. 613.3005 addresses their concerns about System financing of the

other credit needs of farmers, the FCA finds it unnecessary to address

alternative solutions that these commenters offered.

Reproposed Sec. 613.3000(a)(1) contained a definition of

``agricultural assets'' that would have determined the amount of non-

agricultural credit that bona fide farmers, ranchers, and aquatic

producers or harvesters could obtain from FCS banks and associations.

Under final Sec. 613.3005, a borrower's access to the FCS for non-

agricultural credit is not dependent on the ownership of agricultural

assets. As a result, a regulatory definition of ``agricultural assets''

is no longer needed, and therefore, it has been omitted from the final

regulation. Under the circumstances, the FCA need not address specific

suggestions by the commenters to refine reproposed Sec. 613.3000(a)(1).

The FCA has also decided not to incorporate the definition of

``agricultural land'' in reproposed Sec. 613.3000(a)(2) into the final

regulation. Rather, Sec. 619.9025 will continue to define

``agricultural land.'' This approach is consistent with the FCA's

decision to retain most of the definitions in the existing eligibility

regulations.

3. Eligibility of Non-Resident Foreign Nationals

Some commercial banks and their trade associations repeated their

earlier claims that the Act does not authorize non-resident foreign

nationals to borrow from the FCS. The preamble to the reproposed

regulation explained that the Act does not deny foreign nationals

access to the FCS. In fact, FCA regulations have permitted some foreign

nationals to borrow from the FCS for the past 20 years. See 61 FR 42103

(Aug. 13, 1996).

For this reason, final and redesignated Sec. 613.3000(a)(3)

authorizes FCS institutions to extend credit to non-resident foreign

nationals who have been lawfully admitted to the United States on a

visa that authorizes them to own property or operate a business. As a

result, individuals who are non-resident foreign nationals would be

permitted to obtain FCS financing for their agricultural or aquatic

operations and other needs in the United States on the same basis as

citizens and permanent residents.

4. Eligibility of Corporate Entities

Three commercial bank trade associations opposed Sec. 613.3000

(a)(5) and (d)(4), which establishes eligibility criteria and loan

purpose restrictions for legal entities that borrow from FCS banks and

associations. These commenters believe that the FCS should be

authorized to finance only the on-farm production activities of legal

entities and, even then, only when the legal entities are wholly owned

by active farmers.

The FCA notes that these recommendations are more restrictive than

the requirements in existing Sec. 613.3020(b), which neither required

farmers to own all of the voting stock or equity in an eligible legal

entity, nor precluded System lenders from financing the non-

agricultural activities of such borrowers. The FCA had

[[Page 4437]]

proposed to repeal the restrictions on eligibility in existing

Sec. 613.3020(b) because they were not required by the Act. However, to

address commercial bank concerns, the reproposal placed limitations on

the scope of financing for other credit needs for legal entities

related to ownership and involvement in agriculture. While the final

rule does not include the specific restrictions on eligibility of legal

entities in existing Sec. 613.3020(b), it retains existing

Sec. 613.3005(a) (redesignated as Sec. 613.3005), which defines the

scope of lending according to the degree of involvement in agriculture.

The FCA adopts reproposed Sec. 613.3000(a)(5) as final but

redesignates it as Sec. 613.3000(a)(2). As a result, all legal

entities, including those organized under Native American tribal law,

will now be eligible for FCS financing on the same basis as other

farmers.

5. Financing for Processing and Marketing Operations

The FCA received comments about its reproposed processing and

marketing regulation, Sec. 613.3010, from the ABA, IBAA, and CoBank,

ACB. The two commercial bank trade associations opposed provisions in

the regulation that govern the level of farmer ownership of a

processing and marketing unit and the requirements regarding the

farmer's throughput contribution. CoBank expressed concern about intra-

System competition for processing and marketing loans.

a. Farmer Control. The ABA and IBAA asserted that a separate

processing and marketing unit is ineligible for financing under

sections 1.11(a) and 2.4(a) of the Act unless bona fide farmers,

ranchers, or aquatic producers and harvesters own 100 percent of its

equity. The preamble to reproposed Sec. 613.3010(a)(1) responded to

this argument. See 61 FR 42106 (Aug. 13, 1996). As previously noted in

that preamble, a passage in the legislative history indicates that

Congress expressly contemplated joint processing and marketing ventures

between agricultural producers and investors so long as ineligible

parties do not ``exercise substantial control of the facility or

activity financed by the loan.'' 4 Because Sec. 613.3010(a)(1)

requires agricultural or aquatic producers to own more than 50 percent

of the voting stock or equity of an eligible processing and marketing

operation, investors or employees who are not farmers cannot exercise

``substantial control'' over the borrower. The FCA disagrees with the

opinion that any ownership by parties who are not agricultural or

aquatic producers renders a processing and marketing operation

ineligible for FCS financing under sections 1.11(a) and 2.4(a) of the

Act.

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

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

Rec. 16560 (Dec. 13, 1980).

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

The ABA also asserted that the regulation violates the Act because

it allows a passive farm owner to obtain a processing and marketing

loan from a System bank or association that operates under title I or

II of the Act. A processing and marketing operation qualifies for FCS

financing under the Act and Sec. 613.3010 only if it is ``directly

related'' to the borrower's agricultural or aquatic operations. Passive

owners of agricultural land do not conduct a farming or ranching

operation, and in such situations, they would not satisfy the

eligibility criteria for a processing and marketing loan. Therefore,

the FCA adopts Sec. 613.3010(a)(1) as a final regulation without

revision.

b. Throughput Requirements. Two commercial bank trade associations

addressed the throughput requirements of Sec. 613.3010(a)(2). The ABA

asserted that allowing the FCS to finance a processing and marketing

operation where the borrower provides only a minimal portion of the

throughput is not authorized by the Act. The IBAA comment acknowledged

that the Act permits lending to borrowers who provide minimal

throughput but believes the FCA should encourage loans to applicants

whose throughput exceeds 20 percent. Both commenters asked the FCA to

retain the detailed paperwork requirements on FCS banks and

associations in former Sec. 613.3045.

The preambles to the proposed and reproposed regulations responded

to these arguments. See 60 FR 47107 (Sept. 11, 1995); 61 FR 42107 (Aug.

13, 1996). The FCA concludes that the new regulation implements the Act

by requiring that the processing and marketing operations be ``directly

related'' to the borrower's agricultural or aquatic activities and

requiring the borrower or its owner to contribute ``some portion'' of

the throughput. Compliance with the eligibility requirements for

processing and marketing loans is adequately assured through the

internal policies of FCS institutions and the FCA's examination and

enforcement powers. Furthermore, it should be noted that the statute

limits loans where less than 20 percent of throughput is provided by

the borrower to 15 percent of outstanding loans.

c. Intra-System Competition. CoBank, ACB opposed the FCA's decision

to rescind its original proposal to prohibit titles I and II lenders

from financing borrowers who are eligible for credit under title III of

the Act. CoBank's most recent comments about intra-System competition

focused exclusively on processing and marketing loans. The commenter

cited passages in the legislative history that indicate that titles I

and II lenders were not granted new authorities to finance the

processing and marketing operations of previously ineligible borrowers.

The commenter also relied on other passages in the legislative history

that indicate that Congress did not contemplate full-scale competition

for processing and marketing loans between FCS institutions that

operate under different titles of the Act.

The Act sets forth different eligibility criteria for processing

and marketing operators that are financed by FCBs and direct lender

associations from those financed by title III banks. Final

Sec. 613.3010 implements these statutory provisions, and therefore, it

prevents unrestrained intra-System competition for processing and

marketing loans. FCBs and their affiliated associations currently

finance some of those few processing and marketing operators that are

simultaneously able to satisfy the eligibility criteria in title I or

II and title III of the Act. The FCA is disinclined to adopt regulatory

provisions that would restrict FCBs' and associations' exercise of

their statutory authorities.

6. Financing Farm-Related Businesses

Four commercial bank trade associations and 15 commercial banks

submitted comments to the FCA about reproposed Sec. 613.3020, which

authorizes FCS banks and associations that operate under titles I and

II of the Act to finance farm-related businesses. Although one

commenter acknowledged that the FCA had revised Sec. 613.3020 to

address many of the concerns that commercial bankers expressed about

the original proposal, several commenters continued to raise objections

to other provisions of the reproposed regulations regarding farm-

related businesses.

a. On-Farm Requirement. One commercial bank trade association

opposed the repeal of Sec. 619.9120, which requires an eligible farm-

related business to furnish services on the farms and ranches of its

customers. This commenter believes that this ``on farm'' requirement is

mandated by sections 1.11(c)(1) and 2.4(a)(3) of the Act and their

legislative history. The FCA has concluded that neither the literal

language of the statute nor its legislative history require an eligible

farm-related business to actually perform services on the customer's

property. See 44 FR 69631 (Dec. 4, 1979); 60 FR 47108 (Sept.

[[Page 4438]]

11, 1995); 61 FR 42107 (Aug. 13, 1996). The commenter cited a passage

in the legislative history that indicates that off-farm storage and

processing facilities qualify as eligible farm-related businesses.

Accordingly, the FCA retains language of the reproposed regulation. See

61 FR 42119 (Aug. 13, 1996).

b. Custom-Type Services. Commercial bank commenters continued to

oppose the FCA's decision to repeal existing regulatory provisions that

require eligible borrowers to furnish ``custom-type'' services to

farmers and ranchers. Custom-type services are tasks that farmers and

ranchers can perform for themselves, but instead hire outside

contractors to perform. Although sections 1.11(c)(1) and 2.4(a)(3) of

the Act do not mention custom-type services, some commenters insist

that the statute requires eligible farm-related business borrowers to

perform only such services. Another commenter disputed statements in

the earlier preambles that the Act authorizes System lenders to finance

businesses that offer farmers and ranchers technologically advanced

services, such as the aerial or computer mapping of crop and soil

conditions.

Sections 1.11(c)(1) and 2.4(a)(3) of the Act require that eligible

borrowers furnish farm-related services that are ``directly related''

to the on-farm operating needs of farmers and ranchers. Examples of

permissible farm-related services mentioned in the legislative history

are clearly illustrative and do not exclude other services, including

technologically advanced services that directly assist farmers and

ranchers in agricultural production. Indeed, a commercial bank trade

association noted a passage in the legislative history that aerial crop

dusting would be a permissible service, yet this presumably is not an

activity that most farmers typically perform themselves.

Two commercial bank trade associations suggested that the FCA

incorporate a specific list of eligible farm-related businesses into

the final regulation. The suggested approach could prevent FCS banks

and associations from financing farm-related businesses that are

eligible to borrow under sections 1.11(c)(1) and 2.4(a)(3) of the Act.

Although the previous preambles contained examples of permissible

services, they were illustrative only, and not intended as a complete

list of permissible services. Even if it were possible to compile a

comprehensive list today, dynamic advances in the farm services

industry would quickly render it obsolete.

For this reason, and those previously provided, the FCA adopts as

final the repeal of the requirement that eligible farm-related

businesses furnish only ``custom-type'' services to farmers and

ranchers. See 60 FR 47108 (Sept. 11, 1995); 61 FR 42107 (Aug. 13,

1996).

c. Whole-Firm Financing. Three commercial bank trade associations

objected to the regulatory provisions that authorize: (1) ``Whole

firm'' financing to a business that derives more than 50 percent of its

income from furnishing farm-related services; and (2) financing only

for the farm-related services portion of a business that derives less

than 50 percent of its income from furnishing such services. Two

commenters claim that the Act authorizes FCS lenders to extend credit

only to parties who derive a majority of their income from farm-related

services. Three commenters also claimed that Sec. 613.3020 is

unenforceable because money is fungible, and businesses generally do

not keep separate sets of books for services and sales of goods. Under

these circumstances, the commenters argue that the FCA will be unable

to monitor the borrower's use of FCS funds to ensure that only farm-

related activities are financed.

The FCA concludes that final Sec. 613.3020 complies with the Act

because it restricts the FCS to financing entities that are primarily

devoted to farm-related service activities or if the borrower is not

primarily devoted to farm-related services, financing is restricted to

a level that such activities are accomplished in relation to the whole

business. The FCA has sufficient examination and enforcement powers to

ensure that FCS institutions comply with these regulations. As is the

case with all loans, routine examination of loan files will determine

whether each FCS institution has documented the eligibility of

borrowers who obtain financing for a farm-related business.

7. Financing Non-Farm Rural Homes

The FCC, two FCS associations, five commercial bank trade

associations, and two commercial banks commented about various aspects

of reproposed Sec. 613.3030, which governs non-farm rural home loans.

a. Owner-Occupied Dwellings. Three commercial bank trade

associations and one commercial bank opposed the proposed elimination

of the existing regulatory requirement that the borrower occupy the

dwelling. According to these commenters, the Act does not authorize FCS

institutions to finance non-farm rural homes that are tenant-occupied.

The FCA observes that neither sections 1.9(3), 1.11(b), and 2.4(b)

of the Act nor their legislative history require the borrower to occupy

a house which is financed by the FCS. As the FCA observed in the

preamble to the reproposed regulation, the repeal of the owner-

occupancy requirement advances the rationale of the System's rural home

finance authority, which is to ensure the availability of affordable

housing for rural residents. See 61 FR 42109 (Aug. 13, 1996). The

statutory requirement that the FCS finance housing for rural residents

is satisfied because the regulation requires either the owner or a

tenant to occupy the rural home as a principal residence.

b. Definition of Rural Area. Under reproposed Sec. 613.3030(a)(3),

a ``rural area'' is defined as ``open country within a State or the

Commonwealth of Puerto Rico, which may include a town or village that

has a population of not more than 2,500 persons.'' The FCA received

comments about this definition from the FCC and the IBAA. For the

reasons explained below, the FCA adopts the language of

Sec. 613.3030(a)(3) as reproposed.

The FCA proposed the repeal of a provision in existing

Sec. 613.3040(a)(3) that authorized FCS lenders to make home loans in

open agricultural areas within the political boundaries of ``towns''

where the population exceeds 2,500 inhabitants, subject to Agency prior

approval. The FCC asked the FCA to reinstate a provision in the final

rule that would allow FCS lenders to make loans in open, undeveloped

countryside which is devoted to agricultural production even if it has

been annexed by a ``town'' with more than 2,500 inhabitants. In the

commenter's opinion, the fact that this authority has been rarely used

in the past does not justify its repeal. If this provision is omitted

from the final regulation the FCC asked the FCA to ``grandfather'' all

exemptions that have already been granted under Sec. 613.3040(a)(3).

The FCA declines to retain the regulatory provision that permits

FCS banks and associations to finance non-farm rural housing in

``towns'' where the population exceeds 2,500 inhabitants. As the FCA

explained in the preamble to the reproposed regulation, the existing

provision is confusing and this exception has rarely been used. See 61

FR 42110 (Aug. 13, 1996). All exemptions that the FCA granted under

former Sec. 613.3040(c) will continue to be areas in which rural home

loans may be made as long as they meet the conditions upon which they

were approved.

[[Page 4439]]

The IBAA requested that the FCA amend Sec. 613.3030(a)(3) so it

authorizes FCS institutions to make non-farm rural housing loans only

in areas where agricultural enterprises predominate. The commenter

believes that this restriction is necessary so FCS institutions do not

finance housing in metropolitan areas. The commenter's concern is

already addressed, however, because Sec. 613.3030(a)(3) defines a rural

area as ``open country'' and limits System rural home lending to

communities where the population does not exceed 2,500 inhabitants.

These restrictions effectively prevent FCS lenders from financing

housing in urban and suburban areas.

c. Moderately Priced Housing. Reproposed Sec. 613.3030(a)(4)

established a two-tier definition of ``moderately priced housing.''

Under reproposed Sec. 613.3030(a)(4)(i), a rural home is moderately

priced if it satisfies the criteria in section 8.0 of the Act, thereby

qualifying as collateral for securities that are guaranteed by the

Federal Agricultural Mortgage Corporation (Farmer Mac). In the

alternative, Sec. 613.3030(a)(4)(ii) would allow FCS lenders to finance

rural homes that are below the 75th percentile of housing values for

the rural area where they are 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.

The FCA received no comments about the Farmer Mac standard in

Sec. 613.3030(a)(4)(i), but the FCC, two FCS associations, and two

commercial bank trade associations sought revisions to

Sec. 613.3030(a)(4)(ii).

The FCC petitioned the FCA to omit the 75th percentile ceiling from

the final regulation and rely, instead, on the overriding requirement

that the FCS finance only moderately priced housing. The commenter

expressed concern that the regulatory ceiling may unnecessarily curtail

the System's ability to finance moderately priced rural housing. As an

alternative, the commenter suggested that the final regulation

establish the 75th percentile as a general guideline, while maintaining

the overriding standard that financing provided would be on moderately

priced homes.

In response to the comments, the final regulation provides that

non-farm rural housing is automatically deemed to be moderately priced

if it meets either the Farmer Mac criteria, or it falls below the 75th

percentile of housing values for the area where it is located, as

determined by a credible, independent, and recognized national or

regional source. In addition, FCS institutions will be permitted to

finance rural housing that exceeds the 75th percentile of housing

values in a rural area only if they determine that the housing in

question is moderately priced for the rural community where it is

located, using data from a credible, independent, and recognized

national or regional source. The FCA expects System institutions to

fully document information that justifies a decision to finance homes

as moderately priced that exceed the 75th percentile for housing values

in the locale where such loans are made. This approach will give System

institutions the flexibility to serve non-farm rural homeowners, while

implementing the statutory requirement that the FCS finance only

moderately priced homes.

Two FCS associations suggested that Federal Home Loan Mortgage

Corporation (Freddie Mac) or Federal National Mortgage Association

(Fannie Mae) limits determine the moderately priced standard for FCS

rural home lending. The FCA previously declined this recommendation.

See 61 FR 42111 (Aug. 13, 1996). Freddie Mac and Fannie Mae maximum

loan amounts may not be generally representative 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 loan amounts are not universally accepted measures of

moderately priced housing. Instead, they are based on loan amounts.

Two commercial bank trade associations do not believe that

Sec. 613.3030(a)(4)(ii) should allow FCS institutions to determine

moderately priced housing values in their territories. These commenters

expressed concern that the FCA will not be able to take corrective

action against System institutions that have closed loans on expensive

homes prior to examination. As an alternative, these commenters asked

the FCA to adopt a uniform national standard so that FCS rural home

lending is specifically targeted to low and middle income rural

residents. The commenters did not explain whether they wanted the FCA

to prescribe a single price that would apply nationwide or a nationally

recognized standard that takes regional variations of prices into

account.

The FCA has incorporated Farmer Mac's national standard for

moderately priced rural housing into the final regulation. As long as

FCS institutions adhere to the statutory requirement that they finance

only moderately priced rural homes, the FCA believes that they should

be allowed to select other measures of moderately priced housing that

are supported by data from a credible, independent, and recognized

national or regional source. The FCA has not been able to identify a

regionally focused standard for valuing moderately priced homes that is

not influenced by housing values in metropolitan areas. Although the

FCA originally proposed that FCS institutions use the most recent

edition of the Census of Housing, General Housing Characteristics,

published by the United States Bureau of Census to determine moderately

priced housing in their territories, (See 60 FR 47118 (Sept. 11,

1995)), the FCA subsequently withdrew this proposal in large measure

because commercial banks asserted that Census data inflated housing

values in rural areas that are near metropolitan areas. See 61 FR 42110

(Aug. 13, 1996). Commercial bank commenters have not identified any

credible or reliable national standard that reflects moderately priced

rural home values.

The FCA believes that Sec. 613.3030(a)(4)(ii) will effectively

restrain FCS lenders from financing rural homes that are not moderately

priced. The regulation requires each FCS lender to demonstrate that it

used a credible, independent, and recognized source to ascertain

moderately priced housing values in the specific locale where it makes

rural home loans. Any rural home loan for a home that is not moderately

priced is an ineligible loan. The FCA's enforcement powers are

sufficient to deter such violations. For these reasons, the FCA adopts

Sec. 613.3030(a)(4) as a final regulation without revision.

d. Loan Purposes. The FCA's original proposal would have imposed no

restrictions on the use of the proceeds from a loan that was secured by

the borrower's rural home. See 60 FR 47110 (Sept. 11, 1995). The FCA

responded to commercial bank concerns by rescinding this proposal and

restoring the loan purpose restrictions in the existing regulation. See

61 FR 42111 (Aug. 13, 1996). As a result, reproposed Sec. 613.3030(c)

states that FCS institutions may make loans to rural homeowners for the

purpose of buying, building, remodeling, improving, repairing rural

homes, and refinancing the existing indebtedness thereon. The preamble

to the reproposed regulation explained that System lenders are not

precluded from offering revolving credit lines to eligible rural home

borrowers so long as such loans are limited to purposes specified in

Sec. 613.3030(c). See 61 FR 42111 (Aug. 13, 1996).

The FCC and three FCS associations opposed the FCA's decision to

reinstate the purpose restrictions into the regulation because the

System will not be allowed to offer a full range of loan

[[Page 4440]]

products to non-farm rural homeowners. System commenters opined that

the FCA's original proposal is compatible with both the Act and safe

and sound lending practices. For these reasons, System commenters

petitioned the FCA to omit the purpose restrictions from the final

regulation. As an alternative, these commenters suggested that the

final regulation require that the loan must be predominately for the

purposes specified in Sec. 613.3030(c).

The final regulation retains the purpose restrictions in

Sec. 613.3030(c) without revision. The FCA has decided at this time

that rural homeowners qualifying under Sec. 613.3030 should be required

to use the proceeds of a System loan for the dwelling only.

The ABA and the IBAA challenged the preamble statement about the

System's authority to offer revolving credit lines to non-farm rural

homeowners if the loan proceeds are used for the purposes specified in

Sec. 613.3030(c). These commenters believe that the FCA is granting

System lenders new authorities to expand into the home equity mortgage

market, which they claim is adequately served by other lenders. Because

non-farm rural home loans cannot exceed 15 percent of each FCS

institution's loan portfolio, one commenter suggested that the FCA

should require System banks and associations to finance only the

purchase and construction of rural homes. Both commenters inquired how

the FCA will ensure that loan proceeds are not diverted for purposes

that are not authorized by the regulation.

Contrary to the commenters' beliefs, neither Sec. 613.3030(c) nor

its preamble confer new powers on FCS banks and associations. Instead,

they restate the System's existing rural home lending authorities. The

Act and other FCA regulations do not restrict the types of loan

products that System institutions may offer their customers for

permissible loan purposes. For this reason, both the existing and new

regulations allow non-farm rural homeowners to obtain revolving credit

lines from FCS banks and associations so long as the loan proceeds are

used for specified housing purposes. As before, FCS institutions will

still be required to maintain policies, procedures, and sufficient loan

controls that prevent non-farm rural home borrowers from using loan

proceeds for purposes that are not authorized by the regulation. The

FCA will continue to use its examination and enforcement powers to

ensure that FCS institutions comply with Sec. 613.3030(c).

Neither the Act nor its legislative history support commercial bank

claims that the FCS cannot offer home repair and improvement loans to

rural residents who are not farmers unless such credit is unavailable

elsewhere. Several passages of the legislative history confirm that

Congress specifically contemplated that the FCS would finance the

repair, improvement, and remodeling of non-farm rural homes.5 The

legislative history also reveals that Congress specifically considered

and rejected proposals that would have required credit to be

unavailable from other mortgage lenders before rural residents who were

not farmers, ranchers, or aquatic producers and harvesters could obtain

FCS financing for their housing needs.6

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

\5\ See 117 Cong. Rec. S12496 (Jul. 29, 1971); 117 Cong. Rec.

S19970 (Dec. 1, 1971).

\6\ H.R. Rep. 92-593, 92nd Cong., 1st. Sess., (Oct. 23, 1971),

p.12.

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

8. Financing Domestic and International Activities by Title III Lenders

CoBank, the ABA, and IBAA commented on Secs. 613.3100 and 613.3200,

which govern domestic and international lending by title III banks.

While CoBank acknowledged that the FCA had addressed its concerns about

the original proposal, and it sought no further changes to these

regulations, the two bank trade associations continued to oppose

Sec. 613.3100(a)(5) because it would allow a BC or ACB to finance

cooperatives that provide business and financially related services to

their members. These two trade associations repeated their claim that

Congress intended for title III banks to finance only cooperatives that

aid production agriculture. The FCA responded to this opinion in the

preamble to the reproposed regulation, which documented that

Sec. 613.3100(a)(5) is supported by both the plain language of section

3.8(a) of the Act and its legislative history. See 61 FR 42112 (Aug.

13, 1996).

However, the IBAA's most recent comment letter relies on a

statement that a Senator made in 1971 to allege that the FCA

misconstrued the statute. The Senator stated that the Act does not

allow title III banks to finance cooperatives unless a majority of its

members ``are in fact engaged in agricultural or aquatic pursuits as

their major function.'' 7

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

\7\ 117 Cong. Rec. S12498 (July 29, 1971).

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

The Senator's comments address eligibility, not scope of financing,

for cooperatives that borrow from title III banks. Accordingly, the

Senator's statement does not support the claim that title III banks

lack authority to finance eligible service cooperatives that provide

business and financially related services to farmers, ranchers, aquatic

producers and harvesters, and their cooperatives.

Both the Act and its legislative history reveal that Congress

specifically contemplated that title III banks would finance

cooperatives that provide electricity, telephone service, and insurance

services to farmers. Furthermore, in 1980 and 1996, Congress relaxed

the farmer-membership requirements for service cooperatives. The FCA

adopts Secs. 613.3100 and 613.3200 as final regulations without

revision.

9. Participating in Similar Entity Loans

Reproposed Sec. 613.3300 implements the recently added authority

for FCS banks and associations to participate in loans that non-System

lenders make to similar entities, i.e. ineligible persons whose

operations are functionally similar to those of eligible borrowers. Two

commercial bank trade associations opposed this regulation because they

believe that the new customer regulations confer eligibility on parties

that Congress regards as similar entities. As a result, these

commenters claim that the new similar entity regulation will permit FCS

institutions to participate in non-agricultural loans. One of these

commenters requested that the FCA identify parties who will qualify as

similar parties under Sec. 613.3300.

The FCA has already responded to these concerns in the preambles to

both the proposed and reproposed regulations. The FCA again reaffirms

that Sec. 613.3300 is within the parameters of the Act, and it closely

tracks the language of the statute. Furthermore, Sec. 613.3300(b)

expressly prohibits FCS institutions from participating in non-

agricultural loans to similar entities, and the FCA previously denied

System requests to delete this purpose restriction from the regulation.

See 61 FR 42116 (Aug. 13, 1996). Finally, the preamble to the proposed

regulation identified four parties who qualify as similar entities for

FCS banks and associations that operate under titles I and II of the

Act. See 60 FR 47115 (Sept. 11, 1995). The FCA declines to incorporate

a list of similar entities into the regulation for the reasons

explained in the preamble to the reproposed regulation. See 61 FR 42115

(Aug. 13, 1996). The commenters have raised no other issues about

similar entities, and the FCA now adopts Sec. 613.3300 as a final

regulation without further amendment.

[[Page 4441]]

10. Other Proposed Amendments

The FCA received no comments about the proposed amendments to parts

614, 618, 619, and 626. These regulations are now adopted as final

regulations without revision, except for amendments to conform

regulation citations in subpart A of part 614 and Sec. 619.9025 in part

619. The conforming changes to subpart A of part 614 will be addressed

within FCA's final rule on loan underwriting and Sec. 619.9025 is

retained without revision.

IV. Regulatory Impact and FCA Regulatory Philosophy

These final regulations are consistent with the FCA Board's Policy

Statement on Regulatory Philosophy and achieve the Board's objective of

creating an environment that promotes the confidence of borrowers/

shareholders, investors and the public in the System's financial

strength and future viability. See 60 FR 26034 (May 16, 1995). The

objective of the final revisions to the capital adequacy regulations is

to establish standards that encourage the building of a sound capital

structure by System institutions. The building of a sound capital

structure at each institution would improve the likelihood of an

institution's survival during periods of economic stress and thereby

improve the safety and soundness of the System as a whole. The FCA

believes that these final regulations provide a meaningful measurement

of capital adequacy and would be appropriate for all System

institutions to which they apply.

The capital adequacy provisions of this rule would apply to all

System banks, associations, and the Leasing Corporation. During the

last 5 years, most of these institutions have been steadily increasing

both types of surplus identified by the reproposed regulations, and the

FCA estimates that most, if not all, of the institutions would achieve

the minimum standards in less than 7 years if these trends continue.

The final amendments to the customer eligibility regulations would

remove some of the existing restrictions that are not required by the

Act or necessary to implement it.

List of Subjects

12 CFR Part 613

Agriculture, Banks, Banking, Credit, Rural areas.

12 CFR Part 614

Agriculture, Banks, Banking, Flood insurance, Foreign trade,

Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,

Investments, Rural areas.

12 CFR Part 618

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

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

12 CFR Part 619

Agriculture, Banks, Banking, Rural areas.

12 CFR Part 620

Accounting, Agriculture, Banks, Banking, Reporting and

recordkeeping requirements, Rural areas.

12 CFR Part 626

Advertising, Aged, Agriculture, Banks, Banking, Civil rights,

Credit, Fair housing, Marital status discrimination, Sex

discrimination, Signs and symbols.

For the reasons stated in the preamble, parts 613, 614, 615, 618,

619, 620, and 626 of chapter VI, title 12 of the Code of Federal

Regulations are amended as follows:

PART 613--ELIGIBILITY AND SCOPE OF FINANCING

1. The authority citation for part 613 is revised to read as

follows:

Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1,

3.7, 3.8, 3.22, 4.18A, 4.25, 4.26, 4.27, 5.9, 5.17 of the Farm

Credit Act (12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075,

2093, 2122, 2128, 2129, 2143, 2206a, 2211, 2212, 2213, 2243, 2252).

2. Subpart D (Secs. 613.3110 and 613.3120) is removed.

Subpart E--Nondiscrimination in Lending

Secs. 613.3145, 613.3150, 613.3151, 613,3152, 613.3160, 613.3170,

613.3175 (Subpart E) [Redesignated as Part 626]

3. Subpart E of part 613, consisting of Secs. 613.3145, 613.3150,

613.3151, 613.3152, 613.3160, 613.3170, and 613.3175 is redesignated as

new part 626, consisting of Secs. 626.6000, 626.6005, 626.6010,

626.6015, 626.6020, 626.6025, and 626.6030 respectively.

4. Subparts A, B, and C of part 613 are revised to read as follows:

Subpart A--Financing Under Titles I and II of the Farm Credit Act

Sec.

613.3000 Financing for farmers, ranchers, and aquatic producers or

harvesters.

613.3005 Lending objective.

613.3010 Financing for processing or marketing operations.

613.3020 Financing for farm-related service businesses.

613.3030 Rural home financing.

Subpart B--Financing for Banks Operating Under Title III of the Farm

Credit Act

613.3100 Domestic lending.

613.3200 International lending.

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and 4.18A

of the Act

613.3300 Participations and other interests in loans to similar

entities.

Subpart A--Financing Under Titles I and II of the Farm Credit Act

Sec. 613.3000 Financing for farmers, ranchers, and aquatic producers

or harvesters.

(a) Definitions. For purposes of this subpart, the following

definitions apply:

(1) Bona fide farmer or rancher means a person owning agricultural

land or engaged in the production of agricultural products, including

aquatic products under controlled conditions.

(2) Legal entity means any partnership, corporation, estate, trust,

or other legal entity that is established pursuant to the laws of the

United States, any State thereof, the Commonwealth of Puerto Rico, the

District of Columbia, or any tribal authority and is legally authorized

to conduct a business.

(3) Person means an individual who is a citizen of the United

States or a foreign national who has been lawfully admitted into the

United States either for permanent residency pursuant to 8 U.S.C.

1101(a)(20) or on a visa pursuant to a provision in 8 U.S.C.

1101(a)(15) that authorizes such individual to own property or operate

or manage a business or a legal entity.

(4) Producer or harvester of aquatic products means a person

engaged in producing or harvesting aquatic products for economic gain

in open waters under uncontrolled conditions.

(b) Eligible borrower. Farm Credit institutions that operate under

titles I or II of the Act may provide financing to a bona fide farmer

or rancher, or producer or harvester of aquatic products for any

agricultural or aquatic purpose and for other credit needs.

Sec. 613.3005 Lending objective.

It is the objective of each bank and association, except for banks

for cooperatives, to provide full credit, to the extent of

creditworthiness, to the full-time bona fide farmer (one whose primary

business and vocation is farming, ranching, or producing or harvesting

aquatic products); and conservative credit to less than full-time

farmers for agricultural enterprises, and more restricted credit for

other credit

[[Page 4442]]

requirements as needed to ensure a sound credit package or to

accommodate a borrower's needs as long as the total credit results in

being primarily an agricultural loan. However, the part-time farmer who

needs to seek off-farm employment to supplement farm income or who

desires to supplement off-farm income by living in a rural area and is

carrying on a valid agricultural operation, shall have availability of

credit for mortgages, other agricultural purposes, and family needs in

the preferred position along with full-time farmers. Loans to farmers

shall be on an increasingly conservative basis as the emphasis moves

away from the full-time bona fide farmer to the point where

agricultural needs only will be financed for the applicant whose

business is essentially other than farming. Credit shall not be

extended where investment in agricultural assets for speculative

appreciation is a primary factor.

Sec. 613.3010 Financing for processing or marketing operations.

(a) Eligible borrowers. A borrower is eligible for financing for a

processing or marketing operation under titles I and II of the Act,

only if the borrower meets the following requirements:

(1) The borrower is either a bona fide farmer, rancher, or producer

or harvester of aquatic products, or is a legal entity in which

eligible borrowers under Sec. 613.3000(b) own more than 50 percent of

the voting stock or equity; and

(2) The borrower or an owner of the borrowing legal entity

regularly produces some portion of the throughput used in the

processing or marketing operation.

(b) Portfolio restrictions for certain processing and marketing

loans. Processing or marketing loans to eligible borrowers who

regularly supply less than 20 percent of the throughput are subject to

the following restrictions:

(1) Bank limitation. The aggregate of such processing and marketing

loans made by a Farm Credit bank shall not exceed 15 percent of all its

outstanding retail loans at the end of the preceding fiscal year.

(2) Association limitation. The aggregate of such processing and

marketing loans made by all direct lender associations affiliated with

the same Farm Credit bank shall not exceed 15 percent of the aggregate

of their outstanding retail loans at the end of the preceding fiscal

year. Each Farm Credit bank, in conjunction with all its affiliated

direct lender associations, shall ensure that such processing or

marketing loans are equitably allocated among its affiliated direct

lender associations.

(3) Calculation of outstanding retail loans. For the purposes of

this paragraph, ``outstanding retail loans'' includes loans, loan

participations, and other interests in loans that are either bought

without recourse or sold with recourse.

Sec. 613.3020 Financing for farm-related service businesses.

(a) Eligibility. An individual or legal entity that furnishes farm-

related services to farmers and ranchers that are directly related to

their agricultural production is eligible to borrow from a Farm Credit

bank or association that operates under titles I or II of the Act.

(b) Purposes of financing. A Farm Credit Bank, agricultural credit

bank, or direct lender association may 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.

Sec. 613.3030 Rural home financing.

(a) Definitions.

(1) Rural homeowner means an individual who is not a bona fide

farmer, rancher, or producer or harvester of aquatic products.

(2) Rural home means a single-family moderately priced dwelling

located in a rural area that will be the occupant's principal

residence.

(3) Rural area means open country within a State or the

Commonwealth of Puerto Rico, which may include a town or village that

has a population of not more than 2,500 persons.

(4) Moderately priced means the price of any rural home that

either:

(i) 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; or

(ii) Is otherwise determined to be moderately priced for housing

values for the rural area where it is located, as documented 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. Housing values at or below the 75th percentile of

values reflected in such data will be deemed moderately priced.

(b) Eligibility. Any rural homeowner is eligible to obtain

financing on a rural home. No borrower shall have a loan from the Farm

Credit System on more than one rural home at any one time.

(c) Purposes of financing. Loans may be made to rural homeowners

for the purpose of buying, building, remodeling, improving, repairing

rural homes, and refinancing existing indebtedness thereon.

(d) Portfolio limitations.

(1) The aggregate of retail rural home loans by any Farm Credit

Bank or agricultural credit bank shall not exceed 15 percent of the

total of all of its outstanding loans at any one time.

(2) The aggregate of rural home loans made by each direct lender

association shall not exceed 15 percent of the total of its outstanding

loans at the end of its preceding fiscal year, except with the prior

approval of its funding bank.

(3) The aggregate of rural home loans made by all direct lender

associations that are funded by the same Farm Credit bank shall not

exceed 15 percent of the total outstanding loans of all such

associations at the end of the funding bank's preceding fiscal year.

Subpart B--Financing for Banks Operating Under Title III of the

Farm Credit Act

Sec. 613.3100 Domestic lending.

(a) Definitions. For purposes of this subpart, the following

definitions apply:

(1) Cooperative means any association of farmers, ranchers,

producers or harvesters of aquatic products, or any federation of such

associations, or a combination of such associations and farmers,

ranchers, or producers or harvesters of aquatic products that conducts

business for the mutual benefit of its members and has the power to:

(i) Process, prepare for market, handle, or market farm or aquatic

products;

(ii) Purchase, test, grade, process, distribute, or furnish farm or

aquatic supplies; or

(iii) Furnish business and financially related services to its

members.

(2) Farm or aquatic supplies and farm or aquatic business services

are any goods or services normally used by farmers, ranchers, or

producers and harvesters of aquatic products in their business

operations, or to improve the welfare or livelihood of such persons.

(3) Public utility means a cooperative or other entity that is

licensed under

[[Page 4443]]

Federal, State, or local law to provide electric, telecommunication,

cable television, water, or waste treatment services.

(4) Rural area means all territory of a State that is not within

the outer boundary of any city or town having a population of more than

20,000 inhabitants based on the latest decennial census of the United

States.

(5) Service cooperative means a cooperative that is involved in

providing business and financially related services (other than public

utility services) to farmers, ranchers, aquatic producers or

harvesters, or their cooperatives.

(b) Cooperatives and other entities that serve agricultural or

aquatic producers.

(1) Eligibility of cooperatives. A bank for cooperatives or an

agricultural credit bank may lend to a cooperative that satisfies the

following requirements:

(i) Unless the bank's board of directors establishes by resolution

a higher voting control threshold for any type of cooperative, the

percentage of voting control of the cooperative held by farmers,

ranchers, producers or harvesters of aquatic products, or cooperatives

shall be 80 percent except:

(A) Sixty (60) percent for a service cooperative;

(B) Sixty (60) percent for local farm supply cooperatives that have

historically served the needs of a community that would not be

adequately served by other suppliers and have experienced a reduction

in the percentage of membership by agricultural or aquatic producers

due to changed circumstances beyond their control; and

(C) Sixty (60) percent for local farm supply cooperatives that

provide or will provide needed services to a community, and are or will

be in competition with a cooperative specified in

Sec. 613.3100(b)(1)(i)(B);

(ii) The cooperative deals in farm or aquatic products, or products

processed therefrom, farm or aquatic supplies, farm or aquatic business

services, or financially related services with or for members in an

amount at least equal in value to the total amount of such business it

transacts with or for non-members, excluding from the total of member

and non-member business, transactions with the United States, or any

agencies or instrumentalities thereof, or services or supplies

furnished by a public utility; and

(iii) The cooperative complies with one of the following two

conditions:

(A) No member of the cooperative shall have more than one vote

because of the amount of stock or membership capital owned therein; or

(B) The cooperative restricts dividends on stock or membership

capital to 10 percent per year or the maximum percentage per year

permitted by applicable State law, whichever is less.

(iv) Any cooperative that has received a loan from a bank for

cooperatives or an agricultural credit bank shall, without regard to

the requirements in paragraph (b)(1)(i) of this section, continue to be

eligible for as long as more than 50 percent (or such higher percentage

as is established by the bank board) of the voting control of the

cooperative is held by farmers, ranchers, producers or harvesters of

aquatic products, or other eligible cooperatives.

(2) Other eligible entities. The following entities are eligible to

borrow from banks for cooperatives and agricultural credit banks:

(i) Any legal entity that holds more than 50 percent of the voting

control of a cooperative that is an eligible borrower under paragraph

(b)(1) of this section and uses the proceeds of the loan to fund the

activities of its cooperative subsidiary on the terms and conditions

specified by the bank;

(ii) Any legal entity in which an eligible cooperative has an

ownership interest, provided that if such interest is less than 50

percent, financing shall not exceed the percentage that the eligible

cooperative owns in such entity multiplied by the value of the total

assets of such entity; or

(iii) Any creditworthy private entity operated on a non-profit

basis that satisfies the requirements for a service cooperative and

complies with the requirements of either paragraphs (b)(1)(i)(A) and

(b)(1)(iii) of this section, or paragraph (b)(1)(iv) of this section,

and any subsidiary of such entity. An entity that is eligible to borrow

under this paragraph shall be organized to benefit agriculture in

furtherance of the welfare of the farmers, ranchers, and aquatic

producers or harvesters who are its members.

(c) Electric and telecommunication utilities.

(1) Eligibility. A bank for cooperatives or an agricultural credit

bank may lend to:

(i) Electric and telephone cooperatives as defined by section

3.8(a)(4)(A) of the Act that satisfy the eligibility criteria in

paragraph (b)(1) of this section;

(ii) Cooperatives and other entities that:

(A) Have received a loan, loan commitment, insured loan, or loan

guarantee from the Rural Utilities Service of the United States

Department of Agriculture to finance rural electric and

telecommunication services;

(B) Have received a loan or a loan commitment from the Rural

Telephone Bank of the United States Department of Agriculture; or

(C) Are eligible under the Rural Electrification Act of 1936, as

amended, for a loan, loan commitment, or loan guarantee from the Rural

Utilities Service or the Rural Telephone Bank.

(iii) The subsidiaries of cooperatives or other entities that are

eligible under paragraph (c)(1)(ii) of this section.

(iv) Any legal entity that holds more than 50 percent of the voting

control of any public utility that is an eligible borrower under

paragraph (c)(1)(ii) of this section, and uses the proceeds of the loan

to fund the activities of the eligible subsidiary on the terms and

conditions specified by the bank.

(v) Any legal entity in which an eligible utility under paragraph

(c)(1)(ii) of this section has an ownership interest, provided that if

such interest is less than 50 percent, financing shall not exceed the

percentage that the eligible utility owns in such entity multiplied by

the value of the total assets of such entity.

(2) Purposes for financing. A bank for cooperatives or agricultural

credit bank may extend credit to entities that are eligible to borrow

under paragraph (c)(1) of this section in order to provide electric or

telecommunication services in a rural area. A subsidiary that is

eligible to borrow under paragraph (c)(1)(iii) of this section may also

obtain financing from a bank for cooperatives or agricultural credit

bank to operate a licensed cable television utility.

(d) Water and waste disposal facilities.

(1) Eligibility. A cooperative or a public agency, quasi-public

agency, body, or other public or private entity that, under the

authority of State or local law, establishes and operates water and

waste disposal facilities in a rural area, as that term is defined by

paragraph (a)(5) of this section, is eligible to borrow from a bank for

cooperatives or an agricultural credit bank.

(2) Purposes for financing. A bank for cooperatives or agricultural

credit bank may extend credit to entities that are eligible under

paragraph (d)(1) of this section solely for installing, maintaining,

expanding, improving, or operating water and waste disposal facilities

in rural areas.

(e) Domestic lessors. A bank for cooperatives or agricultural

credit bank may lend to domestic parties to finance the acquisition of

facilities or equipment that will be leased to shareholders of the

[[Page 4444]]

bank for use in their operations located inside of the United States.

Sec. 613.3200 International lending.

(a) Definition. For the purpose of this section only, the term

``farm supplies'' refers to inputs that are used in a farming or

ranching operation, but excludes agricultural processing equipment,

machinery used in food manufacturing or other capital goods which are

not used in a farming or ranching operation.

(b) Import transactions. The following parties are eligible to

borrow from a bank for cooperatives or an agricultural credit bank

pursuant to section 3.7(b) of the Act for the purpose of financing the

import of agricultural commodities or products therefrom, aquatic

products, and farm supplies into the United States:

(1) An eligible cooperative as defined by Sec. 613.3100(b);

(2) A counterparty with respect to a specific import transaction

with a voting stockholder of the bank for the substantial benefit of

the shareholder; and

(3) Any foreign or domestic legal entity in which eligible

cooperatives hold an ownership interest.

(c) Export transactions. Pursuant to section 3.7(b)(2) of the Act,

a bank for cooperatives or an agricultural credit bank is authorized to

finance the export (including the cost of freight) of agricultural

commodities or products therefrom, aquatic products, or farm supplies

from the United States to any foreign country. The board of directors

of each bank for cooperatives and agricultural credit bank shall adopt

policies that ensure that exports of agricultural products and

commodities, aquatic products, and farm supplies which originate from

eligible cooperatives are financed on a priority basis. The total

amount of balances outstanding on loans made under this paragraph shall

not, at any time, exceed 50 percent of the capital of any bank for

cooperatives or agricultural credit bank for loans that:

(1) Finance the export of agricultural commodities and products

therefrom, aquatic products, or farm supplies that are not originally

sourced from an eligible cooperative; and

(2) At least 95 percent of the loan amount is not guaranteed by a

department, agency, bureau, board, or commission of the United States

or a corporation that is wholly owned directly or indirectly by the

United States.

(d) International business operations. A bank for cooperatives or

an agricultural credit bank may finance a domestic or foreign entity

which is at least partially owned by eligible cooperatives described in

Sec. 613.3100(b), and facilitates the international business operations

of such cooperatives.

(e) Restrictions.

(1) When eligible cooperatives own less than 50 percent of a

foreign or domestic legal entity, the amount of financing that a bank

for cooperatives or agricultural credit bank may provide to the entity

for imports, exports, or international business operations shall not

exceed the percentage of ownership that eligible cooperatives hold in

such entity multiplied by the value of the total assets of such entity;

and

(2) A bank for cooperatives or agricultural credit bank shall not

finance the relocation of any plant or facility from the United States

to a foreign country.

Subpart C--Similar Entity Authority Under Sections 3.1(11)(B) and

4.18A of the Act

Sec. 613.3300 Participations and other interests in loans to similar

entities.

(a) Definitions.

(1) Participate and participation, for the purpose of this section,

refer to multi-lender transactions, including syndications,

assignments, loan participations, subparticipations, other forms of the

purchase, sale, or transfer of interests in loans, or other extensions

of credit, or other technical and financial assistance.

(2) Similar entity means a party that is ineligible for a loan from

a Farm Credit bank or association, but has operations that are

functionally similar to the activities of eligible borrowers in that a

majority of its income is derived from, or a majority of its assets are

invested in, the conduct of activities that are performed by eligible

borrowers.

(b) Similar entity transactions. A Farm Credit bank or a direct

lender association may participate with a lender that is not a Farm

Credit System institution in loans to a similar entity that is not

eligible to borrow directly under Sec. 613.3000, 613.3010, 613.3020,

613.3100, or 613.3200, for purposes similar to those for which an

eligible borrower could obtain financing from the participating FCS

institution.

(c) Restrictions. Participations by a Farm Credit bank or

association in loans to a similar entity under this section are subject

to the following limitations:

(1) Lending limits.

(i) Farm Credit banks operating under title I of the Act and direct

lender associations. The total amount of all loan participations that

any Farm Credit bank, agricultural credit bank, or direct lender

association has outstanding under paragraph (b) of this section to a

single credit risk shall not exceed:

(A) Ten (10) percent of its total capital; or

(B) Twenty-five (25) percent of its total capital if a majority of

the shareholders of the respective Farm Credit bank or direct lender

association so approve.

(ii) Farm Credit banks operating under title III of the Act. The

total amount of all loan participations that any bank for cooperatives

or agricultural credit bank has outstanding under paragraph (b) of this

section to a single credit risk shall not exceed 10 percent of its

total capital;

(2) Percentage held in the principal amount of the loan. The

participation interest in the same loan held by one or more Farm Credit

bank(s) or association(s) shall not, at any time, equal or exceed 50

percent of the principal amount of the loan; and

(3) Portfolio limitations. The total amount of participations that

any Farm Credit bank or direct lender association has outstanding under

paragraph (b) of this section shall not exceed 15 percent of its total

outstanding assets at the end of its preceding fiscal year.

(d) Approval by other Farm Credit System institutions.

(1) No direct lender association shall participate in a loan to a

similar entity under paragraph (b) of this section without the approval

of its funding bank. A funding bank shall deny such requests only for

safety and soundness reasons affecting the bank.

(2) No Farm Credit bank or direct lender association shall

participate in a loan to a similar entity that is eligible to borrow

under Sec. 613.3100(b) without the prior approval of the bank for

cooperatives or agricultural credit bank that, at the time the loan is

made, has the greatest volume of loans made under title III of the Act

in the State where the headquarters office of the similar entity is

located.

(3) No bank for cooperatives or agricultural credit bank shall

participate in a loan to a similar entity that is eligible to borrow

under Sec. 613.3010 or 613.3020 without the prior consent of the Farm

Credit bank(s) in whose chartered territory the similar entity conducts

operations.

(4) All approvals required under paragraph (d) of this section may

be granted on an annual basis and under such terms and conditions as

the various Farm Credit System institutions may agree.

[[Page 4445]]

PART 614--LOAN POLICIES AND OPERATIONS

4a. The authority citation for part 614 continues to read as

follows:

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

1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 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, 2279-2, 2279b, 2279b-1, 2279b-2,

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

Stat. 1568, 1639.

Subpart A--[Amended]

5. Section 614.4010 is amended by removing the words ``export or''

each place they appear in paragraphs (d)(4) and (d)(5); by removing the

reference ``(d)(3)'' and adding in its place ``(d)(4)'' in paragraph

(d)(5); and by adding new paragraphs (d)(6) and (d)(7) to read as

follows.

Sec. 614.4010 Agricultural credit banks.

* * * * *

(d) * * *

* * * * *

(6) Any party, subject to the requirements in Sec. 613.3200(c) of

this chapter, for the export (including the cost of freight) of

agricultural commodities or products therefrom, aquatic products, or

farm supplies from the United States to any foreign country, in

accordance with Sec. 614.4233 and subpart Q of this part 614; and

(7) Domestic or foreign parties in which eligible cooperatives, as

defined in Sec. 613.3100 of this chapter, hold an ownership interest,

for the purpose of facilitating the international business operations

of such cooperatives pursuant to the requirements of Sec. 613.3200 (d)

and (e) of this chapter.

* * * * *

6. Section 614.4020 is amended by removing the words ``export or''

each place they appear in paragraphs (a)(4) and (a)(5); by adding after

the words ``bank's board'', the reference ``, Sec. 614.4233,'' in

paragraph (a)(4); by removing the words ``board policy'' and adding in

their place, the words ``policies of the bank's board, Sec. 614.4233,''

in paragraph (a)(5); and by adding new paragraphs (a)(6) and (a)(7) to

read as follows:

Sec. 614.4020 Banks for cooperatives.

(a) * * *

* * * * *

(6) Any party, subject to the requirements in Sec. 613.3200(c) of

this chapter, for the export (including the cost of freight) of

agricultural commodities or products therefrom, aquatic products, or

farm supplies from the United States to any foreign country, in

accordance with Sec. 614.4233 and subpart Q of this part 614; and

(7) Domestic or foreign parties in which eligible cooperatives, as

defined in Sec. 613.3100 of this chapter, hold an ownership interest,

for the purpose of facilitating the international business operations

of such cooperatives pursuant to the requirements in Sec. 613.3200 (d)

and (e) of this chapter.

* * * * *

Subpart E--Loan Terms and Conditions

7. Section 614.4233 is amended by revising the introductory

paragraph to read as follows:

Sec. 614.4233 International loans.

Term loans made by banks for cooperatives and agricultural credit

banks under the authority of section 3.7(b) of the Act and

Sec. 613.3200 of this chapter to foreign or domestic parties who are

not shareholders of the bank shall be subject to following conditions:

* * * * *

Subpart P--Farm Credit Bank and Agricultural Credit Bank Financing

of Other Financing Institutions

Sec. 614.4610 [Amended]

8. Section 614.4610 is amended by removing the words ``an

association in the district'' and adding in their place, the words

``any association funded by the bank'' in the first sentence and

removing the reference ``Sec. 613.3040(d)(2)'' and adding in its place

the reference ``Secs. 613.3010(b)(1) and 613.3030(d)''.

Subpart Q--Banks for Cooperatives Financing International Trade

9. The heading for subpart Q is amended by adding after the words

``Banks for Cooperatives'' the words ``and Agricultural Credit Banks''.

Sec. 614.4700 [Amended]

10. Section 614.4700 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place they appear in paragraphs (a) introductory text, (b), and (h).

Sec. 614.4710 [Amended]

11. Section 614.4710 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place they appear in the introductory paragraph and paragraph (c); by

adding after the words ``bank for cooperatives' '' the words ``or

agricultural credit bank's'' in paragraph (a)(1)(ii); by adding after

the words ``bank for cooperatives'' the words ``or an agricultural

credit bank'' each place they appear in paragraphs (a)(1) introductory

text, (a)(1)(i), (a)(3), (a)(5) and (b)(1).

Sec. 614.4720 [Amended]

12. Section 614.4720 is amended by adding after the words ``Banks

for cooperatives'' the words ``and agricultural credit banks'' in the

first sentence of the introductory paragraph.

Sec. 614.4800 [Amended]

13. Section 614.4800 is amended by adding after the words ``A bank

for cooperatives'' the words ``or an agricultural credit bank'' in the

first sentence.

Sec. 614.4810 [Amended]

14. Section 614.4810 is amended by adding after the words ``banks

for cooperatives'' the words ``and agricultural credit banks'' each

place they appear in paragraphs (a) introductory text and (b).

Sec. 614.4900 [Amended]

15. Section 614.4900 is amended by adding after the words ``bank

for cooperatives'' the words ``or an agricultural credit bank'' each

place they appear in paragraphs (a) through (d); and by adding after

the words ``banks for cooperatives'' the words ``and agricultural

credit banks'' in the first sentence of paragraph (i).

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

AND FUNDING OPERATIONS

16. The authority citation for part 615 is revised to read as

follows:

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

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

6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm

Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,

2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,

2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,

2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of

Pub. L. 100-233, 101 Stat. 1568, 1608.

[[Page 4446]]

Subpart H--Capital Adequacy

17. Section 615.5200 is amended by revising paragraphs (a) and (b)

introductory text to read as follows:

Sec. 615.5200 General.

(a) The Board of Directors of each Farm Credit System institution

shall determine the amount of total capital, core surplus, total

surplus, and unallocated surplus needed to assure the institution's

continued financial viability and to provide for growth necessary to

meet the needs of its borrowers. The minimum capital standards

specified in this part are not meant to be adopted as the optimal

capital level in the institution's capital adequacy plan. Rather, the

standards are intended to serve as minimum levels of capital that each

institution must maintain to protect against the credit and other

general risks inherent in its operations.

(b) Each Board of Directors shall establish, adopt, and maintain a

formal written capital adequacy plan as a part of the financial plan

required by Sec. 618.8440 of this chapter. The plan shall include the

capital targets that are necessary to achieve the institution's capital

adequacy goals as well as the minimum permanent capital and surplus

standards. The plan shall address any projected dividends, patronage

distribution, equity retirements, or other action that may decrease the

institution's capital or the components thereof for which minimum

amounts are required by this part. The plan shall set forth the

circumstances in which retirements or revolvements of stock or equities

may occur. If the plan provides for retirement or revolvement of

equities included in core surplus, in connection with a loan default or

the death of a former borrower, the plan must require the institution

to make a prior determination that such retirement or revolvement is in

the best interest of the institution, and also require the institution

to charge off an amount of the indebtedness on the loan equal to the

amount of the equities that are retired or canceled. In addition to

factors that must be considered in meeting the minimum standards, the

board of directors shall also consider at least the following factors

in developing the capital adequacy plan:

* * * * *

Sec. 615.5201 [Amended]

18. Section 615.5201 is amended by adding the words ``Federal land

credit association,'' after the words ``Federal land bank

association,''; and by removing the words ``National Bank for

Cooperatives,'' and adding in their place, the words ``agricultural

credit bank,'' in paragraph (g); and redesignating paragraphs (j)(5)

and (j)(6) as paragraphs (j)(6) and (j)(7); and by adding a new

paragraph (j)(5) to read as follows:

Sec. 615.5201 Definitions.

* * * * *

(j) * * *

(5) Term preferred stock with an original maturity of at least 5

years and on which, if cumulative, the board of directors has the

option to defer dividends, provided that, at the beginning of each of

the last 5 years of the term of the stock, the amount that is eligible

to be counted as permanent capital is reduced by 20 percent of the

original amount of the stock (net of redemptions);

* * * * *

19. Section 615.5205 is revised to read as follows:

Sec. 615.5205 Minimum permanent capital standard.

Each institution shall at all times maintain permanent capital at a

level of at least 7 percent of its risk-adjusted asset base.

20. Section 615.5210 is amended by removing paragraphs (f)(2)(i)(D)

and (f)(2)(v)(D); redesignating paragraph (f)(2)(v)(E) as new paragraph

(f)(2)(v)(D); adding a new paragraph (e)(10); and revising paragraphs

(e)(7) and (f)(2)(i)(C) to read as follows:

Sec. 615.5210 Computation of the permanent capital ratio.

* * * * *

(e) * * *

(7) Each institution shall deduct from its total capital an amount

equal to all goodwill, whenever acquired.

* * * * *

(10) The permanent capital of an institution shall exclude the net

impact of unrealized holding gains or losses on available-for-sale

securities.

(f) * * *

(2) * * *

(i) * * *

(C) Goodwill.

* * * * *

Sec. 615.5216 [Removed and reserved]

21. Section 615.5216 is removed and reserved.

Subpart I--Issuance of Equities

Sec. 615.5220 [Amended]

22. Section 615.5220 is amended by removing paragraph (f),

redesignating existing paragraphs (g), (h), and (i) as paragraphs (f),

(g), and (h), respectively; by removing the words ``may be more than,

but'' each place they appear in paragraphs (d) and (e); by adding the

words ``, agricultural credit banks (with respect to loans other than

to cooperatives),'' after the words ``For Farm Credit Banks'' in

paragraph (d); by adding the words ``and agricultural credit banks

(with respect to loans to cooperatives)'' after the words ``For banks

for cooperatives'' in paragraph (e); and by removing the words

``(including interim standards)'' in newly designated paragraph (f).

Sec. 615.5230 [Amended]

23. Section 615.5230 is amended by removing the words ``preferred

stock to be issued to the Farm Credit System Financial Assistance

Corporation and'' in paragraph (b)(1).

24. Section 615.5240 is amended by removing paragraph (b);

redesignating the introductory paragraph and paragraph (a) introductory

text as paragraphs (a) and (b) introductory text, respectively; adding

new paragraphs (b)(3) and (c); and revising newly designated paragraphs

(a) and (b)(2) to read as follows:

Sec. 615.5240 Permanent capital requirements.

(a) The capitalization bylaws shall enable the institution to meet

the minimum permanent capital adequacy standards established under

subparts H and K of this part and the total capital requirements

established by the board of directors of the institution.

(b) * * *

(2) For perpetual preferred stock issued to persons other than the

Farm Credit System Financial Assistance Corporation:

* * * * *

(3) For term preferred stock:

(i) Retirement must be solely at the discretion of the board of

directors and not upon a date certain, other than the original maturity

date, or upon the happening of any event, such as repayment of the

loan;

(ii) Retirement must be at not more than book value;

(iii) Dividends may be cumulative, but the board of directors must

have the option to defer payment; and

(iv) Disclosure must have been made pursuant to Sec. 615.5250 of

the nature of the investment and the terms and conditions under which

it is issued.

(c) Once an institution's board of directors has made a

determination that the institution's capital position is adequate, the

institution's board of directors may delegate to management the

decision whether to retire borrower stock, provided that:

[[Page 4447]]

(1) Any such retirements are in accordance with the institution's

capital adequacy plan or capital restoration plan;

(2) The institution's permanent capital ratio will be in excess of

9 percent after any such retirements;

(3) The institution meets and maintains all applicable minimum

surplus and collateral standards; and

(4) The aggregate amount of stock purchases, retirements, and the

net effect of such activities are reported to the board of directors

each quarter.

Sec. 615.5250 [Amended]

25. Section 615.5250 is amended by removing paragraph (c);

redesignating paragraphs (d) and (e) as paragraphs (c) and (d),

respectively; by removing the words ``(including interim standards)''

in paragraphs (a)(4)(ii) and newly designated (c)(3); and by removing

the words ``, including interim standards'' in paragraph (a)(4)(iii).

Subpart J--Retirement of Equities

Sec. 615.5260 [Amended]

26. Section 615.5260 is amended by adding the word ``or'' at the

end of paragraph (a)(2)(i); removing ``; or'' at the end of paragraph

(a)(2)(ii) and inserting a period in its place; and by removing

paragraphs (a)(2)(iii) and (d).

Sec. 615.5270 [Amended]

27. Section 615.5270 is amended by removing the words ``(including

interim standards)''; and adding the words ``or term stock at its

stated maturity'' after the reference ``Sec. 615.5290'' in paragraph

(b).

28. Subpart K is revised to read as follows:

Subpart K--Surplus and Collateral Requirements

Sec.

615.5301 Definitions.

615.5330 Minimum surplus ratios.

615.5335 Bank net collateral ratio.

615.5336 Compliance and reporting.

Subpart K--Surplus and Collateral Requirements

Sec. 615.5301 Definitions.

For the purposes of this subpart, the following definitions shall

apply:

(a) The terms institution, permanent capital, risk-adjusted asset

base, and total capital shall have the meanings set forth in

Sec. 615.5201.

(b) Core surplus.

(1) Core surplus means:

(i) Undistributed earnings/unallocated surplus less, for

associations only, an amount equal to the net investment in the bank;

(ii) Nonqualified allocated equities that are not distributed

according to an established plan or practice, provided that, in the

event that a nonqualified patronage allocation is distributed, other

than as required by section 4.14B of the Act, or in connection with a

loan default or the death of an equityholder whose loan has been repaid

(to the extent provided for in the institution's capital adequacy

plan), any remaining nonqualified allocations that were allocated in

the same year will be excluded from core surplus.

(iii) Perpetual common or noncumulative perpetual preferred stock

that is not retired according to an established plan or practice,

provided that, in the event that stock held by a borrower is retired,

other than as required by section 4.14B of the Act or in connection

with a loan default to the extent provided for in the institution's

capital plan, the remaining perpetual stock of the same class or series

shall be excluded from core surplus;

(iv) A capital instrument or a particular balance sheet entry or

account that the Farm Credit Administration has determined to be the

functional equivalent of a component of core surplus. The Farm Credit

Administration may permit an institution to include all or a portion of

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

temporary basis, for purposes of this subpart.

(2) For associations only, other allocated equities may also be

included in the core surplus ratio to the extent permitted by

Sec. 615.5330(b)(3) if the following conditions are met:

(i) The allocated equities are includible in total surplus; and

(ii) The allocated equities, if subject to revolvement, are not

scheduled for revolvement during the next 3 years.

(3) The deductions required to be made by an institution in the

computation of its permanent capital pursuant to Sec. 615.5210(e) (6)

and (7) shall also be made in the computation of its core surplus.

(4) Core surplus shall not include equities held by other System

institutions unless approved pursuant to paragraph (b)(1)(iv) of this

section.

(5) The net impact of unrealized holding gains or losses on

available-for-sale securities shall be excluded from core surplus.

(6) The Farm Credit Administration may, if it finds that a

particular component, balance sheet entry, or account has

characteristics or terms that diminish its contribution to an

institution's ability to absorb losses, require the deduction of all or

a portion of such component, entry, or account from core surplus.

(c) Net collateral means the value of a bank's 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 by the bank.

(d) Net collateral ratio means a bank's net collateral, divided by

the bank's total liabilities.

(e) Net investment in the bank means the total investment by an

association in its affiliated bank, less reciprocal investments and

investments resulting from a loan originating/service agency

relationship, including participations.

(f) Nonqualified allocated equities means allocations of earnings

designated to the institution's members that are not deducted from the

gross taxable income of the allocating institution at the time of

allocation.

(g) Perpetual stock or equity means stock or equity not having a

maturity date, not redeemable at the option of the holder, and having

no other provisions that will require the future redemption of the

issue.

(h) Qualified allocated equities means allocations of earnings that

are deducted from the gross taxable income of the allocating

institution and designated to the institution's members.

(i) Total surplus means:

(1) Undistributed earnings/unallocated surplus;

(2) Allocated equities, including allocated surplus and stock

which, if subject to revolvement or retirement, have an original

planned revolvement or retirement date of not less than 5 years and are

eligible to be included in permanent capital pursuant to

Sec. 615.5201(j)(4)(iv); and

(3) Stock that is not purchased or held as a condition of obtaining

a loan, provided that it is either perpetual stock or term stock with

an original maturity of at least 5 years, and provided that the

institution has no established plan or practice of retiring such

perpetual stock or of retiring such term stock prior to its stated

maturity. The amount of term stock that is eligible to be included in

total surplus shall be reduced by 20 percent (net of redemptions) at

the beginning of each of the last 5 years of the term of the

instrument.

(4) The total surplus of an institution shall exclude the net

impact of unrealized holding gains or losses on available-for-sale

securities.

(5) A capital instrument or a particular balance sheet entry or

account that the Farm Credit

[[Page 4448]]

Administration has determined to be the functional equivalent of a

component of total surplus. The Farm Credit Administration may permit

one or more institutions to include all or a portion of such

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

temporary basis, for purposes of this subpart.

(6) The Farm Credit Administration may, if it finds that a

particular component, balance sheet entry, or account has

characteristics or terms that diminish its contribution to an

institution's ability to absorb losses, require the deduction of all or

a portion of such component, entry, or account from total surplus.

(7) Any deductions made by an institution in the computation of its

permanent capital pursuant to Sec. 615.5210(e) (6) and (7) shall also

be made in the computation of its total surplus.

Sec. 615.5330 Minimum surplus ratios.

(a) Total surplus.

(1) Each institution shall achieve and maintain a ratio of at least

7 percent of total surplus to the risk-adjusted asset base.

(2) Each association shall compute its total surplus ratio by

deducting an amount equal to the amount of allocated bank equities

counted as permanent capital by the bank;

(3) Each Farm Credit bank shall compute its total surplus ratio by

deducting an amount equal to the amount of the bank's equities counted

as association capital.

(b) Core surplus.

(1) Each institution shall achieve and maintain a ratio of core

surplus to the risk-adjusted asset base of at least 3.5 percent, of

which no more than 2 percentage points may consist of allocated

equities otherwise includible pursuant to Sec. 615.5301(b)(2).

(2) Each association shall compute its core surplus ratio by

deducting an amount equal to the net investment in its affiliated Farm

Credit bank from its core surplus.

(c) An institution shall compute its total surplus and core surplus

ratios as of the end of each month.

Sec. 615.5335 Bank net collateral ratio.

(a) Each bank shall achieve and maintain a net collateral ratio of

at least 103 percent.

(b) A bank shall compute its net collateral ratio as of the end of

each month.

Sec. 615.5336 Compliance and reporting.

(a) Noncompliance and reporting. An institution that meets the

minimum applicable surplus ratios and net collateral ratio established

in Secs. 615.5330 and 615.5335 at or after the end of the quarter in

which these regulations become effective and subsequently falls below

one or more minimum requirements shall be in violation of the

applicable regulations. Such institution shall report its noncompliance

to the Farm Credit Administration within 20 calendar days following the

month end in which the institution initially determines that it is not

in compliance with the requirements.

(b) Initial compliance and reporting requirements.

(1) An institution that fails to satisfy one or more of its minimum

applicable surplus and net collateral ratios at the end of the quarter

in which these regulations become effective shall report its initial

noncompliance to the Farm Credit Administration within 20 days

following such quarter end and shall also submit a capital restoration

plan for achieving and maintaining the standards, demonstrating

appropriate annual progress toward meeting the goal, to the Farm Credit

Administration within 60 days following such quarter end. If the

capital restoration plan is not approved by the Farm Credit

Administration, the Agency shall inform the institution of the reasons

for disapproval, and the institution shall submit a revised capital

restoration plan within the time specified by the Farm Credit

Administration.

(2) Approval of compliance plans. In determining whether to approve

a capital restoration plan submitted under this section, the FCA shall

consider the following factors, as applicable:

(i) The conditions or circumstances leading to the institution's

falling below minimum levels, the exigency of those circumstances, and

whether or not they were caused by actions of the institution or were

beyond the institution's control;

(ii) The overall condition, management strength, and future

prospects of the institution and, if applicable, affiliated System

institutions;

(iii) The institution's capital, adverse assets (including

nonaccrual and nonperforming loans), allowance for loss, and other

ratios compared to the ratios of its peers or industry norms;

(iv) How far an institution's ratios are below the minimum

requirements;

(v) The estimated rate at which the institution can reasonably be

expected to generate additional earnings;

(vi) The effect of the business changes required to increase

capital;

(vii) The institution's previous compliance practices, as

appropriate;

(viii) The views of the institution's directors and senior

management regarding the plan; and

(ix) Any other facts or circumstances that the FCA deems relevant.

(3) An institution shall be deemed to be in compliance with the

surplus and collateral requirements of this subpart if it is in

compliance with a capital restoration plan that is approved by the Farm

Credit Administration within 180 days following the end of the quarter

in which these regulations become effective.

29. Subparts L and M are added to read as follows:

Subpart L--Establishment of Minimum Capital Ratios for an

Individual Institution

Sec.

615.5350 General--Applicability.

615.5351 Standards for determination of appropriate individual

institution minimum capital ratios.

615.5352 Procedures.

615.5353 Relation to other actions.

615.5354 Enforcement.

Subpart M--Issuance of a Capital Directive

615.5355 Purpose and scope.

615.5356 Notice of intent to issue a capital directive.

615.5357 Response to notice.

615.5358 Decision.

615.5359 Issuance of a capital directive.

615.5360 Reconsideration based on change in circumstances.

615.5361 Relation to other administrative actions.

Subpart L--Establishment of Minimum Capital Ratios for an

Individual Institution

Sec. 615.5350 General--Applicability.

(a) The rules and procedures specified in this subpart are

applicable to a proceeding to establish required minimum capital ratios

that would otherwise be applicable to an institution under

Secs. 615.5205, 615.5330, and 615.5335. The Farm Credit Administration

is authorized to establish such minimum capital requirements for an

institution as the Farm Credit Administration, in its discretion, deems

to be necessary or appropriate in light of the particular circumstances

of the institution. Proceedings under this subpart also may be

initiated to require an institution having capital ratios greater than

those set forth in Secs. 615.5205, 615.5330, or 615.5335 to continue to

maintain those higher ratios.

(b) The Farm Credit Administration may require higher minimum

capital ratios for an individual institution in view of its

circumstances. For example,

[[Page 4449]]

higher capital ratios may be appropriate for:

(1) An institution receiving special supervisory attention;

(2) An institution that has, or is expected to have, losses

resulting in capital inadequacy;

(3) An institution with significant exposure due to operational

risk, interest rate risk, the risks from concentrations of credit,

certain risks arising from other products, services, or related

activities, or management's overall inability to monitor and control

financial risks presented by concentrations of credit and related

services activities;

(4) An institution exposed to a high volume of, or particularly

severe, problem loans;

(5) An institution that is growing rapidly; or

(6) An institution that may be adversely affected by the activities

or condition of System institutions with which it has significant

business relationships or in which it has significant investments.

Sec. 615.5351 Standards for determination of appropriate individual

institution minimum capital ratios.

The appropriate minimum capital ratios for an individual

institution cannot be determined solely through the application of a

rigid mathematical formula or wholly objective criteria. The decision

is necessarily based in part on subjective judgment grounded in Agency

expertise. The factors to be considered in the determination will vary

in each case and may include, for example:

(a) The conditions or circumstances leading to the Farm Credit

Administration's determination that higher minimum capital ratios are

appropriate or necessary for the institution;

(b) The exigency of those circumstances or potential problems;

(c) The overall condition, management strength, and future

prospects of the institution and, if applicable, affiliated

institutions;

(d) The institution's capital, adverse assets (including nonaccrual

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

to the ratios of its peers or industry norms; and

(e) The views of the institution's directors and senior management.

Sec. 615.5352 Procedures.

(a) Notice. When the Farm Credit Administration determines that

minimum capital ratios greater than those set forth in Secs. 615.5205,

615.5330, or 615.5335 are necessary or appropriate for a particular

institution, the Farm Credit Administration will notify the institution

in writing of the proposed minimum capital ratios and the date by which

they should be reached (if applicable) and will provide an explanation

of why the ratios proposed are considered necessary or appropriate for

the institution.

(b) Response.

(1) The institution may respond to any or all of the items in the

notice. The response should include any matters which the institution

would have the Farm Credit Administration consider in deciding whether

individual minimum capital ratios should be established for the

institution, what those capital ratios should be, and, if applicable,

when they should be achieved. The response must be in writing and

delivered to the designated Farm Credit Administration official within

30 days after the date on which the institution received the notice. In

its discretion, the Farm Credit Administration may extend the time

period for good cause. The Farm Credit Administration may shorten the

time period with the consent of the institution or when, in the opinion

of the Farm Credit Administration, the condition of the institution so

requires, provided that the institution is informed promptly of the new

time period.

(2) Failure to respond within 30 days or such other time period as

may be specified by the Farm Credit Administration shall constitute a

waiver of any objections to the proposed minimum capital ratios or the

deadline for their achievement.

(c) Decision. After the close of the institution's response period,

the Farm Credit Administration will decide, based on a review of the

institution's response and other information concerning the

institution, whether individual minimum capital ratios should be

established for the institution and, if so, the ratios and the date the

requirements will become effective. The institution will be notified of

the decision in writing. The notice will include an explanation of the

decision, except for a decision not to establish individual minimum

capital requirements for the institution.

(d) Submission of plan. The decision may require the institution to

develop and submit to the Farm Credit Administration, within a time

period specified, an acceptable plan to reach the minimum capital

ratios established for the institution by the date required.

(e) Reconsideration based on change in circumstances. If, after the

Farm Credit Administration's decision in paragraph (c) of this section,

there is a change in the circumstances affecting the institution's

capital adequacy or its ability to reach the required minimum capital

ratios by the specified date, either the institution or the Farm Credit

Administration may propose a change in the minimum capital ratios for

the institution, the date when the minimums must be achieved, or the

institution's plan (if applicable). The Farm Credit Administration may

decline to consider proposals that are not based on a significant

change in circumstances or are repetitive or frivolous. Pending a

decision on reconsideration, the Farm Credit Administration's original

decision and any plan required under that decision shall continue in

full force and effect.

Sec. 615.5353 Relation to other actions.

In lieu of, or in addition to, the procedures in this subpart, the

required minimum capital ratios for an institution may be established

or revised through a written agreement or cease and desist proceedings

under part C of title V of the Act, or as a condition for approval of

an application.

Sec. 615.5354 Enforcement.

An institution that does not have or maintain the minimum capital

ratios applicable to it, whether required in subparts H and K of this

part, in a decision pursuant to this subpart, in a written agreement or

temporary or final order under part C of title V of the Act, or in a

condition for approval of an application, or an institution that has

failed to submit or comply with an acceptable plan to attain those

ratios, will be subject to such administrative action or sanctions as

the Farm Credit Administration considers appropriate. These sanctions

may include the issuance of a capital directive pursuant to subpart M

of this part or other enforcement action, assessment of civil money

penalties, and/or the denial or condition of applications.

Subpart M--Issuance of a Capital Directive

Sec. 615.5355 Purpose and scope.

(a) This subpart is applicable to proceedings by the Farm Credit

Administration to issue a capital directive under sections 4.3(b) and

4.3A(e) of the Act. A capital directive is an order issued to an

institution that does not have or maintain capital at or greater than

the minimum ratios set forth in Secs. 615.5205, 615.5330, and 615.5335;

or established for the institution under subpart L, by a written

agreement under part C of title V of the Act, or as a condition for

approval of an

[[Page 4450]]

application. A capital directive may order the institution to:

(1) Achieve the minimum capital ratios applicable to it by a

specified date;

(2) Adhere to a previously submitted plan to achieve the applicable

capital ratios;

(3) Submit and adhere to a plan acceptable to the Farm Credit

Administration describing the means and time schedule by which the

institution shall achieve the applicable capital ratios;

(4) Take other action, such as reduction of assets or the rate of

growth of assets, restrictions on the payment of dividends or

patronage, or restrictions on the retirement of stock, to achieve the

applicable capital ratios; or

(5) A combination of any of these or similar actions.

(b) A capital directive may also be issued to the board of

directors of an institution, requiring such board to comply with the

requirements of section 4.3A(d) of the Act prohibiting the reduction of

permanent capital.

(c) A capital directive issued under this rule, including a plan

submitted under a capital directive, is enforceable in the same manner

and to the same extent as an effective and outstanding cease and desist

order which has become final as defined in section 5.25 of the Act.

Violation of a capital directive may result in assessment of civil

money penalties in accordance with section 5.32 of the Act.

Sec. 615.5356 Notice of intent to issue a capital directive.

The Farm Credit Administration will notify an institution in

writing of its intention to issue a capital directive. The notice will

state:

(a) The reasons for issuance of the capital directive;

(b) The proposed contents of the capital directive, including the

proposed date for achieving the minimum capital requirement; and

(c) Any other relevant information concerning the decision to issue

a capital directive.

Sec. 615.5357 Response to notice.

(a) An institution may respond to the notice by stating why a

capital directive should not be issued and/or by proposing alternative

contents for the capital directive or seeking other appropriate relief.

The response shall include any information, mitigating circumstances,

documentation, or other relevant evidence that supports its position.

The response may include a plan for achieving the minimum capital

ratios applicable to the institution. The response must be in writing

and delivered to the Farm Credit Administration within 30 days after

the date on which the institution received the notice. In its

discretion, the Farm Credit Administration may extend the time period

for good cause. The Farm Credit Administration may shorten the 30-day

time period:

(1) When, in the opinion of the Farm Credit Administration, the

condition of the institution so requires, provided that the institution

shall be informed promptly of the new time period;

(2) With the consent of the institution; or

(3) When the institution already has advised the Farm Credit

Administration that it cannot or will not achieve its applicable

minimum capital ratios.

(b) Failure to respond within 30 days or such other time period as

may be specified by the Farm Credit Administration shall constitute a

waiver of any objections to the proposed capital directive.

Sec. 615.5358 Decision.

After the closing date of the institution's response period, or

receipt of the institution's response, if earlier, the Farm Credit

Administration may seek additional information or clarification of the

response. Thereafter, the Farm Credit Administration will determine

whether or not to issue a capital directive, and if one is to be

issued, whether it should be as originally proposed or in modified

form.

Sec. 615.5359 Issuance of a capital directive.

(a) A capital directive will be served by delivery to the

institution. It will include or be accompanied by a statement of

reasons for its issuance.

(b) A capital directive is effective immediately upon its receipt

by the institution, or upon such later date as may be specified

therein, and shall remain effective and enforceable until it is stayed,

modified, or terminated by the Farm Credit Administration.

Sec. 615.5360 Reconsideration based on change in circumstances.

Upon a change in circumstances, an institution may request the Farm

Credit Administration to reconsider the terms of its capital directive

or may propose changes in the plan to achieve the institution's

applicable minimum capital ratios. The Farm Credit Administration also

may take such action on its own motion. The Farm Credit Administration

may decline to consider requests or proposals that are not based on a

significant change in circumstances or are repetitive or frivolous.

Pending a decision on reconsideration, the capital directive and plan

shall continue in full force and effect.

Sec. 615.5361 Relation to other administrative actions.

A capital directive may be issued in addition to, or in lieu of,

any other action authorized by law, including cease and desist

proceedings, civil money penalties, or the conditioning or denial of

applications. The Farm Credit Administration also may, in its

discretion, take any action authorized by law, in lieu of a capital

directive, in response to an institution's failure to achieve or

maintain the applicable minimum capital ratios.

PART 618--GENERAL PROVISIONS

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

follows:

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

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

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

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

Subpart A--Related Services

Sec. 618.8005 [Amended]

31. Section 618.8005 is amended by removing the reference

``Secs. 613.3010, 613.3020 (a)(1), (a)(2), (b), and 613.3045'' in

paragraph (a) and adding in its place, the reference ``Secs. 613.3000

(a) and (b), 613.3010, and 613.3300'' and by removing the reference

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