Loan Policies and Operations; Loan Sales Relief

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052-AB78

Loan Policies and Operations; Loan Sales Relief

AGENCY: Farm Credit Administration.

ACTION: Direct final rule with opportunity for comment.

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

(Board), issues a direct final rule amending its regulations relating

to loan sales into a secondary market. This action conforms FCA

regulations to recent statutory amendments to the Farm Credit Act of

1971, as amended, (Act) made by sections 206 and 208 of the Farm Credit

System Reform Act of 1996 (1996 Act). These amendments provide that

loans designated by Farm Credit System institutions for sale into a

secondary market are not subject to minimum stock purchase or borrower

rights requirements.

DATES: If no significant adverse comment is received on or before

January 2, 1998, these regulations shall be effective upon the

expiration of 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. If

significant adverse comment is received, the FCA will publish a notice

of withdrawal of the regulations and indicate how the Agency expects to

proceed with further rulemaking.

ADDRESSES: Comments may be submitted via electronic mail to ``reg-

[email protected]'' or facsimile transmission to (703) 734-5784. Comments

also may be mailed or delivered to Patricia W. DiMuzio, Director,

Regulation Development Division, Office of Policy Development and Risk

Control, Farm Credit Administration, 1501 Farm Credit Drive, McLean,

Virginia 22102-5090. Copies of all communications received will be

available for review by interested parties in the Office of Policy

Development and Risk Control, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

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

of Policy Development and Risk Control, (703) 883-4498, TDD (703) 883-

4444;

or

William Larsen, Senior Attorney, Legal Counsel Division, Office of

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

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SUPPLEMENTARY INFORMATION: The Farm Credit System Reform Act of 1996

i made significant changes in title VIII of the Act, which

governs the secondary market for agricultural loans. The 1996 Act also

provided regulatory relief to Farm Credit System (FCS) institutions.

This rulemaking conforms FCA regulations with provisions of the 1996

Act that grant relief from minimum stock purchase requirements and

borrower rights for Loans designated by FCS institutions for sale into

a secondary market.ii

I. Changes Pursuant to Section 206 of The 1996 Act

Section 206 of the 1996 Act amended section 4.3A of the Act by

granting relief from stock purchase requirements for loans designated

for sale into a secondary market. As amended, section 4.3A of the Act

establishes that an institution's bylaws may provide that: (1) For

loans made on or after enactment of section 206 that are designated for

sale into a secondary market, no voting stock or participation

certificate (collectively, equity or equities) purchase requirement

shall apply; and (2) for loans made before the enactment of section 206

that are sold into a secondary market, all equities purchased with

respect to these loans shall, subject to the institution meeting its

regulatory minimum permanent capital requirements, be retired. Section

206 further provides that if such designated loans are not sold into a

secondary market within 180 days, the otherwise applicable equity

purchase requirement shall then apply. However, an institution's bylaws

may provide that if a designated loan is subsequently sold into a

secondary market, the equities relating to the loan shall be retired.

Pursuant to these amendments to section 4.3A of the Act, the FCA is

making conforming amendments to Sec. 614.4335 pertaining to borrower

stock requirements. Amended Sec. 614.4335(a) provides that, in general,

a borrower must meet the institution's minimum borrower stock purchase

requirement as a condition of obtaining a loan. However, under amended

Sec. 614.4335(b), an institution's bylaws may provide that the

institution's minimum borrower stock purchase requirement does not

apply if a loan is designated, at the time the loan is made, for sale

into a secondary market. Amended Sec. 614.4335(b) also implements the

statutory requirement that if a designated loan is not sold into a

secondary market upon the expiration of 180 days, the minimum borrower

stock purchase requirement will apply to the loan.

Further reflecting the 1996 Act amendments to section 4.3A of the

Act, Sec. 614.4335 is amended to add provisions concerning the

retirement of borrower stock for loans sold into a secondary market.

Amended Sec. 614.4335(c)(2) states that an institution's bylaws may

provide that all outstanding voting stock held by a borrower with

respect to a loan shall be retired when the loan is sold into a

secondary market. Thus, if the institution's bylaws so provide, if a

designated loan is sold into a secondary market after 180 days, all

outstanding stock with respect to the loan shall be retired. An

institution's bylaws also may provide that all stock held by a borrower

with respect to a loan made before the enactment of the 1996 Act and

sold into a secondary market shall be retired.

Existing provisions of Sec. 614.4335 that require an institution to

meet minimum permanent capital requirements and specify the treatment

of loans sold with or without recourse are not affected by the 1996 Act

amendments and are redesignated to Sec. 614.4335(c)(1). Finally,

amended Sec. 614.4335(d) provides that paragraphs (b)(1) and (c)(2)

apply regardless of whether the institution retains a subordinated

participation interest in a loan or pool of loans or contributes to a

cash reserve.

II. Changes Pursuant to Section 208 of The 1996 Act

Section 208 of the 1996 Act amended section 4.14A of the Act by

changing the definition of the term ``loan'' to exclude from that

definition loans designated, at the time the loans are made, for sale

into a secondary market. The effect of this statutory change is that

the borrower rights provisions of the Act do not apply to loans

designated, at the time the loans are made, for sale into a secondary

market.iii As is the case with respect to the reattachment

of stock purchase requirements under section 206 of the 1996 Act, if a

designated loan is not sold into a secondary market within 180 days of

designation, borrower rights become applicable unless and until the

loan is subsequently sold into a secondary market.

The FCA is amending Sec. 614.4336 in order to conform it to amended

section 4.14A of the Act. Amended Sec. 614.4336 sets forth treatment of

borrower rights in three loan sale situations: (1) Loan sales to Farm

Credit System institutions; (2) loans designated for sale into a

secondary market; and (3) other loan sales. Under amended

Sec. 614.4336(a), a loan sold to another qualified lender retains

borrower rights. Under amended Sec. 614.4336(b), loans made on or after

February 10, 1996, that are designated at the time they are made for

sale into a secondary market are not subject to borrower rights, unless

the loan is not sold within 180 days of the date of designation. After

180 days, borrower rights apply to a designated loan unless and until

it is subsequently sold into a secondary market. Amended

Sec. 614.4336(c) retains the notice and relinquishment provisions that

currently apply to loan sales to other lenders.

In addition to amending the definition of ``loan'' in section 4.14A

of the Act to remove borrower rights protections from loans designated

for sale into a secondary market, section 208(b) of the 1996 Act

applied the amended definition of ``loan'' to section 8.9(b) of the

Act, effectively removing the section 8.9(b) borrower rights

protections that applied before a loan was sold into the secondary

market for agricultural loans established by title VIII of the Act.

This statutory change requires the removal of current Sec. 614.4367(b)

to conform FCA regulations to the amended Act. In its current form,

Sec. 614.4367(b) implemented section 8.9(b) of the Act by requiring

certain disclosures for loans that will or may be pooled for sale into

the secondary market. The required disclosures included notice that an

applicant could refuse to have his or her loan pooled and thus retain

statutory borrower rights.

Disclosure was also required that, within 3 days of commitment, the

applicant had the right to refuse to allow the loan to be pooled.

Because section 208 of the 1996 Act effectively provides that borrower

rights do not apply to loans designated for sale into a secondary

market, the disclosures and approvals required by Sec. 614.4367(b) no

longer apply. Accordingly, the FCA is removing paragraph (b) of

Sec. 614.4367 and redesignating the remaining paragraphs.

In the event that a designated loan is not sold into the secondary

market within 180 days, the terms of the borrower's loan will change in

two material respects. The borrower is required to purchase stock,

which will increase the effective interest rate on the loan. The

borrower will also be entitled to borrower rights under the Act.

Institutions should ensure that borrowers fully understand their

obligations and rights at the time the loan is made. The FCA has not

included special disclosure obligations for loans designated for sale

into the secondary market because the existing requirements of

Sec. 614.4367 are sufficient to ensure that borrowers are appropriately

informed of: (1) Their obligation to purchase stock if the loan

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is not sold as intended; (2) the change in the effective interest rate

resulting from the stock purchase requirement; and (3) the borrower

rights that will apply.

III. Direct Final Rulemaking

With the promulgation of these regulations, the FCA is using, for

the first time, the ``direct final'' procedure for rulemaking. Direct

final rulemaking permits agencies to adopt noncontroversial rules on an

expedited basis, without going through the usual proposal and final

stages of notice-and-comment rulemaking. Direct final rulemaking was

recommended for promulgation of noncontroversial rules by the

Administrative Conference of the United States (ACUS) in its

Recommendation 95-4, adopted June 15, 1995. Vice President Gore also

recommended direct final rulemaking in his report on the National

Performance Review (NPR) as a means for agencies to streamline the

rulemaking process. See ``Improving Regulatory Systems,'' Accompanying

Report of the NPR, September, 1993.

The FCA is committed to the use of innovative rule-making

techniques to further its strategic goal of implementing effective and

efficient regulations. The FCA believes that the use of direct final

rulemaking in appropriate circumstances offers the means to streamline

the rulemaking process for noncontroversial rules by reducing the time

and resources needed for development, review, clearance, and

publication, while still affording the public adequate opportunity to

comment on or object to a rule.

In direct final rulemaking, the agency gives notice that a rule

will become final at a specified future date unless the agency receives

significant adverse comment on the rule during the comment period

established in the rulemaking notice. The Administrative Procedure Act,

5 U.S.C. 551-59, et seq. (APA), supports this streamlined technique of

rulemaking. Direct final rulemaking is justified under section

553(b)(B) of the APA. Section 553(b)(B) is the APA's ``good cause''

exemption for omitting notice and comment on a rule where an agency

finds ``that notice and public procedure thereon are impracticable,

unnecessary, or contrary to the public interest.'' In direct final

rulemaking, the agency finds that the rule is sufficiently

straightforward and noncontroversial to make normal notice and comment

unnecessary under the APA. However, rather than eliminating public

comment altogether, as would be permissible under section 553(b)(B),

the agency gives the public an opportunity to rebut the agency's

conclusion that public input on the rule is unnecessary.

Notwithstanding this ``good cause'' rationale under section

553(b)(B), direct final rulemaking also meets the basic notice-and-

comment requirements of the APA, although the timing and format of

notice and opportunity for comment necessarily differs from a typical

notice-and-comment rulemaking. If, during the comment period provided,

the agency receives a significant adverse comment on a direct final

rule, the agency commits to withdraw the rule and may either issue

another direct final rule or promulgate the rule in proposed form. A

significant adverse comment is defined as one where the commenter

explains why the rule would be inappropriate, including challenges to

the rule's underlying premise or approach, or would be ineffective or

unacceptable without a change. In general, a significant adverse

comment would raise an issue serious enough to warrant a substantive

response from the agency in a notice-and-comment proceeding.

The FCA believes that the secondary market loan sale amendments fit

the category of rules appropriate for direct final rulemaking. These

changes merely conform the regulations to the 1996 Act. The changes

remove or amend current regulatory requirements that do not reflect the

changes in the Act. As such, the changes are straightforward and

noncontroversial. For these reasons, the FCA does not anticipate that

there will be significant adverse comment on this rulemaking.

Nonetheless, in keeping with the procedures recommended by ACUS for

direct final rulemaking, the FCA is providing a 30-day period from

publication during which members of the public may comment on the rule.

If significant adverse comment is received during the comment period,

the FCA will publish a notice of withdrawal of the rule that will also

indicate how further rulemaking will proceed. If no significant adverse

comment is received, the FCA will publish its customary notice of the

effective date of the rule following the required Congressional waiting

period under section 5.17(c)(1) of the Act.

List of Subjects in 12 CFR Part 614

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

Reporting and recordkeeping requirements, Rural areas.

For the reasons set out in the preamble, part 614 of chapter VI,

title 12 of the Code of Federal Regulations is amended to read as

follows:

PART 614--LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 is revised 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, 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, 4.3A, 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, 8.9 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, 2154a, 2183,

2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a,

2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-

1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5, 2279aa-9); sec. 413 of

Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart H--Loan Purchases and Sales

2. Sections 614.4335 and 614.4336 are revised to read as follows:

Sec. 614.4335 Borrower stock requirements.

(a) In general. Except as provided in paragraph (b) of this

section, a borrower shall meet the institution's minimum borrower stock

purchase requirements as a condition of obtaining a loan.

(b) Loans designated for sale into a secondary market. (1) An

institution's bylaws may provide that the institution's minimum

borrower stock purchase requirements do not apply if a loan is

designated, at the time it is made, for sale into a secondary market.

(2) If a loan designated for sale under paragraph (b)(1) of this

section is not sold into a secondary market during the 180-day period

that begins on the date of designation, the institution's minimum

borrower stock purchase requirements shall apply.

(c) Retirement of borrower stock. (1) In general. Borrower stock

may be retired only if the institution meets the minimum permanent

capital requirements imposed by the FCA pursuant to the Act or

regulations and, except as provided in paragraph (c)(2) of this

section, in accordance with the following:

(i) Borrower stock may be retired if the entire loan is sold

without recourse, provided that when the loan is sold without recourse

to another Farm Credit System institution, the borrower may elect to

hold stock in either the selling or purchasing institution.

(ii) Borrower stock may not be retired when the entire loan is sold

with recourse.

(iii) When an interest in a loan is sold without recourse, a

proportionate amount of borrower stock may be

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retired, but in no event may stock be retired below the institution's

minimum stock purchase requirements for the interest retained.

(iv) If an institution repurchases a loan on which the stock has

been retired, the borrower shall be required to repurchase stock in the

amount of the minimum stock purchase requirement.

(2) Loans sold into a secondary market. An institution's bylaws may

provide that all outstanding voting stock held by a borrower with

respect to a loan shall be retired when the loan is sold into a

secondary market.

(d) Applicability. In the case of a loan sold into a secondary

market under title VIII of the Act, paragraphs (b)(1) and (c)(2) of

this section apply regardless of whether the institution retains a

subordinated participation interest in a loan or pool of loans or

contributes to a cash reserve.

Sec. 614.4336 Borrower rights in connection with loan sales.

(a) Loan sales to Farm Credit System institutions. Loans made by

qualified lenders (as defined in section 4.14A(a)(6) of the Act) and

interests in such loans that are sold to other qualified lenders are

subject to the borrower rights provisions of title IV of the Act.

(b) Loans designated for sale into a secondary market. (1) Except

as provided in paragraph (b)(2) of this section, the borrower rights

provisions of sections 4.14, 4.14A, 4.14B, 4.14C, 4.14D, and 4.36 of

the Act do not apply to a loan made on or after February 10, 1996, that

is designated for sale into a secondary market at the time it is made.

(2) If a loan designated for sale under paragraph (b)(1) of this

section is not sold into a secondary market during the 180-day period

that begins on the date of designation, the borrower rights provisions

specified as inapplicable pursuant to paragraph (b)(1) of this section

shall apply, provided that if the loan is subsequently sold into a

secondary market, the borrower rights specified in paragraph (b)(1) of

this section become inapplicable beginning on the date of the

subsequent sale.

(c) Other loan sales. (1) Except for loans sold to another Farm

Credit institution or designated for sale into a secondary market, a

qualified lender must comply with one of the following two requirements

before selling a loan or interest in a loan that is subject to the

borrower rights provisions of title IV of the Act:

(i) Include provisions in the contract with the borrower, or a

written modification thereto, that ensure that the purchaser of the

loan will be obligated to accord the borrower the same rights qualified

lenders must provide under the Act; or

(ii) Obtain from the borrower a signed written consent to the sale

that explicitly states that the borrower relinquishes the statutory

borrower rights. The consent to the loan sale and the relinquishment of

the borrower rights shall have no effect until the loan is actually

sold and shall be ineffective in the event that the lender or any other

Farm Credit System institution repurchases the loan or any interest

therein.

(2) Before obtaining the borrower's consent to the sale of the loan

and the relinquishment of borrower rights pursuant to paragraph

(c)(1)(ii) of this section, the lending institution shall disclose in

writing to the borrower:

(i) A full and complete description of the statutory rights that

the borrower is asked to relinquish;

(ii) Any changes in the loan terms or conditions that will occur if

the loan is not sold; and

(iii) The fact that the relinquishment of the statutory borrower

rights will not become effective unless the loan is actually sold and

shall become ineffective in the event that the lender or any other Farm

Credit System institution repurchases the loan or any interest therein.

(3) The making of a loan may not be conditioned on the borrower's

consent to its sale and relinquishment of statutory borrower rights.

Subpart K--Disclosure of Loan Information

Sec. 614.4367 [Amended]

3. Section 614.4367 is amended by removing paragraph (b) and

redesignating paragraphs (c) through (e) as paragraphs (b) through (d).

Dated: November 24, 1997.

Nan P. Mitchem,

Acting Secretary, Farm Credit Administration Board.

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\i\ Pub. L. 104-105 (February 10, 1996).

ii Generally, for each loan made by a qualified

lender, a borrower is subject to minimum stock purchase requirements

of 2 percent of the loan or $1,000, whichever is less. The borrower

rights provisions of the Act impose certain disclosure and other

obligations on lenders.

iii The specific borrower rights under the Act that

are affected by the section 4.14A definitional change include

reconsideration of actions (sec. 4.14), restructuring distressed

loans (sec. 4.14A), effect of restructuring on borrower stock (sec.

4.14B), review of restructuring denials (sec. 4.14C), protection of

borrowers who meet all loan obligations (sec. 4.14D), and right of

first refusal (sec. 4.36).

As enacted, the language of section 208 of the 1996 Act amending

the definition of ``loan'' leaves no doubt that Congress intended to

include the section 4.36 borrower's right of first refusal among the

borrower rights that become inapplicable when a loan is designated

for sale into a secondary market. This is consistent with section

8.9(a) of the Act, which specifically exempts loans pooled under

title VIII from section 4.36 borrower rights. However, section 208

of the 1996 Act did not amend the introductory paragraph of section

4.14A(a), which limits the applicability of the section's

definitions to those ``used in this part [C of title IV].'' Since

section 4.36 is located in part G (``Miscellaneous'') of title IV,

it could technically be argued that the amended definition of

``loan'' does not apply to section 4.36. Notwithstanding this

apparent drafting inconsistency, the FCA believes Congressional

intent is clear and interprets the 1996 Act to exempt loans

designated for sale into a secondary market from the section 4.36

borrower's right of first refusal.

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[FR Doc. 97-31569 Filed 12-1-97; 8:45 am]

BILLING CODE 6705-01-P