Loan Policies and Operations; Leasing; General Provisions; Accounting and Reporting Requirements

FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 616, 618, and 621

RIN 3052-AB63

Loan Policies and Operations; Leasing; General Provisions;

Accounting and Reporting Requirements

AGENCY: Farm Credit Administration.

ACTION: Reproposed rule; request for comment.

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

Administration Board (Board) seeks additional comment on a rule to

amend its regulations that provide Farm Credit System (System)

institutions regulatory guidance concerning leasing activities. The

reproposed rule addresses the comments received on the proposed rule

and streamlines the regulations where appropriate. The reproposed rule

provides clear and concise regulations pertaining to the System's

leasing activities and clarifies existing regulations that apply to

leasing.

DATES: Please submit your comments on or before December 7, 1998.

ADDRESSES: You may send us your comments via electronic mail to

``[email protected]'' or through the Pending Regulations section of the

FCA's interactive website at ``www.fca.gov.'' You may also mail or

deliver your comments to Patricia W. DiMuzio, Director, Regulation and

Policy Division, Office of Policy and Analysis, Farm Credit

Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, or

send them by facsimile transmission to FAX number (703) 734-5784. You

may review copies of all comments we receive in the Office of Policy

and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

John J. Hays, Policy Analyst, Office of Policy and Analysis, Farm

Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703)

883-4444,

or

James M. Morris, Senior Counsel, Office of General Counsel, Farm Credit

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

4444.

SUPPLEMENTARY INFORMATION: On October 15, 1997, the FCA published a

proposed rule that would replace the existing regulatory guidance

relating to System institutions' leasing activities (62 FR 53581). The

Farm Credit Leasing Services Corporation (FCL) and AgriBank, FCB

(AgriBank) provided specific comments on the proposed rule. Ag Credit

Agricultural Credit Association and AgFirst, Farm Credit Bank submitted

general comments. After considering the four comment letters received,

we revised the proposed rule and now seek additional comment. We have

renumbered all sections in the reproposed part 616 and note the new

section numbers as part of our discussion of the reproposed amendments.

1. Authority and Lessee Eligibility

As originally proposed, Sec. 616.6100(a), (b), and (c) generally

restated sections 1.11(c)(2), 2.4(b)(4), and 3.7(a) of the Farm Credit

Act of 1971, as amended (Act). Because it is unnecessary to restate the

Act in our regulations, we have omitted these paragraphs. The

reproposed rule designates the remaining paragraph (d) as Sec. 616.6400

and requires that an institution document that the lease of equipment

or facility is authorized under its leasing authorities. In the

reproposed rule, Sec. 616.6100 results from the redesignation of

Sec. 616.6110, discussed below.

2. Purchase and Sale of Interests in Leases

The existing definition of a ``loan'' in Sec. 614.4325(a)(3)

includes leases and generally applies the loan purchase and sale rules

to leases. This approach has proven unsatisfactory because the

interests in a loan and lease are different; a lease cannot be divided

into a principal amount and interest payments. The proposed rule

intended to accommodate these differences by providing a new definition

tailored to leases. We proposed to define a lease participation in

Sec. 616.6000(d) as a fractional undivided interest in: (1) All of the

lease payments; (2) the residual value of all of the property leased;

or (3) all of the lease payments and the residual value of all of the

property leased.

AgriBank and the FCL raised technical concerns with the proposed

approach. AgriBank suggested a clarification to the definition of

``interests in leases'' in proposed Sec. 616.6000(a). The FCL

recognized the difficulty of treating lease interests in the same

manner as loan interests and requested further clarification. After

considering these comments, we have concluded that a different and

simpler approach is needed. The reproposed rule does not differentiate

between ``participation'' interests in leases and other types of lease

interests that can be purchased and sold. Reproposed Sec. 616.6100

(Sec. 616.6110 in the proposed regulation), would authorize a System

institution to purchase from any lessor any interest (including a

participation interest) in a lease for equipment or facilities used in

the operations of eligible borrowers. Specifically, the reproposed rule

would:

(1) Eliminate the distinctions concerning the authority to purchase

``lease interests'' and ``lease participation interests'';

(2) Eliminate cross-title restrictions on the purchase of lease

interests; and

(3) Eliminate the retention requirement concerning the purchase of

lease interests from outside the System. At present, this provision

requires that the servicer of the lease have at least a 10-percent

ownership interest in the lease in order for a System institution to

purchase an interest from a non-System lessor. We conclude that

requiring the servicer to have an ownership interest is not necessary

to manage risk and is not required by law.

The reproposed rule omits as no longer necessary the definition of

a lease participation in proposed Sec. 616.6000(d) and the definition

of a participating institution in proposed Sec. 616.6000(e). Reproposed

Sec. 616.6000(b) would define ``lease'' to include only those leases

for equipment or facilities that are used in the operations of persons

eligible to borrow under part 613 of this chapter.

Eliminating the distinctions between ``lease interests'' and

``participation interests'' enables us to shorten the regulation by

eliminating proposed Sec. 616.6115. Reproposed Sec. 616.6100 would

incorporate relevant provisions from proposed Sec. 616.6115. The

following information explains how we combined these provisions:

[[Page 56874]]

We rewrote paragraph (a) of Sec. 616.6100, as reproposed,

to allow System institutions to purchase leases and interests in

leases. The definition of ``lease'' would continue to limit the types

of leases in which System institutions can purchase an interest, that

is, leases of equipment or facilities used in the operations of

eligible borrowers.

We clarified that paragraph (b) of Sec. 616.6100, as

reproposed, would reflect that the policy requirement applies only if

an institution buys or sells interests in leases.

We removed paragraph (b)(1) of proposed Sec. 616.6110,

because there are no restrictions limiting to whom a System institution

may sell interests in leases. We renumbered and clarified paragraphs

(b)(2) through (b)(7) in reproposed Sec. 616.6100.

We restructured paragraph (c), which contained

requirements roughly parallel to Sec. 614.4325(d) requirements

applicable to loans, to incorporate requirements contained in proposed

Sec. 616.6115(a) and to add a provision concerning transactions through

agents.

We did not change paragraph (d).

We removed paragraph (e) of proposed Sec. 616.6110 because

it duplicates a provision in Sec. 616.6100(b).

We redesignated paragraphs (f) and (g) as paragraphs (e)

and (f) without change.

AgriBank also suggested adding language to the regulation that

would permit lease transactions through agents parallel to loan

transactions permitted by Sec. 614.4325(h). We agree that lease

transactions through agents should be permitted on the same basis as

Sec. 614.4325(h) permits for loans. Reproposed Sec. 616.6100(c)(8)

incorporates the rules contained in Sec. 614.4325(h). This provision

would require a written agency agreement and periodic review of the

agency relationship. If a funding bank serves as an association's

agent, the agency agreement must provide for termination of the

agreement upon 60-days notice to the bank. In addition, the agreement

must provide that an association can require repurchase of the interest

in a lease if the interest does not comply with either the agency

agreement or the association's underwriting standards. Finally, a

technical change is necessary in order to delete the term ``lease''

from the Sec. 614.4325(a)(3) definition of a ``loan'' for purposes of

subpart H, since that subpart would no longer apply.

3. Customer Choice of Lease Provider

Proposed Sec. 616.6120 would have required an institution making

out-of-territory leases to obtain the concurrence of at least one

institution offering similar leasing services in the territory. Upon

reconsideration, we are deleting this requirement from the reproposed

regulation in order to provide System institutions with additional

flexibility to make leases beyond their designated territory. The

reproposed rule would not require a System lessor to satisfy any notice

or concurrence requirements in order to serve lessees beyond the

lessor's territory. The reproposed regulation is now Sec. 616.6200.

4. Leasing Policies, Procedures, and Underwriting Standards

The proposed Sec. 616.6200 would have required a System institution

engaged in leasing to adopt a written policy (or policies) and

underwriting standards. One provision of the proposed regulation would

have required that a System lessor adopt written policies and

procedures that require management to establish a prudent residual

value at the inception of the lease. The FCL agreed with proposed

Sec. 616.6200 in general, but requested that we delete the word

``prudent'' as a modifier of the phrase ``residual value'' in proposed

Sec. 616.6200(d). We have eliminated the term ``prudent'' from proposed

Sec. 616.6200(d) and from the introductory text of Sec. 616.6200

because it is unnecessary and the written policies and procedures must

reflect lease practices that control risk. We have clarified in the

reproposed regulation that policies must address the appropriateness of

all terms and conditions, including the residual value. We also make a

clarifying change to proposed Sec. 616.6200 to replace the general

reference to part 614 with the specific reference to the requirements

of Sec. 614.4150. To ensure that the list in proposed Sec. 616.6200

does not duplicate any requirement of Sec. 614.4150, we have omitted

proposed Sec. 616.6200(a) and (b) and redesignated the remaining

paragraphs. The reproposed rule is now Sec. 616.6300.

5. Investment in Leased Assets

We received no comments on the proposed provision concerning

investment in leased assets, Sec. 616.6210, which would authorize an

institution to purchase property to lease if the acquisition of such

property is consistent with the type of leasing being conducted or

planned in the future. The reproposed rule is now Sec. 616.6500.

6. Lending and Leasing Limits

We received one comment on the proposal to make leases and loans to

a single borrower subject to a ``lending and leasing limit.'' This

provision would limit an institution's exposure to risk from a single

borrower. The FCL sought clarification of the provision that allows

certain interests sold to be excluded from computing the total loans

and leases to a borrower. Proposed Sec. 614.4358(b)(5) would have

excluded interests in leases sold if the sale agreement met three

specific requirements. The third requirement, the subject of the FCL's

comment, is that the agreement under which the interest is sold must

provide for the sharing of all payments on a pro rata basis according

to the percentage interest in the lease. The FCL commented that it is

unclear how Sec. 614.4358(b)(5)(iii) applies when the participation

interest is solely the residual value. We revised the reproposed rule

in response to this comment. The pro rata sharing requirement would

apply only to lease payments.

We have made these additional changes to implement the leasing and

lending limit regulations in subpart J of part 614 include:

We clarified that the definition of ``borrower'' includes,

for the purposes of subpart J, any customer to whom an institution has

made a lease or a commitment to make a lease. See Sec. 614.4350(a).

We expanded the definition of ``loan'' includes all types

of leases (operating, financing, and lease interests). See

Sec. 614.4350(c).

The reproposed rule would prohibit a System institution

from making a lease or a loan if the consolidated amount of all loans

and leases to a single borrower exceeds a specific percentage of the

institution's lending and leasing limit base. See Secs. 614.4352

through 614.4355.

The reproposed rule would prohibit the FCL from making

leases to a single lessee or any related entities that exceed 25

percent of the FCL's ``lending and leasing limit base.'' See

Sec. 614.4356.

We added the outstanding lease balances to the items

included in the computation of obligations. See Sec. 614.4358(a)(1).

All leases, except those that are permitted under

Sec. 614.4361, must comply with the leasing and lending limits at all

times. See Sec. 614.4360(d).

7. Portfolio Limitations

Proposed Sec. 616.6230 would have limited leases made by Farm

Credit Banks (FCBs), agricultural credit banks (ACBs), production

credit associations (PCAs), Federal land credit associations and

agricultural credit associations (ACAs), and the FCL to processing and

marketing operations of agricultural or aquatic producers who supply

less than

[[Page 56875]]

20 percent of the throughput. That provision would have included low-

throughput processing and marketing leases in computing loan portfolio

restrictions contained in sections 1.11(a)(2) and 2.4(a)(1) of the Act.

Loans and leases made to borrowers who supply less than 20 percent of

the throughput used in a processing or marketing operation would have

been subject to the 15-percent portfolio ceiling in Sec. 613.3010(b).

Proposed Sec. 616.6230(b) would have imposed this 15-percent portfolio

limitation on the FCL for leases it makes to processing or marketing

operations.

Upon reconsideration, we have concluded that the Act does not

impose portfolio limitations on leases to processing and marketing

operations. In the absence of a statutory requirement or a safety and

soundness concern, we do not believe such a limitation on leasing

activity is necessary. Therefore, we have not included proposed

Sec. 616.6230 in the reproposed rule.

8. Stock Purchase Requirements

We read the Act to impose a stock purchase requirement in

connection with some leases, but not others. The Act authorizes FCBs to

lease facilities and equipment to ``persons eligible for credit.'' In

contrast, the Act authorizes PCAs and Banks for Cooperatives (BCs) to

lease equipment only to ``stockholders,'' but does not prescribe any

minimum stock purchase requirement. Therefore, lessees who lease

equipment from PCAs, ACAs, BCs, or ACBs under titles II or III of the

Act must be stockholders.

Because cooperatives operate on a one-person, one-vote basis, the

number of shares of stock does not affect membership rights. Therefore,

the purchase of a single share of stock is sufficient to satisfy the

stockholder requirement. Institutions may also satisfy the stock

requirement by counting outstanding shares stockholders already own.

The stock requirement in the reproposed rule would not apply to the FCL

because its stockholders are System banks, rather than its lease

customers. The disclosure requirements for equities issued as a

condition to obtain a lease would be the same as disclosure

requirements for equities issued as a condition to obtain a loan as

required under Sec. 615.5250(a) and (b) of this chapter.

AgriBank inquired whether System institutions could issue

participation certificates to lessees, rather than stock. Because both

stock and participation certificates satisfy the membership

requirements of the Act, the FCA has allowed System institutions to use

either one. We inserted the phrase ``or one participation certificate''

into the reproposed rule after the phrase ``at least one share of

stock,'' in order to clarify that an institution may issue one

participation certificate to satisfy the stock purchase requirement if

authorized by the institution's bylaws. The reproposed rule is now

Sec. 616.6700.

9. Disclosure Requirements

The proposed rule contained two disclosure requirements. Proposed

Sec. 616.6250(a) would have required that lease applicants be provided,

not later than the time of lease closing, a copy of all lease documents

signed by the lessee. In addition, proposed Sec. 616.6250(b) would have

required a System institution to render its decision on the lease

application in as expeditious a manner as is practical and provide

prompt written notice of its decision to the applicant.

The FCL questioned what constitutes ``lease closing.'' The FCL

submits that if the term means lease commencement, this provision could

pose a problem for System lessors because it is an industry practice

for leases to commence on delivery and acceptance of the equipment by

the lessee, while the paperwork may not be finalized until later. The

FCL recommended that we omit the phrase ``not later than the time of

lease closing'' or alternatively, replace it with the phrase ``within a

reasonable time following lease closing.'' The reproposed rule is

revised to require that copies be provided to a lessee within a

reasonable time following lease closing.

The FCL and AgriBank opposed the proposed requirement to provide

notice of adverse action on applications. The FCL contends that

requiring System lessors to provide notice of adverse action would

increase administrative costs and result in an uneven playing field

compared to System competitors. The FCL suggested, as an alternative,

the adoption of a threshold similar to that contained in Federal

Reserve Board Regulation M, which only applies to consumer leases of

less than $25,000. AgriBank recommended that the FCA eliminate entirely

the requirement to provide notice of adverse action because the

requirement would go beyond current legal and regulatory requirements

for other lessors.

The FCA has deleted this requirement in the reproposed rule.

However, the reproposal continues to require that an institution

provide written notice of its decision on the application. While the

FCA believes little additional burden would result from providing the

reason(s) for adverse action, it is not required by law. The FCA

continues to believe that providing such a notice is a good business

practice. The reproposed rule is now Sec. 616.6800.

The existing leasing regulations in Secs. 618.8050 and 618.8060

will be deleted upon the effective date of the final rule. The

reproposed rule also makes conforming technical changes to

Secs. 614.4710 and 621.7.

List of Subjects

12 CFR Part 614

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

Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 616

Agriculture, Banks, banking, leasing.

12 CFR Part 618

Agriculture, Archives and records, Banks, banking, Insurance,

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

12 CFR Part 621

Accounting, Agriculture, Banks, banking, Penalties, Reporting and

recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, parts 614, 618 and 621 are

proposed to be amended and part 616 is proposed to be added to chapter

VI, title 12 of the Code of Federal Regulations 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, 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,

4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6,

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, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149,

2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206,

2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,

2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5);

sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

Subpart H--Loan Purchases and Sales

Sec. 614.4325 [Amended]

2. Section 614.4325 is amended by removing the word ``leases,''

from paragraph (a)(3).

3. The heading of subpart J is revised to read as follows:

[[Page 56876]]

Subpart J--Lending and Leasing Limits

4. Section 614.4350 is amended by revising paragraphs (a) and (c)

to read as follows:

Sec. 614.4350 Definitions.

* * * * *

(a) Borrower means an individual, partnership, joint venture,

trust, corporation, or other business entity (except a Farm Credit

System association or other financing institution that complies with

the criteria in section 1.7(b) of the Act and the regulations in

subpart P of this part) to which an institution has made a loan or a

commitment to make a loan either directly or indirectly. For the

purposes of this subpart, the term ``borrower'' includes any customer

to whom an institution has made a lease or a commitment to make a

lease.

* * * * *

(c) Loan means any extension of, or commitment to extend, credit

authorized under the Act whether it results from direct negotiations

between a lender and a borrower or is purchased from or discounted for

another lender, including participation interests. The term ``loan''

includes loans and leases outstanding, obligated but undisbursed

commitments to lend or lease, contracts of sale, notes receivable,

other similar obligations, guarantees, and all types of leases. An

institution ``makes a loan or lease'' when it enters into a commitment

to lend or lease, advances new funds, substitutes a different borrower

or lessee for a borrower or lessee who is released, or where any other

person's liability is added to the outstanding loan, lease or

commitment.

* * * * *

Sec. 614.4351 [Amended]

5. Section 614.4351 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limit base'' each place they appear

in the heading and in the entire section.

Sec. 614.4352 [Amended]

6. Section 614.4352 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limit base'' in paragraphs (a) and

(b)(1); and by adding the words ``and leasing'' between the words

``lending'' and ``limits'' in paragraph (b)(2).

Sec. 614.4353 [Amended]

7. Section 614.4353 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limit base''.

Sec. 614.4354 [Amended]

8. Section 614.4354 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limit base''.

Sec. 614.4355 [Amended]

9. Section 614.4355 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limit base'' in the introductory

paragraph; and by removing the word ``lending'' in the headings of

paragraphs (a) and (b).

Secs. 614.4356--614.4360 [Redesignated]

10. Sections 614.4356 through 614.4360 are redesignated as

Secs. 614.4357 through 614.4361; and a new Sec. 614.4356 is added to

read as follows:

Sec. 614.4356 Farm Credit Leasing Services Corporation.

The Farm Credit Leasing Services Corporation may enter into a lease

agreement with a lessee if the consolidated amount of all leases and

undisbursed commitments to that lessee or any related entities does not

exceed 25 percent of its lending and leasing limit base.

11. Newly designated Sec. 614.4358 is amended by adding the words

``and leasing'' between the words ``lending'' and ``limit'' in the

introductory text of paragraphs (a) and (b); by adding the words ``and

lease balances outstanding'' after the word ``loans'' the first place

it appears in paragraph (a)(1); by removing the reference

``Sec. 614.4358'' and adding in its place the reference

``Sec. 614.4359'' in paragraph (a)(3); by redesignating existing

paragraph (b)(5) as paragraph (b)(6); and by adding a new paragraph

(b)(5) to read as follows:

Sec. 614.4358 Computation of obligations.

* * * * *

(b) * * *

(5) Interests in leases sold when the sale agreement provides that:

(i) The interest sold must be:

(A) An undivided interest in all the lease payments or the residual

value of all the leased property; or (B) A fractional undivided

interest in the total lease transaction;

(ii) The interest must be sold without recourse; and

(iii) The sharing of all lease payments must be on a pro rata basis

according to the percentage interest in the lease payments.

* * * * *

Sec. 614.4359 [Amended]

12. Newly designated Sec. 614.4359 is amended by adding the words

``and leasing'' between the words ``lending'' and ``limit'' in

paragraphs (a) introductory text, (b), and (c); by removing the

reference ``Sec. 614.4356'' and adding in its place, the reference

``Sec. 614.4357'' in paragraph (a)(1)(iii); and by removing the

reference ``Sec. 614.4358'' and adding in its place, the reference

``Sec. 614.4359'' in the heading for column two in Table 1.

13. Newly designated Sec. 614.4360 is amended by adding the words

``and leasing'' between the words ``lending'' and ``limit'' in the

heading and in paragraphs (a), (b), (c), and (d); by removing the

reference ``Sec. 614.4360'' and adding in its place, the reference

``Sec. 614.4361'' in paragraph (a); by removing the reference

``Sec. 614.4359(b)(3)'' and adding in its place, the reference

``Sec. 614.4360(b)(3)'' in paragraph (c); by redesignating paragraph

(d) as paragraph (e); and by adding a new paragraph (d) to read as

follows:

Sec. 614.4360 Lending and leasing limit violations.

* * * * *

(d) All leases, except those that are permitted under the

provisions of Sec. 614.4361, reading ``effective date of this subpart''

in Sec. 614.4361(a) and ``effective date of these regulations'' in

Sec. 614.4361(b) as ``effective date of this amendment,'' shall be in

compliance with the lending and leasing limit on the date the lease is

made, and at all times thereafter.

* * * * *

Sec. 614.4361 [Amended]

14. Newly designated Sec. 614.4361 is amended by adding the words

``and leasing'' between the words ``lending'' and ``limits'' in each

place they appear in paragraphs (a) and (b); and by removing the

reference ``Sec. 614.4359'' and adding in its place, the reference

``Sec. 614.4360'' in paragraph (b).

Subpart Q--Banks for Cooperatives and Agricultural Credit Banks

Financing International Trade

Sec. 614.4710 [Amended]

15. Section 614.4710 is amended by adding the words ``and leasing''

between the words ``lending'' and ``limits'' in the last sentence of

the introductory paragraph and in paragraphs (a)(2) and (a)(3).

16. A new part 616 is added to read as follows:

PART 616--LEASING

Sec.

616.6000 Definitions.

616.6100 Purchase and sale of interests in leases.

[[Page 56877]]

616.6200 Out-of-territory leasing.

616.6300 Leasing policies, procedures, and underwriting standards.

616.6400 Documentation requirements.

616.6500 Investment in leased assets.

616.6600 Leasing limits.

616.6700 Stock purchase requirements.

616.6800 Disclosure requirements.

Authority: 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, 3.9,

3.10, 3.20, 3.28, 4.3, 4.3A, 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C,

4.14D, 4.14E, 4.18, 4.18A, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9,

5.10, 5.17, 7.0, 7.2, 7.3, 7.6, 7.8, 7.12, 7.13 of the Farm Credit

Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073,

2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129,

2130, 2131, 2141, 2149, 2154, 2154a, 2199, 2200, 2201, 2202, 2202a,

2202c, 2202d, 2202e, 2206, 2206a, 2211, 2212, 2213, 2214, 2219a,

2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279a-3, 2279b, 2279c-1,

2279f, 2279f-1).

PART 616--LEASING

Sec. 616.6000 Definitions.

For the purposes of this part, the following definitions shall

apply:

(a) Interests in leases means ownership interests in any aspect of

a lease transaction, including, but not limited to, servicing rights.

(b) Lease means any contractual obligation to own and lease, or

lease with the option to purchase, equipment or facilities used in the

operations of persons eligible to borrow under part 613 of this

chapter.

(c) Sale with recourse means a sale of a lease or an interest in a

lease in which the seller:

(1) Retains some risk of loss from the transferred asset for any

cause except the seller's breach of usual and customary warranties or

representations designed to protect the purchaser against fraud or

misrepresentation; or

(2) Has an obligation to make payments to any party resulting from:

(i) Default on the lease by the lessee or guarantor or any other

deficiencies in the lessee's performance;

(ii) Changes in the market value of the assets after transfer;

(iii) Any contractual relationship between the seller and purchaser

incident to the transfer that, by its terms, could continue even after

final payment, default, or other termination of the assets transferred;

or

(iv) Any other cause, except that the retention of servicing rights

alone shall not constitute recourse.

Sec. 616.6100 Purchase and sale of interests in leases.

(a) Authority to purchase interests in leases. A Farm Credit System

institution may purchase leases and interests in leases.

(b) Policies. Each Farm Credit System institution that sells or

purchases interests in leases shall do so only in accordance with a

policy adopted by its board of directors that addresses the following:

(1) The types of leases in which the institution may purchase or

sell an interest and the types of interests which may be purchased or

sold;

(2) The underwriting standards to be applied in the purchase of

interests in leases;

(3) Such limitations on the aggregate lease payments and residual

amount of interests in leases that the institution may purchase from a

single institution as are necessary to diversify risk, and such

limitations on the aggregate amounts the institution may purchase from

all institutions as are necessary to assure that service to the

territory is not impeded;

(4) Identification and reporting of leases in which interests are

sold or purchased;

(5) Requirements for securing from the selling lessor in a timely

manner adequate financial and other information concerning the lessee

needed to make an independent judgment; and

(6) Any limitations or conditions to which sales or purchases are

subject that the board deems appropriate, including arbitration.

(c) Purchase and sale agreements. Each agreement to purchase or

sell an interest in a lease shall, at a minimum:

(1) Identify the particular lease(s) to be covered by the

agreement;

(2) Provide for the transfer of lessee information on a timely and

continuing basis;

(3) Identify the nature of the interest(s) sold or purchased;

(4) Specify the rights and obligations of the parties and the terms

and conditions of the sale;

(5) Contain any terms necessary for the appropriate administration

of the lease, including lease servicing and monitoring of the servicer

and authorization and conditions for action in the event of lessee

distress or default;

(6) Provide for a method of resolution of disagreements arising

under the agreement;

(7) Specify whether the contract is assignable by either party; and

(8) In the case of lease transactions through agents, comply with

the provisions of Sec. 614.4325(h) of this chapter, reading the term

``lease'' or ``leases'' in place of the term ``loan'' or ``loans,'' as

applicable.

(d) Independent judgment. Each institution that purchases an

interest in a lease shall make a judgment on the payment ability of the

lessee that is independent of the originating or lead lessor and any

intermediary seller or broker prior to the purchase of the interest and

prior to any servicing action that alters the terms of the original

agreement, which judgment shall not be delegated to any person(s) not

employed by the institution. A Farm Credit System institution that

purchases a lease or any interest therein may use information, such as

appraisals or inspections, furnished by the originating or lead lessor,

or any intermediary seller or broker; however, the purchasing Farm

Credit System institution shall independently evaluate such information

when exercising its independent judgment. The independent judgment

shall be documented by a payment analysis that considers factors set

forth in Sec. 616.6300. The payment analysis shall consider such

financial and other lessee information as would be required by a

prudent lessor and shall include an evaluation of the capacity and

reliability of the servicer. Boards of directors of jointly managed

institutions shall adopt procedures to ensure that the interests of

their respective shareholders are protected in participation between

such institutions.

(e) Sales with recourse. When a lease or interest in a lease is

sold with recourse, it shall be accorded the following treatment:

(1) The lease shall be considered, to the extent of the recourse or

guaranty, a lease by the purchaser to the seller, as well as a lease

from the seller to the lessee, for the purpose of determining whether

total leases to a lessee are within the lending and leasing limits

established in subpart J of part 614.

(2) The amount of the lease subject to the recourse agreement shall

be considered a lease sold with recourse for the purpose of computing

capital ratios.

(f) Similar entity lease transactions. The provisions of

Sec. 613.3300 of this chapter that apply to interests in loans made to

similar entities shall apply to interests in leases made to similar

entities. In applying these provisions, the term ``loan'' shall be read

to include the term ``lease'' and the term ``principal amount'' shall

be read to include the term ``lease amount.''

Sec. 616.6200 Out-of-territory leasing.

A System institution may make leases outside its chartered

territory. A System institution making out-of-territory leases is not

required to provide notification to, or obtain concurrence from, other

System institutions.

[[Page 56878]]

Sec. 616.6300 Leasing policies, procedures, and underwriting

standards.

The board of each institution engaged in lease underwriting shall

set forth a written policy (or policies) and procedures governing such

activity that reflect lease practices that control risk and comply with

all applicable laws and regulations. Any leasing activity shall comply

with the lending policies and loan underwriting requirements in

Sec. 614.4150 of this chapter. An institution engaged in the making,

purchasing, or syndicating of leases also must establish written

policies and procedures that address the additional risks associated

with leasing. Written policies and procedures shall address the

following, if applicable:

(a) Appropriateness of the lease amount, purpose, and terms and

conditions, including the residual value established at the inception

of the lease;

(b) Process for estimating the leased asset's market value during

the lease term;

(c) Types of equipment and facilities the institution will lease;

(d) Remarketing of leased property and associated risks;

(e) Property tax and sales tax reporting;

(f) Title and ownership of leased assets;

(g) Title and licensing for motor vehicles;

(h) Liability associated with ownership, including any

environmental hazards or risks;

(i) Insurance requirements for both the lessor and lessee;

(j) Classification of leases in accordance with generally accepted

accounting principles; and

(k) Tax treatment of lease transactions and associated risks.

Sec. 616.6400 Documentation requirements.

Each institution shall adequately document that any asset it leases

is within its statutory authority.

Sec. 616.6500 Investment in leased assets.

An institution may acquire property to be leased, if the

acquisition of the property is consistent with the leasing then

conducted by the institution or is consistent with a business plan for

expansion of the institution's existing leasing business or for entry

into the leasing business.

Sec. 616.6600 Leasing limits.

All leases made by Farm Credit System institutions shall be subject

to the lending and leasing limits prescribed in subpart J of part 614

of this chapter.

Sec. 616.6700 Stock purchase requirements.

(a) Each System institution making an equipment lease under titles

II or III of the Act shall require the lessee to purchase at least one

share of stock or one participation certificate in accordance with its

bylaws, unless the lessee already owns stock in the institution making

the lease. This provision does not apply to the Farm Credit Leasing

Services Corporation.

(b) The disclosure requirements of Sec. 615.5250(a) and (b) of this

chapter shall apply to stock (or participation certificates) purchased

as a condition for obtaining a lease.

Sec. 616.6800 Disclosure requirements.

(a) Each System institution shall furnish to each lessee a copy of

all lease documents signed by the lessee in connection with the lease,

within a reasonable time following lease closing.

(b) Each System institution shall render its decision on a lease

application in as expeditious a manner as is practical. Upon reaching a

decision on a lease application, the institution shall provide prompt

written notice of its decision to the applicant.

PART 618--GENERAL PROVISIONS

17. 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 C--Leasing

Subpart C--[Removed and Reserved]

18. Subpart C, consisting of Secs. 618.8050 and 618.8060, is

removed and reserved.

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

19. The authority citation for part 621 continues to read as

follows:

Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C.

2252, 2279aa-11).

Subpart C--Loan Performance and Valuation Assessment

Sec. 621.7 [Amended]

20. Section 621.7 is amended by removing the reference

``Sec. 614.4358(a)(2)'' and adding in its place, the reference

``Sec. 614.4359(a)(2)'' in paragraph (a)(2)(iii).

* * * * *

Dated: October 20, 1998.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 98-28480 Filed 10-22-98; 8:45 am]

BILLING CODE 6705-01-P