Organization; Loan Policies and Operations; General Provisions; Chartered Territories

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 614, and 618

RIN 3052-AB87

Organization; Loan Policies and Operations; General Provisions;

Chartered Territories

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: This proposed rule will amend Farm Credit Administration (FCA

or Agency) regulations to provide customers of the Farm Credit System

(FCS, Farm Credit, or System) with the opportunity to do business with

the FCS lender of their choice. The rule proposes to amend regulations

to permit farmers, ranchers, and other eligible customers to seek

financing and related services from any association or FCS bank

operating under title I or II of the Farm Credit Act of 1971, as

amended (Act). The rule proposes to eliminate geographic barriers that

often prevent an FCS lender from serving customers with operations

beyond its designated territory. At the same time, the rule proposes to

ensure every eligible customer's continued access to FCS credit and

services. It also continues to obligate each Farm Credit Bank (FCB),

agricultural credit bank (ACB), and association to extend sound,

adequate, and constructive credit and offer related services to

eligible customers within its chartered territory. An institution that

extends credit or offers related services to borrowers beyond its

designated territory must adopt a board policy and a business plan that

adequately guide these activities. The rule also proposes to make

conforming amendments to other regulations.

DATES: Please send your comments to us on or before February 8, 1999.

ADDRESSES: You may mail or deliver written 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 (703)

734-5784. You may also submit comments via electronic mail to ``reg-

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

website at ``www.fca.gov.'' You may review copies of all comments we

receive in the Office of Policy and Analysis, Farm Credit

Administration.

FOR FURTHER INFORMATION CONTACT:

S. Robert Coleman, Senior Policy Analyst, Office of Policy and

Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-

4498, TDD (703) 883-4444;

or

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:

I. General

The FCA proposes to repeal the restrictions in several existing

regulations so eligible customers can seek financing and related

services from the System institution of their choice. This is the first

major step to implement the FCA Board's Philosophy Statement on Intra-

System Competition adopted July 14, 1998. We believe that the existing

notice and consent restrictions on lending and related services have

become burdensome to both borrowers and System institutions. This has

been heightened by significant changes in agriculture and the financial

markets. The removal of these restrictions will allow associations and

System banks operating under title I or II of the Act to increase

operating efficiencies and offer better service to creditworthy and

eligible borrowers. With the removal of these existing restrictions,

System lenders must modify their policies and business plans as

necessary to ensure that they continue to operate in a safe and sound

manner.

We believe that the most efficient and least disruptive way to

provide customers greater flexibility in selecting their FCS lender and

service provider is through modification of existing regulations. The

rule proposes to amend the regulations in parts 611, 614, and 618 to:

Repeal the existing notification and consent requirements

for lending and related services in Secs. 614.4070 and 618.8030;

Allow eligible customers to apply for credit and related

services from any association or Farm Credit bank operating under title

I or II of the Act;

Require each association or Farm Credit bank operating

under title I or II of the Act to continue to fulfill its obligation to

serve all eligible and creditworthy customers within its designated

territory; and

Continue to promote safety and soundness by requiring each

System lender to develop appropriate policies and revise its business

plans before material amounts of credit or related services are

extended beyond its designated territory.

II. History and Background

Section 1.1 of the Act states that the mission of the FCS is to

furnish, on an ongoing basis, sound, adequate, and constructive credit

and related financial services to America's agricultural and aquatic

producers, their cooperatives, and other eligible rural residents. The

FCS is organized as a nationwide network of cooperative banks,

associations, and service corporations that are owned and controlled by

the farmers, ranchers, aquatic producers or harvesters, and

cooperatives that borrow from them. The charter of each System bank and

association designates a geographic territory in which the institution

will exercise its authorities. Although the two System banks that

operate under title III of the Act have national charters to furnish

credit and related services to cooperatives and rural utilities, all

other System banks and associations have designated territories that

cover a specified geographic region.

In the past, the FCA has used its broad power to charter, regulate,

and examine System institutions in a way that generally promoted

exclusive territories. This policy, which worked well for the

agricultural sector in earlier times, now unnecessarily restricts

customers' choice of lenders and service providers and hinders the

System's ability to provide ample, efficient, and high-quality credit

and related services. Consolidations in many sectors of the

agricultural economy have created fewer, larger, and more vertically

integrated producers that operate in several locations and require more

diversified financial services.

[[Page 60220]]

Additionally, consolidations in the financial services markets and

rapidly changing technologies are creating new sources and methods of

delivery for credit and related services that transcend geographic

boundaries.

The positive aspects of the former policy have eroded over the past

decade as agriculture, in general, and the FCS, in particular, have

restructured in response to significant economic changes. As a result

of this restructuring, a notable amount of geographic competition has

come about in the System. Both title III banks now operate nationally,

providing cooperative customers with a choice of lender. In over 130

counties across the country more than one FCS association now offers

the same type of financing to eligible borrowers. Thus, in many parts

of the country we have seen substantial departures from the notion of

exclusive territories. Customers have benefited from this change.

Furthermore, no safety and soundness concerns have arisen from FCS

institutions that jointly serve these shared designated territories.

Existing Sec. 614.4070 is an obstacle to the ability of consumers

to transact business with the System lender that best fits their needs.

The current rule details a complex and burdensome set of notice and

consent requirements that depend on the location of the customer's

operations and headquarters. In most instances, the customer may do

business only with the FCS lender that serves the territory in which

the customer conducts operations. As a general rule, existing

Sec. 614.4070 prohibits an FCS lender from serving customers operating

beyond the institution's designated territory unless the FCS

institution designated to serve that territory consents. The existing

regulation requires notice whenever a System lender finances the out-

of-territory activities of an existing borrower who also conducts

operations and maintains headquarters in its chartered territory.

Another provision of existing Sec. 614.4070 specifies that out-of-

territory lending should not constitute a significant shift of loan

volume away from the institution's designated territory.

Although some System lenders give the necessary consent freely upon

a customer's request, others do not. The burden of obtaining consent

and, at times not receiving it, impede the System's ability to serve

the needs of eligible customers as Congress intended.

III. Customer Choice for Credit and Related Services

We believe that each FCS institution operating under title I or II

of the Act needs greater flexibility to serve all eligible customers,

without regard to the location of the customer's operations so long as

the services are conducted safely and soundly. For this reason, the FCA

proposes to amend Sec. 614.4070 so that eligible customers can freely

apply for credit and financial services from the FCS institution of

their choice. This approach will benefit the public by increasing the

sources and availability of credit and improving the quality of

services available from System lenders. Additionally, this rule

proposes to provide System institutions with a more flexible regulatory

environment so they can improve their operating efficiencies and better

serve their customers.

Designating service territories through the chartering process has

been, and will remain, the principal method of ensuring that every

eligible customer has access to an FCS lender, as Congress intended.

Proposed Sec. 614.4070(a) reaffirms that each association and FCS bank

that operates under title I or II of the Act is obligated to serve

eligible and creditworthy farmers, ranchers, aquatic producers or

harvesters, farm-related businesses, and rural homeowners in its

designated territory. This obligation encompasses the responsibility to

offer an appropriate array of loan products and related services to all

types of agricultural and aquatic operations within the bounds of

safety and soundness. The designated territory also defines each

lender's obligation under the Act to be responsive to the needs of

young, beginning, and small farmers. Proposed Sec. 614.4070(a) will

ensure that every eligible customer will continue to have an FCS lender

that is committed to providing credit and related services in that

customer's area.

Proposed Sec. 614.4070(b) permits eligible farmers, ranchers,

aquatic producers or harvesters, farm-related businesses, and rural

homeowners to seek financing and related services from any association

or FCS bank operating under title I or II of the Act. The proposed

regulation also allows a bank or association to extend credit,

participate in loans, and provide related services to any eligible

applicant under its respective title I or II authorities. Implementing

this authority for loan participations should help strengthen the

System's safety and soundness. In particular it will benefit an FCS

lender that has a high concentration of loans in only a few

agricultural commodities in its designated territory. These

institutions are especially vulnerable to fluctuations in commodity

prices and downturns in the agricultural economy. Additionally,

geographic restrictions raise concerns because institutions face

increased risk to their loan portfolios from adverse weather, disease,

and pest damage. Buying and selling participations in loans with other

FCS institutions and lenders in other regions of the country help

institutions diversify their loan portfolios and limit their exposure

to risk in a single commodity and in a specific geographic area. This

proposal includes conforming amendments that repeal restrictions on

loan participations in existing Secs. 614.4000(d), 614.4010(e),

614.4030(b), 614.4040(b), and 614.4050(c).

Proposed Sec. 614.4070 also enhances customer choice for related

services. Some associations and FCS banks operating under title I or II

of the Act offer their customers related services while other

institutions offer none. This proposal will repeal Sec. 618.8030, which

contains the same consent and notice restrictions applicable to loans.

This change will enable FCS customers to obtain related services even

if their local FCS association does not offer the service they require.

Sound business principles dictate the importance of developing and

adopting a well-reasoned policy and business plan before any company

implements a new or expanded program. New programs for FCS

institutions, including the offering of credit and related services

provided by this proposed rule, present new opportunities and new risks

for System lenders. Proposed Sec. 614.4070(c) is designed to ensure

that such programs are operated under the appropriate direction and

control of each institution's board of directors.

The FCA Board expects that each FCS institution board will adopt a

policy, or revise its existing policy, to address any additional risks

created by new programs before an institution conducts a material

amount of business with customers in new geographic markets. In

considering whether the new business is material, an institution should

aggregate the volume of its loans, leases, participations and other

interests, and related services. Additionally, each institution should

integrate the opportunities and risks created by the new programs into

its operational and strategic business plans, as discussed in

Sec. 618.8040. In general, the policy and business plan should assess

the institution's risk-bearing capacity and servicing capabilities to

meet the needs of customers who reside in or conduct operations beyond

the institution's designated territory. The institution board, in

developing its policy and revising its business plan, should

specifically:

[[Page 60221]]

Consider how programs for providing credit and related

services to a broader customer base will affect organizational

efficiency, customer service, risk management, and operational

capabilities;

Establish specific operating objectives and strategies for

such programs;

Direct and control the institution's lending and related

service activities conducted beyond its designated territory, ensuring

that such activities are conducted in a safe and sound manner;

Establish the types and amount of loans, loan

participations, and related service activity to be permitted in new

geographic markets;

Assess risk associated with providing loans and related

services in the new markets, establish risk-tolerance levels in

relation to the institution's risk-bearing capacity, and consider loan

portfolio concentrations; and

Ensure existing loan underwriting criteria for loans and

related services that will be offered in new geographic markets are

appropriate, taking into consideration the institution's management

capabilities and credit expertise, and the servicing requirements of

loans made outside its designated territory.

We expect the institution's board, as part of its obligations under

the Act, to continue to ensure that the institution sufficiently meets

the credit and related services needs of eligible customers within its

designated territory, as required by proposed Sec. 614.4070(a). At the

same time, we also expect each institution to maintain safe and sound

operations, including adequate risk-bearing capacity for any new

programs. As part of the board's responsibilities to ensure the

continued safe and sound operations of its institution, we encourage

each board to monitor, through periodic reporting requirements, the

amount, quality, risk, and profitability of loans made to customers

located in new geographic markets.

FCA examiners will evaluate each program in view of the potential

risks and possible effects on the institution's financial condition,

its asset quality, capital, and earnings capacity. To help implement

these regulatory revisions in the most safe and sound manner, we will

issue additional guidance to our examiners and FCS institutions once

the rule becomes final.

IV. Conforming Amendments

Two additional FCA regulations, Secs. 611.1124 and 614.4525,

contain consent requirements that limit the ability of customers to

choose their FCS lender. We propose to revise these regulations.

Section 611.1124 addresses loan transfers that occur when the FCA

modifies association charters to transfer territory from one

association to another. Under existing Sec. 611.1124(f)(6), loans are

usually transferred to the association that acquires the territory,

unless the associations agree otherwise. With the proposed change to

Sec. 614.4070, there is no reason to assume that any territory transfer

would necessarily result in the sale of loans in that territory. As

amended, proposed Sec. 611.1124(f)(6) simply requires the association

to advise its shareholders whether loans will be sold in connection

with the transfer of territory and, if so, the terms of the sale.

The FCA also proposes to repeal provisions in Sec. 614.4525(b) so

that cooperation may be enhanced on special loan programs between

System lenders and dealers and cooperatives that serve different

geographical markets. Additionally, we are proposing to eliminate

paragraphs (c) and (d) because the permissive provisions of these two

paragraphs are unnecessary. FCS lenders do not need regulatory

authority to make contracts with others to facilitate loan applications

and closings, because this authority is clearly within their express

powers under the Act. This proposal would retain existing paragraph (a)

and the remainder of paragraph (b), recognizing that institutions

developing and implementing special lending programs should have

appropriate policies in place providing board direction and control.

Additionally, the FCA is proposing to delete Sec. 614.4080 in its

entirety. This regulation originally addressed cross-territory lending

by the banks for cooperatives, but is no longer applicable since both

banks that have title III authorities now have national charters as

authorized by the Act.

The FCA is also aware that System institutions have entered into a

wide variety of agreements to serve customers in different geographic

markets. Given the proposed changes to Sec. 614.4070 and related

regulations, the FCA requests comment on whether such agreements raise

issues that should be addressed in the final rule.

List of Subjects

12 CFR Part 611

Agriculture, Banks, banking, Rural areas.

12 CFR Part 614

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

Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 618

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

Reporting and recordkeeping requirements, Rural areas, Technical

assistance.

For the reasons stated in the preamble, parts 611, 614, and 618 of

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

be amended to read as follows:

PART 611--ORGANIZATION

1. The authority citation for part 611 continues to read as

follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15,

4.21, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e) of the Farm Credit Act (12

U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2209, 2243,

2244, 2252, 2279a-2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub.

L. 100-233, 101 Stat. 1568, 1638; sec. 409 and 414 of Pub. L. 100-

399, 102 Stat. 989, 1003 and 1004.

Subpart G--Mergers, Consolidations, and Charter Amendments of

Associations

2. Section 611.1124 is amended by removing the phrase ``Each

borrower whose real estate or operations is located in a territory that

will be transferred'' in the first sentence of paragraph (l) and adding

in its place, the phrase ``Each borrower whose loan is sold as

described in paragraph (f)(6) of this section,''; by removing the last

sentence of paragraph (l); and by revising paragraph (f)(6) to read as

follow:

Sec. 611.1124 Territorial adjustments.

* * * * *

(f) * * *

(6) A statement of whether loans will be sold in connection with

the transfer of territory and, if so, the terms of the sale.

* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

3. 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, 4.3A, 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, 7.8, 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,

[[Page 60222]]

2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2097, 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, 2279c-1, 2279f, 2279f-1,

2279aa, 2279aa-5, 2279aa-9); sec. 413 of Pub. L. 100-233, 101 Stat.

1568, 1639.

Subpart A--Lending Authorities

Sec. 614.4000 [Amended]

4. Section 614.4000 is amended by removing paragraph (d)(2); by

removing the words ``and paragraph (d)(2) of this section'' in

paragraph (d)(1); and by redesignating paragraphs (d)(1), (d)(1)(i),

and (d)(1)(ii) as paragraphs (d) introductory text, (d)(1) and (d)(2),

respectively.

Sec. 614.4010 [Amended]

5. Section 614.4010 is amended by removing paragraph (e)(2); by

removing the words ``and paragraph (d)(2) of this section'' in

paragraph (e)(1); and by redesignating paragraphs (e)(1), (e)(1)(i),

and (e)(1)(ii) as paragraphs (e) introductory text, (e)(1) and (e)(2),

respectively.

Sec. 614.4030 [Amended]

6. Section 614.4030 is amended by removing paragraph (b)(2); by

removing the words ``and paragraph (b)(2) of this section'' in

paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i),

and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2),

respectively.

Sec. 614.4040 [Amended]

7. Section 614.4040 is amended by removing paragraph (b)(2); by

removing the words ``and paragraph (b)(2) of this section'' in

paragraph (b)(1); and by redesignating paragraphs (b)(1), (b)(1)(i),

and (b)(1)(ii) as paragraphs (b) introductory text, (b)(1) and (b)(2),

respectively.

Sec. 614.4050 [Amended]

8. Section 614.4050 is amended by removing paragraph (c)(2); by

removing the words ``and paragraph (c)(2) of this section'' in

paragraph (c)(1); and by redesignating paragraphs (c)(1), (c)(1)(i),

and (c)(1)(ii) as paragraphs (c) introductory text, (c)(1) and (c)(2),

respectively.

9. Subpart B is revised to read as follows:

Subpart B--Credit Extensions, Related Services and Designated

Territories

Sec. 614.4070 Credit extensions, related services, and designated

territories--Farm Credit Banks, agricultural credit banks, Federal land

bank associations, Federal land credit associations, production credit

associations, and agricultural credit associations.

(a) Each association or Farm Credit bank operating under title I or

II of the Act must furnish sound, adequate, and constructive credit and

related services pursuant to section 1.1(a) of the Act to creditworthy

and eligible borrowers who reside in or conduct operations in its

designated territory.

(b) Eligible customers may seek financing and related services from

any association or Farm Credit bank operating under title I or II of

the Act, and the Farm Credit bank or association may exercise its

powers under subpart A of this part and part 618 of this chapter to

make loans, participate in loans, and provide related services to any

eligible borrower.

(c) Each association or Farm Credit bank that conducts a material

amount of business beyond its designated territory must adopt a board

policy and business plan that address such activities.

Subpart O--Special Lending Programs

Sec. 614.4525 [Amended]

10. Section 614.4525 is amended by removing paragraphs (c) and (d);

and by removing the second sentence in paragraph (b).

PART 618--GENERAL PROVISIONS

11. 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. 618.8030 [Removed]

12. Section 618.8030 is removed.

Date: November 4, 1998.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 98-29998 Filed 11-6-98; 8:45 am]

BILLING CODE 6705-01-P