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: Final rule.

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SUMMARY: This final rule clarifies existing regulations and provides

Farm Credit System (FCS or System) institutions with more regulatory

guidance about leasing activities. The rule reflects comments received

from two public comment periods.

EFFECTIVE DATE: These regulations will become effective 30 days after

publication in the Federal Register during which either or both houses

of Congress are in session. We will publish a document announcing the

effective date in the Federal Register.

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, we published a proposed

rule to replace the existing regulatory guidance about System

institutions' leasing activities (62 FR 53581). After considering the

six comment letters received, we made revisions and asked for

additional comment on a reproposed rule (63 FR 56873, Oct. 23, 1998).

We received five comment letters on the reproposed rule; four from

System banks and one from the Farm Credit Leasing Services Corporation

(Leasing Corporation). The commenters commented about borrower rights,

notice of action on applications, stock purchase requirements, and out-

of-territory leasing.

[[Page 34515]]

I. Discussion of Comments

A. Borrower Rights

One commenter requested clarification of our interpretation that

statutory borrower rights requirements do not apply to leasing. As

stated in the preamble to the original proposal (62 FR 53581, Oct. 15,

1997), borrower rights do not apply to lease transactions.

B. Notice of Action on the Application

We received two comments on reproposed Sec. 616.6800, which

requires that each institution provide the applicant written notice of

its decision on a lease application. The first comment suggested the

rule should allow verbal notice. The second comment suggested the

notice could be either express or implied, allowing the lessor to

notify an applicant of approval by delivering lease documents to the

applicant without a separate written notice of approval.

We believe that a written notice is appropriate to protect the

interests of a lease applicant and to document that an institution has

complied with this requirement. However, the notice does not have to be

in a particular form and the delivery of written lease documents would

satisfy the notice requirement.

C. Stock Purchase Requirements

One bank requested a clarification of Sec. 614.4232, which requires

that a lessee be a ``voting stockholder'' for a loan to a domestic

lessor for leases on equipment or facilities (leveraged leases). Under

Sec. 616.6700, an institution may satisfy the requirement that an

equipment lessee be a stockholder by issuing either one share of stock

or one participation certificate. The final regulation makes a

conforming amendment to Sec. 614.4232 by removing the term ``voting''

to clarify that the bylaws could provide that a person owning one share

of stock or one participation certificate would be considered a

``stockholder'' for purposes of this section.

D. Out-of-Territory Leasing

Final Sec. 616.6200 provides farmers, ranchers, cooperatives, and

other FCS customers flexibility to choose an FCS lessor regardless of

whether they are located within that lessor's ``territory.'' Section

616.6200 does not require an FCS lessor to satisfy any notice or

concurrence requirements to serve lessees beyond the lessor's

territory.

We received two comments on Sec. 616.6200. One Farm Credit Bank

(FCB) commented: ``We commend you for removing territorial challenges

through the addition of Sec. 616.6200. This will contribute toward

System institutions being able to more effectively serve lease

customers.'' While expressing appreciation for ``the efforts of the FCA

to improve the regulatory environment in which System institutions

operate,'' a second FCB suggested that ``any elimination of geographic

operating territories with respect to leasing should be coordinated

with the review of the proposed elimination of geographic boundaries

with respect to lending activities under Sec. 614.4070, and action on

this aspect of the leasing regulation should be deferred until such

time as FCA has reviewed all comments on the proposed revision to

section 614.4070.'' We do not believe that action on the reproposed

leasing rule must be delayed until we consider proposed amendments to

Sec. 614.4070, the customer choice rule. Our adoption of Sec. 616.6200,

allowing potential customers to choose an FCS lessor regardless of

whether they are located within that lessor's territory, neither

depends on nor determines the fate of the proposed out-of-territory

lending rule. See 63 FR 60219 (Nov. 9, 1998); 63 FR 69229 (Dec. 16,

1998).

It is clear in the Farm Credit Act of 1971, as amended (Act) that

the express statutory authority to lease is separate and distinct from

the authority to lend. Section 2.4(b)(4) of the Act expressly

authorizes production credit associations (PCAs) (and agricultural

credit associations (ACAs) pursuant to section 7.8) to own and lease

equipment, or lease with option to purchase. Section 1.11(c)(2)

expressly authorizes FCBs (and agricultural credit banks (ACBs)

pursuant to section 7.2) to own and lease equipment or facilities, or

lease with option to purchase, and authorizes Federal land credit

associations pursuant to section 7.6 to own and lease facilities, or

lease with option to purchase. Section 3.7(a) expressly authorizes

banks for cooperatives (BCs) (and ACBs pursuant to section 7.2) to own

and lease equipment, or lease with option to purchase. The Act clearly

creates express leasing authorities separate from lending authorities,

and in no case does the Act expressly restrict the geographic location

of lease customers.

The Farm Credit Administration (FCA) and the Farm Credit banks have

long recognized the distinct nature of loans and leases in connection

with the creation of the Leasing Corporation. Section 4.25 of the Act,

which authorizes the establishment of service corporations, provides

that a service corporation cannot ``extend credit.'' Our interpretation

is that this provision does not apply to leases. Thus, the chartering

of the Leasing Corporation was authorized because leases are not

extensions of credit.

The second FCB commented that ``FCA has * * correctly * * *

analyzed the statutory basis for leasing authorities as being

independent of that for lending authorities,'' but indicates concern

that ``the operational impact of out-of-territory leasing activity

would be comparable to the impact of out-of-territory lending.'' For

more than 10 years, the Leasing Corporation has had authority to

compete nationwide with all other FCS lessors for all types of leasing

business. Section 616.6200 establishes that other FCS lessors have the

ability to compete nationwide with the Leasing Corporation on a level

playing field.

II. Summary of Significant Provisions of Final Rule

A. Purchase and Sale of Interests in Leases

The final regulation authorizes 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 final regulation:

(1) Eliminates distinctions concerning the authority to purchase

``lease interests'' and ``lease participation interests.'' The

definition of ``lease'' limits the types of leases in which System

institutions can buy an interest, that is, leases of equipment or

facilities used in the operations of eligible borrowers;

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

interests to provide more flexibility because there is no statutory

restriction; and

(3) Eliminates the retention requirement concerning the purchase of

lease interests from outside the System. Requiring the servicer to have

an ownership interest is not necessary to manage risk and is not

required by law.

The following two provisions are parallel to provisions that apply

to loans: (1) Permit lease transactions through agents on the same

basis that is permitted for loans; and (2) provide for the purchase of

participations in leases made to similar entities on generally the same

basis as the purchase of participations in similar entity loans.

B. Lending and Leasing Limit

The final rule takes a consistent approach to limiting

concentration of risk in individual System institutions. Limits on the

financing (whether in the form of loans or leases) a System institution

can provide to any one

[[Page 34516]]

customer protect against unnecessarily large risks to an institution's

capital. Therefore, all loans and leases to a single customer will be

measured against an institution's lending and leasing limit. The

leasing limit for the Leasing Corporation under the final rule will

limit its risk exposure in a manner similar to the lending and leasing

limit that will apply to other System institutions.

The definition of ``borrower'' includes any customer to

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

The definition of ``loan'' includes all types of leases

(operating, financing, and lease interests).

The rule prohibits a System institution from making a

lease or a loan if the consolidated amount of all loans and leases to a

single borrower exceeds 25 percent of the institution's lending and

leasing limit base (except for loans made under title III of the Act,

which vary between 10 percent and 50 percent depending on the type of

loan and associated risk).

The rule prohibits the Leasing Corporation from making

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

percent of the Leasing Corporation's lending and leasing limit base.

The rule adds the outstanding lease balances to the items

included in the computation of obligations.

All leases, except those permitted under Sec. 614.4361,

must comply with the leasing and lending limit at all times.

C. Out-of-Territory Leasing

The final rule provides System institutions with more flexibility

to make leases outside their chartered territory. A System lessor is

not required to satisfy any notice or concurrence requirements in order

to serve lessees beyond the lessor's territory.

D. Leasing Policies, Procedures, and Underwriting Standards

The final regulation provides only a basic framework for leasing

policies, procedures, and underwriting standards. From a safety and

soundness perspective, System institutions engaged in leasing need to

have adequate policies and procedures that address both loan and lease

underwriting to ensure prudent management of both activities. From a

payment risk perspective, we require institutions engaged in leasing to

comply with the minimum loan underwriting standards in Sec. 614.4150

regarding the minimum amount of financial information required of the

applicant since the risks are very similar for loans and leases. The

loan underwriting regulations require written policies and procedures

to address underwriting standards such as the minimum supporting credit

and financial information required, credit analysis procedures, and

repayment capacity of the applicant. The complexity and depth of the

policies and underwriting standards should be consistent with the

current or planned leasing activities and the institution's risk-

bearing ability.

E. Documentation

We require each institution to document that the leased equipment

or facility is authorized to be leased under its leasing authorities.

Equipment ordinarily is considered to be movable personal property.

Facilities include property that is attached, often permanently, to

real estate. Certain agricultural property may have attributes of both.

We do not provide a specific regulatory definition of equipment and

facility. We expect each System institution involved in leasing to have

the necessary expertise to make such a determination, and we will

review such determinations during the course of our examination

process.

F. Investment in Leased Assets

Section 616.6500 authorizes an institution to buy property to

lease, if buying such property is consistent with the type of leasing

activity being conducted or planned in the future. The purpose of this

provision is to prohibit System institutions from speculating in the

acquisition of property or facilities.

G. Stock Purchase Requirements

We read the Act to impose a stock purchase requirement in

connection with some leases, but not others. 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. An institution may also issue one

participation certificate to satisfy the stock purchase requirement if

authorized by the institution's bylaws. The stock requirement does not

apply to the Leasing Corporation 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).

H. Disclosure Requirements

The final regulation contains two disclosure requirements designed

to protect an applicant's interest. The first requires that lease

applicants be provided a copy of all lease documents signed by the

lessee within a reasonable time following lease closing. The second

requires 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.

I. Portfolio Limitations

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.

III. Conforming Changes

The existing leasing regulations in Sec. Sec. 618.8050 and 618.8060

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

rule makes conforming technical changes to Sec. Sec. 614.4710 and

621.7. The final rule also makes a technical change in Sec. 614.4351

and Sec. 618.8440 to correct erroneous citations. We also clarify in

Sec. 616.6300 that although a board of directors sets policy, it must

direct management to develop procedures that reflect lease practices

that control risk.

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

amended and part 616 is added to

[[Page 34517]]

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 E--Loan Terms and Conditions

2. Section 614.4232 is amended by removing the word ``voting'' from

the introductory text, and revising paragraph (c) to read as follows:

Sec. 614.4232 Loans to domestic lessors.

* * * * *

(c) The lessee must hold at least one share of stock or one

participation certificate; and

* * * * *

Subpart H--Loan Purchases and Sales

Sec. 614.4325 [Amended]

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

from paragraph (a)(3).

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

Subpart J--Lending and Leasing Limits

5. 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 to which an institution

has made a loan or a commitment to make a loan either directly or

indirectly. Excluded are a Farm Credit System association or other

financing institution that comply with the criteria in section 1.7(b)

of the Act and the regulations in subpart P of this part. 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. This includes 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]

6. 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; and by removing the reference

``Sec. 615.5201(j)'' and adding in its place the reference

``Sec. 615.5201(l) in paragraph (a).

Sec. 614.4352 [Amended]

7. 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]

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

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

Sec. 614.4354 [Amended]

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

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

Sec. 614.4355 [Amended]

10. 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).

Sec. Sec. 614.4356-614.4360 [Redesignated]

11. Sections 614.4356 through 614.4360 are redesignated as

Sec. Sec. 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.

12. 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) 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]

13. 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.

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

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

heading and each place they appear 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

[[Page 34518]]

(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 permitted under 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,'' must comply with the lending and leasing limit on the

date the lease is made, and at all times after that.

* * * * *

Sec. 614.4361 [Amended]

15. 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]

16. 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).

17. 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.

616.6200 Out-of-territory leasing.

616.6300 Leasing policies, procedures, and underwriting standards.

616.6400 Documentation.

616.6500 Investment in leased assets.

616.6600 Leasing limit.

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).

Sec. 616.600 Definitions.

For the purposes of this part, the following definitions 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 buy interests in leases. A Farm Credit System

institution may buy leases and interests in leases.

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

buys interests in leases must do so only under a policy adopted by its

board of directors that addresses the following:

(1) The types of leases in which the institution may buy or sell an

interest and the types of interests which may be bought or sold;

(2) The underwriting standards for the purchase of interests in

leases;

(3) Such limits on the aggregate lease payments and residual amount

of interests in leases that the institution may buy from a single

institution as are necessary to diversify risk, and such limits on the

aggregate amounts the institution may buy 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 bought;

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

manner adequate financial and other information about the lessee needed

to make an independent judgment; and

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

subject that the board considers appropriate, including arbitration.

(c) Purchase and sale agreements. Each agreement to buy or sell an

interest in a lease must, 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 bought;

(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

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 buys an interest in

a lease must 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. This must occur before the purchase of the interest

and before any servicing action that alters the terms of the original

agreement. The institution must not delegate such judgment to any

person(s) not employed by the institution. A Farm Credit System

institution that buys a lease or any interest in a lease may use

information, such as appraisals or inspections, provided by the

originating or lead lessor, or any intermediary seller or broker;

however, the buying Farm Credit System institution must independently

evaluate such information when exercising its judgment. The independent

judgment must be documented by a payment analysis that considers

factors set forth in Sec. 616.6300. The payment analysis must consider

such financial and other lessee

[[Page 34519]]

information as would be required by a prudent lessor and must include

an evaluation of the capacity and reliability of the servicer. Boards

of directors of jointly managed institutions must adopt procedures to

ensure 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:

(1) For the purpose of determining the lending and leasing limit in

subpart J of part 614 of this chapter, the lease must be considered, to

the extent of the recourse or guaranty, a lease by the buyer to the

seller, and in addition, the seller must aggregate the lease with other

obligations of the lessee; and

(2) The lease subject to the recourse agreement must be considered

an asset 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 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.

Sec. 616.6300 Leasing policies, procedures, and underwriting

standards.

The board of each institution engaged in lease underwriting must

adopt a written policy (or policies). Management, at the direction of

the board, must develop procedures that reflect lease practices that

control risk and comply with all applicable laws and regulations. Any

leasing activity must comply with the lending policies and loan

underwriting requirements in Sec. 614.4150 of this chapter. An

institution engaged in the making, buying, or syndicating of leases

also must adopt written policies and procedures that address the

additional risks associated with leasing. Written policies and

procedures must 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.

Each institution must 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 that is consistent

with current or planned leasing programs.

Sec. 616.6600 Leasing limit.

All leases made by Farm Credit System institutions shall be subject

to the lending and leasing limit in subpart J of part 614 of this

chapter.

Sec. 616.6700 Stock purchase requirements.

(a) Each System institution, except the Farm Credit Leasing

Services Corporation, making an equipment lease under titles II or III

of the Act must require the lessee to buy or own at least one share of

stock or one participation certificate in the institution making the

lease, in accordance with its bylaws.

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

chapter apply to stock (or participation certificates) bought as a

condition for obtaining a lease.

Sec. 616.6800 Disclosure requirements.

(a) Each System institution must give to each lessee a copy of all

lease documents signed by the lessee within a reasonable time following

lease closing.

(b) Each System institution must make its decision on a lease

application as soon as possible and provide prompt written notice of

its decision to the applicant.

PART 618--GENERAL PROVISIONS

18. 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--[Removed and Reserved]

19. Subpart C, consisting of Sec. Sec. 618.8050 and 618.8060, is

removed and reserved.

Subpart J--Internal Controls

Sec. 618.8440 [Amended]

20. Section 618.8440 is amended by removing the reference ``or

(d)'' in paragraph (b)(6).

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

21. 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]

22. 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: June 18, 1999.

Vivian L. Portis,

Secretary, Farm Credit Administration Board.

[FR Doc. 99-16149 Filed 6-25-99; 8:45 am]

BILLING CODE 6705-01-P