Standards of Conduct; Loan Policies and Operations; General Provisions; Regulatory Burden

FARM CREDIT ADMINISTRATION

12 CFR Parts 612, 614 and 618

RIN 3052-AB85

Standards of Conduct; Loan Policies and Operations; General

Provisions; Regulatory Burden

AGENCY: Farm Credit Administration (FCA).

ACTION: Direct final rule with opportunity to comment.

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SUMMARY: This direct final rule reduces regulatory burden on the Farm

Credit System (FCS or System) by repealing or amending 16 regulations.

These revisions provide System banks and associations with greater

flexibility concerning loan sales, agricultural secondary market

activities, loans to insiders, letters of credit, information programs,

travel expenses, and disclosing borrower information during litigation.

DATES: Unless we receive significant adverse comment by September 8,

1999, these regulations will be effective 30 days after publication in

the Federal Register during which either or both Houses of Congress are

in session. We will publish notice of the effective date in the Federal

Register. If we receive significant adverse comment on an amendment,

paragraph, or section of this rule, and that provision may be addressed

separately from the remainder of the rule, we will withdrawal that

amendment, paragraph, or section and adopt as final those provisions of

the rule that are not the subject of a significant adverse comment. In

such a case, we would then tell you how we expect to continue with

further rulemaking on the provisions that were the subject of

significant adverse comment.

ADDDRESSES: You may send comments by electronic mail to ``reg-

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

website at ``www.fca.gov.'' You may also 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 fax them to

(703) 734-5784. You may review copies of all communications that we

receive in the Office of Policy and Analysis, Farm Credit

Administration.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Senior Policy Analyst, or Dale Aultman, 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. Background

On August 18, 1998, we published a notice in the Federal Register

that invited you to identify existing regulations and policies that

impose unnecessary burdens on the FCS. See 63 FR 44176 (Aug. 18,

1998).\1\ We specifically asked you to focus on those regulations and

policies that are ineffective, duplicate other governmental

requirements, or impose burdens that are greater than the benefits

received. We took this action in our continuing effort to improve the

regulatory environment so the System can better serve farmers and

ranchers.

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\1\ On November 18, 1998, we extended the comment period to

January 19, 1999. See 63 FR 64013 (Nov. 18, 1998).

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We received 30 responses. Of this total, 20 comment letters came

from Farm Credit associations. Six Farm Credit banks sent us seven

comment letters. The Farm Credit Council (FCC) commented on behalf of

its membership. We also received responses from the Federal Farm Credit

Banks Funding Corporation and the Federal Agricultural Mortgage

Corporation (Farmer Mac).

In this first phase of our effort to reduce regulatory burden on

the FCS, we are repealing or revising 16 regulations. These regulations

govern:

Loan sales by agricultural credit banks (ACBs);

Subordinated participation interests in Farmer Mac loan

pools;

Loans to institution-affiliated parties;

Letters of credit that finance international trade;

Informational programs at FCS institutions;

Purchases and sales of personal property;

Travel and subsistence expenses for directors, officers,

and employees; and

Disclosure of confidential information in litigation.

We plan to respond to your other concerns in future phases of this

project, and currently, we are analyzing all the issues that you

raised.

II. Analysis of Changes and Comments by Section

A. Sale of Interests in Loans by ACBs

We are correcting Sec. 614.4010(f)(1) so it accurately reflects the

statutory authority of ACBs to sell interests in loans. The amended

regulations confirm that ACBs may sell interests in the type of long-

term real estate mortgages that they can make under section 1.7(a) of

the Farm Credit Act of 1971, as amended (Act), to:

System banks and associations that have authority to

purchase such interests;

Non-System lenders; and

Certified agricultural mortgage marketing facilities for

Farmer Mac.

We emphasize that revised Sec. 614.4010(f)(1) also permits ACBs to

sell interests in long-term mortgages that they purchase from other

System lenders. Section 3.1(13)(B) of the Act and amended

Sec. 614.4010(f)(1) allow ACBs to sell interests in cooperative, rural

utility, and international loans only to other Farm Credit banks and

associations that have authority to purchase such loan interests.

B. Subordinated Participation Interests in Farmer Mac Pools

We are repealing five separate regulatory provisions

(Secs. 614.4000(e)(4), 614.4010(f)(4), 614.4030(c)(4), 614.4040(c)(4),

and 614.4050(d)(4)) that authorize Farm Credit banks and associations

to purchase subordinated participation interests in pools of loans that

are sold into the Farmer Mac secondary market. The existing regulations

carry out provisions of title VIII of the Act that Congress repealed in

1996.\2\ Prior to 1996, title VIII of the Act required Farm Credit

banks and associations to pledge cash reserves or hold subordinated

participation interests in loans that they pooled and securitized for

Farmer Mac. As amended, title VIII of the Act now permits, but no

longer requires, Farm Credit banks and associations to retain

subordinated participation interests in Farmer Mac pools. With the

removal of these regulations, we will continue to review policy as well

as safety and soundness issues related to subordinated participation

interests in Farmer Mac loan pools.

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\2\ Farm Credit System Reform Act of 1996; Pub. L. No. 104-105,

110 Stat. 162 (Feb. 10, 1996).

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C. Loan Approvals

We received 11 comments about Secs. 614.4460 and 614.4470, which

govern loans to insiders. Although the Agricultural Credit Technical

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Corrections Act of 1988 \3\ abolished the district boards,

Sec. 614.4460 refers to the defunct boards. Under this regulation,

district boards were required to approve loans that System banks make

to:

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\3\ Pub. L. 100-399, 102 Stat. 1003 (Aug. 17, 1988).

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Their directors and employees; and

FCA Board members and staff.

Currently, Sec. 614.4470 requires Farm Credit banks to approve

loans that their affiliated associations make to:

The association's own directors and employees;

Directors and employees of a jointly managed association;

or

Bank employees.

System banks and associations asked us to update Sec. 614.4460 and

repeal the bank approval requirement in Sec. 614.4470. These commenters

believe that our regulations should only apply to large insider loans.

We respond by replacing Secs. 614.4460 and 614.4470 with a single

regulation. Final Sec. 614.4460 requires your board to approve all

loans to:

Certain FCA and Farm Credit System Insurance Corporation

(FCSIC) employees who are permitted to borrow from your institution

under our Supplemental Standards of Ethical Conduct regulations at 5

CFR parts 4101 and 4001, respectively; \4\

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\4\ The new regulation explicitly refers to the Supplemental

Standards of Ethical Conduct regulations that the FCA and FCSIC

Boards enacted in 1995. See 60 FR 30781 (June 12, 1995). Those

regulations specifically prohibit most FCA and FCSIC employees from

borrowing from System institutions. For example, FCA and FCSIC Board

members, examiners, procurement personnel, and all employees over a

certain civil service grade level cannot legally borrow from Farm

Credit banks and associations.

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Your directors and employees;

The directors and employees of another System bank or

association that is under a joint management agreement with your

institution;

The directors and employees of your association's funding

bank; and

A cooperative or other legal entity if any of its

directors, partners, or employees are also members of your board of

directors.

Your board must also approve loans to other borrowers if any of

these parties has a substantial beneficial interest in the proceeds or

collateral of the loan.

When you extend credit to insiders you must comply with the

Standards of Conduct regulations in part 612, the Disclosure

regulations in part 621, and your board's policies. We also require

your institution to document all material facts about your credit

relationships with any of these parties and make it available, on

request, to the FCA's Office of Examination and to the appropriate

officials of your funding bank.

The final regulation repeals the requirement that bank boards

approve loans that their affiliated associations make to insiders. Our

new approach retains adequate controls on loans that Farm Credit banks

and associations make to their directors and employees. Currently, the

boards of Farm Credit banks approve loans to insiders. Under the new

regulation, boards of associations are similarly responsible for

approving loans to their insiders.

The commenters suggested that our regulation should require System

boards to approve only insider loans that are above a minimum amount

established by the institution's policy. We did not adopt this approach

because board approval of all insider loans provides the most

independent and objective approval process for such loans at each bank

or association. Board approval also avoids the appearance of misconduct

and impropriety. Board approval of even small insider loans is

appropriate and reassures customers, shareholders, and investors that

the System boards exercise diligence and independent judgment when they

carry out their duties and obligations. Another regulation,

Sec. 612.2140(a), requires directors of Farm Credit banks and

associations to recuse themselves from board deliberations on their own

loans.

We are repealing Sec. 614.4450 on our own initiative. This

regulation originally carried out provisions of the Act that authorized

the FCA to supervise and approve the lending activities of all System

banks and associations.\5\ After the Farm Credit Act of 1985 \6\

repealed this authority and converted the FCA into an arms-length

regulator, we amended Sec. 614.4450 to state that ``authority for loan

approval is vested in the Farm Credit banks and associations.'' This

rule is no longer needed because it neither implements the Act nor

promotes the System's safety and soundness.

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\5\ See 38 FR 27837 (Oct. 9, 1973).

\6\ Pub. L. No. 99-205, 99 Stat. 1678 (Dec. 23, 1985).

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D. Letters of Credit

Existing Sec. 614.4720 allows banks for cooperatives (BCs) and ACBs

to issue and confirm letters of credit that finance international trade

in agricultural commodities and farm supplies. The final provision of

this regulation, Sec. 614.4720(g), requires BCs and ACBs to charge fees

for issuing letters of credit. We repeal it because we believe that

this should be a business decision of BCs and ACBs. We retain all other

provisions of this regulation because we believe they continue to

promote safe and sound international banking practices at BCs and ACBs.

E. Conducting Information Programs

The FCC, one association, and two Farm Credit Banks asked us to

repeal Sec. 618.8210, which requires FCS institutions to maintain

programs that inform farmers and other members of the public about FCS

organization, functions, and services. The commenters believe that our

regulations should not tell System institutions to conduct

informational programs. Instead, they suggested that each System bank

or association address this issue in its operational program. We agree

that business goals provide an effective incentive for System banks and

associations to market their services to potential customers. We repeal

Sec. 618.8210 because it is no longer needed.

F. Purchases and Sales of Personal Property

The FCC, two System banks, and an association want us to repeal

Sec. 618.8250. The commenters remarked that operational programs of

System lenders, not FCA regulations, should govern the purchases and

sales of personal property.

We respond by adjusting the regulatory requirements that apply to

the purchases and sales of personal property by your banks and

associations. One provision of Sec. 618.8250 is obsolete because it

contains a reference to the defunct district boards. Moreover, we agree

that your policies and operational programs, rather than FCA

regulations, should cover all purchases and most sales of personal

property by your bank or association. However, we believe that our

Standards of Conduct regulations in part 612 should continue to govern

the sale of personal property to your directors, officers, or other

employees. Our regulatory requirements in part 612 help your

institution avoid allegations of favoritism or fraud when you sell

personal property to insiders. We rewrote the final sentence of

Sec. 618.8250 in plain language and transferred it to

Sec. 612.2165(b)(7) in the Standards of Conduct section of the

regulations. This provision requires your institution to sell surplus

personal property above a stated value to your employees through open

competitive bidding.

G. Travel, Subsistence, and Other Related Expenses

Four commenters suggested that we repeal Sec. 618.8270. This

regulation requires the boards of FCS banks and associations to develop

written policies,

[[Page 43048]]

keep records, and audit the travel, subsistence, and other related

expenses of their directors, officers, and employees. The commenters

assert that this regulation imposes unnecessary burdens on FCS

institutions. They point out that System banks and associations already

address this issue in their operational plans.

We have decided to repeal Sec. 618.8270 because other regulations

already cover the travel and subsistence expenses of directors,

officers, and employees of your institutions. For example,

Sec. 618.8430 requires your bank or association to establish effective

internal controls over their operations. Additionally, Sec. 611.400

implements section 4.21 of the Act, which governs compensation for the

FCS bank directors. Our examiners will continue to review the travel,

subsistence, and related expenses of System bank directors in the

normal examination process.

H. Production of Documents and Testimony

One Farm Credit bank asked us to amend Sec. 618.8320(b)(7), and two

Farm Credit banks and two associations wanted us to repeal

Sec. 618.8330. These regulations govern the disclosure of documents and

testimony in litigation. Some commenters objected to the cost of hiring

an attorney to contest orders to produce documents or testimony. All

commenters believe that our regulations should not limit their options

on how best to respond to court orders.

We continue to believe that regulations governing the production of

confidential information during litigation are necessary. However, we

revised our regulations to better balance your borrowers' rights to

confidentiality with your need for greater flexibility in disclosing

information during litigation. We combined both provisions into a

single regulation, Sec. 618.8330, and rewrote it in plain language.

Final Sec. 618.8330(a) allows your bank or association to disclose

confidential information about a borrower (or a successor in interest)

if your institution is in litigation with that borrower or his or her

successor. Without this provision, your institution would have no

authority to produce confidential information about a borrower who is

in litigation with you.

Final Sec. 618.8330(b) allows your bank or association to disclose

confidential information under the lawful order of a court if the

Government or your institution is not a party to the litigation. As a

result, you do not automatically have to contest every order to produce

documents or testimony. You may release confidential borrower

information as defined by Sec. 618.8320(a) only if a judge issues the

order. We believe that this requirement is important because the judge

is impartial and can fairly decide whether the litigant needs the

confidential information in your possession.

III. Direct Final Rule

We are revising or repealing these regulations by a direct final

rulemaking. The Administrative Procedure Act, 5 U.S.C. 551-59, et seq.

(APA), supports direct final rulemaking, which is a streamlined

technique for Federal agencies to enact noncontroversial regulations

more quickly, without the usual notice and comment period. This process

enables us to reduce the time and resources we need to develop, review,

clear, and publish a final rule while still affording the public an

opportunity to comment on or object to the rule.

In a direct final rulemaking, we notify you the rule will become

final on a specified future date unless we receive significant adverse

comment during the comment period. If we receive significant adverse

comment on an amendment, paragraph, or section of this rule, and that

provision may be addressed from the remainder of the rule, we will

withdraw that amendment, paragraph, or section and adopt as final those

provisions of the rule that are not the subject of a significant

adverse comment. In such a case, we would then tell you how we expect

to continue with further rulemaking on the provisions that were the

subject of significant adverse comment.

A significant adverse comment is one where a commenter explains why

the rule would be inappropriate (including challenges to its underlying

premise or approach), ineffective, or unacceptable without a change. In

general, a significant adverse comment would raise an issue serious

enough to warrant a substantive response from the agency in a notice-

and-comment rulemaking.

Direct final rulemaking is justified under section 553(b)(B) of the

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

allows an agency to omit notice and comment on a rule when it finds

``that notice and public procedure thereon are impracticable,

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

rulemaking, the agency finds the rule is straightforward and

noncontroversial to make normal notice and comment unnecessary under

the APA. However, rather than eliminating public comment altogether,

which is permissible under section 553(b)(B), the agency gives the

public an opportunity to rebut the agency's conclusion that public

input on the rule is unnecessary.

We believe that a direct final rulemaking is the proper method for

repealing or revising these regulations that place unnecessary

regulatory burden on FCS institutions. For these reasons, we do not

anticipate significant adverse comment on this rule. If we receive no

significant adverse comment, we will publish our regular notice of the

effective date of the rule following the required Congressional waiting

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

List of Subjects

12 CFR Part 612

Agriculture, Banks, banking, Conflict of interests, 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, the Farm Credit

Administration amends parts 612, 614, and 618 of chapter VI, title 12

of the Code of Federal Regulations as follows:

PART 612--STANDARDS OF CONDUCT

1. The authority citation for part 612 continues to read as

follows:

Authority: Secs. 5.9, 5.17, 5.19 of the Farm Credit Act (12

U.S.C. 2243, 2252, 2254).

2. Amend Sec. 612.2165 by adding the following sentence to the end

of paragraph (b)(7):

Sec. 612.2165 Policies and procedures.

* * * * *

(b) * * *

(7) * * * Farm Credit institutions must use open competitive

bidding whenever they sell surplus property above a stated value (as

established by the board) to their employees.

* * * * *

PART 614--LOAN POLICIES AND OPERATIONS

3. The authority citation for part 614 continues to read as

follows:

Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.

1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,

2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,

4.13, 4.13B, 4.14, 4.14A, 4.14C,

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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 A--Lending Authorities

Sec. 614.4000 [Amended]

4. Remove Sec. 614.4000(e)(4).

5. Amend Sec. 614.4010 by removing paragraph (f)(4) and revising

paragraph (f)(1) to read as follows:

Sec. 614.4010 Agricultural credit banks.

* * * * * *

(f) * * *

(1) Subject to subpart H of this part, agricultural credit banks

may sell interests in real estate mortgage loans identified in

paragraph (a) of this section to Farm Credit System institutions

authorized to purchase such interests, other lenders, and certified

agricultural mortgage marketing facilities for the Federal Agricultural

Mortgage Corporation. Agricultural credit banks may also sell interests

in the types of loans listed in paragraph (d) of this section to other

Farm Credit System institutions that are authorized to purchase such

interests.

* * * * *

Sec. 614.4030 [Amended]

6. Remove Sec. 614.4030(c)(4).

Sec. 614.4040 [Amended]

7. Remove Sec. 614.4040(c)(4).

Sec. 614.4050 [Amended]

8. Remove Sec. 614.4050(d)(4).

9. Revise subpart M to read as follows:

Subpart M--Loan Approval Requirements

Sec. 614.4460 Approval of loans to affiliated parties.

(a) With approval of your board, your bank or association may lend

to the following parties in accordance with part 612 of this chapter

and the policies of your board of directors:

(1) Farm Credit Administration employees permitted to borrow from

your institution under 5 CFR 4101.104;

(2) Farm Credit System Insurance Corporation employees permitted to

borrow from your institution under 5 CFR 4001.104;

(3) Your directors and employees;

(4) The directors or employees of another bank or association under

a joint management agreement with your institution;

(5) The directors or employees of your funding bank if you are an

association;

(6) A cooperative or other legal entity if any of its directors,

partners, or employees are also members of your board of directors; and

(7) Other borrowers if any of the parties identified in this

section are:

(i) Recipients of the loan proceeds;

(ii) Stockholders or other equity owners of the borrower and they

have a significant interest in the loan funds or collateral; or

(iii) Endorsers, guarantors or comakers on the credit.

(b) Your bank or association must document all material facts about

the credit relationship with any of these parties and make the

documentation available, on request, to our Office of Examination and

to the funding bank.

Subpart Q--Banks for Cooperatives and Agricultural Credit Banks

Financing International Trade

Sec. 614.4720 [Amended]

10. Remove Sec. 614.4720(g).

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 F--Miscellaneous Provisions

Secs. 618.8210-618.8270 [Removed and Reserved]

12. Remove and reserve subpart F, consisting of Secs. 618.8210

through 618.8270.

Subpart G--Releasing Information

Sec. 618.8320 [Amended]

13. Amend Sec. 618.8320 as follows:

a. Remove paragraph (b)(7); and

b. Redesignate paragraphs (b)(8), (b)(9) and (b)(10) as paragraphs

(b)(7), (b)(8), and (b)(9).

14. Revise Sec. 618.8330 to read as follows:

Sec. 618.8330 Production of documents and testimony during litigation.

(a) If your bank or association is a party to litigation with a

borrower or a successor in interest, you or your directors, officers,

or employees may disclose confidential information about that borrower

or the successor in interest during the litigation.

(b) If the Government or your bank or association is not a party to

litigation, you or your directors, officers, or employees may produce

confidential documents or testimony only if a court of competent

jurisdiction issues a lawful order signed by a judge.

Dated: August 2, 1999.

Vivian L. Portis,

Secretary, Farm Credit Administration Board.

[FR Doc. 99-20323 Filed 8-6-99; 8:45 am]

BILLING CODE 6705-01-P