Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; FCB Assistance to Associations

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB80

Funding and Fiscal Affairs, Loan Policies and Operations, and

Funding Operations; FCB Assistance to Associations

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency), is proposing

to repeal a regulatory requirement that a Farm Credit Bank or an

agricultural credit bank (collectively referred to as a bank) obtain

FCA prior approval before giving financial assistance to an affiliated

association. Instead, the proposed rule would require a bank to

consider various standards before providing financial assistance and

notify both the FCA and bank shareholders. We expect this rule change

to reduce regulatory burden on banks.

DATES: Please send your comments to us on or before March 22, 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: Dale L. Aultman, Policy Analyst,

Office of Policy and Analysis, Farm Credit Administration, McLean, VA

22102-5090, (703) 883-4498, TDD (703) 883-4444, or Jennifer A. Cohn,

Attorney, Office of General Counsel, Farm Credit Administration,

McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: This action furthers our strategic plan

commitment to consider eliminating regulatory prior approvals that are

not required by the Farm Credit Act of 1971, as amended (Act), or are

not based on safety and soundness concerns. The proposed regulation

would eliminate the existing requirement in Sec. 615.5171 that the FCA

approve, in advance, any financial assistance from a bank to its

affiliated associations. This change is appropriate for two reasons:

The existing regulation's prior approval requirement runs

counter to our current approach to supervising risk in Farm Credit

System (System) institutions. Consistent with our role as arm's-length

regulator, we have found that we can replace many prior approval

requirements with simple notification requirements.

Our new, much stronger, capital regulations will help to

ensure that a bank will not imperil its own capital position in

providing assistance to an association. See 62 FR 4449, January 30,

1997, for a more detailed discussion of our capital regulations.

I. Scope and Application of Sec. 615.5171

Section 1.5(11) of the Act provides that each Farm Credit Bank

shall have the power, subject to our regulation, to ``purchase

nonvoting stock in, or pay in surplus to * * * associations in its

district.'' Section 615.5171 implements this provision of the Act as

follows: ``Farm Credit Banks may purchase nonvoting stock and

participation certificates of and pay in surplus to associations in

their respective districts when authorized by the bank board of

directors on a case basis and approved by the Farm Credit

Administration.''

The regulation applies to any bank purchase of association

nonvoting stock and participation certificates. The regulation does not

discuss voting stock because banks are not eligible association

borrowers/members and thus are not permitted to hold association voting

stock. The regulation also refers to the bank's statutory authority to

``pay in surplus'' to associations. FCA's interpretations of the ``pay

in surplus'' language have resulted in a broad application of the prior

approval requirement for financial assistance transactions.

In general, it has been our practice to consider a bank to have

triggered the prior approval requirement of this regulation when it

purchases nonvoting stock or participation certificates or takes other

action to pay in surplus to improve the capital position of an

association. Thus, the FCA has required prior approval for the

following types of transactions:

(1) Cash gifts;

(2) Debt forgiveness or compromise of indebtedness;

(3) Interest rate concessions;

(4) Interest free loans;

(5) Transfer of loans at less than fair market value;

(6) Reduction or elimination of standard loan service fees;

(7) Assumption of operating or other expenses (e.g., legal fees,

insurance premiums, etc.); and

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(8) Special compensation.

As currently interpreted, Sec. 615.5171 also applies to

transactions pursuant to loss-sharing agreements between banks and

their affiliated associations. Under Sec. 614.4340 of this chapter, any

System institution may enter into an agreement to share loan and other

losses with any other System institution. The agreements can involve

the sharing of losses to protect against stock and participation

certificate impairment, or for any other purpose. The agreements may

address losses that arise in the future or that were recognized before

the date of the agreement.

System institutions may execute loss-sharing agreements without FCA

prior approval. In contrast, the FCA must approve in advance

transactions pursuant to a loss-sharing agreement that result in a bank

transferring capital or surplus to an association. Our proposed rule

would eliminate Agency prior approval of such loss-sharing

transactions, but would still require a bank to notify us before

carrying out the transaction.

We have not interpreted the current regulation to cover routine

business transactions and agreements between the banks and

associations, such as a General Financing Agreement. Thus,

Sec. 615.5171 does not cover payment of dividends or patronage, normal

adjustments to interest rates, bank equalization of purchased equity

investments, and similar matters ordinarily addressed in an

institution's bylaws. Our proposed rule would not change this approach.

II. Approval of Financial Assistance Under Sec. 615.5171

Generally, we have approved bank financial assistance to an

association under the following circumstances:

(1) The bank would continue to be financially sound after providing

assistance. The financial assistance would not place the bank's capital

at risk prior to association capital.

(2) The financial assistance has a reasonable chance of returning

the association to financial stability and self-sufficiency. Similarly,

financial assistance provided to facilitate a merger of a troubled

association would result in a reasonable chance for financial stability

and continued service to borrowers.

(3) The proposed financial assistance is the ``least cost'' option

available.

We have also ensured that other bank shareholders were informed of

the financial assistance and that their interests were adequately

considered by the bank board. In addition, in reviewing the purpose of

proposed financial assistance requests, we have focused on ensuring

that one association was not unduly advantaged compared to other

affiliated associations. We have incorporated these general criteria

for approval of financial assistance into the standards and notice

sections of the proposed regulation.

III. The Proposed Regulation

We propose that the prior approval requirement contained in

Sec. 615.5171 be removed and replaced with the following provisions:

(1) To clarify when the regulation is applicable, we have added a

definition of financial assistance. This definition lists bank

transactions with affiliated associations that we consider to be

financial assistance. In general, financial assistance transactions are

those in which a bank conveys a direct or indirect financial benefit

to, or enters into contractual arrangements with, an affiliated

association on a preferential basis not available on similar terms to

all affiliated associations. On the other hand, we clarify that

financial assistance does not include routine business transactions or

transactions available on similar and nonpreferential terms to all

affiliated associations.

(2) We have added a list of standards that a bank board must

consider before authorizing financial assistance to an affiliated

association. These standards are designed to ensure that financial

assistance is in the best interests of the shareholders of the banks as

well as the receiving association. Bank boards that give financial

assistance must document their consideration of these standards.

(3) We have replaced the current prior approval requirement with a

requirement for prior notification to FCA. This should provide greater

flexibility to the banks and associations, while allowing us to

identify and address safety and soundness concerns before a bank takes

assistance action. During the 30-day notification period, we may need

to request additional information. We also may exercise our enforcement

authorities under title IV, part A, and title V, part C, of the Act.

(4) We have added a requirement for post notification to

shareholders. This will ensure that all shareholders of the bank

(associations and other financing institutions) are appropriately

informed of the bank's assistance action. Banks may inform shareholders

before assistance is given, and, in general, should inform shareholders

as soon as practicable of any assistance actions.

The FCA will continue to coordinate with the Farm Credit System

Insurance Corporation in financial assistance matters to ensure that

all pertinent Insurance Fund issues are appropriately identified and

addressed.

List of Subjects in 12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities,

Investments, Rural areas.

For the reasons stated in the preamble, part 615 of chapter VI,

title 12 of the Code of Federal Regulations is proposed to be amended

to read as follows:

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS,

AND FUNDING OPERATIONS

1. The authority citation for part 615 continues to read as

follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5,

2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17,

6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm

Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074,

2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b,

2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4,

2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of

Pub. L. 100-233, 101 Stat. 1568, 1608.

2. The heading of subpart F is revised to read as follows:

Subpart F--Property, Assistance, and Other Investments

3. Section 615.5171 is revised to read as follows:

Sec. 615.5171 Financial assistance by Farm Credit Banks and

agricultural credit banks to affiliated associations.

(a) Financial assistance. (1) Farm Credit Bank and agricultural

credit bank (collectively, bank) financial assistance to affiliated

associations includes, but is not limited to:

(i) Purchasing an affiliated association's nonvoting stock or

participation certificates; and

(ii) Paying in surplus to an affiliated association in the form of:

(A) Cash;

(B) Debt forgiveness or compromise of indebtedness;

(C) Interest rate concessions;

(D) Interest free loans;

(E) Transfer of loans between the bank and the association at a

value advantageous to the association relative to fair market value;

(F) Reduction or elimination of standard loan service fees;

(G) Assumption of operating or other expenses (e.g., legal fees,

insurance premiums, etc.); and

(H) Any other preferential payment or compensation not available on

similar terms to all affiliated associations.

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(2) Financial assistance does not include routine business

transactions providing financial benefits that are available on similar

and nonpreferential terms to all affiliated associations.

(b) Standards for financial assistance. Before authorizing

financial assistance to an affiliated association, a bank board of

directors must consider and document whether:

(1) The financial assistance is necessary, feasible, and the

``least cost'' alternative available;

(2) The financial assistance is in the best interests of all of the

shareholders;

(3) The bank will continue to be financially sound and maintain

adequate capital after providing the financial assistance; and

(4) The financial assistance will enable the association to

maintain service to borrowers.

(c) Notification requirements. (1) Banks must notify the Chief

Examiner of the Farm Credit Administration at least 30 days prior to

providing financial assistance to an affiliated association.

(2) Banks must notify their shareholders within a reasonable time

of providing financial assistance to an affiliated association.

Date: February 12, 1995.

Vivian L. Portis,

Secretary, Farm Credit Administration Board.

[FR Doc. 99-3980 Filed 2-17-99; 8:45 am]

BILLING CODE 6705-01-P