This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

4429

Vol. 62, No. 20

Thursday, January 30, 1997

FARM CREDIT ADMINISTRATION

12 CFR Parts 613, 614, 615, 618, 619,

620, and 626

RIN 3052–AB10

Eligibility and Scope of Financing;

Loan Policies and Operations; Funding

and Fiscal Affairs, Loan Policies and

Operations, and Funding Operations;

General Provisions; Definitions;

Disclosure to Shareholders;

Nondiscrimination in Lending; Capital

Adequacy and Customer Eligibility

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA) through the FCA

Board (Board) adopts amendments (final

rule) to the current regulations

governing the capital adequacy

provisions and the customer eligibility

provisions for Farm Credit System

(Farm Credit, FCS, or System)

institutions. This rule adds core surplus

and total surplus standards for banks,

associations, and the Farm Credit

Leasing Services Corporation (Leasing

Corporation); adds a collateral ratio for

banks; and adds procedures for setting

higher capital standards for individual

institutions and for issuing capital

directives, when warranted. The rule

also incorporates recent amendments to

the Farm Credit Act of 1971, as

amended (Act), which govern the

eligibility rules for lending under title

III of the Act and provide Farm Credit

banks and associations with new

authorities to participate with non

System lenders in loans to similar

entities. The final rule eliminates

restrictions in the current eligibility

regulations that are not required by the

Act and makes other technical,

clarifying, and conforming changes. The

final rule relocates the

nondiscrimination in lending

regulations to a new part without

change.

DATES: This regulation shall become

effective 30 days after publication in the

Federal Register during which either or

both houses of Congress are in session.

Notice of the effective date will be

published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

Dennis K. Carpenter, Senior Policy

Analyst, and John J. Hays, Policy

Analyst, Office of Policy Development

and Risk Control, Farm Credit

Administration, McLean, VA 22102–

5090, (703) 883–4498, TDD (703) 883–

4444,

or

Rebecca S. Orlich, Senior Attorney, and

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: The FCA

proposed amendments to the capital

provisions of its regulations for FCS

institutions on July 25, 1995 (60 FR

38521) and to the customer eligibility

provisions on September 11, 1995 (60

FR 47103). In response to comments

received, the FCA combined the two

proposals and published proposed

amendments to the capital adequacy

and customer eligibility provisions of its

regulations for Farm Credit institutions

on August 13, 1996 (reproposed rule).

See 61 FR 42092. The 30-day comment

period expired on September 12, 1996.

I. Summary of the Changes in the Final

Rule

A. The capital provisions of the final

rule contain the following changes from

the reproposed rule:

1. Associations may include in their

core surplus allocated equities that are

includible in their total surplus and that

are not scheduled to be revolved in the

next 3 years. Such equities may

comprise up to 2 percentage points of an

association’s 3.5-percent minimum core

surplus to risk-adjusted assets

requirement, with the remaining 1.5

percent in unallocated surplus and

includible perpetual stock.

2. Banks for cooperatives (BCs) and

agricultural credit banks (ACBs) may

include nonqualified allocated equities

that are issued to non-System entities

and that do not have an established plan

or practice of revolvement. Such

equities may comprise up to 2

percentage points of a BC’s or ACB’s

3.5-percent minimum core surplus

requirement, with the remaining 1.5

percent in unallocated surplus and

includible perpetual stock.

3. If specifically provided for in an

institution’s capital adequacy plan, the

institution may retire or cancel

purchased and allocated equities

includible in core surplus for

application against the indebtedness on

a defaulted loan without causing similar

remaining equities to be excluded from

the core surplus ratio. The institution

may also pay out allocated equities in

the event of the death of a former

borrower whose loan has been repaid. In

both cases, the institution board must

determine that retirement or

revolvement is in the best interest of the

institution.

4. Retirement of less than an entire

class or series of equities includible in

core surplus, other than in the

circumstances described in item 3

above, will result in the disallowance of

remaining similar equities from core

surplus.

5. If approved by the FCA, a capital

instrument or a particular balance sheet

account issued to or related to another

System institution may be included in

an institution’s core or total surplus.

6. The Leasing Corporation may

include its C Stock issued to Farm

Credit banks in the total surplus ratio.

B. The eligibility provisions

applicable to title I and title II lenders

incorporate the following changes from

the reproposed rule:

1. The final regulation retains the

existing definition of bona fide farmer

or rancher in § 613.3010(a). This and the

other definitions in § 613.3010 are

redesignated as § 613.3000(a) in order to

replace the reproposed definitions. The

reproposed definitions for agricultural

assets and agricultural land,

§ 613.3000(a)(1) and (2), are withdrawn.

The existing definition of agricultural

land is retained without change in

§ 619.9025. Reproposed § 613.3000(d),

addressing limitations on financing a

farmer’s other credit needs under the

reproposed definitions, is also

withdrawn.

2. Existing § 613.3005(a) is retained as

final § 613.3005 to determine the scope

of financing for farmers, ranchers, and

producers or harvesters of aquatic

products.
4430 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

1The total number of comments received on the

individual provisions of the final rule does not total

1591 because several commenters responded to

both capital and customer provisions in a single

comment letter.

3. The final rule offers some flexibility

in the use of the 75th percentile of local

housing values to establish what

constitutes moderately priced housing.

It requires each FCS institution to

support its determination with

appropriate documentation whenever

the institution adopts a value above the

75th percentile of housing values in the

rural area where it is located.

II. Public Comments Received

The FCA received 1591 comment

letters in response to the reproposed

rule concerning capital adequacy and

customer eligibility provisions. There

were 1079 comments addressing the

customer eligibility rules and 580

comments addressing the reproposed

capital adequacy provisions.1

The FCA received 881 comments from

System institutions and their members/

borrowers, including a comment letter

from the System’s Presidents’ Finance

Committee, which reflected the views of

System banks and associations (System

joint comment) concerning the capital

adequacy rules, as well as a letter from

the Farm Credit Council (FCC), also on

behalf of the System institutions, on the

customer eligibility provisions. Of the

remaining comments, 723 were from

commercial banks, 26 from trade

associations, 22 from members of

Congress who transmitted constituent

letters, and three from State government

agencies. The national trade

associations, in addition to the FCC, that

commented included: the American

Bankers Association (ABA), the

Independent Bankers Association of

America (IBAA), the Credit Union

National Association (CUNA), and the

National Farmers Union (NFU). The

States from which banking chapters and

affiliates of their national associations

submitted comments included Virginia,

Wisconsin, Nebraska, Pennsylvania,

Arizona, California, Alaska, Hawaii,

Montana, New Mexico, Nevada, Oregon,

Utah, Washington, Idaho, Colorado,

Michigan, New York, Indiana, Georgia,

Maine, Louisiana, and South Dakota. In

addition to the written comments

received, a group of System

representatives made an oral

presentation of its views to Agency staff

concerning the capital adequacy

provisions.

III. The Final Rule

After carefully considering the

comments received on the reproposed

rule and further deliberation, the FCA

adopts a rule governing capital

adequacy and customer eligibility for

FCS financing. The FCA responds to the

specific concerns of the commenters as

it explains the provisions of the rule.

A. Capital Adequacy Provisions

Of the 580 written comments received

on the capital provisions, six were from

System banks (AgFirst FCB (two letters),

Western FCB, AgriBank FCB, CoBank

ACB, and St. Paul BC), one was from the

Leasing Corporation, 35 were from

System associations, 532 were from

borrowers/shareholders of several

agricultural credit associations (ACAs),

one was from the System’s Presidents’

Planning Committee on behalf of

System institutions (System joint

comment), four were from various State

and national cooperative councils, and

one was from the ABA on behalf of its

commercial bank members.

Responses to the capital provisions

varied widely. Of the five System banks

that commented, one bank fully

supported the reproposal and urged the

FCA not to diminish required levels by

lowering ratios or widening the

definition of eligible capital. Two

System banks supported the reproposal

as revised by minor changes suggested

in the System joint comment. Those

changes are more fully described below.

The other two System banks suggested

changes to the reproposal primarily as it

affected associations operating on a

Subchapter T basis for tax purposes. Of

the System associations that submitted

comments, a few supported the

reproposal, but the majority asked for

changes in the core surplus

requirement. Likewise, the cooperative

councils and the association borrowers

opposed the core surplus ratio

components as applied to associations.

The ABA commented that it supported

the stiffening of capital requirements for

System institutions and offered a

general opinion that the reproposal was

not stringent enough.

1. Core Surplus Ratio Capital Standard

The majority of the comments on

capital pertained to the core surplus

ratio in the reproposed rule. A System

bank, the Leasing Corporation, and

several associations supported the core

surplus ratio as reproposed, and other

System institutions generally supported

the ratio with minor revisions.

Many other respondents, including

System associations, made the same

criticisms of the core surplus ratio that

they had made of the unallocated

surplus ratio in the originally proposed

capital regulations. They asserted that

the core surplus ratio was contrary to

cooperative principles, unfairly

differentiated between unallocated

surplus and allocated surplus, and

discouraged institutions from operating

as Subchapter T cooperatives. They

stated their belief that an institution

with allocated equities in addition to a

minimum level of unallocated surplus

was a stronger institution than one with

the same amount of unallocated surplus

but no allocated equities. For a detailed

description of these comments, see 61

FR 42092, 42094 (Aug. 13, 1996). Most

of these respondents did not address

specifically the inclusion of

nonqualified allocated equities in the

core surplus ratio.

A System bank that did address the

inclusion of nonqualified allocated

equities disagreed with the FCA’s

statement that inclusion of such equities

would eliminate most of the

disincentives to operate on a Subchapter

T basis and stated that single taxation is

an extremely important tool for

managing tax liabilities on association

earnings.

An association objected to the

requirement that associations deduct the

net investment in the affiliated bank

from the core surplus ratio. Another

association stated that an association

should not have to deduct this

investment unless the bank does not

meet its minimum capital requirements.

A respondent questioned the meaning

of the statement in the reproposal

preamble that the FCA expected a

‘‘healthy portion’’ of core surplus to be

made up of unallocated surplus. See 61

FR 42095–96 (Aug. 13, 1996). The

respondent stated that ‘‘healthy’’

appeared to be a subjective evaluation

and asserted that ‘‘[t]he requirement of

a ‘healthy’ sum of unallocated surplus

runs contrary to the cooperative nature

of the System.’’

Two System associations stated that

the risk monitoring systems already in

place—the Farm Credit System

Insurance Corporation, the Market

Access Agreement, the Contractual

Interbank Performance Agreement,

general financing agreements, and ‘‘a

very aggressive regulator’’—were

sufficient to control risk.

A System bank recommended that the

core surplus of associations be

calculated by means of two separate

ratios: first, measure unallocated

retained earnings (URE) with no

deduction for the investment in the

bank; second, measure total surplus

with a deduction for the investment in

the bank. The bank pointed out that

‘‘[t]he only situation in which the

member’s investment would be

impaired at the point in which losses

exceeded association unallocated

surplus net of its investment in the bank
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4431

2This same rule by its language also applies to

the FCBs; however, the effect of this rule on FCBs

is expected to be minimal.

would be one in which the association’s

investment in the bank was impaired at

the same time.’’ The bank also stated

that tax considerations, not capital

requirements, should be the basis on

which an institution should decide

whether to allocate equities on a

nonqualified or a qualified basis.

Several associations recommended that

the core surplus for associations be

calculated on a more broadly defined

basis by including all permanent capital

less the investment in the bank.

The System, in its joint comment,

recommended that the FCA permit a

call on preferred stock when a bank is

overcapitalized or in a declining rate

environment. It also recommended that

the FCA include in core surplus, on a

case-by-case basis, newly developed or

modified equities or accounts held by

other System institutions.

One commenter requested that the

FCA permit revolvements of

nonqualified allocated equities as long

as the revolvements do not result in

failure to meet the core surplus

requirement. Another commenter stated

that it agreed with the FCA’s rationale

for including nonqualified allocated

equities in core surplus but suggested

that redemptions be permitted when a

borrower dies or defaults on a loan. The

commenter also stated that nonqualified

allocations between System institutions

ought to be includible by one institution

in core surplus and suggested that the

allocations be included in the core

surplus of the issuing institution.

In response to the comments, and

upon further deliberation about the

components and quality of core surplus,

the FCA has made several changes to

the core surplus requirement in the final

rule. The principal change is that

associations with allocated equities,

which are primarily associations that

operate as Subchapter T cooperatives,

may include certain longer-term

qualified as well as nonqualified

allocated equities. However, allocated

equities may comprise no more than 2

percentage points of the association’s

minimum 3.5-percent core surplus

requirement. Includible longer-term

equities are allocated equities not

subject to a revolvement plan or subject

to a revolvement plan of at least 5 years

and not scheduled for distribution

during the next 3 years. The remaining

1.5 percentage points of the minimum

core surplus requirement must be made

up of unallocated retained earnings and

perpetual stock not subject to a

revolvement plan or practice.

This decision reflects the FCA’s

judgment that a formula including

allocated equities that are not scheduled

for retirement within the next 3 years

provides a method for achieving a stable

capital base for associations without

discouraging patronage distributions.

Longer-term allocated equities, while

they may not be perpetual in nature, do

provide important capital protection for

as long as they are held, and an

institution’s board can delay a

scheduled distribution when it is in the

best interest of the institution. By

counting allocated equities only when

they are not within 3 years of

revolvement, institutions are less likely

to have to interrupt scheduled

revolvements to meet their capital

standards in times of adversity because

they have 3 years in which to adjust

continuing allocations or take other

protective measures. Similarly, if an

institution suffers because many of its

borrowers are experiencing adverse

economic circumstances, a sufficient

amount of unallocated surplus will

better enable the institution to continue

to make planned distributions during

the next 3 years, at a time when its

borrowers may need cash distributions

most. In addition, permitting an

association to count both qualified and

nonqualified allocations in the core

surplus ratio gives an association

flexibility to select which type of

allocation to make based primarily on

business considerations rather than

regulatory considerations.

For the BC and any ACB which, like

Subchapter T associations, also have

equities allocated to non-System

borrowers, the Agency decided not to

allow inclusion in core surplus of any

qualified allocated equities or of

nonqualified allocated equities

scheduled for revolvement for several

reasons.2 Such banks have higher

lending limits—from 35 to 50 percent of

the lending limit base for certain BC

loans compared to a 25-percent limit for

all other Farm Credit institutions. The

BC and any ACB carry greater interest

rate risk than associations and carry

certain forms of operational risk from

which associations are largely insulated.

Unlike associations, these banks are

jointly and severally liable on

Systemwide obligations. In addition, the

existing BC and ACB have made a

significant portion of their credit

extensions to relatively few borrowers, a

situation that results in a concentration

of risk. Finally, the BC and ACB have

only the single exclusion of qualified

and revolving nonqualified allocated

equities from their core surplus ratio,

whereas associations must also deduct

their net investment in their affiliated

bank. Therefore, the FCA has

determined that it is appropriate that

such banks maintain a core surplus ratio

of at least 3.5 percent, comprised of

unallocated surplus and nonqualified

allocated equities with no plan or

practice of retirement. Nonqualified

allocated equities may comprise no

more than 2 percentage points of the

institution’s minimum 3.5-percent core

surplus requirement. As with

associations, the remainder must be

comprised of unallocated retained

earnings and perpetual stock.

When an institution’s ratio of

unallocated surplus together with any

perpetual stock includible in core

surplus to risk-adjusted assets amounts

to less than 1.5 percent, the institution

may not count more than 2 percentage

points of allocated equities in

determining compliance with the 3.5-

percent core surplus requirement. For

example, if an institution’s unallocated

surplus and includible perpetual stock

were 1.4 percent of risk-based assets,

and its ratio of long-term allocated

equities were 5 percent, its core surplus

ratio would be 3.4 percent, because

allocated equities could be counted only

up to 2 percentage points. If the

institution’s ratio of unallocated surplus

and perpetual stock were 1.6 percent

and its ratio of long-term allocated

equities were 5 percent, however, its

core surplus ratio would be 6.6 percent.

In this instance, the entire amount of

long-term allocated equities would be

included in the core surplus ratio

because at least 1.5 percent of the

institution’s minimum requirement was

comprised of unallocated surplus and

perpetual stock. The FCA notes that the

restriction on the use of allocated

equities in the computation of the core

surplus ratio applies only to the

components in the computation of the

core surplus ratio and is not intended to

limit the use of such allocated equities

in building and maintaining other

required capital levels.

In establishing the minimum core

surplus requirement at 3.5 percent, the

FCA expects institutions to treat the

core surplus requirement and its

components as a regulatory minimum

and to establish a target or goal for

adequate capital based on their

particular circumstances. There may be

circumstances where the FCA considers

the institution’s component levels of

surplus to be inadequate, even when its

core surplus ratio is at or above 3.5

percent (because the operations of the

institution are of higher risk), and may

take supervisory action, as warranted.

The final rule permits all institutions

to retire equities and apply the proceeds

against indebtedness on a defaulted loan
4432 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

without disallowance of remaining

equities of the same class or series from

treatment as core surplus, subject to the

following conditions: (1) The institution

must specifically provide for such

retirements in the capital adequacy plan

approved by its board of directors and

the circumstances under which they

may occur; (2) the institution must

charge off an amount of the

indebtedness on the loan equal to the

amount of the equities that are retired or

canceled; and (3) the institution board

must determine that each such

retirement is in the best interest of the

institution. Retirable equities include

purchased stock as well as allocated

stock and surplus. The Agency made

this change to accommodate foreclosure

laws of States that preclude the recovery

of a deficiency in certain situations. In

these cases, it may be more

advantageous to the institution to retire

a borrower’s equities. In other cases, it

will be in the best interest of the

institution not to retire equities.

Institutions are required to make this

determination before the equities are

retired.

The final rule also permits

institutions to retire allocated stock and

equities in the event of the death of a

holder of such equities who did not

have a loan outstanding with the

institution at the time of his or her

death, without disallowing remaining

equities from treatment as core surplus,

provided that the institution’s capital

adequacy plan specifically authorizes

such retirements and that the institution

determines that these retirements are in

the best interest of the institution. This

provision enables institutions to make

retirements to help liquidate a former

borrower’s estate, especially in cases

where the allocated equities may not be

transferable. The provision, however,

does not apply to retirements of

purchased stock, which the statute

requires to be transferable. Title to such

stock and the accruing benefits thereto,

including dividends, can be transferred

by the estate executor to the heirs of the

former borrower’s estate. Although these

provisions allow an institution to retire

equities in these circumstances without

disqualifying equities of the same class,

they do not relieve the institution of its

obligation to meet its regulatory capital

standards and to maintain such higher

levels of capital as may be needed in its

particular circumstance.

The FCA has deleted from the final

rule provisions that would have enabled

an institution to retire a pro rata amount

of a class or series of stock or equities

without causing the remaining class or

series of stock or equities to be

disallowed from treatment as core

surplus. The Agency reconsidered those

provisions and determined that the

partial retirements or revolvements

would raise an implication that the

equities are not considered to be a

permanent source of capital by the

institution. If partial retirements of

includible perpetual stock were

commonplace, the FCA believes that

this practice would undermine

stockholders’ perception of the

perpetual character of the stock or

equities. Therefore, if an institution

retires includible stock or equities other

than in connection with a section 4.14B

restructuring or the death or default of

a borrower, the remaining equities of the

same class or series will be disallowed

from treatment as core surplus.

The FCA has expanded a reproposed

provision, permitting inclusion of a

newly developed or modified capital

instrument or particular balance sheet

account with FCA approval, to include

existing capital instruments and balance

sheet accounts as well. Existing equities

issued or allocated to other System

institutions will continue to be

excluded from an institution’s core

surplus as a general principle. But the

FCA will consider including existing

equities as well as any newly developed

or modified capital instrument or a

particular balance sheet account related

to another System institution in core

surplus on a case-by-case basis. The

FCA is not presently aware of any

existing equities held by other System

institutions that it believes would be

appropriate to include in an

institution’s core surplus, but it may

consider the appropriateness of

including any such equities in the

future.

The FCA did not make any other

changes recommended by commenters

to the core surplus ratio. The final rule

continues to require associations to

deduct the net investment in the bank

from core surplus, for the reasons set

forth in the preamble to the reproposed

rule at 61 FR 42096 (Aug. 13, 1996).

With respect to the comment that

current risk monitoring systems are

sufficient to control risk, the FCA was

not convinced that the current risk

monitoring systems assure that

institutions have adequate high quality

capital. The FCA believes this final rule

does provide such assurances. The

suggestion that the core surplus ratio for

associations be replaced by ratios that

separately measure local surplus and

unallocated surplus was rejected

because compliance with the ratios

could be achieved by an association that

has no local unallocated surplus (and

equivalent perpetual equities) and, as

the commenter observes, would not

assure sufficient capital in the event that

the bank is financially stressed at the

same time the affiliated association is

stressed. For a fuller explanation of the

need for local unallocated surplus, see

60 FR 38523 (July 25, 1995). With

respect to the suggestion in the System

joint comment that a call on preferred

stock would be prohibited, the FCA

notes that redemption of perpetual

preferred stock was neither strictly

prohibited in the reproposed rule nor

prohibited in the final rule.

In the final rule, the core surplus ratio

must be calculated by the institution as

of each monthend. A summary of the

core surplus computation follows:

The ratio numerator:

Undistributed earnings/unallocated

surplus (as defined in the FCA Call

Report instructions) less: for

associations only, the net investment in

its affiliated bank, which is—

Total investment in a System bank:

Less: Investment in association by

such bank, up to an amount equal to the

association’s investment in the bank;

Less: Agency/servicing investment in

such bank;

Less: Participation investment in such

bank;

Plus: Perpetual common or

noncumulative preferred stock held by

non-System entities and not purchased

as a condition of obtaining a loan,

provided that the institution has no

established plan or practice of retiring

the stock;

Plus: any other equities or accounts

approved by the FCA for inclusion in

core surplus;

Plus: for banks only, nonqualified

patronage allocations held by persons or

entities other than System institutions,

provided that the institution has no

established plan or practice of retiring

such allocations;

Plus: for associations only,

nonqualified and qualified patronage

allocations held by persons or entities

other than other System institutions,

provided that either the allocations are

subject to a revolvement plan of at least

5 years and will not be distributed

within the next 3 years, or the

institution has no established plan or

practice of retiring such patronage;

Less: investments in the Leasing

Corporation and goodwill as required in

the computation of the institution’s

permanent capital ratio (§ 615.5210(e)(6)

and (7)); Divided by—

The ratio denominator:

Risk-adjusted asset base per the

permanent capital regulations.

2. Total Surplus Ratio Capital Standard

Commenters raised two issues with

regard to the reproposed total surplus
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4433

ratio: the treatment of the Leasing

Corporation’s C Stock and the inclusion

of certain subordinated debt. The

preamble to the reproposed regulations

stated that the Class C Stock issued by

the Leasing Corporation could not be

included in the Leasing Corporation’s

total surplus because the level of stock

fluctuates, somewhat similarly to

borrower stock, based on lease volume.

The Leasing Corporation commented

that its C Stock should be included in

the total surplus calculation because it

is held by System banks, which also

fund the leases. Because a customer of

the Leasing Corporation has no equity at

risk in the corporation, any decision

either to conduct additional business

with the corporation or to terminate

existing leasing relationships does not

involve a consideration by the customer

of the capital level of the corporation.

Therefore, the risk of borrower flight

based on concerns about stock

impairment is non-existent.

The FCA concludes that the basic

characteristics of the C Stock have many

similarities to other FCS institutions’

stock and equities that are includible in

total surplus. Therefore, the C Stock

should be included in the Leasing

Corporation’s total surplus computation.

In its joint comment, the System

requested that subordinated debt with

characteristics of preferred stock be

included in permanent capital and total

surplus, on the ground that commercial

banks and thrifts are permitted to

include this type of subordinated debt

in their Tier 2 capital. The issue of the

treatment of subordinated debt in any

capital ratios for System institutions

was not addressed in the reproposal or

in the 1995 capital proposal, and the

FCA believes that it would be

inappropriate to include this in the final

rule. The Agency is considering this

issue as part of the next phase of its

review of the capital regulations.

Upon reaching these conclusions, the

FCA determines the total surplus ratio

will be calculated by the institution as

of each month end, with a minimum

requirement of 7 percent. A summary of

the computation is as follows:

The ratio numerator:

Undistributed earnings/unallocated

surplus per FCA Call Report;

Plus: certain perpetual common or

noncumulative perpetual preferred

stock held by non-System entities and

not purchased as a condition of

obtaining a loan;

Plus: certain nonqualified and

qualified allocated equities with

revolvement cycles, if any, of at least 5

years;

Plus: term stock with an original

maturity of at least 5 years (reduced by

20 percent per year during the last 5

years of its term);

Plus: any other equities or accounts

approved by the FCA for inclusion in

total surplus;

Less: any equities or accounts

required by the FCA to be deducted

from total surplus;

Less: any deductions for goodwill and

investments in the Leasing Corporation

as required in the computation of the

institution’s permanent capital ratio

pursuant to § 615.5210(e) (6) and (7);

Less: for associations only, an amount

equal to the amount of allocated bank

equities counted as permanent capital

by the bank;

Less: for banks only, an amount equal

to the amount of bank equities counted

as association permanent capital.

Divided by—

The ratio denominator:

Risk-adjusted asset base per the

permanent capital regulations.

3. Collateral Ratio Capital Standard for

Banks

A System bank opposed a collateral

ratio that excludes allocated capital

counted by associations for two reasons:

the allotment agreement does not

change the actual liquidity position of

the bank, and the deduction appears to

be premised on the belief that the

allotment agreements are enforceable

and that every association will call on

the bank to retire such capital at the

same time.

As explained in the preamble to the

reproposal, the exclusion of allocated

capital counted as association

permanent capital is intended to

eliminate the double-leveraging of

shared capital and is not based on

assumptions about the enforceability of

the allotment agreements. Inclusion of

this capital would enable banks and

associations to double-leverage the same

capital for the permanent capital and

collateral ratios. The FCA has decided

to adopt the collateral ratio as

reproposed without changes for the

reasons expressed here and as found in

61 FR 42097–98 (Aug. 13, 1996). Under

the final rule, the net collateral ratio is

calculated as follows:

The ratio numerator is a bank’s net

collateral, which equals:

A bank’s total eligible collateral as

defined by § 615.5050 (except that

eligible investments as described in

§ 615.5140 are to be valued at their

amortized cost),

Less: an amount equal to that portion

of the allocated investments of affiliated

associations that is not counted as

permanent capital of the bank.

Divided by—

The ratio denominator, which equals:

The bank’s total liabilities.

4. Borrower Stock Retirement Provisions

The FCA received no comments on

the reproposal’s provisions enabling

institutions to delegate the retirement of

borrower stock under certain

conditions. However, the final rule

clarifies the board’s obligation to

determine that the institution’s capital

position will remain adequate after any

stock retirements made under delegated

authority.

5. Individual Institution Capital Ratios

and Capital Directives

The FCA received no comments on

the reproposal’s provisions establishing

procedures for setting individual

institution capital ratios and issuing

capital directives. The FCA adopts these

provisions without change.

6. Other Capital Issues

The System, in its joint comment,

recommended that the existing

permanent capital regulations be

harmonized with the reproposal to

include term preferred stock in

permanent capital. The FCA agrees that

term preferred stock, which is

includible in total surplus, should also

be permanent capital on the same basis

as it is considered to be total surplus.

That is, the stock must have an original

maturity of 5 years or more, and in each

of the last 5 years before maturity will

be counted in permanent capital at a

discount of 20 percent. Thus, at the

beginning of 5 years before maturity the

discount will be 20 percent; at the

beginning of 4 years prior to maturity

the discount will be 40 percent; and so

forth until there is a 100-percent

discount at the beginning of one year

prior to maturity. The FCA has added a

stipulation that the institution must

have the option to defer payment of

dividends on such preferred stock. This

qualification is consistent with the

qualification placed on the type of

preferred stock that may be included in

the regulatory capital (Tier 2) of national

banks.

In addition, the FCA added language

to the definitions of total surplus and

core surplus to clarify that deductions

required in the computation of an

institution’s permanent capital ratio

must also be made in the computation

of the institution’s surplus ratios.

Goodwill and the investment by a Farm

Credit bank in the Leasing Corporation

must be deducted from a bank’s surplus

ratios just as they are deducted from the

bank’s permanent capital.

Several System associations inquired

regarding the inclusion in core surplus

of a tax-deferred asset representing taxes
4434 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

3See John P. O’Keefe, Risk-Based Capital

Standards for Commercial Banks: Improved Capital

Adequacy Standards? FDIC Bank Review, Spring/

Summer 1993, vol. 6, no. 1, 1–13. More recently,

economists at the Federal Reserve Bank of Boston

reviewed the capital ratios used to trigger regulatory

intervention. They concluded that the current bank

risk-based and leverage ratios are lagging indicators

of a bank’s financial health and suggested that a

workable solution would be to raise the capital

thresholds for taking prompt corrective action. See

Joe Peek and Eric A. Rosengren, The Use of Capital

Ratios to Trigger Intervention in Problem Banks:

Too Little, Too Late, The New England Economic

Review, September/October 1996, 49–58.

paid on nonqualified allocated equities.

The FCA notes that, based on generally

accepted accounting principles (GAAP),

in circumstances where redemption is

sufficiently ascertainable, the tax

benefits associated with nonqualified

allocations may be recorded as an asset.

In the final rule, this tax-deferred asset

is includible in the core surplus of

institutions if the related nonqualified

allocated equities are included in core

surplus. The FCA notes that it is

presently reviewing the treatment of this

and all other types of tax-deferred assets

in the minimum capital requirements

and will address this issue in the next

phase of its review of the capital

regulations.

A System association inquired

whether a purchase of stock by a System

bank in its affiliated association would

have the effect of reducing an

association’s ‘‘net investment in the

bank,’’ thereby increasing the

association’s core surplus

correspondingly. The FCA agrees that

this is a correct interpretation of the

reproposal and notes that the Agency

would treat such an investment as

financial assistance or paid-in capital

subject to prior FCA approval under

§ 615.5171.

7. Basis for Conclusions and Positions

Taken in the Final Capital Adequacy

Provision

The FCA believes that the changes in

the final rule are consistent with its

views of the purposes of capital and the

need for high quality capital, as set forth

in the supplementary information to the

originally proposed capital

amendments. See 60 FR at 38522–27

(July 27, 1995). The FCA incorporates

that information herein by reference. At

that time, the Agency explained its

position that a mixture of capital

components is necessary to achieve a

sound capital structure and that each

institution should have a minimum

amount of secure capital, exclusive of

borrower stock, that is not at risk at

another System institution. Compliance

with the permanent capital and total

surplus ratios may be achieved with a

variety of components—most types of

capital meet the definition of permanent

capital, and the total surplus

measurement includes both perpetual

and preferred stock, as well as both

unallocated and allocated surplus. The

need for a minimum amount of secure

capital is addressed by the core surplus

ratio, which generally excludes capital

at risk at other System institutions.

The additions made to the

components of core surplus in the final

rule reflect the FCA’s recognition that

some equities allocated to non-System

entities are close to unallocated surplus

as a source of quality capital.

Nonqualified allocated equities with no

plan or practice of retirement are

considered highly stable and have low

borrower expectations of distribution.

Revolving allocated equities, being

somewhat less stable, are only partially

included, and the associations that may

include them are required to maintain a

positive level of local unallocated

surplus in order to meet the 3.5-percent

requirement.

The FCA believes that the core and

total surplus and bank collateral

standards embody the principles set

forth in the 1988 international Basle

Accord that provide for minimum levels

of risk-based high quality and

supplementary capital. Capital

standards for commercial banks and

thrifts were adopted by their Federal

banking regulators in 1989 based on

Basle Accord recommendations, and

subsequent studies have shown that

such standards, which also include a

leverage ratio, are an improvement over

the previous flat-rate standards alone.3

In the FCA’s view, the capital

requirements in the final rule in their

overall effect are very similar to the

standards applied to the commercial

banks and thrifts.

The FCA believes that the capital

provisions in the final rule establish

standards that encourage the building of

a sound capital structure in System

institutions, which will improve the

likelihood of an institution’s survival

during periods of economic stress and

thereby improve the safety and

soundness of the System as a whole.

The FCA believes that these regulations

provide a meaningful measure of capital

adequacy and are appropriate for all

System institutions to which they apply.

B. Customer Eligibility Provisions

1. General Comments

Generally, FCS institutions and their

borrowers endorsed the FCC’s comment

letter, which favored the reproposed

rule but recommended certain

modifications. One State agency

supported the reproposed rule while

another opposed it. All other nonSystem commenters and one FCS

borrower opposed the reproposed

regulations. Many commercial bank

commenters and their trade associations

urged the FCA to abandon all efforts to

amend the existing eligibility

regulations.

Some commenters suggested that the

FCA postpone rulemaking action on

customer regulations until such time

that Congress might address this issue.

The FCA has consulted with the Senate

and House Agriculture Committee staff

about these customer regulations during

the past 6 months. Based on these

discussions and comments received

during two public comment periods, the

FCA has determined that it is

appropriate to proceed with the final

customer regulations.

While many comments focused on

specific provisions of the reproposed

regulations, other comments raised

public policy issues about the role of

government-sponsored enterprises

(GSEs) and the extent to which they

should be allowed to compete with

other credit providers. All comments

were categorized and will be addressed

according to topics that follow.

a. Role of the FCS. The role of the

FCS, as a GSE, and the extent to which

it should be allowed to compete with

other non-GSE credit providers were

issues that were frequently raised by

commercial bankers in opposition to the

reproposed regulations. These

commenters asserted that the FCS

should provide credit only to certain

segments of the agricultural and rural

economy that are not served adequately

by other lenders. These same

commenters also state that the FCA

should allow the FCS to expand only

into certain rural credit markets that

have been neglected by the private

sector.

The FCA finds that these customer

regulations enable FCS banks and

associations to exercise their express

statutory powers appropriately. Neither

the Act nor its legislative history

support claims by commercial bankers

that the FCS is a lender of last resort that

may serve only those rural credit

markets that have been abandoned by

other lenders. Rather, the Act requires

the FCS to maintain a presence in rural

credit markets at all times, thereby

assuring the availability of adequate

credit for agriculture, aquaculture, and

other specified sectors of the rural

economy. The FCS fulfills this function

by financing agriculture, farm-related

businesses, non-farm rural homeowners,

cooperatives, and rural utilities in both

good and bad economic times. The

presence of the System promotes
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4435

competitive behavior among other

lenders that serve these markets and

contributes to the preservation of a well

functioning capital market for

agriculture and other rural credit needs.

The FCA believes that farmers would

not continue to have ready access to

reliable and competitive credit if the

FCS ceased to exist.

The comment letters reveal a

widespread misunderstanding about the

System’s purpose and relationship to

the Federal government and to the

public. Contrary to the beliefs of many

commenters, the Farm Credit System is

not a taxpayer-funded, government loan

program. The Federal government: (1)

Holds no capital stock in FCS

institutions; (2) appoints no members to

the boards of directors of any FCS bank

or association; and (3) appropriates no

funds to the System. Rather, FCS banks

and associations are cooperatives that

are owned and controlled by their

member-borrowers.

In response to claims that commercial

bankers face significantly greater

regulatory burdens than the FCS, the

FCA observes that its examination,

enforcement, and regulatory powers

over the FCS are comparable to the

authorities of other Federal bank

regulatory agencies. Additionally, FCS

lenders are subject to regulatory capital

requirements, lending limits, and loan

underwriting requirements. FCS lenders

are also generally subject to the same

consumer credit laws as commercial

bankers, such as the Truth-In-Lending

Act, Real Estate Settlement Procedures

Act, Equal Credit Opportunity Act, and

the Home Mortgage Disclosure Act. The

requirements of section 4.19 of the Act

to implement specific programs to assist

small, beginning, and young farmers are

not dissimilar from the obligations

imposed on commercial banks under

the Community Reinvestment Act.

Finally, the Act requires titles I and II

lenders to comply with numerous

borrower rights requirements for

agricultural loans, which are

compliance obligations unique to FCS

institutions.

Comments focused on Federal

guarantees of System debt and the tax

status of FCS institutions also reflected

many misconceptions. Certain liabilities

of both FCS banks and commercial

banks are insured. The financial

obligations of FCS banks are insured by

the Farm Credit System Insurance

Corporation (FCSIC), while the deposit

liabilities, up to $100,000 per depositor,

of commercial banks and savings

associations are insured by the Federal

Deposit Insurance Corporation (FDIC).

The FCA observes that the FDIC

insurance fund is backed by the full

faith and credit of the United States

whereas the FCSIC Insurance Fund is

not. Thus, there is no express Federal

guarantee of System debt. In contrast,

commercial banks have an explicit

Federal guarantee of their deposit

liabilities.

Although many commenters assume

that the FCS is tax-exempt, System

institutions that are chartered under

sections 2.0, 3.0, 7.0, and 7.8 of the Act

(PCAs, BCs, ACBs, and ACAs) are

subject to Federal taxation. Thus, FCS

institutions holding 63 percent of total

System assets, as of September 30, 1996,

are subject to Federal taxation.

b. Safety and Soundness. Many

commercial bank commenters assert

that the new customer regulations will

undermine the solvency of the FCS and

expose the taxpayers to risk by

encouraging System lenders to expand

rapidly into credit markets in which

they lack expertise. The FCA has found

no factual basis for this concern. The

FCS has 40 years of experience in

making loans for housing and other nonagricultural purposes. Strict capital

requirements and improved loan

underwriting standards, as well as

effective regulatory oversight, will

ensure that System lenders

appropriately manage the risks

associated with their loans. The capital

provisions of this rule impose strict

capital requirements on all FCS lenders

which will prevent unchecked growth

in System loan portfolios. The FCA has

proposed new loan underwriting

regulations that will require each

System institution to adopt specific

underwriting standards that contain

measurable criteria appropriate for the

type of loan and the institution’s riskbearing capacity. In addition to the

strengthened capital requirements

contained in this rule, the FCSIC

Insurance Fund (which currently

exceeds $1 billion) and the joint and

several liability of all System banks on

System obligations further insulate

investors in System obligations.

2. Financing for Bona Fide Farmers and

Ranchers

Reproposed § 613.3000 contained new

definitions and provisions that

addressed the System’s authorities to

finance the housing, domestic, and nonagricultural business needs of bona fide

farmers, ranchers, and aquatic

producers and harvesters. It would have

established specific limitations on the

amount of credit FCS institutions could

provide for housing and domestic needs

and for non-agricultural business

purposes depending on whether the

borrower was actively engaged in

agricultural or aquatic production and

other factors.

The reproposed definition of a bona

fide farmer, rancher, or aquatic producer

or harvester would have distinguished

‘‘active farmers’’ from those who owned

agricultural land but are not engaged in

cultivating it. The FCA received

comments about this definition from the

FCC, five commercial bank trade

associations, and 342 commercial banks.

All commenters sought modifications to

§ 613.3000(a)(3).

The FCC asserted that the reproposed

rule defined bona fide farmer and

rancher more restrictively than current

§ 613.3010(a). More specifically, the

commenter claimed that the active/

passive concept in reproposed

§ 613.3000 would unduly limit the

System’s ability to finance all classes of

farm owners and operators. The FCC

asserted that the active/passive

distinction ignores the current economic

realities of agriculture because it would

favor parties who conduct agricultural

operations over those who own land

where agricultural operations take

place. The FCC suggested specific

revisions to § 613.3000(a)(3) that would

address System concerns.

Many commercial bank commenters

and their trade associations urged the

FCA to abandon all efforts to amend the

existing regulations. Two commercial

bank trade associations objected to

reproposed § 613.3000(a)(3)(i) because it

would not impose a minimal amount or

percentage of income that a farmer must

generate from agricultural production in

order to become an eligible FCS

borrower. Many commercial bank

commenters expressed concern that this

definition would allow farmers with

minimal agricultural production to

borrow from the FCS for nonagricultural purposes. Two commercial

bank commenters offered specific

recommendations for revising the

definition of a bona fide farmer so that

only farmers who derived a significant

amount of their income from

agricultural production would be

eligible to borrow from the FCS.

The extent to which FCS institutions

could finance the other credit needs of

bona fide farmers and ranchers

generated more comments than any

other provision of the reproposed

regulations. Commercial banks and their

trade associations asked the FCA to

withdraw its proposal and retain the

existing regulation. These commenters

asserted that reproposed § 613.3000(d)

would convert FCS banks and

associations into full-service financial

institutions that would primarily extend

non-agricultural credit to a vastly

increased number of borrowers. These
4436 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

commenters state that Congress never

intended for the FCS to supplant

commercial banks as the principal

provider of non-agricultural credit to

farmers. Two commercial bank trade

associations asserted that the

reproposed regulation would be

incompatible with Congressional intent

unless, at a minimum, it required each

borrower to have an outstanding

agricultural or aquatic loan with a

System lender.

In the event that the FCA chose to

adopt the reproposed regulation, some

commercial bank commenters sought

revisions to § 613.3000(d) that would

address their concerns about the

System’s ability to finance the other

credit needs of farmers. Several

commenters suggested that the FCA

impose specific restrictions of the

System’s authority to finance housing

for both active and passive farmers.

Many commercial bank commenters

suggested that only active farmers

should be allowed to borrow from the

FCS for their domestic needs. One

commercial bank commenter stated that

System institutions should be permitted

to finance only basic necessities for

families that live and work on farms,

and suggested that the final regulation

should specifically forbid farmers from

borrowing from the FCS for luxuries

that are unrelated to their agricultural

activities.

System comments focused on the

provisions of the reproposed regulation

that authorize FCS banks and

associations to finance the nonagricultural business needs of eligible

farmers. The FCC asserted the proposed

limitation on non-agricultural business

financing unreasonably restricts farmer

access to a reliable source of credit and

the ability of the System to meet its

mission. This commenter stated that the

reproposed regulation would ignore the

importance of off-farm employment and

off-farm income to the viability and

continuity of most farming operations.

In the FCC’s view, the limitation also

conflicted with the plain language of the

Act, which places no limitation on the

financing of a borrower’s other credit

needs. The FCC suggested that the final

regulation authorize System institutions

to finance the non-agricultural business

needs of eligible farmers to the full

extent of creditworthiness.

In view of the widespread negative

response to the proposed change in

definitions and the accompanying

limitations on financing other credit

needs, the FCA has decided not to

proceed with its proposed changes to

the definitions or to the rules governing

System financing of farmers’ other

credit needs. The FCA has decided to

retain the definition of bona fide farmer

or rancher in existing § 613.3010(a),

redesignated as § 613.3000(a)(1) and the

scope of financing provisions of

§ 613.3005(a), redesignated as

§ 613.3005.

The final regulation will continue to

define a ‘‘bona fide farmer or rancher’’

as ‘‘a person owning agricultural land,

or engaged in the production of

agricultural products, including aquatic

products under controlled conditions.’’

The FCA also retains the existing

definition of ‘‘producer or harvester of

aquatic products’’ in § 613.3010(d), but

it has redesignated this provision as

final § 613.3000(a)(4).

Existing § 613.3005(a) will continue to

govern the scope of financing for both

agricultural and non-agricultural

purposes. The FCA recognizes that the

proper role of the System in providing

credit to farmers is an important policy

issue on which there are different views.

The Agency will continue to consider

how this regulation can address both the

appropriate scope of FCS lending and

the significant changes in the

agricultural environment, and this issue

may be the subject of future

rulemakings.

The FCA has deleted § 613.3005 (b)

and (c) and redesignated § 613.3005(a)

as final § 613.3005. Paragraphs (b) and

(c) of § 613.3005 pertain to banks for

cooperatives and loan policy

development, respectively, and are not

necessary in the final regulation. As a

conforming amendment, the FCA adopts

final § 613.3000(b), which clarifies (in

accordance with sections 1.11 and 2.4 of

the Act) that FCBs, ACBs, and direct

lender associations are authorized to

finance the agricultural, aquatic and

other credit needs of bona fide farmers,

ranchers and aquatic producers or

harvesters. Final § 613.3000(b) replaces

reproposed § 613.3000(b), (c) and (d),

and it connects the definition and

eligibility provision in final § 613.3000

to the scope of financing provisions in

§ 613.3005. Because commercial bank

commenters have indicated that existing

§ 613.3005 addresses their concerns

about System financing of the other

credit needs of farmers, the FCA finds

it unnecessary to address alternative

solutions that these commenters offered.

Reproposed § 613.3000(a)(1)

contained a definition of ‘‘agricultural

assets’’ that would have determined the

amount of non-agricultural credit that

bona fide farmers, ranchers, and aquatic

producers or harvesters could obtain

from FCS banks and associations. Under

final § 613.3005, a borrower’s access to

the FCS for non-agricultural credit is not

dependent on the ownership of

agricultural assets. As a result, a

regulatory definition of ‘‘agricultural

assets’’ is no longer needed, and

therefore, it has been omitted from the

final regulation. Under the

circumstances, the FCA need not

address specific suggestions by the

commenters to refine reproposed

§ 613.3000(a)(1). The FCA has also

decided not to incorporate the

definition of ‘‘agricultural land’’ in

reproposed § 613.3000(a)(2) into the

final regulation. Rather, § 619.9025 will

continue to define ‘‘agricultural land.’’

This approach is consistent with the

FCA’s decision to retain most of the

definitions in the existing eligibility

regulations.

3. Eligibility of Non-Resident Foreign

Nationals

Some commercial banks and their

trade associations repeated their earlier

claims that the Act does not authorize

non-resident foreign nationals to borrow

from the FCS. The preamble to the

reproposed regulation explained that

the Act does not deny foreign nationals

access to the FCS. In fact, FCA

regulations have permitted some foreign

nationals to borrow from the FCS for the

past 20 years. See 61 FR 42103 (Aug. 13,

1996).

For this reason, final and redesignated

§ 613.3000(a)(3) authorizes FCS

institutions to extend credit to nonresident foreign nationals who have

been lawfully admitted to the United

States on a visa that authorizes them to

own property or operate a business. As

a result, individuals who are nonresident foreign nationals would be

permitted to obtain FCS financing for

their agricultural or aquatic operations

and other needs in the United States on

the same basis as citizens and

permanent residents.

4. Eligibility of Corporate Entities

Three commercial bank trade

associations opposed § 613.3000 (a)(5)

and (d)(4), which establishes eligibility

criteria and loan purpose restrictions for

legal entities that borrow from FCS

banks and associations. These

commenters believe that the FCS should

be authorized to finance only the onfarm production activities of legal

entities and, even then, only when the

legal entities are wholly owned by

active farmers.

The FCA notes that these

recommendations are more restrictive

than the requirements in existing

§ 613.3020(b), which neither required

farmers to own all of the voting stock or

equity in an eligible legal entity, nor

precluded System lenders from

financing the non-agricultural activities

of such borrowers. The FCA had
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4437

4Colloquy between Senators Stewart and

Zorinsky, 126 Cong. Rec. 16560 (Dec. 13, 1980).

proposed to repeal the restrictions on

eligibility in existing § 613.3020(b)

because they were not required by the

Act. However, to address commercial

bank concerns, the reproposal placed

limitations on the scope of financing for

other credit needs for legal entities

related to ownership and involvement

in agriculture. While the final rule does

not include the specific restrictions on

eligibility of legal entities in existing

§ 613.3020(b), it retains existing

§ 613.3005(a) (redesignated as

§ 613.3005), which defines the scope of

lending according to the degree of

involvement in agriculture.

The FCA adopts reproposed

§ 613.3000(a)(5) as final but redesignates

it as § 613.3000(a)(2). As a result, all

legal entities, including those organized

under Native American tribal law, will

now be eligible for FCS financing on the

same basis as other farmers.

5. Financing for Processing and

Marketing Operations

The FCA received comments about its

reproposed processing and marketing

regulation, § 613.3010, from the ABA,

IBAA, and CoBank, ACB. The two

commercial bank trade associations

opposed provisions in the regulation

that govern the level of farmer

ownership of a processing and

marketing unit and the requirements

regarding the farmer’s throughput

contribution. CoBank expressed concern

about intra-System competition for

processing and marketing loans.

a. Farmer Control. The ABA and

IBAA asserted that a separate processing

and marketing unit is ineligible for

financing under sections 1.11(a) and

2.4(a) of the Act unless bona fide

farmers, ranchers, or aquatic producers

and harvesters own 100 percent of its

equity. The preamble to reproposed

§ 613.3010(a)(1) responded to this

argument. See 61 FR 42106 (Aug. 13,

1996). As previously noted in that

preamble, a passage in the legislative

history indicates that Congress

expressly contemplated joint processing

and marketing ventures between

agricultural producers and investors so

long as ineligible parties do not

‘‘exercise substantial control of the

facility or activity financed by the

loan.’’ 4 Because § 613.3010(a)(1)

requires agricultural or aquatic

producers to own more than 50 percent

of the voting stock or equity of an

eligible processing and marketing

operation, investors or employees who

are not farmers cannot exercise

‘‘substantial control’’ over the borrower.

The FCA disagrees with the opinion that

any ownership by parties who are not

agricultural or aquatic producers

renders a processing and marketing

operation ineligible for FCS financing

under sections 1.11(a) and 2.4(a) of the

Act.

The ABA also asserted that the

regulation violates the Act because it

allows a passive farm owner to obtain a

processing and marketing loan from a

System bank or association that operates

under title I or II of the Act. A

processing and marketing operation

qualifies for FCS financing under the

Act and § 613.3010 only if it is ‘‘directly

related’’ to the borrower’s agricultural or

aquatic operations. Passive owners of

agricultural land do not conduct a

farming or ranching operation, and in

such situations, they would not satisfy

the eligibility criteria for a processing

and marketing loan. Therefore, the FCA

adopts § 613.3010(a)(1) as a final

regulation without revision.

b. Throughput Requirements. Two

commercial bank trade associations

addressed the throughput requirements

of § 613.3010(a)(2). The ABA asserted

that allowing the FCS to finance a

processing and marketing operation

where the borrower provides only a

minimal portion of the throughput is

not authorized by the Act. The IBAA

comment acknowledged that the Act

permits lending to borrowers who

provide minimal throughput but

believes the FCA should encourage

loans to applicants whose throughput

exceeds 20 percent. Both commenters

asked the FCA to retain the detailed

paperwork requirements on FCS banks

and associations in former § 613.3045.

The preambles to the proposed and

reproposed regulations responded to

these arguments. See 60 FR 47107 (Sept.

11, 1995); 61 FR 42107 (Aug. 13, 1996).

The FCA concludes that the new

regulation implements the Act by

requiring that the processing and

marketing operations be ‘‘directly

related’’ to the borrower’s agricultural or

aquatic activities and requiring the

borrower or its owner to contribute

‘‘some portion’’ of the throughput.

Compliance with the eligibility

requirements for processing and

marketing loans is adequately assured

through the internal policies of FCS

institutions and the FCA’s examination

and enforcement powers. Furthermore,

it should be noted that the statute limits

loans where less than 20 percent of

throughput is provided by the borrower

to 15 percent of outstanding loans.

c. Intra-System Competition. CoBank,

ACB opposed the FCA’s decision to

rescind its original proposal to prohibit

titles I and II lenders from financing

borrowers who are eligible for credit

under title III of the Act. CoBank’s most

recent comments about intra-System

competition focused exclusively on

processing and marketing loans. The

commenter cited passages in the

legislative history that indicate that

titles I and II lenders were not granted

new authorities to finance the

processing and marketing operations of

previously ineligible borrowers. The

commenter also relied on other passages

in the legislative history that indicate

that Congress did not contemplate fullscale competition for processing and

marketing loans between FCS

institutions that operate under different

titles of the Act.

The Act sets forth different eligibility

criteria for processing and marketing

operators that are financed by FCBs and

direct lender associations from those

financed by title III banks. Final

§ 613.3010 implements these statutory

provisions, and therefore, it prevents

unrestrained intra-System competition

for processing and marketing loans.

FCBs and their affiliated associations

currently finance some of those few

processing and marketing operators that

are simultaneously able to satisfy the

eligibility criteria in title I or II and title

III of the Act. The FCA is disinclined to

adopt regulatory provisions that would

restrict FCBs’ and associations’ exercise

of their statutory authorities.

6. Financing Farm-Related Businesses

Four commercial bank trade

associations and 15 commercial banks

submitted comments to the FCA about

reproposed § 613.3020, which

authorizes FCS banks and associations

that operate under titles I and II of the

Act to finance farm-related businesses.

Although one commenter acknowledged

that the FCA had revised § 613.3020 to

address many of the concerns that

commercial bankers expressed about the

original proposal, several commenters

continued to raise objections to other

provisions of the reproposed regulations

regarding farm-related businesses.

a. On-Farm Requirement. One

commercial bank trade association

opposed the repeal of § 619.9120, which

requires an eligible farm-related

business to furnish services on the farms

and ranches of its customers. This

commenter believes that this ‘‘on farm’’

requirement is mandated by sections

1.11(c)(1) and 2.4(a)(3) of the Act and

their legislative history. The FCA has

concluded that neither the literal

language of the statute nor its legislative

history require an eligible farm-related

business to actually perform services on

the customer’s property. See 44 FR

69631 (Dec. 4, 1979); 60 FR 47108 (Sept.
4438 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

11, 1995); 61 FR 42107 (Aug. 13, 1996).

The commenter cited a passage in the

legislative history that indicates that offfarm storage and processing facilities

qualify as eligible farm-related

businesses. Accordingly, the FCA

retains language of the reproposed

regulation. See 61 FR 42119 (Aug. 13,

1996).

b. Custom-Type Services. Commercial

bank commenters continued to oppose

the FCA’s decision to repeal existing

regulatory provisions that require

eligible borrowers to furnish ‘‘customtype’’ services to farmers and ranchers.

Custom-type services are tasks that

farmers and ranchers can perform for

themselves, but instead hire outside

contractors to perform. Although

sections 1.11(c)(1) and 2.4(a)(3) of the

Act do not mention custom-type

services, some commenters insist that

the statute requires eligible farm-related

business borrowers to perform only

such services. Another commenter

disputed statements in the earlier

preambles that the Act authorizes

System lenders to finance businesses

that offer farmers and ranchers

technologically advanced services, such

as the aerial or computer mapping of

crop and soil conditions.

Sections 1.11(c)(1) and 2.4(a)(3) of the

Act require that eligible borrowers

furnish farm-related services that are

‘‘directly related’’ to the on-farm

operating needs of farmers and ranchers.

Examples of permissible farm-related

services mentioned in the legislative

history are clearly illustrative and do

not exclude other services, including

technologically advanced services that

directly assist farmers and ranchers in

agricultural production. Indeed, a

commercial bank trade association

noted a passage in the legislative history

that aerial crop dusting would be a

permissible service, yet this presumably

is not an activity that most farmers

typically perform themselves.

Two commercial bank trade

associations suggested that the FCA

incorporate a specific list of eligible

farm-related businesses into the final

regulation. The suggested approach

could prevent FCS banks and

associations from financing farm-related

businesses that are eligible to borrow

under sections 1.11(c)(1) and 2.4(a)(3) of

the Act. Although the previous

preambles contained examples of

permissible services, they were

illustrative only, and not intended as a

complete list of permissible services.

Even if it were possible to compile a

comprehensive list today, dynamic

advances in the farm services industry

would quickly render it obsolete.

For this reason, and those previously

provided, the FCA adopts as final the

repeal of the requirement that eligible

farm-related businesses furnish only

‘‘custom-type’’ services to farmers and

ranchers. See 60 FR 47108 (Sept. 11,

1995); 61 FR 42107 (Aug. 13, 1996).

c. Whole-Firm Financing. Three

commercial bank trade associations

objected to the regulatory provisions

that authorize: (1) ‘‘Whole firm’’

financing to a business that derives

more than 50 percent of its income from

furnishing farm-related services; and (2)

financing only for the farm-related

services portion of a business that

derives less than 50 percent of its

income from furnishing such services.

Two commenters claim that the Act

authorizes FCS lenders to extend credit

only to parties who derive a majority of

their income from farm-related services.

Three commenters also claimed that

§ 613.3020 is unenforceable because

money is fungible, and businesses

generally do not keep separate sets of

books for services and sales of goods.

Under these circumstances, the

commenters argue that the FCA will be

unable to monitor the borrower’s use of

FCS funds to ensure that only farmrelated activities are financed.

The FCA concludes that final

§ 613.3020 complies with the Act

because it restricts the FCS to financing

entities that are primarily devoted to

farm-related service activities or if the

borrower is not primarily devoted to

farm-related services, financing is

restricted to a level that such activities

are accomplished in relation to the

whole business. The FCA has sufficient

examination and enforcement powers to

ensure that FCS institutions comply

with these regulations. As is the case

with all loans, routine examination of

loan files will determine whether each

FCS institution has documented the

eligibility of borrowers who obtain

financing for a farm-related business.

7. Financing Non-Farm Rural Homes

The FCC, two FCS associations, five

commercial bank trade associations, and

two commercial banks commented

about various aspects of reproposed

§ 613.3030, which governs non-farm

rural home loans.

a. Owner-Occupied Dwellings. Three

commercial bank trade associations and

one commercial bank opposed the

proposed elimination of the existing

regulatory requirement that the

borrower occupy the dwelling.

According to these commenters, the Act

does not authorize FCS institutions to

finance non-farm rural homes that are

tenant-occupied.

The FCA observes that neither

sections 1.9(3), 1.11(b), and 2.4(b) of the

Act nor their legislative history require

the borrower to occupy a house which

is financed by the FCS. As the FCA

observed in the preamble to the

reproposed regulation, the repeal of the

owner-occupancy requirement advances

the rationale of the System’s rural home

finance authority, which is to ensure the

availability of affordable housing for

rural residents. See 61 FR 42109 (Aug.

13, 1996). The statutory requirement

that the FCS finance housing for rural

residents is satisfied because the

regulation requires either the owner or

a tenant to occupy the rural home as a

principal residence.

b. Definition of Rural Area. Under

reproposed § 613.3030(a)(3), a ‘‘rural

area’’ is defined as ‘‘open country

within a State or the Commonwealth of

Puerto Rico, which may include a town

or village that has a population of not

more than 2,500 persons.’’ The FCA

received comments about this definition

from the FCC and the IBAA. For the

reasons explained below, the FCA

adopts the language of § 613.3030(a)(3)

as reproposed.

The FCA proposed the repeal of a

provision in existing § 613.3040(a)(3)

that authorized FCS lenders to make

home loans in open agricultural areas

within the political boundaries of

‘‘towns’’ where the population exceeds

2,500 inhabitants, subject to Agency

prior approval. The FCC asked the FCA

to reinstate a provision in the final rule

that would allow FCS lenders to make

loans in open, undeveloped countryside

which is devoted to agricultural

production even if it has been annexed

by a ‘‘town’’ with more than 2,500

inhabitants. In the commenter’s

opinion, the fact that this authority has

been rarely used in the past does not

justify its repeal. If this provision is

omitted from the final regulation the

FCC asked the FCA to ‘‘grandfather’’ all

exemptions that have already been

granted under § 613.3040(a)(3).

The FCA declines to retain the

regulatory provision that permits FCS

banks and associations to finance nonfarm rural housing in ‘‘towns’’ where

the population exceeds 2,500

inhabitants. As the FCA explained in

the preamble to the reproposed

regulation, the existing provision is

confusing and this exception has rarely

been used. See 61 FR 42110 (Aug. 13,

1996). All exemptions that the FCA

granted under former § 613.3040(c) will

continue to be areas in which rural

home loans may be made as long as they

meet the conditions upon which they

were approved.
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4439

The IBAA requested that the FCA

amend § 613.3030(a)(3) so it authorizes

FCS institutions to make non-farm rural

housing loans only in areas where

agricultural enterprises predominate.

The commenter believes that this

restriction is necessary so FCS

institutions do not finance housing in

metropolitan areas. The commenter’s

concern is already addressed, however,

because § 613.3030(a)(3) defines a rural

area as ‘‘open country’’ and limits

System rural home lending to

communities where the population does

not exceed 2,500 inhabitants. These

restrictions effectively prevent FCS

lenders from financing housing in urban

and suburban areas.

c. Moderately Priced Housing.

Reproposed § 613.3030(a)(4) established

a two-tier definition of ‘‘moderately

priced housing.’’ Under reproposed

§ 613.3030(a)(4)(i), a rural home is

moderately priced if it satisfies the

criteria in section 8.0 of the Act, thereby

qualifying as collateral for securities

that are guaranteed by the Federal

Agricultural Mortgage Corporation

(Farmer Mac). In the alternative,

§ 613.3030(a)(4)(ii) would allow FCS

lenders to finance rural homes that are

below the 75th percentile of housing

values for the rural area where they are

located, as determined by data from a

credible, independent, and recognized

national or regional source, such as a

Federal, State, or local government

agency, or an industry source. The FCA

received no comments about the Farmer

Mac standard in § 613.3030(a)(4)(i), but

the FCC, two FCS associations, and two

commercial bank trade associations

sought revisions to § 613.3030(a)(4)(ii).

The FCC petitioned the FCA to omit

the 75th percentile ceiling from the final

regulation and rely, instead, on the

overriding requirement that the FCS

finance only moderately priced housing.

The commenter expressed concern that

the regulatory ceiling may unnecessarily

curtail the System’s ability to finance

moderately priced rural housing. As an

alternative, the commenter suggested

that the final regulation establish the

75th percentile as a general guideline,

while maintaining the overriding

standard that financing provided would

be on moderately priced homes.

In response to the comments, the final

regulation provides that non-farm rural

housing is automatically deemed to be

moderately priced if it meets either the

Farmer Mac criteria, or it falls below the

75th percentile of housing values for the

area where it is located, as determined

by a credible, independent, and

recognized national or regional source.

In addition, FCS institutions will be

permitted to finance rural housing that

exceeds the 75th percentile of housing

values in a rural area only if they

determine that the housing in question

is moderately priced for the rural

community where it is located, using

data from a credible, independent, and

recognized national or regional source.

The FCA expects System institutions to

fully document information that

justifies a decision to finance homes as

moderately priced that exceed the 75th

percentile for housing values in the

locale where such loans are made. This

approach will give System institutions

the flexibility to serve non-farm rural

homeowners, while implementing the

statutory requirement that the FCS

finance only moderately priced homes.

Two FCS associations suggested that

Federal Home Loan Mortgage

Corporation (Freddie Mac) or Federal

National Mortgage Association (Fannie

Mae) limits determine the moderately

priced standard for FCS rural home

lending. The FCA previously declined

this recommendation. See 61 FR 42111

(Aug. 13, 1996). Freddie Mac and

Fannie Mae maximum loan amounts

may not be generally representative of

moderately priced housing in rural areas

because they include housing values in

urban and suburban communities.

Furthermore, the Freddie Mac and

Fannie Mae maximum loan amounts are

not universally accepted measures of

moderately priced housing. Instead,

they are based on loan amounts.

Two commercial bank trade

associations do not believe that

§ 613.3030(a)(4)(ii) should allow FCS

institutions to determine moderately

priced housing values in their

territories. These commenters expressed

concern that the FCA will not be able

to take corrective action against System

institutions that have closed loans on

expensive homes prior to examination.

As an alternative, these commenters

asked the FCA to adopt a uniform

national standard so that FCS rural

home lending is specifically targeted to

low and middle income rural residents.

The commenters did not explain

whether they wanted the FCA to

prescribe a single price that would

apply nationwide or a nationally

recognized standard that takes regional

variations of prices into account.

The FCA has incorporated Farmer

Mac’s national standard for moderately

priced rural housing into the final

regulation. As long as FCS institutions

adhere to the statutory requirement that

they finance only moderately priced

rural homes, the FCA believes that they

should be allowed to select other

measures of moderately priced housing

that are supported by data from a

credible, independent, and recognized

national or regional source. The FCA

has not been able to identify a regionally

focused standard for valuing moderately

priced homes that is not influenced by

housing values in metropolitan areas.

Although the FCA originally proposed

that FCS institutions use the most recent

edition of the Census of Housing,

General Housing Characteristics,

published by the United States Bureau

of Census to determine moderately

priced housing in their territories, (See

60 FR 47118 (Sept. 11, 1995)), the FCA

subsequently withdrew this proposal in

large measure because commercial

banks asserted that Census data inflated

housing values in rural areas that are

near metropolitan areas. See 61 FR

42110 (Aug. 13, 1996). Commercial bank

commenters have not identified any

credible or reliable national standard

that reflects moderately priced rural

home values.

The FCA believes that

§ 613.3030(a)(4)(ii) will effectively

restrain FCS lenders from financing

rural homes that are not moderately

priced. The regulation requires each

FCS lender to demonstrate that it used

a credible, independent, and recognized

source to ascertain moderately priced

housing values in the specific locale

where it makes rural home loans. Any

rural home loan for a home that is not

moderately priced is an ineligible loan.

The FCA’s enforcement powers are

sufficient to deter such violations. For

these reasons, the FCA adopts

§ 613.3030(a)(4) as a final regulation

without revision.

d. Loan Purposes. The FCA’s original

proposal would have imposed no

restrictions on the use of the proceeds

from a loan that was secured by the

borrower’s rural home. See 60 FR 47110

(Sept. 11, 1995). The FCA responded to

commercial bank concerns by

rescinding this proposal and restoring

the loan purpose restrictions in the

existing regulation. See 61 FR 42111

(Aug. 13, 1996). As a result, reproposed

§ 613.3030(c) states that FCS institutions

may make loans to rural homeowners

for the purpose of buying, building,

remodeling, improving, repairing rural

homes, and refinancing the existing

indebtedness thereon. The preamble to

the reproposed regulation explained

that System lenders are not precluded

from offering revolving credit lines to

eligible rural home borrowers so long as

such loans are limited to purposes

specified in § 613.3030(c). See 61 FR

42111 (Aug. 13, 1996).

The FCC and three FCS associations

opposed the FCA’s decision to reinstate

the purpose restrictions into the

regulation because the System will not

be allowed to offer a full range of loan
4440 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

5See 117 Cong. Rec. S12496 (Jul. 29, 1971); 117

Cong. Rec. S19970 (Dec. 1, 1971).

6H.R. Rep. 92–593, 92nd Cong., 1st. Sess., (Oct.

23, 1971), p.12.

7 117 Cong. Rec. S12498 (July 29, 1971).

products to non-farm rural homeowners.

System commenters opined that the

FCA’s original proposal is compatible

with both the Act and safe and sound

lending practices. For these reasons,

System commenters petitioned the FCA

to omit the purpose restrictions from the

final regulation. As an alternative, these

commenters suggested that the final

regulation require that the loan must be

predominately for the purposes

specified in § 613.3030(c).

The final regulation retains the

purpose restrictions in § 613.3030(c)

without revision. The FCA has decided

at this time that rural homeowners

qualifying under § 613.3030 should be

required to use the proceeds of a System

loan for the dwelling only.

The ABA and the IBAA challenged

the preamble statement about the

System’s authority to offer revolving

credit lines to non-farm rural

homeowners if the loan proceeds are

used for the purposes specified in

§ 613.3030(c). These commenters

believe that the FCA is granting System

lenders new authorities to expand into

the home equity mortgage market,

which they claim is adequately served

by other lenders. Because non-farm

rural home loans cannot exceed 15

percent of each FCS institution’s loan

portfolio, one commenter suggested that

the FCA should require System banks

and associations to finance only the

purchase and construction of rural

homes. Both commenters inquired how

the FCA will ensure that loan proceeds

are not diverted for purposes that are

not authorized by the regulation.

Contrary to the commenters’ beliefs,

neither § 613.3030(c) nor its preamble

confer new powers on FCS banks and

associations. Instead, they restate the

System’s existing rural home lending

authorities. The Act and other FCA

regulations do not restrict the types of

loan products that System institutions

may offer their customers for

permissible loan purposes. For this

reason, both the existing and new

regulations allow non-farm rural

homeowners to obtain revolving credit

lines from FCS banks and associations

so long as the loan proceeds are used for

specified housing purposes. As before,

FCS institutions will still be required to

maintain policies, procedures, and

sufficient loan controls that prevent

non-farm rural home borrowers from

using loan proceeds for purposes that

are not authorized by the regulation.

The FCA will continue to use its

examination and enforcement powers to

ensure that FCS institutions comply

with § 613.3030(c).

Neither the Act nor its legislative

history support commercial bank claims

that the FCS cannot offer home repair

and improvement loans to rural

residents who are not farmers unless

such credit is unavailable elsewhere.

Several passages of the legislative

history confirm that Congress

specifically contemplated that the FCS

would finance the repair, improvement,

and remodeling of non-farm rural

homes.5 The legislative history also

reveals that Congress specifically

considered and rejected proposals that

would have required credit to be

unavailable from other mortgage lenders

before rural residents who were not

farmers, ranchers, or aquatic producers

and harvesters could obtain FCS

financing for their housing needs.6

8. Financing Domestic and International

Activities by Title III Lenders

CoBank, the ABA, and IBAA

commented on §§ 613.3100 and

613.3200, which govern domestic and

international lending by title III banks.

While CoBank acknowledged that the

FCA had addressed its concerns about

the original proposal, and it sought no

further changes to these regulations, the

two bank trade associations continued

to oppose § 613.3100(a)(5) because it

would allow a BC or ACB to finance

cooperatives that provide business and

financially related services to their

members. These two trade associations

repeated their claim that Congress

intended for title III banks to finance

only cooperatives that aid production

agriculture. The FCA responded to this

opinion in the preamble to the

reproposed regulation, which

documented that § 613.3100(a)(5) is

supported by both the plain language of

section 3.8(a) of the Act and its

legislative history. See 61 FR 42112

(Aug. 13, 1996).

However, the IBAA’s most recent

comment letter relies on a statement

that a Senator made in 1971 to allege

that the FCA misconstrued the statute.

The Senator stated that the Act does not

allow title III banks to finance

cooperatives unless a majority of its

members ‘‘are in fact engaged in

agricultural or aquatic pursuits as their

major function.’’ 7

The Senator’s comments address

eligibility, not scope of financing, for

cooperatives that borrow from title III

banks. Accordingly, the Senator’s

statement does not support the claim

that title III banks lack authority to

finance eligible service cooperatives that

provide business and financially related

services to farmers, ranchers, aquatic

producers and harvesters, and their

cooperatives.

Both the Act and its legislative history

reveal that Congress specifically

contemplated that title III banks would

finance cooperatives that provide

electricity, telephone service, and

insurance services to farmers.

Furthermore, in 1980 and 1996,

Congress relaxed the farmermembership requirements for service

cooperatives. The FCA adopts

§§ 613.3100 and 613.3200 as final

regulations without revision.

9. Participating in Similar Entity Loans

Reproposed § 613.3300 implements

the recently added authority for FCS

banks and associations to participate in

loans that non-System lenders make to

similar entities, i.e. ineligible persons

whose operations are functionally

similar to those of eligible borrowers.

Two commercial bank trade associations

opposed this regulation because they

believe that the new customer

regulations confer eligibility on parties

that Congress regards as similar entities.

As a result, these commenters claim that

the new similar entity regulation will

permit FCS institutions to participate in

non-agricultural loans. One of these

commenters requested that the FCA

identify parties who will qualify as

similar parties under § 613.3300.

The FCA has already responded to

these concerns in the preambles to both

the proposed and reproposed

regulations. The FCA again reaffirms

that § 613.3300 is within the parameters

of the Act, and it closely tracks the

language of the statute. Furthermore,

§ 613.3300(b) expressly prohibits FCS

institutions from participating in nonagricultural loans to similar entities, and

the FCA previously denied System

requests to delete this purpose

restriction from the regulation. See 61

FR 42116 (Aug. 13, 1996). Finally, the

preamble to the proposed regulation

identified four parties who qualify as

similar entities for FCS banks and

associations that operate under titles I

and II of the Act. See 60 FR 47115 (Sept.

11, 1995). The FCA declines to

incorporate a list of similar entities into

the regulation for the reasons explained

in the preamble to the reproposed

regulation. See 61 FR 42115 (Aug. 13,

1996). The commenters have raised no

other issues about similar entities, and

the FCA now adopts § 613.3300 as a

final regulation without further

amendment.
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4441

10. Other Proposed Amendments

The FCA received no comments about

the proposed amendments to parts 614,

618, 619, and 626. These regulations are

now adopted as final regulations

without revision, except for

amendments to conform regulation

citations in subpart A of part 614 and

§ 619.9025 in part 619. The conforming

changes to subpart A of part 614 will be

addressed within FCA’s final rule on

loan underwriting and § 619.9025 is

retained without revision.

IV. Regulatory Impact and FCA

Regulatory Philosophy

These final regulations are consistent

with the FCA Board’s Policy Statement

on Regulatory Philosophy and achieve

the Board’s objective of creating an

environment that promotes the

confidence of borrowers/shareholders,

investors and the public in the System’s

financial strength and future viability.

See 60 FR 26034 (May 16, 1995). The

objective of the final revisions to the

capital adequacy regulations is to

establish standards that encourage the

building of a sound capital structure by

System institutions. The building of a

sound capital structure at each

institution would improve the

likelihood of an institution’s survival

during periods of economic stress and

thereby improve the safety and

soundness of the System as a whole.

The FCA believes that these final

regulations provide a meaningful

measurement of capital adequacy and

would be appropriate for all System

institutions to which they apply.

The capital adequacy provisions of

this rule would apply to all System

banks, associations, and the Leasing

Corporation. During the last 5 years,

most of these institutions have been

steadily increasing both types of surplus

identified by the reproposed

regulations, and the FCA estimates that

most, if not all, of the institutions would

achieve the minimum standards in less

than 7 years if these trends continue.

The final amendments to the

customer eligibility regulations would

remove some of the existing restrictions

that are not required by the Act or

necessary to implement it.

List of Subjects

12 CFR Part 613

Agriculture, Banks, Banking, Credit,

Rural areas.

12 CFR Part 614

Agriculture, Banks, Banking, Flood

insurance, Foreign trade, Reporting and

recordkeeping requirements, Rural

areas.

12 CFR Part 615

Accounting, Agriculture, Banks,

Banking, Government securities,

Investments, Rural areas.

12 CFR Part 618

Agriculture, Archives and records,

Banks, Banking, Insurance, Reporting

and recordkeeping requirements, Rural

areas, Technical assistance.

12 CFR Part 619

Agriculture, Banks, Banking, Rural

areas.

12 CFR Part 620

Accounting, Agriculture, Banks,

Banking, Reporting and recordkeeping

requirements, Rural areas.

12 CFR Part 626

Advertising, Aged, Agriculture,

Banks, Banking, Civil rights, Credit, Fair

housing, Marital status discrimination,

Sex discrimination, Signs and symbols.

For the reasons stated in the

preamble, parts 613, 614, 615, 618, 619,

620, and 626 of chapter VI, title 12 of

the Code of Federal Regulations are

amended as follows:

PART 613—ELIGIBILITY AND SCOPE

OF FINANCING

1. The authority citation for part 613

is revised to read as follows:

Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11,

2.2, 2.4, 2.12, 3.1, 3.7, 3.8, 3.22, 4.18A, 4.25,

4.26, 4.27, 5.9, 5.17 of the Farm Credit Act

(12 U.S.C. 2013, 2015, 2017, 2018, 2019,

2073, 2075, 2093, 2122, 2128, 2129, 2143,

2206a, 2211, 2212, 2213, 2243, 2252).

2. Subpart D (§§ 613.3110 and

613.3120) is removed.

Subpart E—Nondiscrimination in

Lending

§§ 613.3145, 613.3150, 613.3151, 613,3152,

613.3160, 613.3170, 613.3175 (Subpart E)

[Redesignated as Part 626]

3. Subpart E of part 613, consisting of

§§ 613.3145, 613.3150, 613.3151,

613.3152, 613.3160, 613.3170, and

613.3175 is redesignated as new part

626, consisting of §§ 626.6000,

626.6005, 626.6010, 626.6015, 626.6020,

626.6025, and 626.6030 respectively.

4. Subparts A, B, and C of part 613 are

revised to read as follows:

Subpart A—Financing Under Titles I and II

of the Farm Credit Act

Sec.

613.3000 Financing for farmers, ranchers,

and aquatic producers or harvesters.

613.3005 Lending objective.

613.3010 Financing for processing or

marketing operations.

613.3020 Financing for farm-related service

businesses.

613.3030 Rural home financing.

Subpart B—Financing for Banks Operating

Under Title III of the Farm Credit Act

613.3100 Domestic lending.

613.3200 International lending.

Subpart C—Similar Entity Authority Under

Sections 3.1(11)(B) and 4.18A of the Act

613.3300 Participations and other interests

in loans to similar entities.

Subpart A—Financing Under Titles I

and II of the Farm Credit Act

§ 613.3000 Financing for farmers,

ranchers, and aquatic producers or

harvesters.

(a) Definitions. For purposes of this

subpart, the following definitions apply:

(1) Bona fide farmer or rancher means

a person owning agricultural land or

engaged in the production of

agricultural products, including aquatic

products under controlled conditions.

(2) Legal entity means any

partnership, corporation, estate, trust, or

other legal entity that is established

pursuant to the laws of the United

States, any State thereof, the

Commonwealth of Puerto Rico, the

District of Columbia, or any tribal

authority and is legally authorized to

conduct a business.

(3) Person means an individual who

is a citizen of the United States or a

foreign national who has been lawfully

admitted into the United States either

for permanent residency pursuant to 8

U.S.C. 1101(a)(20) or on a visa pursuant

to a provision in 8 U.S.C. 1101(a)(15)

that authorizes such individual to own

property or operate or manage a

business or a legal entity.

(4) Producer or harvester of aquatic

products means a person engaged in

producing or harvesting aquatic

products for economic gain in open

waters under uncontrolled conditions.

(b) Eligible borrower. Farm Credit

institutions that operate under titles I or

II of the Act may provide financing to

a bona fide farmer or rancher, or

producer or harvester of aquatic

products for any agricultural or aquatic

purpose and for other credit needs.

§ 613.3005 Lending objective.

It is the objective of each bank and

association, except for banks for

cooperatives, to provide full credit, to

the extent of creditworthiness, to the

full-time bona fide farmer (one whose

primary business and vocation is

farming, ranching, or producing or

harvesting aquatic products); and

conservative credit to less than full-time

farmers for agricultural enterprises, and

more restricted credit for other credit
4442 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

requirements as needed to ensure a

sound credit package or to

accommodate a borrower’s needs as

long as the total credit results in being

primarily an agricultural loan. However,

the part-time farmer who needs to seek

off-farm employment to supplement

farm income or who desires to

supplement off-farm income by living in

a rural area and is carrying on a valid

agricultural operation, shall have

availability of credit for mortgages, other

agricultural purposes, and family needs

in the preferred position along with fulltime farmers. Loans to farmers shall be

on an increasingly conservative basis as

the emphasis moves away from the fulltime bona fide farmer to the point where

agricultural needs only will be financed

for the applicant whose business is

essentially other than farming. Credit

shall not be extended where investment

in agricultural assets for speculative

appreciation is a primary factor.

§ 613.3010 Financing for processing or

marketing operations.

(a) Eligible borrowers. A borrower is

eligible for financing for a processing or

marketing operation under titles I and II

of the Act, only if the borrower meets

the following requirements:

(1) The borrower is either a bona fide

farmer, rancher, or producer or

harvester of aquatic products, or is a

legal entity in which eligible borrowers

under § 613.3000(b) own more than 50

percent of the voting stock or equity;

and

(2) The borrower or an owner of the

borrowing legal entity regularly

produces some portion of the

throughput used in the processing or

marketing operation.

(b) Portfolio restrictions for certain

processing and marketing loans.

Processing or marketing loans to eligible

borrowers who regularly supply less

than 20 percent of the throughput are

subject to the following restrictions:

(1) Bank limitation. The aggregate of

such processing and marketing loans

made by a Farm Credit bank shall not

exceed 15 percent of all its outstanding

retail loans at the end of the preceding

fiscal year.

(2) Association limitation. The

aggregate of such processing and

marketing loans made by all direct

lender associations affiliated with the

same Farm Credit bank shall not exceed

15 percent of the aggregate of their

outstanding retail loans at the end of the

preceding fiscal year. Each Farm Credit

bank, in conjunction with all its

affiliated direct lender associations,

shall ensure that such processing or

marketing loans are equitably allocated

among its affiliated direct lender

associations.

(3) Calculation of outstanding retail

loans. For the purposes of this

paragraph, ‘‘outstanding retail loans’’

includes loans, loan participations, and

other interests in loans that are either

bought without recourse or sold with

recourse.

§ 613.3020 Financing for farm-related

service businesses.

(a) Eligibility. An individual or legal

entity that furnishes farm-related

services to farmers and ranchers that are

directly related to their agricultural

production is eligible to borrow from a

Farm Credit bank or association that

operates under titles I or II of the Act.

(b) Purposes of financing. A Farm

Credit Bank, agricultural credit bank, or

direct lender association may finance:

(1) All of the farm-related business

activities of an eligible borrower who

derives more than 50 percent of its

annual income (as consistently

measured on either a gross sales or net

sales basis) from furnishing farm-related

services that are directly related to the

agricultural production of farmers and

ranchers; or

(2) Only the farm-related services

activities of an eligible borrower who

derives 50 percent or less of its annual

income (as consistently measured on

either a gross sales or net sales basis)

from furnishing farm-related services

that are directly related to the

agricultural production of farmers and

ranchers.

§ 613.3030 Rural home financing.

(a) Definitions.

(1) Rural homeowner means an

individual who is not a bona fide

farmer, rancher, or producer or

harvester of aquatic products.

(2) Rural home means a single-family

moderately priced dwelling located in a

rural area that will be the occupant’s

principal residence.

(3) Rural area means open country

within a State or the Commonwealth of

Puerto Rico, which may include a town

or village that has a population of not

more than 2,500 persons.

(4) Moderately priced means the price

of any rural home that either:

(i) Satisfies the criteria in section 8.0

of the Act pertaining to rural home

loans that collateralize securities that

are guaranteed by the Federal

Agricultural Mortgage Corporation; or

(ii) Is otherwise determined to be

moderately priced for housing values for

the rural area where it is located, as

documented by data from a credible,

independent, and recognized national or

regional source, such as a Federal, State,

or local government agency, or an

industry source. Housing values at or

below the 75th percentile of values

reflected in such data will be deemed

moderately priced.

(b) Eligibility. Any rural homeowner is

eligible to obtain financing on a rural

home. No borrower shall have a loan

from the Farm Credit System on more

than one rural home at any one time.

(c) Purposes of financing. Loans may

be made to rural homeowners for the

purpose of buying, building,

remodeling, improving, repairing rural

homes, and refinancing existing

indebtedness thereon.

(d) Portfolio limitations.

(1) The aggregate of retail rural home

loans by any Farm Credit Bank or

agricultural credit bank shall not exceed

15 percent of the total of all of its

outstanding loans at any one time.

(2) The aggregate of rural home loans

made by each direct lender association

shall not exceed 15 percent of the total

of its outstanding loans at the end of its

preceding fiscal year, except with the

prior approval of its funding bank.

(3) The aggregate of rural home loans

made by all direct lender associations

that are funded by the same Farm Credit

bank shall not exceed 15 percent of the

total outstanding loans of all such

associations at the end of the funding

bank’s preceding fiscal year.

Subpart B—Financing for Banks

Operating Under Title III of the Farm

Credit Act

§ 613.3100 Domestic lending.

(a) Definitions. For purposes of this

subpart, the following definitions apply:

(1) Cooperative means any association

of farmers, ranchers, producers or

harvesters of aquatic products, or any

federation of such associations, or a

combination of such associations and

farmers, ranchers, or producers or

harvesters of aquatic products that

conducts business for the mutual benefit

of its members and has the power to:

(i) Process, prepare for market,

handle, or market farm or aquatic

products;

(ii) Purchase, test, grade, process,

distribute, or furnish farm or aquatic

supplies; or

(iii) Furnish business and financially

related services to its members.

(2) Farm or aquatic supplies and farm

or aquatic business services are any

goods or services normally used by

farmers, ranchers, or producers and

harvesters of aquatic products in their

business operations, or to improve the

welfare or livelihood of such persons.

(3) Public utility means a cooperative

or other entity that is licensed under
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4443

Federal, State, or local law to provide

electric, telecommunication, cable

television, water, or waste treatment

services.

(4) Rural area means all territory of a

State that is not within the outer

boundary of any city or town having a

population of more than 20,000

inhabitants based on the latest

decennial census of the United States.

(5) Service cooperative means a

cooperative that is involved in

providing business and financially

related services (other than public

utility services) to farmers, ranchers,

aquatic producers or harvesters, or their

cooperatives.

(b) Cooperatives and other entities

that serve agricultural or aquatic

producers.

(1) Eligibility of cooperatives. A bank

for cooperatives or an agricultural credit

bank may lend to a cooperative that

satisfies the following requirements:

(i) Unless the bank’s board of

directors establishes by resolution a

higher voting control threshold for any

type of cooperative, the percentage of

voting control of the cooperative held by

farmers, ranchers, producers or

harvesters of aquatic products, or

cooperatives shall be 80 percent except:

(A) Sixty (60) percent for a service

cooperative;

(B) Sixty (60) percent for local farm

supply cooperatives that have

historically served the needs of a

community that would not be

adequately served by other suppliers

and have experienced a reduction in the

percentage of membership by

agricultural or aquatic producers due to

changed circumstances beyond their

control; and

(C) Sixty (60) percent for local farm

supply cooperatives that provide or will

provide needed services to a

community, and are or will be in

competition with a cooperative

specified in § 613.3100(b)(1)(i)(B);

(ii) The cooperative deals in farm or

aquatic products, or products processed

therefrom, farm or aquatic supplies,

farm or aquatic business services, or

financially related services with or for

members in an amount at least equal in

value to the total amount of such

business it transacts with or for nonmembers, excluding from the total of

member and non-member business,

transactions with the United States, or

any agencies or instrumentalities

thereof, or services or supplies

furnished by a public utility; and

(iii) The cooperative complies with

one of the following two conditions:

(A) No member of the cooperative

shall have more than one vote because

of the amount of stock or membership

capital owned therein; or

(B) The cooperative restricts

dividends on stock or membership

capital to 10 percent per year or the

maximum percentage per year permitted

by applicable State law, whichever is

less.

(iv) Any cooperative that has received

a loan from a bank for cooperatives or

an agricultural credit bank shall,

without regard to the requirements in

paragraph (b)(1)(i) of this section,

continue to be eligible for as long as

more than 50 percent (or such higher

percentage as is established by the bank

board) of the voting control of the

cooperative is held by farmers, ranchers,

producers or harvesters of aquatic

products, or other eligible cooperatives.

(2) Other eligible entities. The

following entities are eligible to borrow

from banks for cooperatives and

agricultural credit banks:

(i) Any legal entity that holds more

than 50 percent of the voting control of

a cooperative that is an eligible

borrower under paragraph (b)(1) of this

section and uses the proceeds of the

loan to fund the activities of its

cooperative subsidiary on the terms and

conditions specified by the bank;

(ii) Any legal entity in which an

eligible cooperative has an ownership

interest, provided that if such interest is

less than 50 percent, financing shall not

exceed the percentage that the eligible

cooperative owns in such entity

multiplied by the value of the total

assets of such entity; or

(iii) Any creditworthy private entity

operated on a non-profit basis that

satisfies the requirements for a service

cooperative and complies with the

requirements of either paragraphs

(b)(1)(i)(A) and (b)(1)(iii) of this section,

or paragraph (b)(1)(iv) of this section,

and any subsidiary of such entity. An

entity that is eligible to borrow under

this paragraph shall be organized to

benefit agriculture in furtherance of the

welfare of the farmers, ranchers, and

aquatic producers or harvesters who are

its members.

(c) Electric and telecommunication

utilities.

(1) Eligibility. A bank for cooperatives

or an agricultural credit bank may lend

to:

(i) Electric and telephone cooperatives

as defined by section 3.8(a)(4)(A) of the

Act that satisfy the eligibility criteria in

paragraph (b)(1) of this section;

(ii) Cooperatives and other entities

that:

(A) Have received a loan, loan

commitment, insured loan, or loan

guarantee from the Rural Utilities

Service of the United States Department

of Agriculture to finance rural electric

and telecommunication services;

(B) Have received a loan or a loan

commitment from the Rural Telephone

Bank of the United States Department of

Agriculture; or

(C) Are eligible under the Rural

Electrification Act of 1936, as amended,

for a loan, loan commitment, or loan

guarantee from the Rural Utilities

Service or the Rural Telephone Bank.

(iii) The subsidiaries of cooperatives

or other entities that are eligible under

paragraph (c)(1)(ii) of this section.

(iv) Any legal entity that holds more

than 50 percent of the voting control of

any public utility that is an eligible

borrower under paragraph (c)(1)(ii) of

this section, and uses the proceeds of

the loan to fund the activities of the

eligible subsidiary on the terms and

conditions specified by the bank.

(v) Any legal entity in which an

eligible utility under paragraph (c)(1)(ii)

of this section has an ownership

interest, provided that if such interest is

less than 50 percent, financing shall not

exceed the percentage that the eligible

utility owns in such entity multiplied

by the value of the total assets of such

entity.

(2) Purposes for financing. A bank for

cooperatives or agricultural credit bank

may extend credit to entities that are

eligible to borrow under paragraph (c)(1)

of this section in order to provide

electric or telecommunication services

in a rural area. A subsidiary that is

eligible to borrow under paragraph

(c)(1)(iii) of this section may also obtain

financing from a bank for cooperatives

or agricultural credit bank to operate a

licensed cable television utility.

(d) Water and waste disposal

facilities.

(1) Eligibility. A cooperative or a

public agency, quasi-public agency,

body, or other public or private entity

that, under the authority of State or

local law, establishes and operates water

and waste disposal facilities in a rural

area, as that term is defined by

paragraph (a)(5) of this section, is

eligible to borrow from a bank for

cooperatives or an agricultural credit

bank.

(2) Purposes for financing. A bank for

cooperatives or agricultural credit bank

may extend credit to entities that are

eligible under paragraph (d)(1) of this

section solely for installing,

maintaining, expanding, improving, or

operating water and waste disposal

facilities in rural areas.

(e) Domestic lessors. A bank for

cooperatives or agricultural credit bank

may lend to domestic parties to finance

the acquisition of facilities or equipment

that will be leased to shareholders of the
4444 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

bank for use in their operations located

inside of the United States. § 613.3200

International lending.

(a) Definition. For the purpose of this

section only, the term ‘‘farm supplies’’

refers to inputs that are used in a

farming or ranching operation, but

excludes agricultural processing

equipment, machinery used in food

manufacturing or other capital goods

which are not used in a farming or

ranching operation.

(b) Import transactions. The following

parties are eligible to borrow from a

bank for cooperatives or an agricultural

credit bank pursuant to section 3.7(b) of

the Act for the purpose of financing the

import of agricultural commodities or

products therefrom, aquatic products,

and farm supplies into the United

States:

(1) An eligible cooperative as defined

by § 613.3100(b);

(2) A counterparty with respect to a

specific import transaction with a voting

stockholder of the bank for the

substantial benefit of the shareholder;

and

(3) Any foreign or domestic legal

entity in which eligible cooperatives

hold an ownership interest.

(c) Export transactions. Pursuant to

section 3.7(b)(2) of the Act, a bank for

cooperatives or an agricultural credit

bank is authorized to finance the export

(including the cost of freight) of

agricultural commodities or products

therefrom, aquatic products, or farm

supplies from the United States to any

foreign country. The board of directors

of each bank for cooperatives and

agricultural credit bank shall adopt

policies that ensure that exports of

agricultural products and commodities,

aquatic products, and farm supplies

which originate from eligible

cooperatives are financed on a priority

basis. The total amount of balances

outstanding on loans made under this

paragraph shall not, at any time, exceed

50 percent of the capital of any bank for

cooperatives or agricultural credit bank

for loans that:

(1) Finance the export of agricultural

commodities and products therefrom,

aquatic products, or farm supplies that

are not originally sourced from an

eligible cooperative; and

(2) At least 95 percent of the loan

amount is not guaranteed by a

department, agency, bureau, board, or

commission of the United States or a

corporation that is wholly owned

directly or indirectly by the United

States.

(d) International business operations.

A bank for cooperatives or an

agricultural credit bank may finance a

domestic or foreign entity which is at

least partially owned by eligible

cooperatives described in § 613.3100(b),

and facilitates the international business

operations of such cooperatives.

(e) Restrictions.

(1) When eligible cooperatives own

less than 50 percent of a foreign or

domestic legal entity, the amount of

financing that a bank for cooperatives or

agricultural credit bank may provide to

the entity for imports, exports, or

international business operations shall

not exceed the percentage of ownership

that eligible cooperatives hold in such

entity multiplied by the value of the

total assets of such entity; and

(2) A bank for cooperatives or

agricultural credit bank shall not

finance the relocation of any plant or

facility from the United States to a

foreign country.

Subpart C—Similar Entity Authority

Under Sections 3.1(11)(B) and 4.18A of

the Act

§ 613.3300 Participations and other

interests in loans to similar entities.

(a) Definitions.

(1) Participate and participation, for

the purpose of this section, refer to

multi-lender transactions, including

syndications, assignments, loan

participations, subparticipations, other

forms of the purchase, sale, or transfer

of interests in loans, or other extensions

of credit, or other technical and

financial assistance.

(2) Similar entity means a party that

is ineligible for a loan from a Farm

Credit bank or association, but has

operations that are functionally similar

to the activities of eligible borrowers in

that a majority of its income is derived

from, or a majority of its assets are

invested in, the conduct of activities

that are performed by eligible

borrowers.

(b) Similar entity transactions. A

Farm Credit bank or a direct lender

association may participate with a

lender that is not a Farm Credit System

institution in loans to a similar entity

that is not eligible to borrow directly

under § 613.3000, 613.3010, 613.3020,

613.3100, or 613.3200, for purposes

similar to those for which an eligible

borrower could obtain financing from

the participating FCS institution.

(c) Restrictions. Participations by a

Farm Credit bank or association in loans

to a similar entity under this section are

subject to the following limitations:

(1) Lending limits.

(i) Farm Credit banks operating under

title I of the Act and direct lender

associations. The total amount of all

loan participations that any Farm Credit

bank, agricultural credit bank, or direct

lender association has outstanding

under paragraph (b) of this section to a

single credit risk shall not exceed:

(A) Ten (10) percent of its total

capital; or

(B) Twenty-five (25) percent of its

total capital if a majority of the

shareholders of the respective Farm

Credit bank or direct lender association

so approve.

(ii) Farm Credit banks operating

under title III of the Act. The total

amount of all loan participations that

any bank for cooperatives or agricultural

credit bank has outstanding under

paragraph (b) of this section to a single

credit risk shall not exceed 10 percent

of its total capital;

(2) Percentage held in the principal

amount of the loan. The participation

interest in the same loan held by one or

more Farm Credit bank(s) or

association(s) shall not, at any time,

equal or exceed 50 percent of the

principal amount of the loan; and

(3) Portfolio limitations. The total

amount of participations that any Farm

Credit bank or direct lender association

has outstanding under paragraph (b) of

this section shall not exceed 15 percent

of its total outstanding assets at the end

of its preceding fiscal year.

(d) Approval by other Farm Credit

System institutions.

(1) No direct lender association shall

participate in a loan to a similar entity

under paragraph (b) of this section

without the approval of its funding

bank. A funding bank shall deny such

requests only for safety and soundness

reasons affecting the bank.

(2) No Farm Credit bank or direct

lender association shall participate in a

loan to a similar entity that is eligible to

borrow under § 613.3100(b) without the

prior approval of the bank for

cooperatives or agricultural credit bank

that, at the time the loan is made, has

the greatest volume of loans made under

title III of the Act in the State where the

headquarters office of the similar entity

is located.

(3) No bank for cooperatives or

agricultural credit bank shall participate

in a loan to a similar entity that is

eligible to borrow under § 613.3010 or

613.3020 without the prior consent of

the Farm Credit bank(s) in whose

chartered territory the similar entity

conducts operations.

(4) All approvals required under

paragraph (d) of this section may be

granted on an annual basis and under

such terms and conditions as the

various Farm Credit System institutions

may agree.
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4445

PART 614—LOAN POLICIES AND

OPERATIONS

4a. 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,

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, 7.7, 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, 2096, 2121, 2122, 2124, 2128, 2129,

2131, 2141, 2149, 2183, 2184, 2199, 2201,

2202, 2202a, 2202c, 2202d, 2202e, 2206,

2206a, 2207, 2219a, 2219b, 2243, 2244, 2252,

2279a, 2279–2, 2279b, 2279b–1, 2279b–2,

2279f, 2279f–1, 2279aa, 2279aa–5); sec. 413

of Pub. L. 100–233, 101 Stat. 1568, 1639.

Subpart A—[Amended]

5. Section 614.4010 is amended by

removing the words ‘‘export or’’ each

place they appear in paragraphs (d)(4)

and (d)(5); by removing the reference

‘‘(d)(3)’’ and adding in its place ‘‘(d)(4)’’

in paragraph (d)(5); and by adding new

paragraphs (d)(6) and (d)(7) to read as

follows.

§ 614.4010 Agricultural credit banks.

* * * * *

(d) * * *

* * * * *

(6) Any party, subject to the

requirements in § 613.3200(c) of this

chapter, for the export (including the

cost of freight) of agricultural

commodities or products therefrom,

aquatic products, or farm supplies from

the United States to any foreign country,

in accordance with § 614.4233 and

subpart Q of this part 614; and

(7) Domestic or foreign parties in

which eligible cooperatives, as defined

in § 613.3100 of this chapter, hold an

ownership interest, for the purpose of

facilitating the international business

operations of such cooperatives

pursuant to the requirements of

§ 613.3200 (d) and (e) of this chapter.

* * * * *

6. Section 614.4020 is amended by

removing the words ‘‘export or’’ each

place they appear in paragraphs (a)(4)

and (a)(5); by adding after the words

‘‘bank’s board’’, the reference ‘‘,

§ 614.4233,’’ in paragraph (a)(4); by

removing the words ‘‘board policy’’ and

adding in their place, the words

‘‘policies of the bank’s board,

§ 614.4233,’’ in paragraph (a)(5); and by

adding new paragraphs (a)(6) and (a)(7)

to read as follows:

§ 614.4020 Banks for cooperatives.

(a) * * *

* * * * *

(6) Any party, subject to the

requirements in § 613.3200(c) of this

chapter, for the export (including the

cost of freight) of agricultural

commodities or products therefrom,

aquatic products, or farm supplies from

the United States to any foreign country,

in accordance with § 614.4233 and

subpart Q of this part 614; and

(7) Domestic or foreign parties in

which eligible cooperatives, as defined

in § 613.3100 of this chapter, hold an

ownership interest, for the purpose of

facilitating the international business

operations of such cooperatives

pursuant to the requirements in

§ 613.3200 (d) and (e) of this chapter.

* * * * *

Subpart E—Loan Terms and

Conditions

7. Section 614.4233 is amended by

revising the introductory paragraph to

read as follows:

§ 614.4233 International loans.

Term loans made by banks for

cooperatives and agricultural credit

banks under the authority of section

3.7(b) of the Act and § 613.3200 of this

chapter to foreign or domestic parties

who are not shareholders of the bank

shall be subject to following conditions:

* * * * *

Subpart P—Farm Credit Bank and

Agricultural Credit Bank Financing of

Other Financing Institutions

§ 614.4610 [Amended]

8. Section 614.4610 is amended by

removing the words ‘‘an association in

the district’’ and adding in their place,

the words ‘‘any association funded by

the bank’’ in the first sentence and

removing the reference

‘‘§ 613.3040(d)(2)’’ and adding in its

place the reference ‘‘§§ 613.3010(b)(1)

and 613.3030(d)’’.

Subpart Q—Banks for Cooperatives

Financing International Trade

9. The heading for subpart Q is

amended by adding after the words

‘‘Banks for Cooperatives’’ the words

‘‘and Agricultural Credit Banks’’.

§ 614.4700 [Amended]

10. Section 614.4700 is amended by

adding after the words ‘‘banks for

cooperatives’’ the words ‘‘and

agricultural credit banks’’ each place

they appear in paragraphs (a)

introductory text, (b), and (h).

§ 614.4710 [Amended]

11. Section 614.4710 is amended by

adding after the words ‘‘banks for

cooperatives’’ the words ‘‘and

agricultural credit banks’’ each place

they appear in the introductory

paragraph and paragraph (c); by adding

after the words ‘‘bank for cooperatives’ ’’

the words ‘‘or agricultural credit bank’s’’

in paragraph (a)(1)(ii); by adding after

the words ‘‘bank for cooperatives’’ the

words ‘‘or an agricultural credit bank’’

each place they appear in paragraphs

(a)(1) introductory text, (a)(1)(i), (a)(3),

(a)(5) and (b)(1).

§ 614.4720 [Amended]

12. Section 614.4720 is amended by

adding after the words ‘‘Banks for

cooperatives’’ the words ‘‘and

agricultural credit banks’’ in the first

sentence of the introductory paragraph.

§ 614.4800 [Amended]

13. Section 614.4800 is amended by

adding after the words ‘‘A bank for

cooperatives’’ the words ‘‘or an

agricultural credit bank’’ in the first

sentence.

§ 614.4810 [Amended]

14. Section 614.4810 is amended by

adding after the words ‘‘banks for

cooperatives’’ the words ‘‘and

agricultural credit banks’’ each place

they appear in paragraphs (a)

introductory text and (b).

§ 614.4900 [Amended]

15. Section 614.4900 is amended by

adding after the words ‘‘bank for

cooperatives’’ the words ‘‘or an

agricultural credit bank’’ each place

they appear in paragraphs (a) through

(d); and by adding after the words

‘‘banks for cooperatives’’ the words

‘‘and agricultural credit banks’’ in the

first sentence of paragraph (i).

PART 615—FUNDING AND FISCAL

AFFAIRS, LOAN POLICIES AND

OPERATIONS, AND FUNDING

OPERATIONS

16. The authority citation for part 615

is revised 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.
4446 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

Subpart H—Capital Adequacy

17. Section 615.5200 is amended by

revising paragraphs (a) and (b)

introductory text to read as follows:

§ 615.5200 General.

(a) The Board of Directors of each

Farm Credit System institution shall

determine the amount of total capital,

core surplus, total surplus, and

unallocated surplus needed to assure

the institution’s continued financial

viability and to provide for growth

necessary to meet the needs of its

borrowers. The minimum capital

standards specified in this part are not

meant to be adopted as the optimal

capital level in the institution’s capital

adequacy plan. Rather, the standards are

intended to serve as minimum levels of

capital that each institution must

maintain to protect against the credit

and other general risks inherent in its

operations.

(b) Each Board of Directors shall

establish, adopt, and maintain a formal

written capital adequacy plan as a part

of the financial plan required by

§ 618.8440 of this chapter. The plan

shall include the capital targets that are

necessary to achieve the institution’s

capital adequacy goals as well as the

minimum permanent capital and

surplus standards. The plan shall

address any projected dividends,

patronage distribution, equity

retirements, or other action that may

decrease the institution’s capital or the

components thereof for which minimum

amounts are required by this part. The

plan shall set forth the circumstances in

which retirements or revolvements of

stock or equities may occur. If the plan

provides for retirement or revolvement

of equities included in core surplus, in

connection with a loan default or the

death of a former borrower, the plan

must require the institution to make a

prior determination that such retirement

or revolvement is in the best interest of

the institution, and also require the

institution to charge off an amount of

the indebtedness on the loan equal to

the amount of the equities that are

retired or canceled. In addition to

factors that must be considered in

meeting the minimum standards, the

board of directors shall also consider at

least the following factors in developing

the capital adequacy plan:

* * * * *

§ 615.5201 [Amended]

18. Section 615.5201 is amended by

adding the words ‘‘Federal land credit

association,’’ after the words ‘‘Federal

land bank association,’’; and by

removing the words ‘‘National Bank for

Cooperatives,’’ and adding in their

place, the words ‘‘agricultural credit

bank,’’ in paragraph (g); and

redesignating paragraphs (j)(5) and (j)(6)

as paragraphs (j)(6) and (j)(7); and by

adding a new paragraph (j)(5) to read as

follows:

§ 615.5201 Definitions.

* * * * *

(j) * * *

(5) Term preferred stock with an

original maturity of at least 5 years and

on which, if cumulative, the board of

directors has the option to defer

dividends, provided that, at the

beginning of each of the last 5 years of

the term of the stock, the amount that

is eligible to be counted as permanent

capital is reduced by 20 percent of the

original amount of the stock (net of

redemptions);

* * * * *

19. Section 615.5205 is revised to read

as follows:

§ 615.5205 Minimum permanent capital

standard.

Each institution shall at all times

maintain permanent capital at a level of

at least 7 percent of its risk-adjusted

asset base.

20. Section 615.5210 is amended by

removing paragraphs (f)(2)(i)(D) and

(f)(2)(v)(D); redesignating paragraph

(f)(2)(v)(E) as new paragraph (f)(2)(v)(D);

adding a new paragraph (e)(10); and

revising paragraphs (e)(7) and (f)(2)(i)(C)

to read as follows:

§ 615.5210 Computation of the permanent

capital ratio.

* * * * *

(e) * * *

(7) Each institution shall deduct from

its total capital an amount equal to all

goodwill, whenever acquired.

* * * * *

(10) The permanent capital of an

institution shall exclude the net impact

of unrealized holding gains or losses on

available-for-sale securities.

(f) * * *

(2) * * *

(i) * * *

(C) Goodwill.

* * * * *

§ 615.5216 [Removed and reserved]

21. Section 615.5216 is removed and

reserved.

Subpart I—Issuance of Equities

§ 615.5220 [Amended]

22. Section 615.5220 is amended by

removing paragraph (f), redesignating

existing paragraphs (g), (h), and (i) as

paragraphs (f), (g), and (h), respectively;

by removing the words ‘‘may be more

than, but’’ each place they appear in

paragraphs (d) and (e); by adding the

words ‘‘, agricultural credit banks (with

respect to loans other than to

cooperatives),’’ after the words ‘‘For

Farm Credit Banks’’ in paragraph (d); by

adding the words ‘‘and agricultural

credit banks (with respect to loans to

cooperatives)’’ after the words ‘‘For

banks for cooperatives’’ in paragraph (e);

and by removing the words ‘‘(including

interim standards)’’ in newly designated

paragraph (f).

§ 615.5230 [Amended]

23. Section 615.5230 is amended by

removing the words ‘‘preferred stock to

be issued to the Farm Credit System

Financial Assistance Corporation and’’

in paragraph (b)(1).

24. Section 615.5240 is amended by

removing paragraph (b); redesignating

the introductory paragraph and

paragraph (a) introductory text as

paragraphs (a) and (b) introductory text,

respectively; adding new paragraphs

(b)(3) and (c); and revising newly

designated paragraphs (a) and (b)(2) to

read as follows:

§ 615.5240 Permanent capital

requirements.

(a) The capitalization bylaws shall

enable the institution to meet the

minimum permanent capital adequacy

standards established under subparts H

and K of this part and the total capital

requirements established by the board of

directors of the institution.

(b) * * *

(2) For perpetual preferred stock

issued to persons other than the Farm

Credit System Financial Assistance

Corporation:

* * * * *

(3) For term preferred stock:

(i) Retirement must be solely at the

discretion of the board of directors and

not upon a date certain, other than the

original maturity date, or upon the

happening of any event, such as

repayment of the loan;

(ii) Retirement must be at not more

than book value;

(iii) Dividends may be cumulative,

but the board of directors must have the

option to defer payment; and

(iv) Disclosure must have been made

pursuant to § 615.5250 of the nature of

the investment and the terms and

conditions under which it is issued.

(c) Once an institution’s board of

directors has made a determination that

the institution’s capital position is

adequate, the institution’s board of

directors may delegate to management

the decision whether to retire borrower

stock, provided that:
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4447

(1) Any such retirements are in

accordance with the institution’s capital

adequacy plan or capital restoration

plan;

(2) The institution’s permanent

capital ratio will be in excess of 9

percent after any such retirements;

(3) The institution meets and

maintains all applicable minimum

surplus and collateral standards; and

(4) The aggregate amount of stock

purchases, retirements, and the net

effect of such activities are reported to

the board of directors each quarter.

§ 615.5250 [Amended]

25. Section 615.5250 is amended by

removing paragraph (c); redesignating

paragraphs (d) and (e) as paragraphs (c)

and (d), respectively; by removing the

words ‘‘(including interim standards)’’

in paragraphs (a)(4)(ii) and newly

designated (c)(3); and by removing the

words ‘‘, including interim standards’’

in paragraph (a)(4)(iii).

Subpart J—Retirement of Equities

§ 615.5260 [Amended]

26. Section 615.5260 is amended by

adding the word ‘‘or’’ at the end of

paragraph (a)(2)(i); removing ‘‘; or’’ at

the end of paragraph (a)(2)(ii) and

inserting a period in its place; and by

removing paragraphs (a)(2)(iii) and (d).

§ 615.5270 [Amended]

27. Section 615.5270 is amended by

removing the words ‘‘(including interim

standards)’’; and adding the words ‘‘or

term stock at its stated maturity’’ after

the reference ‘‘§ 615.5290’’ in paragraph

(b).

28. Subpart K is revised to read as

follows:

Subpart K—Surplus and Collateral

Requirements

Sec.

615.5301 Definitions.

615.5330 Minimum surplus ratios.

615.5335 Bank net collateral ratio.

615.5336 Compliance and reporting.

Subpart K—Surplus and Collateral

Requirements

§ 615.5301 Definitions.

For the purposes of this subpart, the

following definitions shall apply:

(a) The terms institution, permanent

capital, risk-adjusted asset base, and

total capital shall have the meanings set

forth in § 615.5201.

(b) Core surplus.

(1) Core surplus means:

(i) Undistributed earnings/unallocated

surplus less, for associations only, an

amount equal to the net investment in

the bank;

(ii) Nonqualified allocated equities

that are not distributed according to an

established plan or practice, provided

that, in the event that a nonqualified

patronage allocation is distributed, other

than as required by section 4.14B of the

Act, or in connection with a loan default

or the death of an equityholder whose

loan has been repaid (to the extent

provided for in the institution’s capital

adequacy plan), any remaining

nonqualified allocations that were

allocated in the same year will be

excluded from core surplus.

(iii) Perpetual common or

noncumulative perpetual preferred

stock that is not retired according to an

established plan or practice, provided

that, in the event that stock held by a

borrower is retired, other than as

required by section 4.14B of the Act or

in connection with a loan default to the

extent provided for in the institution’s

capital plan, the remaining perpetual

stock of the same class or series shall be

excluded from core surplus;

(iv) A capital instrument or a

particular balance sheet entry or

account that the Farm Credit

Administration has determined to be the

functional equivalent of a component of

core surplus. The Farm Credit

Administration may permit an

institution to include all or a portion of

such instrument, entry, or account as

core surplus, permanently or on a

temporary basis, for purposes of this

subpart.

(2) For associations only, other

allocated equities may also be included

in the core surplus ratio to the extent

permitted by § 615.5330(b)(3) if the

following conditions are met:

(i) The allocated equities are

includible in total surplus; and

(ii) The allocated equities, if subject to

revolvement, are not scheduled for

revolvement during the next 3 years.

(3) The deductions required to be

made by an institution in the

computation of its permanent capital

pursuant to § 615.5210(e) (6) and (7)

shall also be made in the computation

of its core surplus.

(4) Core surplus shall not include

equities held by other System

institutions unless approved pursuant to

paragraph (b)(1)(iv) of this section.

(5) The net impact of unrealized

holding gains or losses on available-forsale securities shall be excluded from

core surplus.

(6) The Farm Credit Administration

may, if it finds that a particular

component, balance sheet entry, or

account has characteristics or terms that

diminish its contribution to an

institution’s ability to absorb losses,

require the deduction of all or a portion

of such component, entry, or account

from core surplus.

(c) Net collateral means the value of

a bank’s collateral as defined by

§ 615.5050 (except that eligible

investments as described in § 615.5140

are to be valued at their amortized cost),

less an amount equal to that portion of

the allocated investments of affiliated

associations that is not counted as

permanent capital by the bank.

(d) Net collateral ratio means a bank’s

net collateral, divided by the bank’s

total liabilities.

(e) Net investment in the bank means

the total investment by an association in

its affiliated bank, less reciprocal

investments and investments resulting

from a loan originating/service agency

relationship, including participations.

(f) Nonqualified allocated equities

means allocations of earnings

designated to the institution’s members

that are not deducted from the gross

taxable income of the allocating

institution at the time of allocation.

(g) Perpetual stock or equity means

stock or equity not having a maturity

date, not redeemable at the option of the

holder, and having no other provisions

that will require the future redemption

of the issue.

(h) Qualified allocated equities means

allocations of earnings that are deducted

from the gross taxable income of the

allocating institution and designated to

the institution’s members.

(i) Total surplus means:

(1) Undistributed earnings/

unallocated surplus;

(2) Allocated equities, including

allocated surplus and stock which, if

subject to revolvement or retirement,

have an original planned revolvement or

retirement date of not less than 5 years

and are eligible to be included in

permanent capital pursuant to

§ 615.5201(j)(4)(iv); and

(3) Stock that is not purchased or held

as a condition of obtaining a loan,

provided that it is either perpetual stock

or term stock with an original maturity

of at least 5 years, and provided that the

institution has no established plan or

practice of retiring such perpetual stock

or of retiring such term stock prior to its

stated maturity. The amount of term

stock that is eligible to be included in

total surplus shall be reduced by 20

percent (net of redemptions) at the

beginning of each of the last 5 years of

the term of the instrument.

(4) The total surplus of an institution

shall exclude the net impact of

unrealized holding gains or losses on

available-for-sale securities.

(5) A capital instrument or a

particular balance sheet entry or

account that the Farm Credit
4448 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

Administration has determined to be the

functional equivalent of a component of

total surplus. The Farm Credit

Administration may permit one or more

institutions to include all or a portion of

such instrument, entry, or account as

total surplus, permanently or on a

temporary basis, for purposes of this

subpart.

(6) The Farm Credit Administration

may, if it finds that a particular

component, balance sheet entry, or

account has characteristics or terms that

diminish its contribution to an

institution’s ability to absorb losses,

require the deduction of all or a portion

of such component, entry, or account

from total surplus.

(7) Any deductions made by an

institution in the computation of its

permanent capital pursuant to

§ 615.5210(e) (6) and (7) shall also be

made in the computation of its total

surplus.

§ 615.5330 Minimum surplus ratios.

(a) Total surplus.

(1) Each institution shall achieve and

maintain a ratio of at least 7 percent of

total surplus to the risk-adjusted asset

base.

(2) Each association shall compute its

total surplus ratio by deducting an

amount equal to the amount of allocated

bank equities counted as permanent

capital by the bank;

(3) Each Farm Credit bank shall

compute its total surplus ratio by

deducting an amount equal to the

amount of the bank’s equities counted

as association capital.

(b) Core surplus.

(1) Each institution shall achieve and

maintain a ratio of core surplus to the

risk-adjusted asset base of at least 3.5

percent, of which no more than 2

percentage points may consist of

allocated equities otherwise includible

pursuant to § 615.5301(b)(2).

(2) Each association shall compute its

core surplus ratio by deducting an

amount equal to the net investment in

its affiliated Farm Credit bank from its

core surplus.

(c) An institution shall compute its

total surplus and core surplus ratios as

of the end of each month.

§ 615.5335 Bank net collateral ratio.

(a) Each bank shall achieve and

maintain a net collateral ratio of at least

103 percent.

(b) A bank shall compute its net

collateral ratio as of the end of each

month.

§ 615.5336 Compliance and reporting.

(a) Noncompliance and reporting. An

institution that meets the minimum

applicable surplus ratios and net

collateral ratio established in

§§ 615.5330 and 615.5335 at or after the

end of the quarter in which these

regulations become effective and

subsequently falls below one or more

minimum requirements shall be in

violation of the applicable regulations.

Such institution shall report its

noncompliance to the Farm Credit

Administration within 20 calendar days

following the month end in which the

institution initially determines that it is

not in compliance with the

requirements.

(b) Initial compliance and reporting

requirements.

(1) An institution that fails to satisfy

one or more of its minimum applicable

surplus and net collateral ratios at the

end of the quarter in which these

regulations become effective shall report

its initial noncompliance to the Farm

Credit Administration within 20 days

following such quarter end and shall

also submit a capital restoration plan for

achieving and maintaining the

standards, demonstrating appropriate

annual progress toward meeting the

goal, to the Farm Credit Administration

within 60 days following such quarter

end. If the capital restoration plan is not

approved by the Farm Credit

Administration, the Agency shall inform

the institution of the reasons for

disapproval, and the institution shall

submit a revised capital restoration plan

within the time specified by the Farm

Credit Administration.

(2) Approval of compliance plans. In

determining whether to approve a

capital restoration plan submitted under

this section, the FCA shall consider the

following factors, as applicable:

(i) The conditions or circumstances

leading to the institution’s falling below

minimum levels, the exigency of those

circumstances, and whether or not they

were caused by actions of the institution

or were beyond the institution’s control;

(ii) The overall condition,

management strength, and future

prospects of the institution and, if

applicable, affiliated System

institutions;

(iii) The institution’s capital, adverse

assets (including nonaccrual and

nonperforming loans), allowance for

loss, and other ratios compared to the

ratios of its peers or industry norms;

(iv) How far an institution’s ratios are

below the minimum requirements;

(v) The estimated rate at which the

institution can reasonably be expected

to generate additional earnings;

(vi) The effect of the business changes

required to increase capital;

(vii) The institution’s previous

compliance practices, as appropriate;

(viii) The views of the institution’s

directors and senior management

regarding the plan; and

(ix) Any other facts or circumstances

that the FCA deems relevant.

(3) An institution shall be deemed to

be in compliance with the surplus and

collateral requirements of this subpart if

it is in compliance with a capital

restoration plan that is approved by the

Farm Credit Administration within 180

days following the end of the quarter in

which these regulations become

effective.

29. Subparts L and M are added to

read as follows:

Subpart L—Establishment of Minimum

Capital Ratios for an Individual

Institution

Sec.

615.5350 General—Applicability.

615.5351 Standards for determination of

appropriate individual institution

minimum capital ratios.

615.5352 Procedures.

615.5353 Relation to other actions.

615.5354 Enforcement.

Subpart M—Issuance of a Capital Directive

615.5355 Purpose and scope.

615.5356 Notice of intent to issue a capital

directive.

615.5357 Response to notice.

615.5358 Decision.

615.5359 Issuance of a capital directive.

615.5360 Reconsideration based on change

in circumstances.

615.5361 Relation to other administrative

actions.

Subpart L—Establishment of Minimum

Capital Ratios for an Individual

Institution

§ 615.5350 General—Applicability.

(a) The rules and procedures specified

in this subpart are applicable to a

proceeding to establish required

minimum capital ratios that would

otherwise be applicable to an institution

under §§ 615.5205, 615.5330, and

615.5335. The Farm Credit

Administration is authorized to

establish such minimum capital

requirements for an institution as the

Farm Credit Administration, in its

discretion, deems to be necessary or

appropriate in light of the particular

circumstances of the institution.

Proceedings under this subpart also may

be initiated to require an institution

having capital ratios greater than those

set forth in §§ 615.5205, 615.5330, or

615.5335 to continue to maintain those

higher ratios.

(b) The Farm Credit Administration

may require higher minimum capital

ratios for an individual institution in

view of its circumstances. For example,
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4449

higher capital ratios may be appropriate

for:

(1) An institution receiving special

supervisory attention;

(2) An institution that has, or is

expected to have, losses resulting in

capital inadequacy;

(3) An institution with significant

exposure due to operational risk,

interest rate risk, the risks from

concentrations of credit, certain risks

arising from other products, services, or

related activities, or management’s

overall inability to monitor and control

financial risks presented by

concentrations of credit and related

services activities;

(4) An institution exposed to a high

volume of, or particularly severe,

problem loans;

(5) An institution that is growing

rapidly; or

(6) An institution that may be

adversely affected by the activities or

condition of System institutions with

which it has significant business

relationships or in which it has

significant investments.

§ 615.5351 Standards for determination of

appropriate individual institution minimum

capital ratios.

The appropriate minimum capital

ratios for an individual institution

cannot be determined solely through the

application of a rigid mathematical

formula or wholly objective criteria. The

decision is necessarily based in part on

subjective judgment grounded in

Agency expertise. The factors to be

considered in the determination will

vary in each case and may include, for

example:

(a) The conditions or circumstances

leading to the Farm Credit

Administration’s determination that

higher minimum capital ratios are

appropriate or necessary for the

institution;

(b) The exigency of those

circumstances or potential problems;

(c) The overall condition,

management strength, and future

prospects of the institution and, if

applicable, affiliated institutions;

(d) The institution’s capital, adverse

assets (including nonaccrual and

nonperforming loans), allowance for

loss, and other ratios compared to the

ratios of its peers or industry norms; and

(e) The views of the institution’s

directors and senior management.

§ 615.5352 Procedures.

(a) Notice. When the Farm Credit

Administration determines that

minimum capital ratios greater than

those set forth in §§ 615.5205, 615.5330,

or 615.5335 are necessary or appropriate

for a particular institution, the Farm

Credit Administration will notify the

institution in writing of the proposed

minimum capital ratios and the date by

which they should be reached (if

applicable) and will provide an

explanation of why the ratios proposed

are considered necessary or appropriate

for the institution.

(b) Response.

(1) The institution may respond to

any or all of the items in the notice. The

response should include any matters

which the institution would have the

Farm Credit Administration consider in

deciding whether individual minimum

capital ratios should be established for

the institution, what those capital ratios

should be, and, if applicable, when they

should be achieved. The response must

be in writing and delivered to the

designated Farm Credit Administration

official within 30 days after the date on

which the institution received the

notice. In its discretion, the Farm Credit

Administration may extend the time

period for good cause. The Farm Credit

Administration may shorten the time

period with the consent of the

institution or when, in the opinion of

the Farm Credit Administration, the

condition of the institution so requires,

provided that the institution is informed

promptly of the new time period.

(2) Failure to respond within 30 days

or such other time period as may be

specified by the Farm Credit

Administration shall constitute a waiver

of any objections to the proposed

minimum capital ratios or the deadline

for their achievement.

(c) Decision. After the close of the

institution’s response period, the Farm

Credit Administration will decide,

based on a review of the institution’s

response and other information

concerning the institution, whether

individual minimum capital ratios

should be established for the institution

and, if so, the ratios and the date the

requirements will become effective. The

institution will be notified of the

decision in writing. The notice will

include an explanation of the decision,

except for a decision not to establish

individual minimum capital

requirements for the institution.

(d) Submission of plan. The decision

may require the institution to develop

and submit to the Farm Credit

Administration, within a time period

specified, an acceptable plan to reach

the minimum capital ratios established

for the institution by the date required.

(e) Reconsideration based on change

in circumstances. If, after the Farm

Credit Administration’s decision in

paragraph (c) of this section, there is a

change in the circumstances affecting

the institution’s capital adequacy or its

ability to reach the required minimum

capital ratios by the specified date,

either the institution or the Farm Credit

Administration may propose a change

in the minimum capital ratios for the

institution, the date when the

minimums must be achieved, or the

institution’s plan (if applicable). The

Farm Credit Administration may

decline to consider proposals that are

not based on a significant change in

circumstances or are repetitive or

frivolous. Pending a decision on

reconsideration, the Farm Credit

Administration’s original decision and

any plan required under that decision

shall continue in full force and effect.

§ 615.5353 Relation to other actions.

In lieu of, or in addition to, the

procedures in this subpart, the required

minimum capital ratios for an

institution may be established or revised

through a written agreement or cease

and desist proceedings under part C of

title V of the Act, or as a condition for

approval of an application.

§ 615.5354 Enforcement.

An institution that does not have or

maintain the minimum capital ratios

applicable to it, whether required in

subparts H and K of this part, in a

decision pursuant to this subpart, in a

written agreement or temporary or final

order under part C of title V of the Act,

or in a condition for approval of an

application, or an institution that has

failed to submit or comply with an

acceptable plan to attain those ratios,

will be subject to such administrative

action or sanctions as the Farm Credit

Administration considers appropriate.

These sanctions may include the

issuance of a capital directive pursuant

to subpart M of this part or other

enforcement action, assessment of civil

money penalties, and/or the denial or

condition of applications.

Subpart M—Issuance of a Capital

Directive

§ 615.5355 Purpose and scope.

(a) This subpart is applicable to

proceedings by the Farm Credit

Administration to issue a capital

directive under sections 4.3(b) and

4.3A(e) of the Act. A capital directive is

an order issued to an institution that

does not have or maintain capital at or

greater than the minimum ratios set

forth in §§ 615.5205, 615.5330, and

615.5335; or established for the

institution under subpart L, by a written

agreement under part C of title V of the

Act, or as a condition for approval of an
4450 Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations

application. A capital directive may

order the institution to:

(1) Achieve the minimum capital

ratios applicable to it by a specified

date;

(2) Adhere to a previously submitted

plan to achieve the applicable capital

ratios;

(3) Submit and adhere to a plan

acceptable to the Farm Credit

Administration describing the means

and time schedule by which the

institution shall achieve the applicable

capital ratios; (4) Take other action, such as

reduction of assets or the rate of growth

of assets, restrictions on the payment of

dividends or patronage, or restrictions

on the retirement of stock, to achieve

the applicable capital ratios; or (5) A combination of any of these or

similar actions.

(b) A capital directive may also be

issued to the board of directors of an

institution, requiring such board to

comply with the requirements of section

4.3A(d) of the Act prohibiting the

reduction of permanent capital. (c) A capital directive issued under

this rule, including a plan submitted

under a capital directive, is enforceable

in the same manner and to the same

extent as an effective and outstanding

cease and desist order which has

become final as defined in section 5.25

of the Act. Violation of a capital

directive may result in assessment of

civil money penalties in accordance

with section 5.32 of the Act.

§ 615.5356 Notice of intent to issue a

capital directive.

The Farm Credit Administration will

notify an institution in writing of its

intention to issue a capital directive.

The notice will state:

(a) The reasons for issuance of the

capital directive; (b) The proposed contents of the

capital directive, including the

proposed date for achieving the

minimum capital requirement; and (c) Any other relevant information

concerning the decision to issue a

capital directive.

§ 615.5357 Response to notice.

(a) An institution may respond to the

notice by stating why a capital directive

should not be issued and/or by

proposing alternative contents for the

capital directive or seeking other

appropriate relief. The response shall

include any information, mitigating

circumstances, documentation, or other

relevant evidence that supports its

position. The response may include a

plan for achieving the minimum capital

ratios applicable to the institution. The

response must be in writing and

delivered to the Farm Credit

Administration within 30 days after the

date on which the institution received

the notice. In its discretion, the Farm

Credit Administration may extend the

time period for good cause. The Farm

Credit Administration may shorten the

30-day time period:

(1) When, in the opinion of the Farm

Credit Administration, the condition of

the institution so requires, provided that

the institution shall be informed

promptly of the new time period;

(2) With the consent of the institution;

or

(3) When the institution already has

advised the Farm Credit Administration

that it cannot or will not achieve its

applicable minimum capital ratios.

(b) Failure to respond within 30 days

or such other time period as may be

specified by the Farm Credit

Administration shall constitute a waiver

of any objections to the proposed capital

directive.

§ 615.5358 Decision.

After the closing date of the

institution’s response period, or receipt

of the institution’s response, if earlier,

the Farm Credit Administration may

seek additional information or

clarification of the response. Thereafter,

the Farm Credit Administration will

determine whether or not to issue a

capital directive, and if one is to be

issued, whether it should be as

originally proposed or in modified form.

§ 615.5359 Issuance of a capital directive.

(a) A capital directive will be served

by delivery to the institution. It will

include or be accompanied by a

statement of reasons for its issuance.

(b) A capital directive is effective

immediately upon its receipt by the

institution, or upon such later date as

may be specified therein, and shall

remain effective and enforceable until it

is stayed, modified, or terminated by the

Farm Credit Administration.

§ 615.5360 Reconsideration based on

change in circumstances.

Upon a change in circumstances, an

institution may request the Farm Credit

Administration to reconsider the terms

of its capital directive or may propose

changes in the plan to achieve the

institution’s applicable minimum

capital ratios. The Farm Credit

Administration also may take such

action on its own motion. The Farm

Credit Administration may decline to

consider requests or proposals that are

not based on a significant change in

circumstances or are repetitive or

frivolous. Pending a decision on

reconsideration, the capital directive

and plan shall continue in full force and

effect.

§ 615.5361 Relation to other administrative

actions.

A capital directive may be issued in

addition to, or in lieu of, any other

action authorized by law, including

cease and desist proceedings, civil

money penalties, or the conditioning or

denial of applications. The Farm Credit

Administration also may, in its

discretion, take any action authorized

by law, in lieu of a capital directive, in

response to an institution’s failure to

achieve or maintain the applicable

minimum capital ratios.

PART 618—GENERAL PROVISIONS

30. 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

§ 618.8005 [Amended]

31. Section 618.8005 is amended by

removing the reference ‘‘§§ 613.3010,

613.3020 (a)(1), (a)(2), (b), and

613.3045’’ in paragraph (a) and adding

in its place, the reference ‘‘§§ 613.3000

(a) and (b), 613.3010, and 613.3300’’ and

by removing the reference ‘‘§§ 613.3110

and 613.3120’’ and adding in its place,

the reference ‘‘§§ 613.3100, 613.3200,

and 613.3300’’ in paragraph (b).

Subpart J—Internal Controls

§ 618.8440 [Amended]

32. Section 618.8440 is amended by

removing the reference ‘‘§ 615.5200(b)’’

and adding in its place, the references

‘‘§§ 615.5200(b), 615.5330 (c) or (d), and

615.5335(b)’’ in paragraph (b)(6).

PART 619—DEFINITIONS

33. The authority citation for part 619

continues to read as follows:

Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12,

5.17, 5.18, 7.0, 7.6, 7.7, 7.8 of the Farm Credit

Act (12 U.S.C. 2015, 2075, 2160, 2243, 2246,

2252, 2253, 2279a, 2279b, 2279b–1, 2279b–

2).

§§ 619.9030, 619.9040, 619.9065, 619.9080,

619.9090, 619.9100, 619.9120, 619.9150,

619.9160, 619.9190, 619.9220, 619.9270,

619.9280, 619.9300, and 619.9310

[Removed]

34. Sections 619.9030, 619.9040,

619.9065, 619.9080, 619.9090, 619.9100,

619.9120, 619.9150, 619.9160, 619.9190,

619.9220, 619.9270, 619.9280, 619.9300,

and 619.9310 are removed.
Federal Register / Vol. 62, No. 20 / Thursday, January 30, 1997 / Rules and Regulations 4451

PART 620—DISCLOSURE TO

SHAREHOLDERS

35. The authority citation for part 620

continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11 of the

Farm Credit Act (12 U.S.C. 2252, 2254,

2279aa–11); sec. 424 of Pub. L. 100–233, 101

Stat. 1568, 1656.

Subpart B—Annual Report to

Shareholders

36. Section 620.5 is amended by

revising paragraphs (d)(1)(ix) and

(g)(4)(ii) to read as follows:

§ 620.5 Contents of the annual report to

shareholders.

* * * * *

(d) * * *

(1) * * *

(ix) The statutory and regulatory

restriction regarding retirement of stock

and distribution of earnings pursuant to

§ 615.5215, and any requirements to add

capital under a plan approved by the

Farm Credit Administration pursuant to

§§ 615.5330, 615.5335, 615.5351, or

615.5357.

* * * * *

(g) * * *

(4) * * *

(ii) Describe any material trends or

changes in the mix and cost of debt and

capital resources. The discussion shall

consider changes in permanent capital,

core and total surplus, and net collateral

requirements, debt, and any off-balancesheet financing arrangements.

* * * * *

PART 626—NONDISCRIMINATION IN

LENDING

37. The authority citation for part 626

is added to read as follows:

Authority: Secs. 1.5, 2.2, 2.12, 3.1, 5.9, 5.17

of the Farm Credit Act (12 U.S.C. 2013, 2073,

2093, 2122, 2243, 2252); 42 U.S.C. 3601 et

seq.; 15 U.S.C. 1691 et seq.; 12 CFR 202, 24

CFR 100, 109, 110.

§ 626.6025 [Amended]

38. Newly designated § 626.6025 is

amended by removing the reference

‘‘§ 613.3160(b)’’ and adding in its place,

the reference ‘‘§ 626.6020(b)’’ in

paragraph (b).

* * * * *

Dated: January 23, 1997.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 97–2058 Filed 1–29–97; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF THE INTERIOR

Office of Surface Mining Reclamation

and Enforcement

30 CFR Part 943

[SPATS No. TX–025–FOR]

Texas Regulatory Program and

Abandoned Mine Land Reclamation

Plan

AGENCY: Office of Surface Mining

Reclamation and Enforcement (OSM),

Interior.

ACTION: Final rule; approval of

amendment.

SUMMARY: OSM is approving, with

certain exceptions, a proposed

amendment to the Texas regulatory

program and abandoned mine land

reclamation plan (hereinafter referred to

as the ‘‘Texas program’’) under the

Surface Mining Control and

Reclamation Act of 1977 (SMCRA).

Texas is proposing to recodify the Texas

Surface Coal Mining and Reclamation

Act. Texas intends to reclassify and

rearrange its statutes into a format that

will accommodate further expansion of

the law and to eliminate repealed,

invalid, and duplicated provisions in

order to make the statutes more

understandable and usable without

altering the meaning or effect of the law.

EFFECTIVE DATE: January 30, 1997.

FOR FURTHER INFORMATION CONTACT:

Jack R. Carson, Acting Director, Tulsa

Field Office, Office of Surface Mining

Reclamation and Enforcement, 5100

East Skelly Drive, Suite 470, Tulsa,

Oklahoma 74135–6548, Telephone:

(918) 581–6430.

SUPPLEMENTARY INFORMATION:

I. Background on the Texas Program

II. Submission of the Proposed Amendment

III. Director’s Findings

IV. Summary and Disposition of Comments

V. Director’s Decision

VI. Procedural Determinations

I. Background on the Texas Program

On February 16, 1980, the Secretary of

the Interior conditionally approved the

Texas regulatory program. Background

information on the Texas program,

including the Secretary’s findings, the

disposition of comments, and the

conditions of approval can be found in

the February 27, 1980, Federal Register

(45 FR 12998). Subsequent actions

concerning the conditions of approval

and program amendments can be found

at 30 CFR 943.10, 943.15, and 943.16.

On June 23, 1980, the Secretary of the

Interior approved the Texas abandoned

mine plan as submitted on April 24,

1980, and amended on May 30, and

June 2 and 4, 1980. Information

pertaining to the general background,

revisions, and amendments to the initial

plan submission, as well as the

Secretary’s findings and the disposition

of comments can be found in the June

23, 1980, Federal Register (45 FR

41940). Subsequent actions concerning

plan amendments can be found at 30

CFR 943.25.

II. Submission of the Proposed

Amendment

By letter dated August 24, 1995

(Administrative Record No. TX–594),

Texas submitted a proposed amendment

to its program pursuant to SMCRA.

Texas submitted the proposed

amendment at its own initiative. Texas

proposed to recodify the Texas Surface

Coal Mining and Reclamation Act

(TSCMRA) as enacted by Senate Bill

(S.B.) 959 (Section 12.02), 74th Texas

Legislature (1995). S.B. 959 codified,

with revisions, the TSCMRA at Chapter

134 of Title 4, Natural Resources Code,

and it repealed Article 5920–11,

Vernon’s Texas Civil Statutes with

exceptions, including Sections 11 (b),

(c), and (d).

OSM announced receipt of the

proposed amendment in the October 16,

1995, Federal Register (60 FR 53569),

and in the same document opened the

public comment period and provided an

opportunity for a public hearing on the

adequacy of the proposed amendment.

The public comment period closed on

November 15, 1995.

During its review of the amendment,

OSM identified concerns relating to: (1)

A definition for ‘‘permit applicant’’ or

‘‘applicant’’ [Article 5920–11, Section

3(2)]; (2) repeal of the exemption for

surface coal mining operations affecting

two acres or less [Article 5920–11,

Section 35(2) and Chapter 134, Section

134.005(a)(2), as recodified]; (3) coal

exploration operations being subject to

penalties for violating statutes and/or

regulations [Article 5920–11, Section

27(c) and Chapter 134, Section 134.014,

as recodified]; (4) the determination

date on which surface coal mining

operations are exempted from being

subject to designations of areas

unsuitable for mining [Article 5920–11,

Section 33(e) and Chapter 134, Section

134.022, as recodified]; (5) notices of

violations that permit applicants are

required to disclose when applying for

a coal mining permit [Article 5920–11,

Section 21(c) and Chapter 134, Section

134.068, as recodified]; (6) performance

standards regarding the elimination of

all highwalls and spoil piles [Article

5920–11, Section 23(b)(3) and Chapter

134, Section 134.092(a)(2), as

recodified]; (7) violations not creating