Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations 51007

The Board has been asked by

representatives of the automobile

leasing industry—including leasing

companies, automobile dealerships, and

vendor support services—to delay the

mandatory compliance date of the new

Regulation M rules beyond October 1,

1997. The request is based on the

current state of implementation of the

new leasing software at the 22,500 newcar dealerships that arrange for

automobile leases provided through

approximately 9,000 independent

lessors. Based on the information that

they have shared, less than half of the

dealerships have the necessary software

programs in place that would enable

them to produce computer-generated

disclosure statements by October 1,

1997. In some cases, they would have in

place only one of the five or six lessor

programs that they typically make

available to consumers. The alternative

is to complete the leasing forms

manually, with resultant delays and a

great potential for errors that would

subsequently have to be corrected.

The Board believes that consumers

will not be well served by proceeding

on the October 1 schedule. Accordingly,

to better ensure that consumers receive

accurate and meaningful lease

disclosures, the Board has delayed the

mandatory compliance date to January

1, 1998.

By order of the Board of Governors of the

Federal Reserve System, September 25, 1997.

William W. Wiles,

Secretary of the Board.

[FR Doc. 97–25921 Filed 9–29–97; 8:45 am]

BILLING CODE 6210–01–M

FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 619

RIN 3052–AB64

Loan Policies and Operations;

Definitions; Loan Underwriting

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA), through the FCA

Board (Board), issues a final rule

amending its regulations relating to loan

underwriting in response to comments

received from the Board’s initiative to

reduce regulatory burden and in an

effort to streamline the regulations and

set clear minimum regulatory standards

where appropriate. The Board’s action

eliminates unnecessary regulations,

requires each Farm Credit System

(System or FCS) institution to adopt

loan underwriting policies and

standards, and makes other changes to

the regulations governing prudent credit

administration.

EFFECTIVE DATE: These regulations shall

be effective upon the expiration of 30

days 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:

John J. Hays, Policy Analyst, Regulation

Development Division, Office of

Policy Development and Risk Control,

703) 883–4498, TDD (703) 883–4444;

or

Joy E. Strickland, Senior Attorney,

Regulatory Enforcement Division,

Office of General Counsel, (703) 883–

4020, TDD (703) 883–4444.

SUPPLEMENTARY INFORMATION: On April

15, 1996, the Board published proposed

amendments to the regulations relating

to loan underwriting, loan sale and

purchase transactions, and the lending

authority of production credit

associations (PCAs). The amendments

were proposed largely in furtherance of

comments received on the Board’s

request for public comment on the

appropriateness of requirements that the

FCA regulations impose on the System.

See 58 FR 34003 (June 23, 1993). The

FCA has addressed many of those

comments in previous rulemakings. The

proposed amendments addressed the

remaining regulatory burden issues that

relate to loan underwriting and the

independent credit judgment rule for

loan sale and purchase transactions

through agents. In addition to

responding to the regulatory burden

comments, the FCA also proposed other

amendments to refocus regulatory

requirements for loan underwriting,

make the regulations more

understandable and useful to the reader,

set minimum regulatory standards, and

make conforming amendments. The FCA received a total of 20

comments on the proposed

amendments. Seventeen (17) Farm

Credit institutions and the Farm Credit

Council (FCC) submitted comments.

The FCA also received comments from

the Appraisal Subcommittee of the

Federal Financial Institutions

Examination Council, and the American

Society of Farm Managers and Rural

Appraisers, Inc. (collectively, appraisal

groups). In general, all of the System

commenters expressed support for the

proposed regulation and its goal of

reducing regulatory burden. Most of the

System commenters also supported

FCA’s proposals to streamline the

regulations governing the bank/

association relationship and place more

decision-making authority and

accountability with direct lender

associations. One association

commented favorably on the entire

proposal and suggested no changes.

Other System commenters stated that

although the proposal is a large step

toward reducing regulatory burden, it

did not reduce enough burden in certain

areas. Also, some banks and

associations requested clarification of

the proposed new responsibilities of

associations and the remaining areas of

bank direction and supervision of

associations. The appraisal groups

commented that although they

understood the FCA’s reasons for the

proposed changes to §§ 614.4245 and

614.4250, the changes were inconsistent

with the Uniform Standards of

Professional Appraisal Practice

(USPAP). The appraisal groups

suggested alternatives for the FCA to

achieve its objectives and ensure that

appraisals remain in compliance with

USPAP.

Specific comments and changes to the

proposed amendments will be

addressed in the section-by-section

analysis of the comments that follows.

Except for changes noted in the sectionby-section analysis, the FCA adopts the

proposed amendments as final. Specific

comments relating to proposed

§ 614.4200(b), which contained

requirements for obtaining borrower

financial statements, will be addressed

in the discussion of Subparts C and D—

Bank/Association Lending Relationship

and General Loan Policies for Banks and

Associations. In order to provide readers

with a guideline for the amended

regulations, the following is a list of

changes this final rule will make to

parts 614 and 619:

Subpart A—Lending Authorities

§§ 614.4000 through 614.4050—Revised.

Subpart C—Bank/Association Lending

Relationship

§§ 614.4100, 614.4110, and 614.4130—No

changes made.

§ 614.4120—Revised.

§§ 614.4135 through 614.4145—Deleted.

Subpart D—General Loan Policies for Banks

and Associations

§ 614.4150—Revised.

§ 614.4160—Deleted.

§ 614.4165—Revised.

Subpart E—Loan Terms and Conditions

§ 614.4200—Revised.

§§ 614.4210 through 614.4230—Deleted.

§ 614.4231—Revised.

§§ 614.4232 and 614.4233—No changes

made.

Subpart F—Collateral Evaluation

Requirements

§ 614.4245—Revised.
51008 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations

Subpart H—Loan Purchases and Sales

§ 614.4325—Revised.

Subpart J—Lending Limits

§ § 614.4355 and 614.4358—Revised.

Subpart O—Banks for Cooperatives

Financing International Trade

§ 614.4810—Revised.

Part 619—Definitions

§§ 619.9165 and 619.9290—Removed.

I. Subpart A—Lending Authorities

The FCA received 12 comments on

proposed § 614.4040, which codifies

guidance that the FCA has provided to

institutions regarding loans made by

PCAs that have amortization schedules

longer than 7 years. The commenters

were evenly split, with 6 commenters

expressing support for the proposal and

6 commenters objecting to the proposal.

The comments received in support of

the proposal generally stated that the

provisions are appropriate for PCA

lending and should not be broadened or

modified. Two PCA commenters noted

that the proposal was more than

adequate to offer direction to direct

lenders.

All except one of the commenters

requesting modification of the proposal

generally believe that it is too

restrictive. They object to the proposed

15-year limitation on amortization

periods for PCA loans because they

assert that the statutory 15-year limit

applies only to the term of the loan, not

the loan amortization. Those

commenters also stated that the

prohibition against a PCA making loans

solely to acquire real estate is without

statutory basis and inconsistent with a

PCA’s ability to take ‘‘owned’’ real

estate as collateral. They asserted their

belief that the loan purpose restriction

was implemented only to minimize

competition between System

institutions. These commenters

suggested the following changes: (1)

Apply the 15-year amortization

restriction only to loans with 7 to 10-

year terms; (2) delete any loan purpose

restriction; and (3) clarify that the

authorizing policy is the bank’s not the

association’s. One PCA expressed

agreement with the comments regarding

the 15-year and loan purpose

restrictions, but differed from the

foregoing comments by urging that the

authority for amortizing these loans

should be through association policy

rather than bank policy and control.

One jointly managed PCA/Federal land

bank association (FLBA) agreed with

this PCA commenter and suggested that

bank approval should not be required

for association policies to exercise these

authorities and that association board

policies on this issue need only comply

with general policies and standards of

the funding bank.

A bank and a FLBA requested

clarification of four issues regarding the

loan purpose restriction under

§ 614.4040(a)(2): (1) Is the purpose of

the loan limited only to financing of

facilities; (2) if real estate is purchased

along with a facility, must the real estate

be integral to the operation or can the

real estate be separate, unimproved

land, such as two parcels that the seller

will only sell together; (3) if the real

estate can be separate, is there a limit on

the value of the real estate versus the

value of the facility; and (4) can a PCA

make a loan solely for the purchase of

real estate if the PCA has another

production loan to the borrower?

With regard to the comment that

Congress intended the 15-year

limitation to apply only to loan term,

rather than loan amortization, the FCA

agrees, in part, with the commenters’

interpretation of the Farm Credit Act of

1971, as amended (Act), and its

legislative history. Under the Act,

Federal land credit associations (FLCAs)

have the authority to make loans with

terms of greater than 15 years, while

PCAs are limited to loan terms of less

than 15 years. Although the 15-year

limitation technically applies only to a

loan’s term, rather than a loan’s

amortization, 15 years is the outward

limit of PCA loan-making authority

approved by Congress. The FCA

concludes that the 15-year limitation is

consistent with the differing lending

authorities of PCAs and FLCAs and

recognizes the importance of the Act’s

distinction between long-term real

estate lenders and short-and

intermediate-term lenders. Based on the

outward limits placed on loan term and

the differences between PCA and FLCA

lending authorities, the FCA continues

to believe that the 15-year limitation is

appropriate and adopts the limitation

and the loan purpose restrictions as

proposed. The FCA clarifies that the

loan purpose restriction only applies to

loans amortized for longer than the

maximum loan term otherwise

authorized for PCAs in § 614.4040(a)(1).

Since there is a possibility of

competition between short- and longterm lenders in some areas if PCAs

amortize loans over periods longer than

their maximum authorized loan terms,

the FCA believes that System borrowers

would be best served if the institutions

affected by this issue develop the

policies to address it. Because both

long- and short-term lenders are

represented at the bank level, the bank,

through its association directors and

stockholders, is in the best position to

develop a policy that appropriately

considers the needs of the borrowers

and the relationships and conditions

existing in each district. Therefore, the

FCA adopts as final the requirement that

association authority to amortize loans

under § 614.4040(a)(2) is pursuant to

funding bank approval. The FCA also

notes that, pursuant to section 1.10 of

the Act, bank approval continues to be

required for PCA authority to make

loans with terms of more than 7, but not

more than 10 years.

In response to the questions raised

regarding the loan purpose restriction in

§ 614.4040(a)(2), the FCA concludes that

the amortization authority in

§ 614.4040(a)(2) can be used for any

authorized purpose for PCA lending,

with the exception that it may not be

used solely to finance the acquisition of

unimproved real estate. Although the

restriction excludes loans for the

purpose of purchasing unimproved real

estate (the real estate will be considered

unimproved even though it may include

minimal improvements, such as

fencing), the authority in

§ 614.4040(a)(2) clearly provides for the

acquisition of production facilities and

the land upon which the facilities are

located. There are many types of loans

that fall between these two boundaries,

including those addressed in the bank’s

questions. The FCA believes that the

institutions involved should establish

reasonable standards for judging

compliance with the loan purpose

restrictions for the same reasons that it

believes that authority for the

amortization period should be

addressed in bank policy, i.e., it allows

the amortization authority to be best

tailored to the needs of the borrowers

and the relationships between the

institutions in each district. Therefore

each PCA’s policy, subject to bank

approval, for implementing the

authority in § 614.4040(a)(2) should

clearly state under what circumstances

such financing will occur. In response

to the bank’s fourth question, however,

PCAs are not authorized to finance the

acquisition of unimproved real estate

under this authority solely because they

also have outstanding production or

equipment loans to the borrower.

Commenters also suggested two

technical changes to § 614.4040(a)(2): (1)

Change the point at which the

underwriting criteria must be met for

refinancing from ‘‘maturity’’ to the time

of ‘‘refinancing’’ because a loan may be

refinanced prior to its maturity date;

and (2) change the term ‘‘real estate’’ to

‘‘land’’ to more clearly authorize the

financing of buildings. The FCA agrees

that the term ‘‘refinance’’ is more

appropriate than ‘‘maturity’’ and has
Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations 51009

amended the regulation accordingly. A

borrower may wish to refinance a loan

prior to the maturity date, and any

refinancing cannot extend the ultimate

repayment of the loan more than 15

years from the date of the original loan.

The FCA believes that the clarifications

provided in the previous paragraph

should clear up any doubt that this

authority may be used to finance

buildings and other facilities. Therefore,

the FCA adopts in final the term ‘‘real

estate’’ as proposed.

The FCA also received 2 comments

stating that the amended PCA

amortization authority could result in

agricultural credit associations (ACAs)

having less authority to make short-and

intermediate-term loans than PCAs.

Although the FCA agrees with the

commenters that ACAs should have at

least the same authorities as PCAs,

applying the provisions of

§ 614.4040(a)(2) to ACAs would have

the unintended result of unnecessarily

restricting ACAs’ authority. Since there

are no limitations in the Act on the

length of amortizations for loans and the

existing requirement in § 614.4220(c)

that short-and intermediate-term loans

with maturities in excess of 7 years

must be amortized over the term of the

loan will be deleted by this rule, there

will be no restrictions on amortizations

of loans made by an ACA. As stated

above, the restriction on a PCA’s

amortization authority derives from the

Act’s distinction between long-and

short-term lenders. Because an ACA

may make short-, intermediate-, and

long-term loans, there is no need to

restrict amortizations for ACA loans.

Therefore, the FCA believes that

applying § 614.4040(a)(2) would

unnecessarily restrict ACA lending and

is not making the change requested.

II. Subparts C and D—Bank/Association

Lending Relationship and General Loan

Policies for Banks and Associations

The FCA proposed to clarify the role

of Farm Credit Banks (FCBs) and

agricultural credit banks (ACBs) in the

supervision of associations’ credit

operations. The FCA believes that

autonomy in association operations

promotes accountability in many areas,

including prudent lending operations.

Also, the FCA believes that each direct

lender, through its board of directors,

should adopt and follow its own

policies and procedures for operations.

As noted previously, most of the

commenters were in support of this

change and philosophy. The final rule

deletes existing §§ 614.4135, 614.4140,

and 614.4145 as proposed. However, in

taking this action, the FCA recognizes

the continuing importance of general

bank oversight of association credit

activities that may have a material

impact on the bank and on the

association’s ability to perform on its

direct loan(s) from the bank.

The FCA proposed a new regulation,

§ 614.4150, to address credit

supervision by each institution’s board

of directors and to require that loan

policies and underwriting standards

must be adopted by each direct lending

institution. The FCA received six

comment letters on proposed

§ 614.4150. The commenters sought

clarification of the term ‘‘measurable

standards’’ in § 614.4150(g) and stated

that loan underwriting standards should

not include specific ratios, such as debt

coverage and liquidity, on which to base

each loan decision. The commenters

also felt that while there is support for

measurable standards, documenting

each loan not in compliance with each

standard (§ 614.4150(i)) is unduly

burdensome. They contend that

standards should be applicable only to

the primary portion of the loan portfolio

or a majority of the industry or market

that the lender finances and that the

focus should be on documenting those

loans in significant noncompliance with

the standards as a whole. The FCC also

suggested alternative language for

§ 614.4150(i) to encompass this

philosophy.

The commenters are concerned that

§ 614.4150(i) requires that a single set of

standards be applicable to all loans. In

response, the FCA does not intend to

require institutions to establish specific

ratios that necessarily apply to all loans.

It may be prudent to apply distinct

ratios to differing loans. In developing

standards, each direct lender is

expected to identify the similar types of

loans in their portfolios, based on such

items as similar operations, sources of

repayment, collateral, and economic or

geographic characteristics, and to

establish loan underwriting standards

tailored to address the strengths and

weaknesses of each type of loan and the

institution’s ability to absorb the risk

posed by such loans. Such standards

should include ratios, measures,

scoring, and other specific credit

evaluation tools appropriate to the

portion of the portfolio being addressed

and the institution’s risk-bearing

capacity. In addition to specific

standards, general lending guidelines

that have applicability to different types

of loans can be useful in identifying risk

and may be necessary for unusual loans

that do not fit within any of the lenders’

primary lending areas. A number of

things will affect the level of detail in

standards, such as the importance of

loan type to the institution’s portfolio

and the level of risk in the type of loan,

and the regulations do not prescribe a

set formula.

Regarding documentation of

noncompliance with the loan

underwriting standards, the regulation

requires that whenever a loan does not

meet any of the standards established

for that type of loan, the reason for

making an exception to the standards

and accepting the loan must be

documented. The FCA believes that this

documentation is critical on an

individual loan basis and any burden

that arises from this documentation is

outweighed by the importance of the

documentation to sound credit

administration. The amount of loans

that may require documentation of

noncompliance and the detail of such

documentation will vary according to

the standards developed by each

institution, and any burden of such

documentation can be reduced by welltailored, specific standards. Therefore,

the FCA believes the requirements of

§ 614.4150 (g) and (i) are appropriate

and adopts them as proposed with

minor syntactical changes to paragraph

(g).

The commenters also noted that

proposed § 614.4150(h) does not

entirely serve the purpose of existing

§ 614.4160(e) because a loan’s structure

should be determined not only by the

loan’s purpose, as required by

§ 614.4150(h), but also by the terms,

conditions, and collateral, which are

referenced in existing § 614.4160(e). The

FCA has revised paragraph (h) to state

that loan terms and conditions must be

appropriate for the loan. Use of the term

‘‘loan’’ includes the requirement that

the terms and conditions must be

appropriate for the purpose of the loan

and any other relevant criteria of the

loan, such as collateral. The

commenters also requested clarification

that underwriting standards do not have

to be included in the policies adopted

by the institutions’ boards of directors

pursuant to § 614.4150. The FCA

clarifies that loan underwriting

standards must be adopted pursuant to

board policies but are not required to be

contained in board policies.

An FCB commenter asserted that the

regulations should not be interpreted to

prohibit banks from establishing ‘‘bright

line’’ credit standards for associations in

general financing agreements (GFAs).

Further, the bank asserts that as long as

the FCA approves GFAs, it can review

any ‘‘bright line’’ standards for

appropriateness through that avenue. If,

on the other hand, the FCA removes the

banks’ ‘‘regulatory authority’’ to

establish credit standards for direct

lenders, the FCA should eliminate its
51010 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations

1The FCA published proposed amendments to

the regulations governing GFAs on March 24, 1997

(62 FR 13842).

approval of GFAs and make clear that

the GFAs can include bank approval of

association credit standards and/or

compliance with bank collateral

requirements. The FCC requested

clarification about the apparent conflict

between the proposal and section 2.4(a)

of the Act, which appears to say that

PCAs are required to make loans under

standards approved by the bank.

Association commenters requested

clarification that banks do not have to

approve association lending policies.

In response to the comments

regarding what should be included in

GFAs, it is the FCA’s general belief that

banks can establish credit criteria for

associations as appropriate to reflect the

risks in the direct loans. This issue will

be addressed in revisions to the

regulations governing GFAs 1. The

provisions of this regulation reflect the

FCA’s views that detailed underwriting

standards for direct lender loans are the

responsibility of that lender.

Some commenters questioned

whether § 614.4150 conflicts with the

provisions of section 1.5(17) of the Act.

Section 1.5(17) of the Act authorizes

banks to adopt standards for lending.

Nothing in the revised regulation

prohibits the banks from continuing to

adopt standards for making direct loans

to direct lender associations and for

FLBA lending. Some comments also

questioned whether § 614.4150 is

consistent with section 2.4(a) of the Act.

In response, the banks will continue to

develop standards appropriate to ensure

repayment of the direct loan, which in

turn helps ensure the safety and

soundness of all of the institutions in

the district. The FCA believes that

section 2.4(a) neither requires that banks

prescribe detailed association lending

standards nor prohibits associations

from adopting standards to govern their

own lending operations. Therefore, the

FCA believes that § 614.4150 is

consistent with the Act.

The FCA received comments from the

FCC and nine institutions regarding the

proposed requirements for obtaining

borrower financial statements in

§ 614.4200(b). Most of the commenters

urged deleting all of proposed paragraph

(b) except the first sentence. The

commenters strongly believe that even

though the financial statement provision

was a significant reduction over existing

requirements, the proposal did not go

far enough. They asserted that the

proposal was inconsistent with the FCA

regulatory philosophy statement, the

FCA Board Chairman’s remarks in the

FCA’s 1995 annual report,

Congressional intent in the Act,

proposed § 614.4150, and the FCA’s role

as an arms-length regulator. They also

asserted that the proposal was not

necessary for safety and soundness.

According to the commenters, this

provision of the regulation micromanages this one aspect of lending

operations, which is in stark contrast

with the overall objective of the

proposed regulation to put loan

underwriting in the hands of direct

lenders. Commenters asserted that the

thresholds for obtaining financial

statements should not be set by

regulation. Instead the standards should

be set by each direct lender institution

according to the institution’s financial

position, capital strength, risk-bearing

ability, credit quality, portfolio, and

operations of the individual institutions

and borrowers (as applicable). The

commenters contend that in this way

safety and soundness will be better

measured because standards will be

developed on an institution-specific

basis.

In addition, the commenters noted

that a regulation requiring institutions

to request financial statements at loan

origination for all loans above a set

threshold limits the institutions’ ability

to use credit scoring with creditworthy

customers. They urged that a borrower’s

total lending relationship, if quite large,

should not prevent the use of credit

scoring on small transactions. Also,

obtaining financial statements at each

material servicing action is vague and

could be costly to the System, especially

where actions such as release of

collateral pose no risk to the lender. The

commenters also asserted that

requesting financial statements can

cause problems in enforcement. They

stated that in their experience, very few

borrowers respond to requests, requiring

considerable time and money on the

institution’s part to obtain the

statements, and that it has been

especially difficult to enforce a financial

statement submission requirement if a

borrower meets all other loan

obligations. Finally, the commenters

stated that the requirement can

needlessly drive away good borrowers

and create a competitive disadvantage.

One commenter suggested that if the

FCA maintains a requirement regarding

financial statements, the requirement

should only apply to adversely

classified loans above $100,000.

Another stated that if the requirement is

maintained, ‘‘material servicing action’’

should be changed to ‘‘any servicing

action that materially increases the

borrower’s access to credit, reduces the

institution’s collateral protection, or

otherwise materially increases the

institution’s risk position.’’ Also, the

threshold should be changed to

$250,000. This commenter also urged

changing ‘‘less than acceptable’’ to

‘‘Substandard, Doubtful, and Loss.’’

Finally, one PCA commenter supported

the proposal and believes that the

requirements for financial statements

are appropriate.

After careful consideration of the

issues surrounding borrower financial

statements and the comments received

on the proposed regulation, the FCA

concludes that requiring each direct

lender to develop standards for

obtaining financial statements and other

financial information is appropriate.

The FCA does not adopt proposed

§ 614.4200(b) and, instead, incorporates

the substance of the first sentence of this

paragraph into the loan underwriting

standards required by § 614.4150. This

relocation reflects the decision to treat

this issue as a loan underwriting

standard rather than as loan terms and

conditions. Section 614.4150(a) now

requires that an institution’s policies

and procedures must prescribe the

minimum supporting credit and

financial information necessary and the

frequency for collection of such

information.

The final regulation requires that each

institution include in its policies and

procedures how and when to obtain and

use financial information, including

financial statements, to determine

creditworthiness for repayment of loans.

The policies must be specific as to when

collection of items such as balance

sheets, income statements, and

statements of cashflows will be required

and must address the times for their

collection, such as at loan inception,

when taking servicing actions, and

periodically during the term of the loan.

The requirements for setting parameters

of when to obtain and use financial

information must take into

consideration basic criteria including,

but not limited to, loan size, loan type,

loan classification, frequency of

payment, source of repayment,

applicant’s operation, and capital

position and risk bearing capacity of the

institution. The FCA will evaluate and

determine the appropriateness of each

institution’s policies and procedures on

lending practices, including collection

of financial information, during the

examination process.

As noted in the preamble to the

proposed regulations, there are no

industrywide standards for the size or

complexity of loans warranting current

and complete financial information.

However, prudent credit practices

dictate that risk be assessed in each
Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations 51011

loan. The FCA continues to believe that

the best method for assessing risk in

certain loans is through analysis of

items such as a balance sheet and

income statement and considers the

absence of information necessary to

document loan performance

expectations to be an unsafe and

unsound lending practice. The FCA also

notes that the approach for addressing

the collection and use of financial

statements in credit analysis in this final

rule is consistent with the approach

taken by other Federal financial

institution regulatory agencies.

Finally, the FCA notes the

commenters’ concerns regarding

potential reluctance of some borrowers

to submit financial statements and

requiring them to do so. However, the

FCA believes that for loans where

prudent lending dictates obtaining and

evaluating financial statements, the

safety and soundness benefits to the

institution outweigh the potential

negative reactions of borrowers. Thus,

adequate controls for enforcing

institution policies regarding obtaining

financial statements are expected with

implementation of this regulation.

Other than the changes previously

noted to paragraphs (a), (h), and (i), the

FCA adopts § 614.4150 as proposed. The

FCA also notes that in instances where

direct lending authority has not been

transferred to the FLBAs, the banks

must develop lending policies and

standards that all FLBAs within their

respective districts must follow in

making credit decisions for the bank.

Additionally, in certain circumstances

where loss exposure accrues to

individual FLBAs through loss-sharing

agreements with the FCB, loan policies

and standards may be needed by FLBAs

to augment and supplement those

established by their supervisory banks.

The FCA received three comments on

proposed § 614.4165, which requires

that bank lending policies give special

consideration to the credit needs of

young, beginning, and small farmers,

ranchers, and producers or harvesters of

aquatic products. The commenters

recommended revising existing

paragraph (e) to place the

responsibilities for grouping specialized

enterprises according to risk with the

direct lender, whether bank or

association. The FCA agrees with the

comment and has revised existing

paragraph (e) (now redesignated as

paragraph (c)) to place the responsibility

for grouping specialized enterprises

with direct lenders, rather than with the

banks, consistent with other changes in

this final rule. Commenters were also

concerned that the proposed changes in

the regulation will result in additional

regulatory burden by increasing

reporting requirements. They requested

clarification of narrative reporting

requirements, asked whether definitions

will be in call reports, and asked how

the changes will reflect the

requirements for special enterprises. In

response to the commenters, the FCA

clarifies that the reporting requirements,

which are statutory, will not change as

a result of the final amendments to

§ 614.4165. The amendments merely

eliminate the duplication and

inconsistencies that exist between the

call reports and regulations. Also,

necessary definitions will continue to be

included in the call reports as they are

now and may be modified as the young,

beginning, and small farmer lending

environment changes. Therefore, other

than the changes noted to redesignated

paragraph (c), the amendments to

§ 614.4165 are adopted as proposed.

III. Subpart E—Loan Terms and

Conditions

The FCA received two comments on

proposed § 614.4200(a)(1). The

commenters suggested that the FCA

change the language to refer solely to a

‘‘written document or documents,’’

because loan terms and conditions may

be set forth in more than one document.

The FCA recognizes that terms and

conditions may be included in more

than one document and to alleviate any

confusion, amends § 614.4200(a)(1) to

refer to a ‘‘written document or

documents.’’ However, the FCA

continues to list sample documents in

the regulation and reiterates that the list

is illustrative only, and does not require

that terms and conditions be set forth in

any particular written document.

The FCA also received three

comments on § 614.4200(c)(1) regarding

the security requirements for long-term

real estate loans. An ACA commented

that the proposed requirement that

collateral taken to secure long-term real

estate mortgages must consist primarily

of agricultural real estate limits a

System institution’s ability to serve

diversified agriculture and creditworthy

customers. It asserted that properties in

metropolitan areas, such as nurseries

and properties purchased for the

purpose of farming in the future, have

high non-agricultural or commercial

values, often over the agricultural value

of the property. An FCB commenter

supported the concept of the proposed

amendment but stated that rather than

focusing on the value of the collateral,

the amount of agricultural collateral

required should be based on the amount

of the loan. The bank suggests that a

better approach to preserve the rural

focus of System lending is to require

that the amount of money that may be

loaned on the non-agricultural collateral

cannot exceed the amount that could be

loaned on the agricultural collateral.

Finally, the commenter suggested that

the FCA add ‘‘buildings or

improvements thereto’’ after

‘‘agricultural land’’ because such

improvements add value to the land.

The FCA believes that the

requirement that the primary collateral

must be more than 50 percent

agricultural or rural land is consistent

with the mandate in section 1.7(a)(1) of

the Act that FCS institutions make real

estate mortgage loans in rural areas. The

FCA also recognizes and supports the

position that lenders should take the

maximum collateral possible and

appropriate to ensure safe and sound

lending. In order to clarify

§ 614.4200(b)(1), the FCA is specifying

in the regulation that the collateral

taken to meet the loan-to-value

limitation in § 614.4200(b)(1) must be

primarily agricultural or rural property.

If collateral is available in addition to

the collateral taken to meet the loan-tovalue requirement, the lender can, and

is strongly encouraged to, take any

additional collateral that appropriately

secures the loan. There is no

requirement that this additional

collateral be agricultural or rural

property. In response to the

commenters’ questions, if the value of

the non-agricultural or non-rural

property taken as additional collateral is

greater than the value of the collateral

taken to meet the loan-to-value

limitation, the excess value of such

additional collateral will not result in a

violation of this section.

Regarding the suggestion to add the

words ‘‘buildings and improvements’’

after ‘‘agricultural land,’’ the FCA

interprets the term ‘‘agricultural land’’

to include any buildings and

improvements that have been made to

the land and modifies proposed

§ 614.4200(c)(1) (now paragraph (b)(1))

to reference ‘‘agricultural land and

improvements made thereto.’’ Such

improvements are normally considered

in establishing the value of the land for

collateral purposes.

The FCA received a comment that

institutions should have the authority to

take a second lien on property serving

as primary collateral to meet the loanto-value ratio for agricultural loans, as

long as the lender also holds the first

lien on the property. Similar authority

was proposed in § 614.4200(c)(4) for

rural home loans, and the commenter

stated that it should apply to

agricultural loans as well. According to

the commenter, having a second lien on

property while already holding a first
51012 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations

2A jurisdictional exception is intended to provide

a saving or severability clause intended to preserve

the balance of USPAP if one or more of the parts

of USPAP are determined to be contrary to the law

or public policy of a jurisdiction. FCA would have

to establish a jurisdictional exception by regulation.

lien to collateralize another loan results

in the same level of security for the

lender as having only a first lien

position in another piece of property.

Also, the commenter stated that the

security requirements in the Act are the

same for both rural home loans and

agricultural loans. The FCA agrees with

the commenters that the first lien loan

security requirements in the Act are the

same for all real estate mortgage loans.

Therefore, the FCA amends

§ 614.4200(b)(1) to authorize lenders to

take a second lien interest in real

property if the lender already holds a

first lien interest in the property,

because the effective result of both liens

is a first lien on the property. Except for

this change, the clarification of

agricultural land, and the changes

previously discussed regarding

relocating requirements for collection of

financial information to § 614.4150 (and

the redesignation of paragraphs as a

result), § 614.4200 is adopted as

proposed.

IV. Subpart F—Collateral Evaluation

Requirements

The FCA received comments from

two appraisal groups and four System

institution commenters regarding

proposed modifications to §§ 614.4245

and 614.4250. The appraisal groups

concurred that there is a need to

simplify the appraisal process in lowrisk, small loan programs, but thought

that the amendments proposed were not

the best way to accomplish the

simplification. The appraisal groups

suggested that the USPAP contains

sufficient flexibility to meet the

collateral evaluation needs of small loan

programs. They further suggested that if

the use of limited appraisals under

USPAP rule 1 and summary and

restricted reports under rule 2 are not

sufficient, the FCA could specify

appropriate additional departures in

regulations, which would allow

appraisers to use the USPAP

jurisdictional exception.

Since the publication of the collateral

evaluation regulations in 1995, the FCA

has received several requests to review

those regulations, because institutions

have asserted that certain provisions are

potentially burdensome. The FCA

proposed amendments to §§ 614.4245

and 614.4250 in an attempt to address

those concerns. After reviewing the

comments on the proposed amendments

and reconsidering the requirements of

the regulations and comments received

on the collateral evaluation regulation

subsequent to publication, the FCA has

decided to withdraw the majority of the

proposed amendments to §§ 614.4245

and 614.4250 and modify others.

The FCA believes that the departure

provisions of USPAP are sufficient to

meet the needs of System institutions in

their small loan programs and

encourages institutions to follow those

provisions in developing small loan

programs. Once those provisions are

implemented, the FCA will consider

whether modifications to the regulations

are necessary to create a jurisdictional

exception.2 The FCA also welcomes

institutions to contact the FCA for

guidance in using the USPAP departure

provisions in small loan programs.

The FCA received comments from

System institutions to withdraw the

$100,000 loan size limitation on small

loan programs referenced in the

proposed amendment to § 614.4245 and

provide more flexibility for small real

estate loans and loans for the purchase

of new equipment and vehicles. The

FCA agrees with the commenters that a

$100,000 blanket limitation for all small

loan programs is not appropriate.

Regarding added flexibility, the FCA

believes that the institutions can make

use of the USPAP provisions mentioned

above for both small real estate loans

and loans for the purchase of new

equipment and vehicles and that

changes are not necessary. Therefore,

the FCA withdraws the proposed

amendments to § 614.4250. The FCA

adopts as final the proposed

amendments to § 614.4245(d), except

that the word ‘‘modified,’’ the reference

to § 614.4250(b), and the limitation that

small loan programs consist of loans of

$100,000 or less are removed and the

term ‘‘minimum information program’’

is added in place of small loan program.

With regard to these changes, the FCA

notes that institutions with minimum

information programs must set the

parameters of those programs in their

policies and loan underwriting

standards. Such parameters should

include, but are not necessarily limited

to, portfolio limitations, maximum loan

size, collateral requirements, and

information required for documentation

of repayment capacity.

V. Subpart H—Loan Purchases and

Sales

The FCA received three comments,

two from associations and one from the

FCC, regarding the proposed restrictions

in § 614.4325 on the funding bank

serving as an agent for an association in

purchasing loans. The commenters

stated that restricting the funding bank

from acting as an association’s agent

limits the System’s potential for

cooperating on a regional or national

basis to serve rural America. They

offered trade credit projects and other

situations in which the FCA has said

that the use of credit scoring is

appropriate as examples of projects that

would be impeded if the funding bank

were prohibited from serving as an

association’s agent. The commenters

also noted that the restriction is

inconsistent with the FCA’s recognition

of direct lender associations’ autonomy

and responsibility for their own lending

operations. Further, it is the

commenters’ belief that there are

different relationships between banks

and associations in different districts,

and the FCA should not impinge on

those relationships by regulation.

Finally, the commenters suggested that

if the FCA is unwilling to remove the

restriction entirely, the FCA should

adopt the position that the funding bank

can be an association’s agent, but the

association has the authority to

terminate the agency relationship with a

90-day notice to the bank.

In response to the commenters, the

FCA notes that the restriction on a

funding bank serving as an association’s

agent may appear inconsistent with the

philosophy the FCA has adopted in

these loan underwriting regulations that

associations adopt their own lending

standards and oversee their lending

operations. However, the relationship

between a funding bank and its

associations can result in unequal

bargaining positions between banks and

associations and create conflicts with an

association’s ability to hold its agent,

the funding bank, responsible for acting

in the association’s best interest. Thus,

notwithstanding potential

inconsistencies with association

autonomy, the FCA believes it is

necessary to take steps to minimize any

damages caused by these conflicts. As

suggested by the commenters, one way

to minimize problems is to require

institutions to include in the agency

agreement a provision authorizing an

association to terminate the agreement

with notice to the funding bank. The

FCA agrees with the commenters, but

believes that termination alone would

not be sufficient to remedy the damages

caused by a bank’s failure to act

appropriately if an association has

purchased loans prior to terminating the

agency agreement. As a result, the FCA

withdraws the proposed prohibition in

§ 614.4325 against a funding bank

serving as an association’s agent. The

final regulation contains a provision for

termination of the agency agreement
Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations 51013

with no more than a 60-day notice to the

bank, and in addition, requires a

provision in the agreement that the bank

would be required to purchase from the

association any loans that the

association, in its sole discretion,

determines do not comply with the

terms of the agency agreement or the

association’s loan underwriting

standards. The added provision will

provide a remedy to an association

injured by a bank’s breach of the agency

agreement and minimize any possible

effect of an unequal bargaining position

between a bank and an association. In

addition, although the commenters

suggested 90 days, the FCA believes that

a shorter time period for the notice

provides greater flexibility for an

association to act in situations in which

the association believes that the bank

may not be acting in its interest.

Further, 60 days should give banks

sufficient notice to make any

arrangements necessary as result of

termination of the agency agreement. In

addition, the parties may, by mutual

agreement, specify a notice period of

less than 60 days. Other than

withdrawing the funding bank

restriction and adding the termination

and damages provisions, the FCA

adopts the amendments to subpart H as

proposed.

Finally, except where previously

noted in this supplementary

information, the proposed amendments,

including the many conforming

amendments within subparts A, C, H, J,

and Q of part 614 and in part 619, are

adopted as final without change.

List of Subjects

12 CFR Part 614

Agriculture, Banks, banking, Flood

insurance, Foreign trade, Reporting and

recordkeeping requirements, Rural

areas.

12 CFR Part 619

Agriculture, Banks, Banking, Rural

areas.

For the reasons stated in the

preamble, parts 614 and 619 of chapter

VI, title 12 of the Code of Federal

Regulations are amended to read as

follows:

PART 614—LOAN POLICIES AND

OPERATIONS

1. The authority citation for part 614

continues to read as follows:

Authority: 42 U.S.C. 4012a, 4104a, 4101b,

4106, and 4128; Secs. 1.3, 1.5, 1.6, 1.7, 1.9,

1.10, 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, 2279a–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—Lending Authorities

2. Section 614.4000 is amended by

removing the words ‘‘agricultural credit

association of a Federal land credit

association’’ and adding in its place, the

words ‘‘agricultural credit association or

a Federal land credit association’’ in the

introductory text of paragraph (f), and

revising paragraph (a) to read as follows:

§ 614.4000 Farm Credit Banks.

(a) Long-term real estate lending.

Except to the extent such authorities are

transferred pursuant to section 7.6 of the

Act, Farm Credit Banks are authorized,

subject to the requirements in

§ 614.4200 of this part, to make real

estate mortgage loans with maturities of

not less than 5 years nor more than 40

years and continuing commitments to

make such loans.

* * * * *

3. Section 614.4010 is amended by

removing the reference ‘‘§ 614.4230’’

and adding in its place, the reference

‘‘§ 614.4200’’ in paragraphs (d)(1) and

(d)(2); and revising paragraph (a) to read

as follows:

§ 614.4010 Agricultural credit banks.

(a) Long-term real estate lending.

Except to the extent such authorities are

transferred pursuant to section 7.6 of the

Act, agricultural credit banks are

authorized, subject to the requirements

of § 614.4200, to make real estate

mortgage loans with maturities of not

less than 5 years nor more than 40 years

and continuing commitments to make

such loans.

* * * * *

§ 614.4020 [Amended]

4. Section 614.4020 is amended by

removing the reference ‘‘614.4230’’ and

adding in its place, the reference

‘‘614.4200’’ in paragraphs (a)(1) and

(a)(2).

5. Section 614.4030 is amended by

revising paragraph (a) to read as follows:

§ 614.4030 Federal land credit

associations.

(a) Long-term real estate lending.

Federal land credit associations are

authorized, subject to the requirements

of § 614.4200, to make real estate

mortgage loans with maturities of not

less than 5 years nor more than 40 years

and continuing commitments to make

such loans.

* * * * *

6. Section 614.4040 is amended by

removing paragraph (b); redesignating

paragraphs (c) and (d) as new

paragraphs (b) and (c), respectively;

removing the reference ‘‘paragraph

(c)(2)’’ and adding in its place, the

reference ‘‘paragraph (b)(2)’’ in newly

designated paragraph (b)(1); and by

revising paragraph (a) to read as follows:

§ 614.4040 Production credit associations.

(a) Loan terms. (1) Production credit

associations are authorized to make or

guarantee loans and other similar

financial assistance for the following

terms:

(i) Not more than 7 years

(ii) More than 7 years, but not more

than 10 years, subject to authorization

in policies approved by the funding

bank

(iii) Not more than 15 years to

producers or harvesters of aquatic

products for major capital expenditures,

including but not limited to the

purchase of vessels, construction or

purchase of shore facilities, and similar

purposes directly related to the

producing or harvesting operation

(2) Subject to policies approved by the

funding bank, production credit

associations may amortize loans over a

period greater than the loan terms

authorized under paragraph (a)(1) of this

section, provided that:

(i) The loan is amortized over a period

not to exceed 15 years

(ii) The loan may be refinanced only

if the lender determines, at the time of

refinancing, that the loan meets its loan

policy and underwriting criteria;

(iii) Any refinancing may not extend

repayment beyond 15 years from the

date of the original loan; and

(iv) The loan is not being made solely

for the purpose of acquiring

unimproved real estate; and

(3) Short-and intermediate-term loans

shall be made with maturities that are

appropriate for the purpose and

underlying collateral of the loan and

that comply with an institution’s loan

underwriting standards adopted

pursuant to § 614.4150 and the general

requirements of § 614.4200 of this part.

* * * * *

7. Section 614.4050 is amended by

adding introductory text and by revising

paragraphs (a) and (b) to read as follows:

§ 614.4050 Agricultural credit

associations.

Agricultural credit associations are

authorized to make or guarantee, subject
51014 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations

to the requirements of § 614.4200 of this

part:

(a) Long-term real estate mortgage

loans with maturities of not less than 5

nor more than 40 years, and continuing

commitments to make such loans; and

(b) Short-and intermediate-term loans

and provide other similar financial

assistance for a term of not more than

10 years (15 years for aquatic producers

and harvesters).

* * * * *

Subpart C—Bank/Association Lending

Relationship

§ 614.4120 [Amended]

8. Section 614.4120 is amended by

removing the words ‘‘the factors set

forth in §§ 614.4150 and 614.4160’’ and

adding in their place, the words ‘‘the

loan underwriting policies and

standards adopted pursuant to

§ 614.4150’’ in the last sentence of

paragraph (a).

§§ 614.4135, 614.4140, and 614.4145

[Removed]

9. Sections 613.4135, 613.4140, and

614.4145 are removed.

Subpart D—General Loan Policies for

Banks and Associations

§§ 614.4150, 614.4160, 614.4170

[Removed]

10. Sections 614.4150, 614.4160, and

614.4170 are removed.

11. New section 614.4150 is added to

read as follows:

§ 614.4150 Lending policies and loan

underwriting standards.

Under the policies of its board, each

institution shall adopt written standards

for prudent lending and shall issue

written policies, operating procedures,

and control mechanisms that reflect

prudent credit practices and comply

with all applicable laws and regulations.

Written policies and procedures shall, at

a minimum, prescribe:

(a) The minimum supporting credit

and financial information, frequency for

collection of information, and

verification of information required in

relation to loan size, complexity and

risk exposure

(b) The procedures to be followed in

credit analysis

(c) The minimum standards for loan

disbursement, servicing and collections

(d) Requirements for collateral and

methods for its administration

(e) Loan approval delegations and

requirements for reporting to the board

(f) Loan pricing practices

(g) Loan underwriting standards that

include measurable standards:

(1) For determining that an applicant

has the operational, financial, and

management resources necessary to

repay the debt from cashflow

(2) That are appropriate for each loan

program and the institution’s riskbearing ability; and

(3) That consider the nature and type

of credit risk, amount of the loan, and

enterprise being financed

(h) Requirements that loan terms and

conditions are appropriate for the loan;

and

(i) Such other requirements as are

necessary for the professional conduct

of a lending organization, including

documentation for each loan transaction

of compliance with the loan

underwriting standards or the

compensating factors or extenuating

circumstances that establish repayment

of the loan notwithstanding the failure

to meet any one or more loan

underwriting standard.

12. Section 614.4165 is amended by

removing paragraphs (b) and (c);

redesignating paragraphs (d) and (e) as

new paragraphs (b) and (c) respectively;

and revising paragraph (a) and the last

sentence of newly designated paragraph

(c) to read as follows:

§ 614.4165 Special credit needs.

(a) The board of each direct lender

institution shall adopt policies to

establish programs to provide credit and

related services to young, beginning,

and small farmers, ranchers, and

producers or harvesters of aquatic

products.

* * * * *

(c) * * * Where such programs are

authorized, the direct lender institution

board shall adopt appropriate policies

that define criteria for the selection of

specialized high-risk enterprises.

Subpart E—Loan Terms and

Conditions

13. Section 614.4200 is revised to read

as follows:

§ 614.4200 General requirements.

(a) Terms and conditions. (1) The

terms and conditions of each loan made

by a Farm Credit bank or association

shall be set forth in a written document

or documents, such as a loan agreement,

promissory note, or other instrument(s)

appropriate to the type and amount of

the credit extension, in order to

establish loan conditions and

performance requirements. Copies of all

documents executed by the borrower in

connection with the closing of a loan

made under titles I or II of the Act shall

be provided to the borrower at the time

of execution and at any time thereafter

that the borrower requests additional

copies.

(2) The terms and conditions of all

loans shall be adequately disclosed in

writing to the borrower not later than

loan closing. For loans made under

titles I and II of the Act, the institution

shall provide prompt written notice of

the approval of the loan.

(3) Applicants shall be provided

notification of the action taken on each

credit application in compliance with

the requirements of 12 CFR 202.9.

(b) Security. (1) Long-term real estate

mortgage loans must be secured by a

first lien interest in real estate, except

that the loans may be secured by a

second lien interest if the institution

also holds the first lien on the property.

No funds shall be advanced, under a

legally binding commitment or

otherwise, if the outstanding loan

balance after the advance would exceed

85 percent (or 97 percent as provided in

section 1.10(a) of the Act) of the

appraised value of the real estate, except

that a loan on which private mortgage

insurance is obtained may exceed 85

percent of the appraised value of the

real estate to the extent that the loan

amount in excess of 85 percent is

covered by such insurance. The real

estate that is used to satisfy the loan-tovalue limitation must be comprised

primarily of agricultural or rural

property, including agricultural land

and improvements thereto, a farmrelated business, a marketing or

processing operation, a rural residence,

or real estate used as an integral part of

an aquatic operation.

(2) Notwithstanding the requirements

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

lending institution may advance funds

for the payment of taxes or insurance

premiums with respect to the real estate,

reschedule loan payments, grant partial

releases of security interests in the real

estate, and take other actions necessary

to protect the lender’s collateral

position. Any action taken that results

in exceeding the loan-to-value

limitation shall be in accordance with a

policy of the institution’s board of

directors and adequately documented in

the loan file.

(3) Short- and intermediate-term loans

may be secured or unsecured as the

documented creditworthiness of the

borrower warrants.

(4) In addition to the requirements in

paragraph (b)(1) of this section, a longterm, non-farm rural home loan,

including a revolving line of credit,

shall be secured by a first lien on the

property, except that it may be secured

by a second lien if the institution also

holds the first lien on the property. A

short- or intermediate-term loan on a

rural home, including a revolving line of

credit, must be secured by a lien on the
Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Rules and Regulations 51015

property unless the financing is

provided exclusively for repairs,

remodeling, or other improvements to

the rural home, in which case the loan

may be secured by other property or

unsecured if warranted by the

documented creditworthiness of the

borrower.

(5) Except as provided in § 614.4231,

loans made under title III of the Act may

be secured or unsecured, as appropriate

for the purpose of the loan and the

documented creditworthiness of the

borrower.

§§ 614.4210, 614.4220, 614.4222, 614.4230

[Removed]

14. Sections 614.4210, 614.4220,

614.4222, and 614.4230 are removed.

15. Section 614.4231 is revised to read

as follows:

§ 614.4231 Certain seasonal commodity

loans to cooperatives.

Loans on certain commodities that are

part of government programs shall

comply with the criteria established for

those programs. Security taken on

program commodities shall be

consistent with prudent lending

practices and ensure compliance with

the government program. The bank shall

provide for periodic review by bank

officials of any custodial activities and

shall provide notice to the custodians

that their activities are subject to review

and examination by the Farm Credit

Administration.

Subpart F—Collateral Evaluation

Requirements

16. Section 614.4245 is amended by

adding a new paragraph (d) to read as

follows:

§ 614.4245 Collateral evaluation policies.

* * * * *

(d) An institution’s board of directors

may adopt specific collateral evaluation

requirements, consistent with the

regulations in this subpart, for loans

designated as part of a minimum

information program.

Subpart H—Loan Purchases and Sales

17. Section 614.4325 is amended by

removing the reference ‘‘§ 614.4160’’

and adding in its place, the words ‘‘the

loan underwriting standards adopted

pursuant to § 614.4150’’ in the fourth

sentence of paragraph (e); revising

paragraph (a)(1); and adding new

paragraph (h) to read as follows:

§ 614.4325 Purchase and sale of interests

in loans.

(a) * * *

(1) Interests in loans means

ownership interests in the principal

amount, interest payments, or any

aspect of a loan transaction and

transactions involving a pool of loans,

including servicing rights.

* * * * *

(h) Transactions through agents.

Transactions pertaining to purchases of

loans, including the judgment on

creditworthiness, may be performed

through an agent, provided that:

(1) The institution establishes the

necessary criteria in a written agency

agreement that outlines, at a minimum,

the scope of the agency relationship and

obligates the agent to comply with the

institution’s underwriting standards;

(2) The institution periodically

reviews the agency relationship to

determine if the agent’s actions are in

the best interest of the institution;

(3) The agent must be independent of

the seller or intermediate broker in the

transaction; and

(4) If an association’s funding bank

serves as its agent, the agency agreement

must provide that:

(i) The association can terminate the

agreement upon no more than 60 days

notice to the bank;

(ii) The association may, in its

discretion, require the bank to purchase

from the association any interest in a

loan that the association determines

does not comply with the terms of the

agency agreement or the association’s

loan underwriting standards.

Subpart J—Lending Limits

§ 614.4355 [Amended]

18. Section 614.4355 is amended by

removing the word ‘‘seasonal’’ and

adding in its place, the word

‘‘commodity’’ the second place it

appears in paragraphs (a)(6) and (b)(1)

respectively, and in paragraph (a)(8).

§ 614.4358 [Amended]

19. Section 614.4358 is amended by

removing the words ‘‘on the credit

factors set forth in § 614.4160’’ and

adding in their place, the words ‘‘under

the loan underwriting standards

adopted pursuant to § 614.4150’’ in

paragraph (a)(1)(ii).

Subpart O—Banks for Cooperatives

Financing International Trade

§ 614.4810 [Amended]

20. Section 614.4810 is amended by

removing the words ‘‘credit factors

listed in § 614.4160’’ and adding in their

place, the words ‘‘the loan underwriting

standards adopted pursuant to

§ 614.4150’’ in paragraph (b).

PART 619—DEFINITIONS

21. 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).

§§ 619.9165 and 619.9290 [Removed]

22. Sections 619.9165 and 619.9290

are removed.

Dated: September 24, 1997.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 97–25934 Filed 9–29–97; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 97–NM–218–AD; Amendment

39–10143; AD 97–20–05]

RIN 2120–AA64

Airworthiness Directives; British

Aerospace Model HS 748 Series

Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule; request for

comments.

SUMMARY: This amendment adopts a

new airworthiness directive (AD) that is

applicable to all British Aerospace

Model HS 748 series airplanes. This

action requires installation of a

modified aileron cable pulley guard and

rubbing strips. This amendment is

prompted by issuance of mandatory

continuing airworthiness information by

a foreign civil airworthiness authority.

The actions specified by this AD are

intended to prevent jamming or

restricting of the aileron cable, which

could lead to the loss of aircraft roll

control.

DATES: Effective October 15, 1997.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of October 15,

1997.

Comments for inclusion in the Rules

Docket must be received on or before

October 30, 1997.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, ANM–103,

Attention: Rules Docket No. 97–NM–

218–AD, 1601 Lind Avenue, SW.,

Renton, Washington 98055–4056.

The service information referenced in

this AD may be obtained from AI(R)

American Support, Inc., 13850 Mclearen