[Federal Register Volume 62, Number 199 (Wednesday, October 15, 1997)]
[Proposed Rules]
[Pages 53581-53588]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27146]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 616, 618, and 621

RIN 3052-AB63


Loan Policies and Operations; Leasing; General Provisions; 
Accounting and Reporting Requirements

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA) through the Farm Credit 
Administration Board (Board) issues a proposed rule to amend its 
regulations that provide Farm Credit System (Farm Credit or System) 
institutions, including the Farm Credit Leasing Services Corporation 
(FCL), regulatory guidance concerning leasing activities. The proposed 
rule clarifies leasing authorities of System institutions and addresses 
issues regarding leasing raised by System institutions and FCA 
examiners. The proposed rule is also intended to provide clear and 
concise regulations pertaining to the System's leasing activities and 
clarify what existing regulations are applicable to leasing activities.

DATES: Comments should be received on or before December 15, 1997.

ADDRESSES: Comments may be mailed or delivered to Patricia W. DiMuzio, 
Director, Regulation Development Division, Office of Policy Development 
and Risk Control, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, Virginia 22102-5090, or sent by facsimile transmission to FAX 
number (703) 734-5784. Comments may also be provided by electronic mail 
addressed to <a href="/cdn-cgi/l/email-protection#82e2e2f0e7e5afe1edefefc2e4e1e3ace5edf4">``<span class="__cf_email__" data-cfemail="f1839496dc929e9c9cb1979290df969e87">[email protected]</span></a>'' on the internet. Copies of all 
communications received will be available for examination by interested 
parties in the Office of Policy Development and Risk Control, Farm 
Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Robert G. Magnuson, Policy Analyst, Office of Policy Development and 
Risk Control, Farm Credit Administration, McLean, VA 22102-5090, (703) 
883-4498, TDD (703) 883-4444,
      or
James M. Morris, Senior Counsel, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.

SUPPLEMENTARY INFORMATION: System leasing operations continue to evolve 
to meet the demands of agricultural and aquatic producers, 
cooperatives, and rural utilities. Several System institutions have 
inaugurated new leasing programs to meet the increased demands for 
leasing and provide customers with more options for financing the 
expansion of agricultural operations. In addition, the FCL has 
experienced substantial growth since 1990 because of increased demand 
for leases by agricultural and aquatic producers and their 
cooperatives.
    The System's statutory leasing powers were granted to supplement 
its lending authorities. The leasing provisions of the Farm Credit Act 
of 1971, as amended (Act), remain separate authorities, however, and do 
not parallel the rules for lending in all respects. The proposed 
regulations are intended to clarify which lending regulations are 
applicable to leasing activities and how the rules applicable to 
leasing differ from those governing lending transactions. In addition, 
this proposal provides specific guidance for the FCL.
    The FCL was chartered in 1983 as a service corporation under 
section 4.25 of the Act. The FCL was initially organized and owned by 
14 of the 37 then existing System banks to acquire and lease assets and 
provide related services to eligible customers of the System. Today, it 
is owned by all eight of the System banks. As a service corporation, it 
derives its leasing authorities from the authorities of its stockholder 
banks that operate under titles I and III of the Act.
    FCA's regulations currently address the leasing activities of 
System banks, associations, and the FCL by defining ``loans'' as 
including leases in some, but not all regulatory provisions and by 
generally providing that service corporations are subject to the 
regulations applicable to their organizing banks. This approach has 
conveyed the FCA's view that leasing activities should ordinarily 
follow the rules for lending and that the FCL should be governed by the 
same rules as other System lessors. This approach, while having the 
virtue of simplicity, has not always proved satisfactory. It does not 
account for the ways in which lease transactions differ from loan 
transactions, nor does it reflect differences between loans and leases 
in the Act. The proposed regulations would apply rules uniformly to all 
System institutions that conduct leasing activities under the same 
title(s) of the Act.
    The existing leasing regulations in Secs. 618.8050 and 618.8060 
will be deleted upon the promulgation of final leasing regulations in 
part 616. Technical changes are made to Secs. 614.4710 and 621.9 to 
conform with the below amendments. A discussion of the proposed 
amendments follows.

I. Leasing Authorities

1. Authority and Lessee Eligibility

    Proposed Sec. 616.6100 implements sections 1.11(c)(2), 2.4(b)(4), 
and 3.7(a) of the Act, which grant express leasing authorities to 
various System institutions. Proposed Sec. 616.6100(a) addresses the 
authority of Farm Credit Banks (FCBs), agricultural credit banks 
(ACBs), Federal land credit associations (FLCAs), agricultural credit 
associations (ACAs), and the FCL to lease facilities under section 
1.11(c)(2) of the Act. Similarly, proposed Sec. 616.6100(b) reflects 
the equipment leasing authority of: (1) FCBs, ACBs, and the FCL under 
section 1.11(c)(2) of the Act; and (2) ACAs and production credit 
associations (PCAs) under section

[[Page 53582]]

2.4(b)(4) of the Act. Proposed Sec. 616.6100(a) and (b) reflect the 
statutory authority of FCBs, ACAs, PCAs, FLCAs, ACBs, and the FCL to 
make leases to: (1) Bona fide farmers, ranchers, or aquatic producers 
and harvesters; (2) processing and/or marketing operations; and (3) 
farm-related service businesses.
    Section 1.11(c)(2) of the Act specifies that System banks may only 
lease facilities or equipment to persons eligible for credit under 
titles I or II of the Act for use in their operations. Section 
2.4(b)(4) of the Act, however, specifies that associations may only 
lease equipment to stockholders for use in their operations. In 
accordance with these provisions, the scope of leasing activity by 
System banks and associations to bona fide farmers, ranchers, and 
aquatic producers and harvesters under proposed Sec. 616.6100 is 
restricted to those assets used in the eligible lessee's operations.
    Proposed Sec. 616.6100(c) provides that the banks for cooperatives 
(BCs, ACBs, and the FCL are authorized to lease equipment to 
cooperatives, rural electric, telecommunication, and cable television 
utilities, water and waste treatment facilities, and other entities 
that comply with the requirements of Sec. 613.3100(b), (c), and (d). As 
discussed above, the Act grants PCAs the authority to lease only 
equipment, and FLCAs the authority to lease only facilities, but these 
terms are not defined in the Act and are not always clearly 
distinguishable from each other. Equipment is ordinarily considered to 
be movable personal property. Facilities include property that is 
attached, often permanently, to real estate. The FCA acknowledges that 
certain agricultural property may have attributes of both equipment and 
facilities. For example, center-pivot irrigation systems may be fairly 
viewed as either equipment or a facility. Recognizing that agricultural 
``equipment'' and ``facilities'' may in some instances overlap, the 
proposed rule does not attempt to provide a specific regulatory 
definition of equipment and facility. Instead, proposed 
Sec. 616.6100(d) requires each institution to document that the leased 
equipment or facility is authorized to be leased under its leasing 
authorities. While the FCA expects each System institution involved in 
lending and leasing to have the necessary expertise to make such a 
determination, it will review these determinations as part of FCA's 
routine examination process.

2. Purchase and Sale of Interests in Leases

    The current regulatory requirements for transactions involving 
interests in loans are in Secs. 614.4325 and 614.4330. These 
regulations have been in effect since 1992 and establish the necessary 
guidance and parameters for institutions to follow for loan 
participations. Although the FCA believes that analogous requirements 
should apply to the purchase and sale of lease interests, a definition 
of a participation in a lease is needed.
    The FCA's current regulations on loan purchases and sales do not 
differentiate participations in leases from participations in loans. 
FCA regulations define ``loan'' for purposes of subpart H of part 614 
as ``any extension of credit or similar financial assistance of the 
type authorized under the Act, such as leases * * * and other similar 
transactions.'' A ``loan participation'' is defined as ``a fractional 
undivided interest in the principal amount of a loan that is sold by a 
lead lender to a participating institution in accordance with the 
requirements of Sec. 614.4330 of this subpart.'' Although the 
definition of a ``loan'' in Sec. 614.4325(a)(3) specifically includes 
``leases,'' the definition of a ``loan participation'' in 
Sec. 614.4325(a)(4) does not, by its terms, address the very different 
structure of a lease.
    In leases, there is no separately identified ``principal'' and 
``interest.'' Instead, the lessor receives a stream of lease payments, 
and a purchase price (if a purchase option is exercised) or the return 
of the leased asset (if a purchase option is not exercised). Since 
leases are structured differently than loans, the FCA proposes a 
definition of a ``lease participation'' that addresses the different 
structure of a lease transaction and provides sufficient flexibility to 
cover lease situations that are analogous to a ``fractional undivided 
interest in the principal amount'' of a loan. Viewed from the lessor's 
perspective, a lease has two primary components, the stream of lease 
payments and the residual value. These two components of a lease, lease 
payments and residual value, do not correspond neatly to the concepts 
of interest, principal, and collateral in a loan transaction. Because 
each of these components of a lease has distinct characteristics and 
risks, the FCA believes that it is appropriate to consider interests in 
leases to be lease participations when they represent a fractional 
undivided interest in the whole of either or both of these two 
components. Accordingly, the FCA proposes to define a lease 
participation in Sec. 616.6000(d) as a fractional undivided interest 
in: (1) All of the lease payments; (2) the residual value of all of the 
property leased; or (3) all of the lease payments and the residual 
value of all of the property leased.
    Other than the new definition of participation in Sec. 616.6000(d), 
the proposed lease participation regulations contained in Sec. 616.6110 
closely parallel most of the provisions of Secs. 614.4325 and 614.4330 
governing loan participations, except for the provisions concerning 
``collateral'' or other loan specific concepts.
    Amendments to the Act in 1992 and 1994 granted System institutions 
authority to participate in financing provided to similar entities. The 
regulations implementing this recent authority for loans are found in 
Sec. 613.3300 of this chapter. The FCA believes that participations in 
leases made to similar entities are also authorized by the recent 
amendments to the Act. The proposed regulations address similar entity 
lease participations for the first time. New provisions concerning 
purchasing interests in leases made to similar entities are proposed at 
Sec. 616.6110(g). The proposed provisions are generally parallel to the 
provisions of Sec. 613.3300 that apply to loan participations. Proposed 
Sec. 616.6110(g) identifies the terminology changes necessary to apply 
the regulation to similar entity lease participations.
    The proposed lease participation regulations set forth in 
Sec. 616.6115 apply the provisions of Sec. 614.4330 with minor changes 
in terminology to lease participations.

3. Out-of-Territory Leases

    Farm Credit institutions seeking to provide loan services to 
borrowers outside their respective chartered territories are required 
to coordinate such activities with other Farm Credit institutions 
offering similar lending services in those territories. Proposed 
Sec. 616.6120 provides that a Farm Credit bank or association that 
conducts leasing activities outside its chartered territory is subject 
to the same requirements that Sec. 614.4070 imposes on out-of-territory 
loans.
    As a service corporation owned by the eight System banks, the FCL 
is chartered to do business nationwide. Therefore, it is not subject to 
out-of-territory requirements. The proposed regulations do not require 
other Farm Credit institutions to notify or obtain concurrence from the 
FCL with respect to out-of-territory leases. The FCA believes this is 
appropriate, because the FCL does not have exclusive leasing authority 
in a particular geographic

[[Page 53583]]

territory but provides leasing services concurrently with other System 
institutions.

II. Lease Operations

1. Leasing Policies and Underwriting Standards

    Proposed Sec. 616.6200 would require System institutions engaged in 
leasing to adopt written policies and underwriting standards governing 
such activity to ensure that all risks associated with leasing are 
properly managed. There are many similarities between the credit risk 
of a loan and the payment risk of a lease. In each case, the borrower's 
or lessee's ability to make the contractual payments is a primary 
concern. Therefore, some aspects of the primary payment analysis 
required of a lessor are similar to the analysis appropriate for a 
lender making a loan. The most significant difference is that in 
leasing, not only is there the risk associated with the lessee's 
ability to service its contractual lease obligation, but there is the 
additional risk associated with establishing the appropriate residual 
values on the equipment or facility and the ultimate remarketing of the 
leased property. Therefore, from a safety and soundness perspective, 
System institutions engaged in leasing need to have adequate policies 
and procedures that address both loan and lease underwriting to ensure 
prudent management of both activities.
    From a payment risk perspective, the proposed rule requires System 
institutions engaged in leasing to comply with the minimum loan 
underwriting standards in part 614 regarding the minimum amount of 
financial information required of the applicant since the risks are 
very similar for both loans and leases. The loan underwriting 
regulations \1\ would require written policies and procedures to 
address underwriting standards such as the minimum supporting credit 
information required, credit analysis procedures, and repayment 
capacity of the applicant.
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    \1\ Final loan underwriting regulations are currently under 
consideration by the FCA. See the proposed rule published in the 
Federal Register on April 15, 1996 (61 FR 16403).
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    In addition to requiring institutions to exercise due diligence in 
reviewing the applicant's ability to make payments as required under 
part 614, the proposed rule also requires institutions engaged in 
leasing to adopt policies and underwriting standards that address the 
unique risks associated with lease transactions. These additional risks 
include things such as the establishment of residual values of the 
leased property, the types of equipment leased, remarketing of leased 
property, tax treatment of lease transactions, and liability associated 
with ownership. The proposed rule provides only a minimum framework. 
The complexity and depth of the policies and underwriting standards 
should be consistent with the current or planned leasing activity and 
the institution's risk-bearing ability.

2. Investment in Leased Assets

    Proposed Sec. 616.6210 authorizes an institution to purchase 
property to lease if the acquisition is consistent with the type of 
leasing being conducted or planned in the future. The purpose of this 
provision is to prohibit System institutions from speculating in the 
acquisition of property or facilities.

3. Lending and Leasing Limits

    The FCA believes that a consistent approach should be applied to 
financial risks in all System institutions, including the FCL, to 
properly limit any concentration of risk. Limits on the amount of 
financing (whether in the form of loans or leases) a System institution 
can provide to any one customer protect against unnecessarily large 
risks to an institution's capital. The proposed regulatory changes 
would limit an institution's exposure to risk from a single lessee or 
borrower, and prescribe consistent standards for leases in all types of 
System institutions.
    Section 616.6220 of the proposed regulations refers to the lending 
and leasing limit regulations in subpart J of part 614. The proposed 
regulations would amend subpart J in order to make it clear that the 
lending limits apply to all leases made by System banks and 
associations. The FCA proposes to modify the title of subpart J to be 
``Lending and Leasing Limits,'' and to make conforming changes 
throughout the subpart. The FCA believes all System institutions should 
have a single limit that applies to all types of financial obligations. 
Both loans and leases should be measured against this limit when 
calculating how much risk an institution can absorb from a single 
customer. Likewise, all loans and leases to a single borrower should be 
attributed to that customer when calculating the total risk against the 
institutions' lending and leasing limit.
    In Sec. 614.4350(a) the definition of ``borrower'' would be amended 
to clarify that, for the purposes of this subpart, the term 
``borrower'' includes any customer to whom an institution has made a 
lease or a commitment to make a lease. In Sec. 614.4350(c) the 
definition of ``loan'' is proposed to be amended to include all types 
of leases (operating, financing, and lease interests.)
    In Secs. 614.4352 through 614.4355, proposed changes to clarify 
that a System institution is prohibited from making a lease or a loan 
if the consolidated amount of all loans and leases to a single customer 
exceeds a specific percentage of the institution's lending and leasing 
limit base.
    A new Sec. 614.4356 is proposed that prescribes standard leasing 
limits for the FCL. The proposed regulation prohibits the FCL from 
making leases to a single customer that exceed 25 percent of the FCL's 
leasing limit base. This requirement is similar to the risk exposure 
allowed for other System institutions.
    In proposed Sec. 614.4358(a)(1), outstanding lease balances are 
added to the items included in the computation of obligations. In 
Sec. 614.4358(b), the FCA proposes to add a new paragraph to address 
certain exclusions from the lending and leasing limits regarding 
participations or interests sold in leases. The proposed regulation at 
Sec. 614.4358(b)(5) allow interests in leases sold, including 
participation interests, to be excluded from leases to a customer 
subject to the lending and leasing limit when the sale agreement meets 
specific requirements. This exclusion is based on the premise that the 
institution originating the lease retains some interest in the lease, 
whether it is in the lease payments or residual value. To the extent 
that such an interest is retained, the originating institution may 
exclude that portion of the lease payments or residual interests in 
which it no longer has a legitimate ownership interest. In 
Sec. 614.4360, the FCA proposes to add a new paragraph (d) to clarify 
that all leases, except those that are permitted under Sec. 614.4361, 
must be in compliance with the limits at all times.

4. Portfolio Limitations

    Under proposed Sec. 616.6230, the restrictions in sections 
1.11(a)(2) and 2.4(a)(1) of the Act would apply to leases that FCBs, 
ACBs, direct lender associations, and the FCL make to agricultural or 
aquatic producers who supply less than 20 percent of the throughput to 
a processing and/or marketing operation. More specifically, leases by 
Farm Credit banks and direct lender associations to customers who 
supply less than 20 percent of the throughput used in a processing and/
or marketing operation would be subject to the 15-percent portfolio 
ceiling in Sec. 613.3010(b)(2). Furthermore, proposed Sec. 616.6230(b) 
places this same 15-percent portfolio limitation on the FCL

[[Page 53584]]

for its leases made to processing and/or marketing operations eligible 
under Sec. 613.3010.

5. Stock Purchase Requirements

    The Act authorizes FCBs to lease facilities and equipment to 
``persons eligible for credit.'' The Act authorizes PCAs and BCs, 
respectively, to lease equipment to ``stockholders,'' but does not 
prescribe any minimum stock requirements for leases. Accordingly, the 
FCA concludes that lessees who lease equipment from PCAs, ACAs, BCs, or 
ACBs under titles II and III must be stockholders.
    Because the minimum stock purchase requirement under section 
4.3A(c)(1)(E) does not apply to leases, the FCA has determined that the 
purchase of a single share is sufficient to satisfy the stock 
requirement. Institutions may satisfy the minimum stock requirement by 
counting outstanding shares stockholders already own in the institution 
making the lease. The minimum stock requirement in proposed 
Sec. 616.6240(a) does not apply to the FCL due to its stockholders 
being System banks, and not its lease customers. The FCA also proposes 
that the disclosure requirements for equities issued as a condition of 
obtaining a lease are the same as disclosure requirements for equities 
issued as a condition of obtaining a loan as required under 
Sec. 615.5250 (a) and (b) of this chapter.

6. Disclosure Requirements

    The FCA has concluded that the borrower rights provisions of the 
Act do not apply to leases, because the borrower rights provisions of 
the Act explicitly refer to ``loans,'' but not leases. Significantly, 
lessees have no ownership rights in the leased equipment or facilities 
during the term of the lease, and thus, many of the borrower rights 
provisions such as those pertaining to restructuring or right of first 
refusal are not applicable to leasing.
    However, proposed Sec. 616.6250(a) does require that lease 
applicants be provided, at a minimum, a copy of all lease documents 
signed by the lessee, not later than the time of lease closing. In 
addition, proposed Sec. 616.6250(b) requires a System institution to 
render its decision on the lease application in as expeditious a manner 
as is practical. The proposed rule also requires a System institution 
to provide prompt written notice of its decision to the applicant.

List of Subjects

12 CFR Part 614

    Agriculture, Banks, banking, Flood insurance, Foreign trade, 
Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 616

    Agriculture, Banks, banking, leasing.

12 CFR Part 618

    Agriculture, Archives and records, Banks, banking, Insurance, 
Reporting and recordkeeping requirements, Rural areas, Technical 
assistance.

12 CFR Part 621

    Accounting, Agriculture, Banks, banking, Penalties, Reporting and 
recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, it is proposed that parts 
614, 618 and 621 be amended and part 616 be added to chapter VI, title 
12 of the Code of Federal Regulations to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

    1. The authority citation for part 614 is revised to read as 
follows:

    Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 
4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 
4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 
7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 
2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 
2093, 2094, 2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 
2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 
2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa, 
2279aa-5); sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.

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

Subpart J--Lending and Leasing Limits

    3. Section 614.4350 is amended by revising paragraphs (a) and (c) 
to read as follows:


Sec. 614. 4350  Definitions.

* * * * *
    (a) Borrower means an individual, partnership, joint venture, 
trust, corporation, or other business entity (except a Farm Credit 
System association or other financing institution, as defined in 
Sec. 614.4540) to which an institution has made a loan or a commitment 
to make a loan either directly or indirectly. For the purposes of this 
subpart, the term ``borrower'' includes any customer to which an 
institution has made a lease or a commitment to make a lease.
* * * * *
    (c) Loan means any extension of, or commitment to extend, credit 
authorized under the Act whether it results from direct negotiations 
between a lender and a borrower or is purchased from or discounted for 
another lender, including participation interests. The term ``loan'' 
includes loans and leases outstanding, obligated but undisbursed 
commitments to lend or lease, contracts of sale, notes receivable, 
other similar obligations, guarantees, and all types of leases. An 
institution ``makes a loan or lease'' when it enters into a commitment 
to lend or lease, advances new funds, substitutes a different borrower 
or lessee for a borrower or lessee who is released, or where any other 
person's liability is added to the outstanding loan, lease or 
commitment.
* * * * *


Sec. 614.4351  [Amended]

    4. Section 614.4351 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' each place they appear 
in the heading and the entire section.


Sec. 614.4352  [Amended]

    5. Section 614.4352 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' in paragraphs (a) and 
(b)(1), and by adding the words ``and leasing'' between the words 
``lending'' and ``limits'' in paragraph (b)(2).


Sec. 614.4353  [Amended]

    6. Section 614.4353 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base.''


Sec. 614.4354  [Amended]

    7. Section 614.4354 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base.''


Sec. 614.4355  [Amended]

    8. Section 614.4355 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limit base'' in the introductory 
paragraph, and by removing the word ``lending'' in the headings of 
paragraphs (a) and (b).


Secs. 614.4356-614.4360  [Redesignated]

    9. Subpart J is amended by redesignating Sec. 614.4356 through

[[Page 53585]]

Sec. 614.4360 as Sec. 614.4357 through Sec. 614.4361, and by adding a 
new Sec. 614.4356 to read as follows:


Sec. 614.4356  Farm Credit Leasing Services Corporation.

    The Farm Credit Leasing Services Corporation may enter into lease 
agreements if the consolidated amount of all leases and undisbursed 
commitments to a single lessee or any related entities does not exceed 
25 percent of its leasing limit base.
    10. Newly designated Sec. 614.4358 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in the 
introductory text of paragraphs (a) and (b); by adding the words 
``lease balances outstanding'' after the word ``loans'' the first place 
it appears in paragraph (a)(1); by removing the reference 
``Sec. 614.4358'' and adding in its place the reference 
``Sec. 614.4359'' in paragraph (a)(3); by redesignating existing 
paragraph (b)(5) as (b)(6); and by adding new paragraph (b)(5) to read 
as follows:


Sec. 614.4358  Computation of obligations.

    (b) * * *
    (5) Interests in leases sold, including participation interests, 
when the sale agreement meets the following requirements:
    (i) The interest sold must be a fractional undivided interest in 
all the lease payments, the residual value of all the leased property, 
or both;
    (ii) The interest must be sold without recourse; and
    (iii) The agreement under which the interest is sold must provide 
for the sharing of all payments on a pro rata basis according to the 
percentage interest in the lease.
* * * * *


Sec. 614.4359  [Amended]

    11. Newly designated Sec. 614.4359 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit(s)'' in 
paragraphs (a) introductory text, (b), and (c); by removing the 
reference ``Sec. 614.4356'' and adding in its place, the reference 
``Sec. 614.4357'' in paragraph (a)(1)(iii), and by removing the 
reference ``Sec. 614.4358'' and adding in its place, the reference 
``Sec. 614.4359'' in the heading for column two in Table 1.
    12. Newly designated Sec. 614.4360 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit'' in the 
heading and in paragraphs (a), (b), (c), and (d); by revising the 
reference ``Sec. 614.4360'' and adding in its place, the reference 
``Sec. 614.4361'' in paragraph (a); by removing the reference 
``Sec. 614.4359(b)(3)'' and adding in its place, the reference 
``Sec. 614.4360(b)(3)'' in paragraph (c); and by redesignating 
paragraph (d) as paragraph (e); and by adding a new paragraph (d) to 
read as follows:


Sec. 614.4360  Lending and leasing limit violations.

* * * * *
    (d) All leases, except those that are permitted under the 
provisions of Sec. 614.4361, reading ``effective date of this subpart'' 
in Sec. 614.4361(a) and ``effective date of these regulations'' in 
Sec. 614.4361(b) as ``effective date of this amendment,'' shall be in 
compliance with the lending and leasing limit on the date the lease is 
made, and at all times thereafter.
* * * * *


Sec. 614.4361  [Amended]

    13. Newly designated Sec. 614.4361 is amended by adding the words 
``and leasing'' between the words ``lending'' and ``limit(s)'' in each 
place they appear in paragraphs (a) and (b), and by removing the 
reference ``Sec. 614.4359'' and adding in its place, the reference 
``Sec. 614.4360'' in paragraph (b).

Subpart O--Banks for Cooperatives and Agricultural Credit Banks 
Financing International Trade


Sec. 614.4710  [Amended]

    14. Section 614.4710 is amended by adding the words ``and leasing'' 
between the words ``lending'' and ``limits'' in the last sentence of 
the introductory paragraph and in paragraphs (a)(2) and (a)(3).
    15-16. A new part 616 is added to read as follows:

PART 616--LEASING

Subpart A--Leasing Authorities

Sec.
616.6000  Definitions.
616.6100  Authority and lessee eligibility.
616.6110  Purchase and sale of interests in leases.
616.6115  Lease participations.
616.6120  Out-of-territory leasing.

Subpart B--Leasing Operations

616.6200  Leasing policies and underwriting standards.
616.6210  Investment in leased assets.
616.6220  Leasing limits.
616.6230  Portfolio limitations.
616.6240  Stock purchase requirements.
616.6250  Disclosure requirements.

    Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 
2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.9, 
3.10, 3.20, 3.28, 4.3, 4.3A, 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 
4.14D, 4.14E, 4.18, 4.18A, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 
5.10, 5.17, 7.0, 7.2, 7.3, 7.6, 7.8, 7.12, 7.13 of the Farm Credit 
Act (12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 
2074, 2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 
2130, 2131, 2141, 2149, 2154, 2154a, 2199, 2200, 2201, 2202, 2202a, 
2202c, 2202d, 2202e, 2206, 2206a, 2211, 2212, 2213, 2214, 2219a, 
2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279a-3, 2279b, 2279c-1, 
2279f, 2279f-1).

Subpart A--Leasing Authorities


Sec. 616.6000  Definitions.

    For the purposes of this part, the following definitions shall 
apply:
    (a) Interests in leases means ownership interests in any aspect of 
a lease transaction, including servicing rights.
    (b) Lead lessor means an institution having a direct contractual 
relationship with a lessee to make a lease, which institution sells or 
assigns an interest or interests in such lease to one or more other 
lessors.
    (c) Lease means any contractual obligation to own and lease, or 
lease with the option to purchase, equipment or facilities.
    (d) Lease participation means, with respect to a lease that is sold 
by a lead lessor to a participating institution in accordance with the 
requirements of Sec. 616.6100, a fractional undivided interest in:
    (1) All of the lease payments;
    (2) The residual value of all of the property leased; or
    (3) All of the lease payments and the residual value of all of the 
property leased.
    (e) Participating institution means an institution that purchases a 
lease participation originated by another lessor.
    (f) Sale with recourse means a sale of a lease or an interest in a 
lease in which the seller:
    (1) Retains some risk of loss from the transferred asset for any 
cause except the seller's breach of usual and customary warranties or 
representations designed to protect the purchaser against fraud or 
misrepresentation; or
    (2) Has an obligation to make payments to any party resulting from:
    (i) Default on the lease by the lessee or guarantor or any other 
deficiencies in the lessee's performance;
    (ii) Changes in the market value of the assets after transfer;
    (iii) Any contractual relationship between the seller and purchaser 
incident to the transfer that, by its terms, could continue even after 
final payment, default, or other termination of the assets transferred; 
or
    (iv) Any other cause, except the retention of servicing rights 
alone shall not constitute recourse.

[[Page 53586]]

Sec. 616.6100  Authority and lessee eligibility.

    (a) Facility leases. Farm Credit Banks, agricultural credit banks, 
Federal land credit associations, agricultural credit associations, and 
the Farm Credit Leasing Services Corporation may own and lease, or 
lease with option to purchase, to any person or entity that is eligible 
to borrow under Secs. 613.3000, 613.3010, or 613.3020 of this chapter, 
facilities needed in the operations of that person or entity.
    (b) Equipment leases. Farm Credit Banks, agricultural credit banks, 
production credit associations, agricultural credit associations, and 
the Farm Credit Leasing Services Corporation may own and lease, or 
lease with option to purchase, to any person or entity that is eligible 
to borrow under Secs. 613.3000, 613.3010, or 613.3020 of this chapter, 
equipment needed in the operations of that person or entity.
    (c) Equipment leases under title III of the Act. Agricultural 
credit banks, banks for cooperatives, and the Farm Credit Leasing 
Services Corporation may own and lease, or lease with option to 
purchase, to cooperatives and other entities that comply with the 
requirements of Sec. 613.3100 (b), (c), and (d) of this chapter, 
equipment needed in the operations of those cooperatives or other 
entities.
    (d) Documentation. Each institution shall adequately document that 
the leased asset is within its statutory authority to lease equipment 
or facilities.


Sec. 616.6110  Purchase and sale of interests in leases.

    (a) Authority to purchase and sell interests in leases. Leases and 
interests in leases may only be sold in accordance with each 
institution's leasing authorities, as set forth in Sec. 616.6100. No 
Farm Credit System institution may purchase from an institution that is 
not a Farm Credit System institution any interest in a lease, unless 
the interest is a participation interest that qualifies under the 
institution's leasing authority, as set forth in Sec. 616.6100, and 
meets the requirements of Sec. 616.6115.
    (b) Policies. Each Farm Credit System institution that is 
authorized to sell or purchase interests in leases under this subpart 
shall exercise that authority in accordance with a policy adopted by 
its board of directors that addresses the following matters:
    (1) The types of purchasers to which the institution is authorized 
to sell interests in leases;
    (2) The types of leases in which the institution may purchase or 
sell an interest and the types of interests which may be purchased or 
sold;
    (3) The underwriting standards to be applied in the purchase of 
interests in leases;
    (4) Such limitations on the aggregate lease payments and/or 
residual amount of interests in leases that the institution may 
purchase from a single institution as are necessary to diversify risk, 
and such limitations on the aggregate amounts the institution may 
purchase from all institutions as are necessary to assure that service 
to the territory is not impeded;
    (5) Provision for the identification and reporting of leases in 
which interests are sold or purchased;
    (6) Requirements for providing and securing in a timely manner 
adequate financial and other information needed to make an independent 
judgment; and
    (7) Any limitations or conditions to which sales or purchases are 
subject that the board deems appropriate, including arbitration.
    (c) Purchase and sale agreements. Agreements to purchase or sell an 
interest in a lease shall, at a minimum:
    (1) Identify the particular lease(s) to be covered by the 
agreement;
    (2) Provide for the transfer of lessee information on a timely and 
continuing basis;
    (3) Identify the nature of the interest(s) sold or purchased;
    (4) Set forth the rights and obligations of the parties and the 
terms and conditions of the sale; and
    (5) Contain any terms necessary for the appropriate administration 
of the lease and the protection of the interests of the Farm Credit 
System institution.
    (d) Independent judgment. Each institution that purchases an 
interest in a lease shall make a judgment on the payment ability of the 
lessee that is independent of the originating or lead lessor and any 
intermediary seller or broker prior to the purchase of the interest and 
prior to any servicing action that alters the terms of the original 
agreement, which judgment shall not be delegated to any person(s) not 
employed by the institution. A Farm Credit System institution that 
purchases a lease or any interest therein may use information, such as 
appraisals or inspections, furnished by the originating or lead lessor, 
or any intermediary seller or broker; however, the purchasing Farm 
Credit System institution shall independently evaluate such information 
when exercising its independent judgment. The independent judgment 
shall be documented by a payment analysis that considers factors set 
forth in Sec. 616.6200 and is independent of the originating 
institution and any intermediary seller or broker. The payment analysis 
shall consider such financial and other lessee information as would be 
required by a prudent lessor and shall include an evaluation of the 
capacity and reliability of the servicer. Boards of directors of 
jointly managed institutions shall adopt procedures to ensure that the 
interests of their respective shareholders are protected in 
participation between such institutions.
    (e) Limitations. The aggregate interests in lease payments or 
residual values of leases purchased from a single lead lessor and the 
aggregate interests in lease payments or residual values in leases 
purchased from other institutions shall not exceed the limits set in 
the institution's policy.
    (f) Sales with recourse. When a lease or interest in a lease is 
sold with recourse, it shall be accorded the following treatment:
    (1) The lease shall be considered, to the extent of the recourse or 
guaranty, a lease by the purchaser to the seller, as well as a lease 
from the seller to the lessee, for the purpose of determining whether 
total leases to a lessee are within the lending or leasing limits 
established in subpart J of part 614.
    (2) The amount of the lease subject to the recourse agreement shall 
be considered a lease sold with recourse for the purpose of computing 
permanent capital ratios.
    (g) Similar entity lease transactions. The provisions of 
Sec. 613.3300 of this chapter that apply to interests in loans made to 
similar entities shall apply to interests in leases made to similar 
entities. In applying these provisions, the term ``loan'' shall be read 
to include the term ``lease'' and the term ``principal amount'' shall 
be read to include the term ``lease amount.''


Sec. 616.6115  Lease participations.

    Agreements to purchase or sell a lease participation interest shall 
be subject to the provisions of Sec. 616.6110, and, in addition, shall 
satisfy the requirements of this section.
    (a) Participation agreements. Agreements to purchase or sell a 
participation interest in a lease shall, in addition to meeting the 
requirements of Sec. 616.6110(c), at a minimum:
    (1) Define the duties and responsibilities of the participating 
institution and the lead lessor, and/or the servicing institution, if 
different from the lead lessor.
    (2) Provide for lease servicing and monitoring of the servicer;
    (3) Set forth authorization and conditions for action in the event 
of lessee distress or default;

[[Page 53587]]

    (4) Provide for sharing of risk;
    (5) Set forth conditions for the offering and acceptance of the 
lease participation and termination of the agreement;
    (6) Provide for sharing of fees, and costs between participating 
institutions;
    (7) Provide for a method of resolution of disagreements arising 
under the agreement between two or more institutions;
    (8) Specify whether the contract is assignable by either party; and
    (9) Provide for the issuance of certificates evidencing an 
undivided interest in a lease.
    (b) Retention requirement. No participation interest may be 
purchased from an institution that is not a Farm Credit System 
institution unless the servicing institution has an ownership interest 
in the lease payments and/or residual amount equal to the lesser of 10 
percent of the lease payments and/or residual amount or such lesser 
amount as represents the servicing institution's leasing limit, which 
ownership interest cannot be assigned separately from the servicing 
rights.
    (c) Intrasystem participations. Leases participated between or 
among Farm Credit System institutions shall meet the lessee 
eligibility, membership, lease term, lease amount, and stock purchase 
requirements of the originating lessor.


Sec. 616.6120  Out-of-territory leasing.

    The out-of-territory consent and notification requirements of 
Sec. 614.4070 of this chapter shall apply to leases. Institutions shall 
obtain consent from at least one institution that, at the time the 
lease is executed, offers similar leasing services in the territory. 
Institutions are not required to obtain concurrence from or provide 
notification to the Farm Credit Leasing Services Corporation when 
making out-of-territory leases.

Subpart B--Leasing Operations


Sec. 616.6200  Leasing policies and underwriting standards.

    The board of each institution engaged in lease underwriting shall 
set forth written policies and procedures governing such activity that 
reflect prudent lease practices that control risk and comply with all 
applicable laws and regulations. Any leasing activity shall comply with 
the requirements under the lending policies and loan underwriting 
standards in part 614 of this chapter. Institutions engaged in the 
making, purchasing, or syndicating of leases also must establish 
written policies and procedures that address the additional risks 
associated with leasing. Written underwriting policies and procedures 
shall address the following, if applicable:
    (a) Financial condition, capacity and integrity of the applicant;
    (b) Repayment capacity of the applicant;
    (c) Appropriateness of the lease amount, purpose, and terms and 
conditions;
    (d) Establishment of a prudent residual value at the inception of 
the lease and the related process of estimating the leased asset's 
market value during the lease term;
    (e) Types of equipment and facilities the institution will lease;
    (f) Remarketing of leased property and associated risks;
    (g) Property tax and sales tax reporting;
    (h) Title and ownership of leased assets;
    (i) Title and licensing for motor vehicles;
    (j) Liability associated with ownership, including any 
environmental hazards or risks;
    (k) Insurance requirements for both the lessor and lessee;
    (l) Classification of leases in accordance with generally accepted 
accounting principles; and
    (m) Tax treatment of lease transactions and associated risks.


Sec. 616.6210  Investment in leased assets.

    An institution may acquire property to be leased, if the 
acquisition of the property is consistent with the leasing then 
conducted by the institution or is consistent with a business plan for 
expansion of the institution's existing leasing business or for entry 
into the leasing business.


Sec. 616.6220  Leasing limits.

    All leases made by Farm Credit System institutions shall be subject 
to the lending and leasing limits prescribed in subpart J of part 614 
of this chapter.


Sec. 616.6230  Portfolio limitations.

    (a) Leases that Farm Credit banks and direct lender associations 
make under Sec. 616.6100 (a) or (b) to processing or marketing 
operations shall be subject to the requirements of Sec. 613.3010(b) of 
this chapter, reading the term ``loan'' to include the term ``lease'' 
and the term ``borrower'' to include ``lessee.''
    (b) Processing and/or marketing leases that the Farm Credit Leasing 
Services Corporation makes to eligible lessees who supply, on a regular 
basis, less than 20 percent of the throughput shall be subject to the 
requirements of Sec. 613.3010 (b)(1) and (b)(3) of this chapter, 
reading the term ``lease'' in the place of the term ``loan.''


Sec. 616.6240  Stock purchase requirements.

    (a) Each System institution making an equipment lease under titles 
II or III of the Act shall require the lessee to purchase at least one 
share of stock in accordance with its bylaws, unless the lessee already 
owns stock in the institution making the lease. This provision does not 
apply to the Farm Credit Leasing Services Corporation.
    (b) The disclosure requirements of Sec. 615.5250 (a) and (b) of 
this chapter shall apply to stock purchased as a condition for 
obtaining a lease.


Sec. 616.6250  Disclosure requirements.

    (a) Each System institution shall furnish to each lessee a copy of 
all lease documents signed by the lessee in connection with the lease, 
not later than the time of lease closing.
    (b) Each System institution shall render its decision on a lease 
application in as expeditious a manner as is practical. Upon reaching a 
decision on a lease application, the institution shall provide prompt 
written notice of its decision to the applicant. Where the lessor makes 
an adverse decision on a lease application, the notice shall include 
the specific reasons for the institution's action.

PART 618--GENERAL PROVISIONS

    17. The authority citation for part 618 continues to read as 
follows:

    Authority: Secs. 1.5, 1.11, 1.12, 2.2, 2.4, 2.5, 2.12, 3.1, 3.7, 
4.12, 4.13A, 4.25, 4.29, 5.9, 5.10, 5.17 of the Farm Credit Act (12 
U.S.C. 2013, 2019, 2020, 2073, 2075, 2076, 2093, 2122, 2128, 2183, 
2200, 2211, 2218, 2243, 2244, 2252).

Subpart C--Leasing


Secs. 618.8050 and 618.8060  Subpart C [Removed and Reserved]

    18. Subpart C, consisting of Secs. 618.8050 and 618.8060, is 
removed and reserved.

PART 621--ACCOUNTING AND REPORTING REQUIREMENTS

    19. The authority citation for part 621 continues to read as 
follows:

    Authority: Secs. 5.17, 8.11 of the Farm Credit Act (12 U.S.C. 
2252, 2279aa-11).

Subpart C--Loan Performance and Valuation Assessment


Sec. 621.7  [Amended]

    20. Section 621.7 is amended by removing the reference 
``Sec. 614.4358(a)(2)'' and adding in its place, the reference 
``Sec. 614.4359(a)(2)'' in paragraph (a)(2)(iii).


[[Page 53588]]


    Dated: October 8, 1997.
Floyd Fithian,
Secretary, Farm Credit Administration Board.
[FR Doc. 97-27146 Filed 10-14-97; 8:45 am]
BILLING CODE 6705-01-P


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