This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

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

The Code of Federal Regulations is sold by

the Superintendent of Documents. Prices of

new books are listed in the first FEDERAL

REGISTER issue of each week.

Rules and Regulations Federal Register

36541

Vol. 63, No. 129

Tuesday, July 7, 1998

1As used in this preamble, references to Farm

Credit banks apply only to FCBs and ACBs.

Although the bank for cooperatives is also a System

bank, it lacks statutory authority to finance the OFIs

identified in section 1.7(b) of the Act.

FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 614, 620, and 630

RIN 3052–AB67

Organization; Loan Policies and

Operations; Disclosure to

Shareholders; Disclosure to Investors

in Systemwide and Consolidated Bank

Debt Obligations of the Farm Credit

System; Other Financing Institutions

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit

Administration (FCA or Agency),

through the FCA Board (Board), issues

a final rule amending its regulations that

govern the funding and discount

relationship between Farm Credit

System (Farm Credit, FCS, or System)

banks that operate under title I of the

Farm Credit Act of 1971, as amended

(Act), and non-System other financing

institutions (OFIs). The final rule

substantially expands access to System

funding so OFIs can provide more shortand intermediate-term credit to parties

who are eligible to borrow under

sections 2.4(a) and (b) of the Act. The

FCA has repealed several non-statutory

limits on OFI eligibility. The final rule

assures access to any creditworthy OFI

that is significantly involved in

agricultural lending and demonstrates a

continuing need for funds to serve its

agricultural borrowers. Under certain

circumstances, OFIs may seek financing

from a Farm Credit Bank (FCB) or

agricultural credit bank (ACB) other

than the System bank that is chartered

to serve its territory. The final rule

requires FCBs and ACBs to finance OFIs

only on a fully secured basis and to

have full recourse to the OFI’s capital.

EFFECTIVE DATE: This regulation shall

become effective 30 days after

publication in the Federal Register

during which either or both houses of

Congress are in session. Notice of the

effective date will be published in the

Federal Register.

FOR FURTHER INFORMATION CONTACT: Eric

Howard, Policy Analyst or S. Robert

Coleman, Senior Policy Analyst,

Regulation and Policy Division, Office

of Policy Analysis, Farm Credit

Administration, McLean, VA 22102–

5090, (703) 883–4498,

or

Richard A. Katz, Senior Attorney,

Regulatory Enforcement Division,

Office of General Counsel, Farm

Credit Administration, McLean, VA

22102–5090, (703) 883–4020, TDD

(703) 883–4444.

SUPPLEMENTARY INFORMATION: This final

rule completes a 2-year effort by the

FCA to revise these regulations so that

farmers, ranchers, and other eligible

rural residents have greater access to

credit through OFIs that are financed by

FCBs and ACBs. On May 17, 1996, the

FCA published an Advance Notice of

Proposed Rulemaking seeking

comments on how these regulations

could be more responsive to the credit

needs of OFIs and their borrowers. See

61 FR 24907. In response to these

comments, the FCA proposed a rule that

substantially revised the regulations in

subpart P of part 614. See 62 FR 38223

(July 17, 1997). After considering the

comments received, the FCA Board

adopts a final rule that provides greater

opportunities for OFIs to obtain funding

from FCS banks so they can finance

agriculture, aquaculture, and other

specified rural credit needs.

Sixteen comment letters were

received in response to the proposed

rule. Of this total, comments were

received from 4 trade associations, 5

FCS banks (one comment letter came

from 2 FCS banks that are jointlymanaged), 4 System direct lender

associations, a federation representing

System production credit associations

(PCAs), a commercial bank, a

commercial bank holding company, and

an existing OFI. Four trade associations

submitted comments on behalf of their

members: the American Bankers

Association (ABA); the Independent

Bankers Association of America (IBAA);

the North Dakota Bankers Association

(NDBA); and the Farm Credit Council

(Council).

The comment letters revealed a

diverse range of views about OFI access

to System funding. All System direct

lender association commenters, except

one, opposed any revision to the

existing OFI regulation because of their

concerns over competition. One

commercial bank supported the

proposed rule and urged the FCA to

adopt it as a final rule without revision.

Three commercial bank trade

associations recognized the FCA’s

efforts to improve OFI access to System

funding, but they recommended

modifications to the rule. The remaining

commenters focused on specific issues

that were important to their institutions.

Commercial bank trade associations

opined that the FCA’s regulatory

proposal made progress toward granting

OFIs more access to System funding.

However, these commenters believe that

several provisions of the statute

discourage many commercial banks

from becoming OFIs. The most

commonly cited statutory impediments

to greater commercial bank participation

in this program include: (1) No

authority for OFIs to obtain System bank

funding 1 for long-term mortgages; (2)

lack of OFI representation on the boards

of FCS funding banks; and (3) the need

to offer borrower rights. For these

reasons, the commenters again asked the

FCA to support legislative initiatives

that would remodel the FCS so it is

similar to the Federal Home Loan Bank

System. As the commenters

acknowledge, the existing statute does

not enable the FCA to accommodate

some of their requests, and therefore,

these issues are not addressed by this

rulemaking.

Several PCA commenters expressed

concern that expanded OFI access

would place them at a competitive

disadvantage. These commenters asked

the FCA to enact regulations that

provide PCAs with more business

opportunities before final OFI

regulations are adopted. Although

several commenters stated that PCAs

cannot effectively compete with OFIs

until their intermediate-term lending

authorities are expanded, section 1.10(b)

of the Act establishes the maximum

timeframe for intermediate-term loans.

The FCA has considered the concerns

of the commenters and adopts a final

rule that balances the needs of these

parties. The final rule incorporates
36542 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations

2See H.R. 96–1287, 96th Cong., 2d. Sess., (1980),

21, 32–34. See also 126 Cong. Rec. H 10960–64

(daily ed. Nov. 19, 1980).

many of the commenters’ suggestions

and promotes a safe and sound lending

relationship between System funding

banks and their OFIs. The changes

increase availability of credit to farmers,

ranchers, aquatic producers and

harvesters, and other eligible rural

borrowers.

I. OFI Access

A. Proposed Rule and Comments

The FCA proposed a two-tier

approach for OFIs to establish their

eligibility for a funding and discount

relationship with a System bank. Under

§ 614.4540(a), any financial institution

that operates under one of the charters

specified in section 1.7(b)(1)(B) of the

Act may borrow from an FCB or ACB.

Additionally, § 614.4540(b) assures

access to creditworthy OFIs that have at

least 15 percent of their loans to

agricultural or aquatic producers and

enter into a 2-year funding agreement

with an FCB or ACB. The regulations

require OFIs to use System funding only

to extend short- and intermediate-term

credit to eligible persons for authorized

purposes under sections 1.10(b) and

2.4(a) and (b) of the Act. This new

approach enables more OFIs to borrow

from System banks, and as a result,

farmers and ranchers should have

greater access to affordable and

dependable credit.

The FCA proposed to repeal the

following eligibility provisions of the

existing regulations that are not required

by the Act:

• The 60-percent loan-to-deposit ratio

for OFIs that are depository institutions;

• The requirement that OFIs

primarily use locally generated funds

for lending operations;

• The automatic denial of access to

any entity that primarily finances the

sale of products by its affiliates;

• Consideration of an OFI applicant’s

relationship with its affiliates and

subsidiaries; and

• A mandatory non-use fee for OFIs

that fail to maintain a specified average

daily loan balance.

The FCA received comments on

proposed § 614.4540 from the ABA,

IBAA, NDBA, and the Council. These

commenters supported the repeal of the

non-statutory OFI eligibility criteria that

are identified above. The final rule

repeals these provisions.

Although all four trade associations

supported greater OFI access to System

funding, they expressed differing views

on the need to modify proposed

§ 614.4540. The NDBA supported the

two-tier approach for OFI access. The

Council requested that the FCA amend

the regulation so it expressly conveys

that System funding banks have

discretion to deny the credit application

of any OFI that is not covered by

§ 614.4540(b).

The ABA and IBAA requested

amendments that would favor their

respective constituencies. The IBAA

believes that the regulation should favor

small, rural community banks whereas

the ABA opined that all banks that

provide agricultural credit should be

entitled to System funding. The IBAA

commented that no lender should be

granted access to the FCS unless

agricultural loans comprise at least 10

percent of its loan portfolio. Although

the IBAA supports the 15-percent

threshold for assured access, it believes

that OFIs that meet this criterion should

be entitled to preferred status and

special benefits, such as the lowest cost

of funds from System banks and greater

flexibility concerning collateral

requirements. In contrast, the ABA

suggested that any commercial bank

should be assured access under final

§ 614.4540(b) if agricultural loans

comprise at least 10 percent of its loan

portfolio, or exceed a fixed dollar

amount, such as $5,000,000. In the

ABA’s view, the final rule should

include a fixed dollar threshold because

agricultural loans often comprise a

small percentage of the loan portfolios

of large commercial banks that are major

providers of agricultural credit. This

commenter believes that these large

commercial banks deserve assured

access to System funding.

The ABA also asked the FCA to

reorganize proposed § 614.4540. The

commenter suggested that the FCA

relocate the provisions in proposed

§ 614.4540(b) that enable FCBs and

ACBs to deny the funding requests of

OFIs that are assured access to

§ 614.4540(c), which governs denials.

The ABA stated that this change would

clearly communicate the FCA’s

expectations to System banks and make

this regulation more user-friendly.

The IBAA requested that the FCA

assume a more active role in collecting

and reporting information about the

efforts of each System bank to provide

agricultural credit through OFIs.

Specifically, the commenter suggested

that the FCA appoint an Ombudsman to

review complaints by OFIs.

Additionally, the IBAA recommended

that the FCA’s Annual Report contain

comprehensive information about the

number of OFI applications, the number

of funding requests that are either

approved or denied, a summary of the

reasons for denial, and the total amount

of funds that System banks advance to

OFIs. The IBAA also asked that the final

regulations require outside board

members to represent OFI interests and

establish target goals for the minimum

number of new commercial bank OFIs

that each System bank will approve

every year.

B. Final Rule

Final § 614.4540 retains the two-tier

approach to OFI eligibility as proposed.

The FCA continues to believe that this

regulatory approach best implements

the requirements of the Act. Section

1.7(b) of the Act and its legislative

history indicate that Congress intended

that Farm Credit banks primarily

provide financial assistance to small,

local OFIs, but it did not exclude other

agricultural creditors from this

program.2

The FCA was not persuaded by the

IBAA’s request to exclude large

financial institutions and the ABA’s

request to grant most large commercial

banks the same assured access to FCS

funding as small, local OFIs.

Accordingly, the FCA does not adopt

the IBAA’s recommendation to amend

§ 614.4540(a) so that OFI applicants are

automatically denied access to FCS

funding if agricultural loans comprise

less than 10 percent of their loan

portfolios. In addition, the final

regulation does not incorporate the

ABA’s request that final § 614.4540(b)

grant assured access to OFIs that have

at least $5,000,000 or 10 percent of their

loan portfolio in agricultural loans. The

FCA emphasizes that the final

regulation allows any institution,

including large financial institutions, to

fund or discount their agricultural loans

with an FCB or ACB, but it does not

assure access to creditworthy OFIs

unless they have at least 15 percent of

their loans in agriculture and enter into

a 2-year funding relationship. The FCA

continues to believe that the 15-percent

threshold is the best measure of whether

an OFI is significantly involved in

agricultural or aquatic lending, as

section 1.7(b)(4)(B)(i) of the Act

requires.

The IBAA requested that the final

regulation require FCBs and ACBs to

provide the lowest cost of funds and

other special benefits to OFIs that are

entitled to assured access. This request

would unnecessarily involve the

regulator in the daily business decisions

of System banks. Additionally, final

§ 614.4590 requires Farm Credit banks

to treat their OFIs equitably and to

determine loan rates through an

objective process. The FCA believes that

System funding banks should retain
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations 36543

discretion to negotiate the price of

funding and other loan terms with OFIs.

The final rule fulfills the FCA’s

responsibility to ensure that FCBs and

ACBs abide by their statutory mission to

finance creditworthy OFIs in a safe and

sound manner.

Many of the ABA’s suggestions for

reorganizing § 614.4540 have been

incorporated into the final rule. The

FCA adopts proposed § 614.4540(a) as a

final regulation, without revision. This

provision allows FCBs and ACBs to

fund and discount short- and

intermediate-term agricultural, aquatic,

processing and marketing, farm-related

business, and rural home loans for any

financial institution that operates under

a charter specified in section 1.7(b)(1)(B)

of the Act. As amended, final

§ 614.4540(b) grants assured access to

creditworthy OFIs that maintain at least

15 percent of their loan volume to

agricultural and aquatic producers and

enter into a 2-year funding or discount

relationship with an FCB or ACB. Final

§ 614.4540(c) retains the requirement in

the proposed regulation that FCBs and

ACBs establish objective policies and

loan underwriting standards for

determining the creditworthiness of

each OFI applicant. Under final

§ 614.4540(d), FCBs and ACBs can deny

the funding requests of creditworthy

OFIs that satisfy the conditions in

§ 614.4540(b) only if such requests: (1)

Adversely affect the Farm Credit bank’s

ability to achieve and maintain

established or projected capital levels or

raise funds in the money markets; or (2)

otherwise expose the Farm Credit bank

to safety and soundness risks. The

Council requested that the FCA amend

§ 614.4540(a) so it expressly conveys

that System funding banks have

discretion to deny the credit application

of any OFI that is not assured access.

This revision is unnecessary because

§ 614.4540(c) requires FCBs and ACBs

to develop loan underwriting standards

for all OFI applicants. As a result, the

framework of this regulation provides

FCS banks appropriate discretion, under

their policies and loan underwriting

standards, to deny the funding requests

of OFIs that are not assured access.

Commercial bank trade associations

commented that the proposed regulation

did not require System funding banks to

explain their reason for denying an

OFI’s application. In response to this

concern, the FCA adds § 614.4540(e)

that requires System banks to

expeditiously process all OFI funding

requests and to promptly provide all

applicants written notification of the

credit decision. Additionally, System

banks must provide the applicant with

specific reasons for any adverse credit

decision.

In response to the IBAA’s

recommendation about comprehensive

reporting on OFIs, the FCA adds new

§ 614.4540(f), which requires the board

of directors of each FCB and ACB to

receive annual written reports about the

scope of their OFI program activities

during the preceding fiscal year. The

FCA expects that these annual reports

will identify:

• The number of OFI applicants by

category (such as commercial banks,

credit unions, agricultural credit

corporations, etc.);

• The number of approved and

denied OFI applications;

• A summary of the reasons for

denying OFI applications;

• The total amount of funds advanced

to OFIs; and

• Other information necessary to

evaluate the success of the System

bank’s OFI program.

Periodically, the FCA may issue

special calls for this information.

The FCA does not adopt the IBAA’s

request to appoint an OFI Ombudsman

because there are more efficient ways

for the FCA to address concerns that

OFIs may raise. The FCA Board does not

accept the IBAA’s request that the

Agency appoint outside board members

to represent OFI interests and to

establish target goals for OFI lending.

The FCA has no authority under the Act

to appoint directors to the boards of

Farm Credit banks. In further response

to the IBAA, the Agency believes that

this rule offers FCS banks sufficient

business incentives to extend more

credit to OFIs. Additionally, a

creditworthy OFI has the option to seek

funding from another System funding

bank if its designated FCB or ACB

denies or fails to approve its

application.

II. Place of Discount

Proposed § 614.4550 addresses place

of discount for OFIs. Proposed

§ 614.4550(a) specifies that an FCB or

ACB provide funding, discount and

other financial assistance to any OFI

whose headquarters is located within

the funding bank’s chartered territory.

Under proposed § 614.4550(b), an FCB

or ACB could finance an OFI whose

headquarters is not located in its

chartered territory if the System funding

bank identified in § 614.4550(a)

consents, denies the OFI’s application,

or otherwise fails to approve the

funding request pursuant to Regulation

B of the Board of Governors of the

Federal Reserve System, 12 CFR

202.2(f).

The ABA, IBAA, NDBA, three FCBs

and two PCAs commented on the place

of discount rule. AgFirst FCB supported

the FCA’s proposal. This commenter

believes that the proposal best enables

FCS banks to fund OFIs in today’s

market. The IBAA suggested that the

FCA modify its proposal to allow an OFI

that is dissatisfied with its System

funding bank to seek financing from any

other FCB or ACB. The ABA and the

NDBA urged the FCA to remove all

geographic restrictions on place of

discount. These commenters believe

that geographic restrictions hamper the

success of the OFI program because

non-System financial institutions are

required to seek funding from a System

bank that is owned and controlled by

their competitors. The FCB of Texas

asserted that the existing regulation

governing place of discount is sound

and should not be changed. The

commenter believes that the FCA’s

proposal will ultimately lead to unsafe

and unsound competition between FCS

banks for OFI business. The FCB of

Texas opposed the proposal to make an

OFI’s headquarters the sole factor to

determine the place of discount. Finally,

two PCAs made the FCA aware of their

concerns that associations lack similar

opportunities to seek funding from other

FCBs or ACBs. After the comment

period expired, the FCA received an

inquiry from an FCB about whether

existing OFIs would be required to

change their place of discount once the

proposed regulation became final.

The FCA Board believed the proposed

rule established a balanced approach

concerning the place of discount for

OFIs. Traditionally, OFIs have been

required to establish a funding or

discount relationship with a System

bank owned and controlled by their

competitors. Several commenters

believe that this factor explains why the

program has not been widely used by

commercial banks and other potential

OFIs. The FCA has addressed this

concern by proposing a regulation that

provides additional flexibility

concerning place of discount to OFI

applicants.

The FCA believes that some

limitations on the place of discount for

OFIs are appropriate because FCS

charters specify territories that System

institutions serve. Direct lender

associations do not have the same

options to obtain financing from other

FCBs and ACBs, and therefore, the

recommendations of the three

commercial bank trade associations

would not treat FCS direct lender

associations fairly. Additionally, the

ABA’s and NDBA’s suggestion would

deny an FCB or ACB the first
36544 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations

opportunity to finance OFIs operating in

its chartered territory. The final rule

permits OFIs to apply to any System

funding bank after the designated FCS

bank rejects or fails to approve the OFI’s

application. The FCA was not

persuaded by the FCB of Texas’

argument that changes to the place of

discount rule will lead to destructive

competition that will ultimately

undermine the safety and soundness of

the FCS.

In response to the comments, the FCA

has modified proposed § 614.4550 to

provide additional flexibility regarding

an OFI’s place of discount. The final

regulation continues to require OFIs to

apply first to the FCS bank that serves

the territory where the OFI operates.

The FCA recognizes that some OFIs

operate in the chartered territory of two

or more FCS banks. Under the final

regulation, an OFI may select the FCS

funding bank that serves the territory

where the OFI is headquartered, or

alternatively, where more than 50

percent of the OFI’s outstanding loan

volume is concentrated.

If the designated funding bank denies,

or otherwise fails to approve an OFI’s

completed application within 60 days,

final § 614.4550(b) allows the OFI to

apply to any other FCB or ACB. Under

final § 614.4550(c), the designated FCS

bank may also grant an OFI its consent

to seek financing from any other System

funding bank. The FCA has

redesignated this consent provision as

final § 614.4550(c) to enhance the clarity

of the regulation. A new provision,

§ 614.4550(d), states that an OFI is not

required to terminate an established

funding or discount relationship with

its System funding bank if the OFI

subsequently relocates its headquarters

or experiences a shift in its loan volume

concentration.

As mentioned earlier, the FCB of

Texas urged the FCA to retain the

existing regulation on place of discount.

However, the FCB of Texas asked the

FCA to consider three alternatives if the

final regulation allows OFIs to seek

funding from other FCS banks. First, the

commenter requested that the FCA

modify the regulation to provide the

designated FCS bank with the ‘‘right of

first refusal’’ for any lending agreement

that an OFI negotiated with another

System bank. Second, the commenter

wanted the FCA to determine whether

another FCS bank should be permitted

to finance each OFI that has been

denied credit from the designated

System bank for safety and soundness

reasons. Finally, the FCB of Texas asked

the FCA to clarify that the regulation

prohibits an OFI from ‘‘shopping’’ FCS

banks for funding on a loan-by-loan

basis. The commenter sought

confirmation that the regulation does

not allow an existing OFI to fund or

discount individual loans with another

System bank if its funding bank rejects

those same loans.

The FCA believes a specific ‘‘right of

first refusal’’ is unnecessary because the

designated System bank will have

already denied or failed to approve the

OFI’s initial application. The

requirement that an OFI first seek

funding from its designated bank is the

equivalent of a ‘‘right of first refusal.’’ In

response to the commenter’s second

request, the FCA need not determine

whether another FCB or ACB can

finance an OFI that has been denied

credit by its designated funding bank

because § 614.4540(c) requires each FCB

and ACB to establish its own objective

policies and loan underwriting

standards for determining an OFI

applicant’s creditworthiness. The FCA

will examine the extension of credit to

OFIs in the same context of safety and

soundness as it does other risks held in

the funding bank’s portfolio. The FCA

clarifies that the regulation does not

permit an OFI to ‘‘shop’’ for FCS

funding on a loan-by-loan basis because

§ 614.4560(a)(1) requires all OFIs to

execute a general financing agreement

(GFA) to establish a funding or discount

relationship with a System funding

bank. Under the circumstances,

§ 614.4550(b) applies to the overall

relationship between an FCB or ACB

and the OFI, not a specific discounted

loan.

III. Requirements for OFI Funding

Relationships

Proposed § 614.4560 implements

several statutory provisions that govern

the funding and discount relationship

between OFIs and System funding

banks. More specifically, each OFI is

required to: (1) Execute a GFA with its

System funding bank; (2) purchase nonvoting stock in the System funding bank

pursuant to the bank’s bylaws; (3)

extend credit only to parties and for

purposes that are authorized by sections

1.10(b) and 2.4(a) and (b) of the Act; (4)

adhere to portfolio limitations on nonfarm rural home loans and certain

processing and marketing loans; and (5)

comply with statutory and regulatory

borrower rights requirements for all

agricultural and aquatic loans that an

FCB or ACB funds or discounts.

Additionally, proposed § 614.4560(e)

implements section 5.21 of the Act,

which enables the FCA to examine nondepository OFIs and obtain examination

reports from the State regulators of

commercial banks, trust companies, and

savings associations. Under this

regulatory provision, OFIs are required

to execute the applicable consent forms

or releases before they obtain financing

from an FCB or ACB. Section 5.22 of the

Act enables the FCA to receive

examination reports directly from other

Federal regulatory agencies.

The FCA proposed to repeal existing

§ 614.4650, which contains five criteria

for a System funding bank to revoke or

suspend an OFI’s line of credit. The

FCA expects each FCS bank to

incorporate criteria for revoking or

suspending its funding relationship

with an OFI into its policies and loan

underwriting standards. This issue

should also be addressed in the GFA

between an OFI and the System funding

bank.

The FCA received only one comment

about proposed § 614.4560. The IBAA

commented that the FCA should

establish general guidelines for FCBs

and ACBs to follow when they negotiate

GFAs with their OFIs. Additionally, the

commenter suggested that the FCA

consult with OFIs to develop a model

GFA.

The FCA recently adopted a GFA rule

that eliminated Agency prior-approval

of GFAs. See 63 FR 12401, March 13,

1998. The new rule addresses the

IBAA’s concerns because they provide

general guidelines for developing GFAs

between System funding banks and

OFIs. However, the FCA does not

believe it should interfere in the

business operations of System banks by

negotiating with OFIs to develop a

model GFA. The FCA adopts proposed

§ 614.4560 as a final regulation.

IV. Recourse and Security

Requirements

Proposed § 614.4570 would prohibit

any FCB or ACB from extending credit

to an OFI on an unsecured, limited, or

non-recourse basis. Proposed

§ 614.4570(a) requires an OFI to endorse

all obligations that it funds or discounts

through an FCB or ACB with full

recourse or its unconditional guarantee.

Proposed § 614.4570(b)(1) requires each

OFI to pledge all notes, drafts, and other

obligations that are funded or

discounted with the FCB or ACB as

collateral for the credit extension.

Proposed § 614.4570(b)(2) obligates each

FCB or ACB to perfect its security

interest in such obligations and the

proceeds thereunder in accordance with

applicable State law.

A. Full Recourse

An existing OFI, the Council, and two

jointly managed FCBs opposed the full

recourse requirement in § 614.4570(a).

The existing OFI commented that the

full recourse requirement would
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations 36545

seriously jeopardize any new

opportunities that the new regulation

creates for expanded OFI access. One of

the jointly managed FCBs expressed

concern about how the full recourse

requirement in the proposal would

affect its relationship with an existing

OFI and potential opportunities to

finance new OFIs in the future. The

Council believes recourse to an OFI’s

capital should be subject to negotiation

between the parties, and each System

bank’s loan underwriting standards

should address this issue.

From a safety and soundness

perspective, FCBs and ACBs need full

recourse to an OFI’s capital in the event

of default. Full recourse is necessary

because the final rule significantly

expands OFI access to the FCS and it

repeals many existing regulatory

restraints on the funding and discount

relationship between System banks and

their OFIs. Section 1.7(b)(3)(A) of the

Act prohibits a System bank from

funding an OFI if its aggregate liabilities

exceed ten times its paid-in and

unimpaired capital and surplus. In light

of this statutory safety and soundness

requirement, the FCA believes that it is

prudent for FCS banks to have full

recourse to an OFI’s capital.

Additionally, the regulations in 12 CFR

part 615, subpart H, require FCS lenders

to hold sufficient capital as a cushion

against risk in all loans. Full recourse to

an OFI’s capital strengthens the FCS

funding bank’s risk-bearing capacity.

System funding banks are required to

have full recourse to the capital of direct

lender associations. Since OFIs have

access to other sources of funds, they

may expose System funding banks to

greater risk of loss than direct lender

associations.

B. Security

The FCA received comments from the

ABA, IBAA, and the Council about the

security OFIs are required to pledge

under proposed § 614.4570(b). The ABA

and the IBAA requested that the final

regulation provide OFIs with additional

flexibility to pledge other types of

collateral to their FCS funding bank.

The ABA opposed § 614.4570(b)

because it requires OFIs to pledge all

loans that are actually funded by the

FCS bank as primary collateral. The

commenter believes the requirement is

particularly burdensome due to the

tracking and recordkeeping that it

entails. The ABA recommended that an

OFI be allowed to pledge unrelated

agricultural loans as collateral. The

Council commented that loan perfection

should be determined by the FCS

funding bank’s underwriting standards.

The security requirements of

§ 614.4570(b) ensure compliance with

two sections of the Act. First, section

1.7(b) of the Act requires OFIs to use

funds from a title I bank only for the

purpose of extending short- and

intermediate-term credit to eligible

borrowers for authorized purposes

under section 2.4(a) and (b) of the Act.

Second, OFIs are required to track

which loans are funded or discounted

through the FCB or ACB funding

relationship to ensure compliance with

the borrower rights requirements of the

Act. In light of these statutory

requirements, the FCA does not adopt

the ABA’s suggestion to allow an OFI to

pledge other agricultural loans as

primary collateral to a System funding

bank. However, § 614.4570(c) permits

System funding banks to accept longterm mortgages on agricultural assets as

supplemental collateral. Final

§ 614.4570(b)(2) requires that FCBs and

ACBs perfect, in accordance with State

law, a senior security interest in any and

all obligations that an OFI pledges as

collateral.

In summary, the FCA’s new

regulatory approach for OFI financing

affords OFIs greater flexibility and

additional access to the FCS. To ensure

the safe and sound implementation of

the OFI program, the FCA adopts

proposed § 614.4570 as a final

regulation without revision.

V. Limitation on the Extension of

Funding, Discount and Other Similar

Financial Assistance to an OFI

Proposed § 614.4580 derives from

section 1.7(b)(3) of the Act. This

statutory provision prohibits a System

funding bank from extending credit to

an OFI if its aggregate liabilities exceed

ten times its paid-in and unimpaired

capital and surplus, or a lesser amount

established by the laws of the

jurisdiction creating the OFI.

The IBAA commented that the FCA

should discourage FCBs and ACBs from

establishing less than a 10:1 capital

ratio, except under rare circumstances.

The commenter expressed concerns that

a more stringent capital requirement

could raise an OFI’s cost of borrowing

from the System, and make this program

less attractive to potential OFI

applicants.

The FCA expects each FCB and ACB

to develop loan underwriting standards

that address OFI capital requirements.

Compliance with these loan

underwriting standards are the basis for

determining safety and soundness in

credit extensions. The FCA believes

System banks need the flexibility to

tailor underwriting standards to manage

the risks from OFIs, based on the banks’

risk-bearing capacity. As a safety and

soundness regulator, the FCA will not

preclude FCBs and ACBs from

establishing a capital requirement that is

more stringent than the 10:1 ratio in the

statute. However, the final rule requires

FCS funding banks to treat OFIs

equitably in this and other matters. The

FCA adopts proposed § 614.4580 as a

final regulation.

VI. Lending Limit to a Single OFI

Borrower

The FCA proposed to eliminate the

existing regulatory lending limit on

extensions of credit that OFIs make to

their borrowers with FCS funds. The

proposal acknowledged that some OFIs

will remain subject to the lending limit

that their primary regulator imposes

under applicable Federal or State law.

Additionally, the FCA expects each FCB

or ACB to prudently manage the risk

exposure caused by concentrations in

OFI loan portfolios through its loan

underwriting standards and the GFA.

The FCA solicited commenters’ views

on whether the final rule should contain

a lending limit on extensions of credit

that an OFI makes to its borrowers with

FCS funds. Additionally, the FCA

requested suggestions for other

approaches to manage and control risks

originating through OFI lending

relationships.

The ABA, IBAA, and the Council

supported the repeal of the existing 50-

percent lending limit on OFI borrowers.

These commenters advised the FCA that

the repeal of the lending limit would

enhance the Farm Credit banks’ ability

to finance OFIs. These trade

associations also claimed that the repeal

of existing § 614.4565 would not imperil

the safety and soundness of System

banks that maintain adequate loan

underwriting standards. The IBAA

requested that the final regulation

prohibit FCBs and ACBs from

establishing a lending limit below 50

percent. The IBAA also expressed

concern that the FCA’s proposal would

impose the Federal or State lending

limit on the affiliates and subsidiaries of

regulated financial institutions.

As the FCA originally proposed, the

final rule repeals the lending limit in

existing § 614.4565. In response to the

IBAA, the FCA observes that OFIs

remain subject to any lending limit

imposed by Federal or State law. If the

OFI is not subject to a Federal or State

lending limit, the funding banks’

underwriting standards and the GFA

will address single borrower

concentration risks in the OFI’s

portfolio. The FCA rejects the IBAA

suggestion that the final rule prohibit

FCBs and ACBs from establishing a
36546 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations

lending limit of less than 50 percent

because it is inconsistent with safety

and soundness. The underwriting

standards of each Farm Credit bank

should ensure that concentrations in an

OFI’s loan portfolio do not expose the

bank to unacceptable levels of risk.

VII. Equitable Treatment of OFIs and

FCS Associations

Proposed § 614.4590 promotes the

equitable treatment of OFIs and direct

lender associations. Proposed

§ 614.4590(a) would require FCBs and

ACBs to apply objective loan

underwriting standards for both types of

borrowers. Under proposed

§ 614.4590(b), the total charges a Farm

Credit bank assesses an OFI must be

comparable to the charges it imposes on

direct lender associations. Furthermore,

any variation in funding costs must be

attributed to differences in credit risk

and administrative costs.

The IBAA and the NDBA commented

on proposed § 614.4590. According to

the IBAA, references to ‘‘similar’’

underwriting standards and

‘‘comparable’’ overall cost of funds in

the proposed regulation grants System

banks too much discretion. The IBAA

asserts that the interest rates and the

overall cost of funds should be equal for

both OFIs and direct lender

associations. For this reason, the

commenter believes that the final

regulation should require System banks

to disclose pricing information about

their loans to FCS direct lender

associations. According to the IBAA,

‘‘equal treatment’’ entails lower stock

purchase requirements and mandatory

dividend payments to OFIs because they

are not afforded voting rights and other

privileges. The NDBA commented that

the final rule should require FCBs and

ACBs to adopt ‘‘objective and uniform

underwriting standards and pricing

requirements.’’

The FCA observes that there are

fundamental differences between OFIs

and direct lender associations. These

differences make it difficult to compare

the treatment of these two types of

financial institutions. The following

factors illustrate some of the basic

differences between OFIs and direct

lender associations that preclude

identical treatment:

• OFIs have access to several funding

sources whereas direct lender

associations are required to borrow from

their designated funding bank.

• Direct lender associations have

significant amounts of capital invested

in their System funding bank, but most

OFIs do not.

• As part of a cooperative system,

direct lender associations share in

System gains and losses. In contrast,

OFIs have limited exposure to System

losses in the FCS.

• Administrative costs for funding a

direct lender association and an OFI

differ because OFIs are not required to

maintain a long-term commitment with

an FCB or ACB.

Under these circumstances, the

regulations can only require FCBs and

ACBs to treat OFIs and direct lender

associations equitably, but not equally.

The FCA expects System funding banks

to treat similarly situated associations

and OFIs comparably. Any variation in

the overall amounts that System funding

banks charge OFIs and direct lender

associations for capitalization

requirements, interest rates, and fees

shall be attributed to differences in

credit risk and administrative costs.

The FCA does not adopt any of the

IBAA’s suggestions for revising this

regulation. The final regulation does not

require dividend payments to OFIs, or

establish OFI investment levels in

System funding banks because the FCA

regulations do not impose business

practices on FCS institutions in the

absence of compelling public policy or

safety and soundness reasons. The final

regulation does not compel FCS funding

banks to charge identical rates to OFIs

and FCS direct lender associations, and

therefore, it is unnecessary for FCBs and

ACBs to disclose pricing information for

direct lender associations.

The FCA finds merit in the NDBA’s

suggestion that § 614.4590(a) should

require FCBs and ACBs to establish

comparable and objective loan pricing

standards for both OFIs and direct

lender associations. Accordingly, the

FCA has incorporated this revision into

final § 614.4590(a). Additionally, the

FCA substitutes ‘‘comparable’’ for

‘‘similar’’ in final § 614.4590(a) so that

the language used throughout this

regulation is consistent.

VIII. Miscellaneous Issues

A. Association Funding of OFIs

One association asked the FCA to

clarify that PCAs and agricultural credit

associations can establish and manage

OFI relationships on authority delegated

by their System banks. The commenter

observed that such a program,

established under System bank

guidelines, would become a natural

adjunct to the participation authorities

that associations now exercise.

Although the Act authorizes only FCBs

and ACBs to provide funding to OFIs,

the FCA believes that direct lender

associations have considerable

opportunities for involvement in their

funding bank’s OFI relationships.

Indeed, as funding banks have

increasingly become wholesale lenders,

associations may be in a position to

recruit OFIs, assess the risk in the retail

loans or collateral, and service the credit

relationship on behalf of the bank.

Through their participation authorities,

associations may form effective

alliances with other agricultural lenders

for the benefit of farmers and ranchers.

B. Small Business Investment

Companies

A commercial bank holding company

commented that the final regulation

should permit Small Business

Investment Companies (SBICs) to

participate in the OFI program.

According to the commenter, SBICs and

similar state-chartered entities need

access to additional stable pools of

funds to support their agricultural

lending operations. The commenter also

suggested that the FCA follow the lead

of the Federal Housing Finance Board

and permit System banks to invest

directly in SBICs.

SBICs do not qualify as OFIs because

they do not have one of the charters

specified in section 1.7(b)(1)(B) of the

Act. Additionally, Federal and State

laws effectively preclude SBICs from

participating in the OFI program. As a

result, the final regulation does not

allow SBICs to become OFIs.

The OFI regulations do not implement

the investment authorities of FCS banks

under sections 1.5(15) and 3.1(13)(A) of

the Act. An existing investment

regulation, § 615.5140, does not

authorize System banks to invest in

SBIC equities. However, the FCA

recently proposed amendments to

§ 615.5140, and the Agency will

consider the commenter’s request when

it deliberates on the final investment

regulation.

C. Insolvency

The FCA received no comments about

proposed § 614.4600, which governs the

insolvency of OFIs. The FCA adopts

proposed § 614.4600 as a final rule.

List of Subjects

12 CFR Part 611

Agriculture, Banks, Banking, Rural

areas.

12 CFR Part 614

Agriculture, Banks, Banking, Flood

insurance, Foreign trade, Reporting and

recordkeeping requirements, Rural

areas.

12 CFR Part 620

Accounting, Agriculture, Banks,

Banking, Reporting and recordkeeping

requirements, Rural areas.
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations 36547

12 CFR Part 630

Accounting, Agriculture, Banks,

Banking, Credit, Organization and

functions (Government agencies),

Reporting and recordkeeping

requirements, Rural areas.

For the reasons stated in the

preamble, parts 611, 614, 620, and 630

of chapter VI, title 12 of the Code of

Federal Regulations are amended to

read as follows:

PART 611—ORGANIZATION

1. The authority citation for part 611

continues to read as follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0,

3.21, 4.12, 4.15, 4.21, 5.9, 5.10, 5.17, 7.0–

7.13, 8.5(e) of the Farm Credit Act (12 U.S.C.

2011, 2021, 2071, 2091, 2121, 2142, 2183,

2203, 2209, 2243, 2244, 2252, 2279a–2279f–

1, 2279aa–5(e)); secs. 411 and 412 of Pub. L.

100–233, 101 Stat. 1568, 1638; secs. 409 and

414 of Pub. L. 100–399, 102 Stat. 989, 1003,

and 1004.

Subpart P—Termination of Farm Credit

Status—Associations

2. Section 611.1205 is amended by

revising paragraph (c) to read as follows:

§ 611.1205 Definitions.

* * * * *

(c) OFI means an other financing

institution that has established a

funding and discount relationship with

a Farm Credit Bank or an agricultural

credit bank pursuant to section 1.7(b)(1)

of the Act and the regulations in subpart

P of part 614.

* * * * *

PART 614—LOAN POLICIES AND

OPERATIONS

3. The authority citation for part 614

continues to read as follows:

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

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

1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,

2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28,

4.3A, 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, 8.9 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, 2154a, 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, 2279aa–9); sec. 413 of Pub. L. 100–

233, 101 Stat. 1568, 1639.

Subpart J—Lending Limits

4. Section 614.4350 is amended by

revising paragraph (a) to read as follows:

§ 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 that complies with the

criteria in section 1.7(b) of the Act and

the regulations in subpart P of this part)

to which an institution has made a loan

or a commitment to make a loan either

directly or indirectly.

* * * * *

5. Subpart P of part 614 is revised to

read as follows:

Subpart P—Farm Credit Bank and

Agricultural Credit Bank Financing of

Other Financing Institutions

Sec.

614.4540 Other financing institution access

to Farm Credit Banks and agricultural

credit banks for funding, discount, and

other similar financial assistance.

614.4550 Place of discount.

614.4560 Requirements for OFI funding

relationships.

614.4570 Recourse and security.

614.4580 Limitation on the extension of

funding, discount and other similar

financial assistance to an OFI.

614.4590 Equitable treatment of OFIs and

Farm Credit System associations.

614.4600 Insolvency of an OFI.

Subpart P—Farm Credit Bank and

Agricultural Credit Bank Financing of

Other Financing Institutions

§ 614.4540 Other financing institution

access to Farm Credit Banks and

agricultural credit banks for funding,

discount, and other similar financial

assistance.

(a) Basic criteria for access. Any

national bank, State bank, trust

company, agriculture credit corporation,

incorporated livestock loan company,

savings association, credit union, or any

association of agricultural producers

engaged in the making of loans to

farmers and ranchers, and any

corporation engaged in the making of

loans to producers or harvesters of

aquatic products may become an other

financing institution (OFI) that funds,

discounts, and obtains other similar

financial assistance from a Farm Credit

Bank or agricultural credit bank in order

to extend short- and intermediate-term

credit to eligible borrowers for

authorized purposes pursuant to

sections 1.10(b) and 2.4(a) and (b) of the

Act. Each OFI shall be duly organized

and qualified to make loans and leases

under the laws of each jurisdiction in

which it operates.

(b) Assured access. Each Farm Credit

Bank or agricultural credit bank must

fund, discount, or provide other similar

financial assistance to any creditworthy

OFI that:

(1) Maintains at least 15 percent of its

loan volume at a seasonal peak in loans

and leases to farmers, ranchers, aquatic

producers and harvesters. The Farm

Credit Bank or agricultural credit bank

shall not include the loan assets of the

OFI’s parent, affiliates, or subsidiaries

when determining compliance with the

requirement of this paragraph; and

(2) Executes a general financing

agreement with the Farm Credit Bank or

agricultural credit bank that establishes

a financing or discount relationship for

at least 2 years.

(c) Underwriting standards. Each

Farm Credit Bank and agricultural credit

bank shall establish objective policies

and loan underwriting standards for

determining the creditworthiness of

each OFI applicant.

(d) Denial of OFI access. A Farm

Credit Bank or an agricultural credit

bank may deny the funding request of

any creditworthy OFI that meets the

conditions in paragraph (b) of this

section only when such request would:

(1) Adversely affect a Farm Credit

Bank or agricultural credit bank’s ability

to:

(i) Achieve and maintain established

or projected capital levels; or

(ii) Raise funds in the money markets;

or

(2) Otherwise expose the Farm Credit

Bank or agricultural credit bank to

safety and soundness risks.

(e) Notice to applicants. Each Farm

Credit Bank or agricultural credit bank

shall render its decision on an OFI

application in as expeditious a manner

as is practicable. Upon reaching a

decision on an application, the Farm

Credit Bank or agricultural credit bank

shall provide prompt written notice of

its decision to the applicant. When the

Farm Credit Bank or agricultural credit

bank makes an adverse credit decision

on an application, the written notice

shall include the specific reason(s) for

the decision.

(f) Reports to the board of directors.

Each Farm Credit Bank and agricultural

credit bank shall provide its board of

directors with a written annual report

regarding the scope of OFI program

activities during the preceding fiscal

year.

§ 614.4550 Place of discount.

(a) A Farm Credit Bank or agricultural

credit bank may provide funding,

discounting, or other similar financial

assistance to any OFI applicant that:

(1) Maintains its headquarters in such

funding bank’s chartered territory; or

(2) Has more than 50 percent of its

outstanding loan volume to eligible
36548 Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations

borrowers who conduct agricultural or

aquatic operations in such funding

bank’s chartered territory.

(b) If the Farm Credit Bank or

agricultural credit bank identified in

paragraph (a) of this section denies or

otherwise fails to approve an OFI’s

funding request within 60 days of

receipt of a ‘‘completed application’’ as

defined by 12 CFR 202.2(f), the OFI may

apply to any other Farm Credit Bank or

agricultural credit bank for funding,

discounting, or other similar financial

assistance.

(c) The Farm Credit Bank or

agricultural credit bank may grant its

consent for an OFI identified in

paragraph (a) of this section to seek

financing from another Farm Credit

Bank or agricultural credit bank.

(d) No OFI shall be required to

terminate its existing funding or

discount relationship with a Farm

Credit Bank or agricultural credit bank

if, at a subsequent time, an OFI relocates

its headquarters to the chartered

territory of another Farm Credit Bank or

agricultural credit bank or the loan

volume in the relevant territory falls

below 50 percent.

§ 614.4560 Requirements for OFI funding

relationships.

(a) As a condition for extending

funding, discount and other similar

financial assistance to an OFI, each

Farm Credit Bank or agricultural credit

bank shall require every OFI to:

(1) Execute a general financing

agreement pursuant to the regulations in

subpart C of part 614; and

(2) Purchase non-voting stock in its

Farm Credit Bank or agricultural credit

bank pursuant to the bank’s bylaws.

(b) A Farm Credit Bank or agricultural

credit bank shall extend funding,

discount and other similar financial

assistance to an OFI only for purposes

and terms authorized under sections

1.10(b) and 2.4(a) and (b) of the Act.

(c) Rural home loans to borrowers

who are not bona fide farmers, ranchers,

and aquatic producers and harvesters

are subject to the restrictions in

§ 613.3030 of this chapter. Loans that an

OFI makes to processing and marketing

operators who supply less than 20

percent of the throughput shall be

included in the calculation that

§ 613.3010(b)(1) of this chapter

establishes for Farm Credit Banks and

agricultural credit banks.

(d) The borrower rights requirements

in part C of title IV of the Act, and

section 4.36 of the Act, and the

regulations in subparts K, L, and N of

part 614 shall apply to all loans that an

OFI funds or discounts through a Farm

Credit Bank or agricultural credit bank,

unless such loans are subject to the

Truth-in-Lending Act, 15 U.S.C. 1601 et

seq.

(e) As a condition for obtaining

funding, discount and other similar

financial assistance from a Farm Credit

Bank or agricultural credit bank, all

State banks, trust companies, or Statechartered savings associations shall

execute a written consent that

authorizes their State regulators to

furnish examination reports to the Farm

Credit Administration upon its request.

Any OFI that is not a depository

institution shall consent in writing to

examination by the Farm Credit

Administration as a condition precedent

for obtaining funding, discount and

other similar financial assistance from a

Farm Credit Bank or agricultural credit

bank, and file such consent with its

Farm Credit funding bank.

§ 614.4570 Recourse and security.

(a) Full recourse and guarantee. All

obligations that are funded or

discounted through a Farm Credit Bank

or agricultural credit bank shall be

endorsed with the full recourse or

unconditional guarantee of the OFI.

(b) General collateral. (1) Each Farm

Credit Bank and agricultural credit bank

shall take as collateral all notes, drafts,

and other obligations that it funds or

discounts for each OFI; and

(2) Each Farm Credit Bank and

agricultural credit bank shall perfect, in

accordance with State law, a senior

security interest in any and all

obligations and the proceeds thereunder

that the OFI pledges as collateral.

(c) Supplemental collateral. (1) Each

Farm Credit Bank and agricultural credit

bank shall develop policies and loan

underwriting standards that establish

uniform and objective requirements to

determine the need and amount of

supplemental collateral or other credit

enhancements that each OFI shall

provide as a condition for obtaining

funding, discount and other similar

financial assistance from such Farm

Credit bank.

(2) The amount, type, and quality of

supplemental collateral or other credit

enhancements required for each OFI

shall be established in the general

financing agreement and shall be

proportional to the level of risk that the

OFI poses to the Farm Credit Bank or

agricultural credit bank.

§ 614.4580 Limitation on the extension of

funding, discount and other similar

financial assistance to an OFI.

(a) No obligation shall be purchased

from or discounted for and no loan shall

be made or other similar financial

assistance extended by a Farm Credit

Bank or agricultural credit bank to an

OFI if the amount of such obligation

added to the aggregate liabilities of such

OFI, whether direct or contingent (other

than bona fide deposit liabilities),

exceeds ten times the paid-in and

unimpaired capital and surplus of such

OFI or the amount of such liabilities

permitted under the laws of the

jurisdiction creating such OFI,

whichever is less.

(b) It shall be unlawful for any

national bank that is indebted to any

Farm Credit Bank or agricultural credit

bank, on paper discounted or

purchased, to incur any additional

indebtedness, if by virtue of such

additional indebtedness its aggregate

liabilities, direct or contingent, will

exceed the limitation described in

paragraph (a) of this section.

§ 614.4590 Equitable treatment of OFIs and

Farm Credit System associations.

(a) Each Farm Credit Bank and

agricultural credit bank shall apply

comparable and objective loan

underwriting standards and pricing

requirements to both OFIs and Farm

Credit System direct lender

associations.

(b) The total charges that a Farm

Credit Bank or agricultural credit bank

assesses an OFI through capitalization

requirements, interest rates, and fees

shall be comparable to the charges that

the same Farm Credit Bank or

agricultural credit bank imposes on its

direct lender associations. Any variation

between the overall funding costs that

OFIs and direct lender associations are

charged by the same funding bank shall

result from differences in credit risk and

administrative costs to the Farm Credit

Bank or agricultural credit bank.

§ 614.4600 Insolvency of an OFI.

If an OFI that is indebted to a Farm

Credit Bank or agricultural credit bank

becomes insolvent, is in process of

liquidation, or fails to service its loans

properly, the Farm Credit Bank or

agricultural credit bank may take over

such loans and other assets that the OFI

pledged as collateral. Once the Farm

Credit Bank or agricultural credit bank

exercises its remedies, it shall have the

authority to make additional advances,

to grant renewals and extensions, and to

take such other actions as may be

necessary to collect and service loans to

the OFI’s borrower. The funding Farm

Credit Bank or agricultural credit bank

may also liquidate the OFI’s loans and

other assets in order to achieve

repayment of the debt.
Federal Register / Vol. 63, No. 129 /Tuesday, July 7, 1998 /Rules and Regulations 36549

PART 620—DISCLOSURE TO

SHAREHOLDERS

6. The authority citation for part 620

continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11 of the

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

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

Stat. 1568, 1656.

Subpart B—Annual Report to

Shareholders

§ 620.5 [Amended]

7. Section 620.5 is amended by

removing the word ‘‘financial’’ and

adding in its place the word

‘‘financing’’; and by removing the words

‘‘, as defined in § 614.4540(e) of this

chapter’’ in paragraph (a)(8).

PART 630—DISCLOSURE TO

INVESTORS IN SYSTEMWIDE AND

CONSOLIDATED BANK DEBT

OBLIGATIONS OF THE FARM CREDIT

SYSTEM

8. The authority citation for part 630

continues to read as follows:

Authority: Secs. 5.17, 5.19 of the Farm

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

Subpart B—Annual Report to Investors

§ 630.20 [Amended]

9. Section 630.20 is amended by

removing the words ‘‘, as defined in

§ 614.4540(e) of this chapter’’ in

paragraph (a)(1)(v).

Dated: June 26, 1998.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 98–17844 Filed 7–6–98; 8:45 am]

BILLING CODE 6705–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 98–NM–155–AD; Amendment

39–10643; AD 98–14–10]

RIN 2120–AA64

Airworthiness Directives; Boeing

Model 747–400, 757, 767, and 777

Series Airplanes Equipped with

AlliedSignal RIA–35B Instrument

Landing System Receivers

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Final rule; request for

comments.

SUMMARY: This amendment adopts a

new airworthiness directive (AD) that is

applicable to certain Boeing Model 747–

400, 757, 767, and 777 series airplanes.

This action requires a revision to the

Airplane Flight Manual (AFM) to

prohibit certain types of approaches if

only one instrument landing system

(ILS) receiver is operational. This action

also requires repetitive inspections to

detect certain faults of all RIA–35B ILS

receivers, and replacement of discrepant

ILS receivers with new, serviceable, or

modified units; or, alternatively, an

additional revision to the AFM and

installation of a placard to prohibit

certain operations. This AD also

provides for optional terminating action

for the AFM revisions and repetitive

inspections. This amendment is

prompted by a report of errors in the

glide slope deviation provided by an ILS

receiver. The actions specified in this

AD are intended to detect and correct

faulty ILS receivers, and to ensure that

the flightcrew is advised of the potential

hazard of performing ILS approaches

using a localizer deviation from a faulty

ILS receiver and also advised of the

procedures necessary to address that

hazard. Erroneous localizer deviation

could result in a landing outside the

lateral boundary of the runway.

DATES: Effective July 22, 1998.

The incorporation by reference of

certain publications listed in the

regulations is approved by the Director

of the Federal Register as of July 22,

1998.

Comments for inclusion in the Rules

Docket must be received on or before

September 8, 1998.

ADDRESSES: Submit comments in

triplicate to the Federal Aviation

Administration (FAA), Transport

Airplane Directorate, ANM–114,

Attention: Rules Docket No. 98–NM–

155–AD, 1601 Lind Avenue, SW.,

Renton, Washington 98055–4056.

The service information referenced in

this AD may be obtained from

AlliedSignal Aerospace, Technical

Publications, Dept. 65–70, P.O. Box

52170, Phoenix, Arizona 85072–2170.

This information may be examined at

the FAA, Transport Airplane

Directorate, 1601 Lind Avenue, SW.,

Renton, Washington; or at the Office of

the Federal Register, 800 North Capitol

Street, NW., suite 700, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Jay

Yi, Aerospace Engineer, Systems and

Equipment Branch, ANM–130S, FAA,

Transport Airplane Directorate, Seattle

Aircraft Certification Office, 1601 Lind

Avenue, SW., Renton, Washington

98055–4056; telephone (425) 227–1013;

fax (425) 227–1181.

SUPPLEMENTARY INFORMATION: The FAA

has received a report indicating that,

during a test flight of a Boeing airplane,

the flightcrew detected discrepancies in

the glide slope deviation provided by

one of the onboard Instrument Landing

System (ILS) receivers. (The glide slope

is the flight path that an airplane is to

follow when making an ILS landing.

The display of the glide slope deviation

indicates the position of the airplane

relative to the glide slope and indicates

to the flightcrew whether the airplane

needs to be at a higher or lower altitude

to be on the normal approach flight

path.) The discrepancies in the glide

slope deviation provided by the

discrepant ILS receiver resulted in the

display showing that the airplane was

on the glide slope, when the airplane

was approximately one dot low on the

glide slope (as determined from the data

provided by the ILS receivers that were

operating correctly). The flightcrew

received no annunciation that there

were discrepancies between the glide

slope deviations being provided by the

ILS receivers.

An investigation conducted by

AlliedSignal, the manufacturer of the

RIA–35B ILS receivers installed on the

airplane, has revealed that the

discrepancies in the glide slope

deviation were caused by failure of an

internal component of the ILS receiver

due to that component’s sensitivity to

temperature. Due to the nature of the

failure, that component also could fail

on other airplanes.

The same ILS receiver provides

localizer deviation. (The display of the

localizer deviation indicates the

position of the airplane relative to the

center line of the runway during an ILS

landing.) Faults in the ILS receiver, if

not corrected, could result in a landing

outside the lateral boundary of the

runway. If a faulty ILS receiver provides

a localizer deviation that contains errors

that are not detected by the flightcrew,

use of a single ILS receiver for ILS or

localizer approaches could result in the

pilot being directed to land the airplane

outside the lateral boundary of the

runway. If the localizer deviations

generated by two of the ILS receivers

onboard the airplane contain errors that

are not detected by the flightcrew,

during category II and III operations, the

autopilot system may land the airplane

outside the lateral boundary of the

runway.

The FAA finds that flightcrews are

not currently provided with adequate

information necessary to address the

potential hazard of performing an ILS or

localizer approach using a localizer

deviation provided by a faulty ILS

receiver. Therefore, the FAA has

determined that flightcrews must be

provided with such information and

must be made aware that certain types