This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

24907

Vol. 61, No. 97

Friday, May 17, 1996

1Pub. L. No. 503, 42 Stat. 1454, (Mar. 4, 1923).

2Pub. L. No. 439, 46 Stat. 816, (June 26, 1930).

3Pub. L. No. 75–73D, title II, 48 Stat. 257, 259,

(June 16, 1933).

4See H. R. Rep. No. 1712, 67th Cong., 1st. Sess.

(Feb. 25, 1923), P. 17.

5Section 410 of the Agricultural Credit Act of

1987 (1987 Act) created the FCBs through the

mandatory merger of the Federal Land Bank and the

FICB in each Farm Credit district. See Pub. L. No.

100–233, § 410, 101 Stat. 1568, 1637, (Jan. 6, 1988).

Section 7.0 of the Act allows a FCB to merge with

a bank for cooperatives in order to form an ACB.

Section 7.0 of the Act derives from section 416 of

the 1987 Act. Section 7.0 was further amended by

section 408(b) of the Agricultural Credit Technical

Corrections Act of 1988. See Pub. L. No. 100–233,

§ 416, 101 Stat. 1568, 1645, (Jan. 6, 1988); Pub. L.

No. 100–399, § 408(b), 102 Stat. 989, 1001, (Aug. 17,

1988).

FARM CREDIT ADMINISTRATION

12 CFR Part 614

RIN 3052–AB67

Loan Policies and Operations; Other

Financing Institutions

AGENCY: Farm Credit Administration.

ACTION: Advance notice of proposed

rulemaking.

SUMMARY: The Farm Credit

Administration (FCA) requests public

comment through an Advance Notice of

Proposed Rulemaking (ANPRM)

concerning potential revisions to the

regulations in subpart P of part 614 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). Farm Credit Banks

(FCBs) and agricultural credit banks

(ACBs) are authorized to fund and

discount certain short- and

intermediate-term loans for non-System

lenders, such as commercial banks,

savings associations, credit unions, trust

companies, agricultural credit

corporations, and other agricultural and

aquatic lenders as part of their mission

to finance agriculture, aquaculture, and

other specified rural credit needs.

External developments, such as the

consolidation of the commercial

banking industry, the advent of

interstate banking and branching, the

gradual reduction of Federal assistance

to agriculture and rural communities,

and the increased interest of nonSystem financial institutions in

additional sources of funding and

liquidity may necessitate revisions to

the regulations in subpart P of part 614

so that System banks can fulfill their

obligation to meet demands in rural

communities for short- and

intermediate-term credit. The purpose

of any future rulemaking would be to

ensure that eligible and creditworthy

farmers, ranchers, aquatic producers

and harvesters, processing and

marketing operators, farm-related

businesses, and rural homeowners will

continue to have access to affordable,

dependable, and stable short- and

intermediate-term credit through both

System and non-System lenders.

Specifically, this ANPRM seeks

comments regarding the FCA’s OFI

regulations and how they may be

revised to better implement the

statutory provisions.

DATES: Written comments should be

received on or before July 16, 1996.

ADDRESSES: Comments may be mailed

or delivered to Patricia W. DiMuzio,

Associate Director, Regulation

Development, Office of Examination,

Farm Credit Administration, 1501 Farm

Credit Drive, McLean, Virginia 22102–

5090 or sent by facsimile transmission

to the FAX number at (703) 734–5784.

Copies of all communications received

will be available for review by

interested parties in the Office of

Examination, Farm Credit

Administration.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Policy Analyst, Regulation

Development, Office of Examination,

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: The

Agricultural Credit Act of 1923 1 created

12 Federal intermediate credit banks

(FICBs) to discount agricultural

production loans for national and State

banks, trust companies, savings

associations, credit unions, agricultural

credit corporations, incorporated

livestock loan companies, and other

specified lenders. In 1930, Congress

authorized the former FICBs to make

secured loans and advances directly to

such institutions (hereinafter OFIs).2 As

a result, OFIs could borrow from and

discount production agricultural loans

with System banks before the Farm

Credit Act of 1933 3 created production

credit associations (PCAs) as an

alternative source of financing the

operating needs of farmers and ranchers.

The legislative history to the Act

reveals that Congress originally granted

OFIs discount privileges at System

banks in order to redress the scarcity of

operating credit for farmers and

ranchers.4 During the past 73 years,

Congress has responded to the changing

demands of agricultural producers and

other rural residents for affordable

short- and intermediate-term credit by

updating the statutory authorities of the

FICBs and their successor FCBs and

ACBs 5 to provide funding and financial

assistance to both System and nonSystem lenders. Currently, section 1.7(b)

of the Act authorizes OFIs to obtain

funding from FCBs or ACBs for any loan

that a PCA could make under section

2.4 of the Act to eligible farmers,

ranchers, aquatic producers and

harvesters, processing and marketing

operators, farm-related businesses, and

rural homeowners.

Section 1.7(b)(4) of the Act requires

the FCA to enact regulations that assure

that funding from Farm Credit banks

operating under title I of the Act will be

‘‘available on a reasonable basis’’ to any

national bank, State bank, trust

company, agricultural credit

corporation, incorporated livestock loan

company, savings association, credit

union, association of agricultural

producers engaged in making loans to

farmers and ranchers, or corporation

engaged in making loans to producers or

harvesters of aquatic products that: (1)

Is significantly involved in lending for

agricultural or aquatic purposes; (2)

demonstrates a continuing need for

supplementary sources of funds to meet

the credit requirements of its

agricultural or aquatic borrowers; (3) has

limited access to national or regional

capital markets; and (4) does not use the

services of System banks to extend
24908 Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Proposed Rules

6Current section 1.7(b)(4) derives from section

203 of the Farm Credit Act Amendments of 1980

(1980 Act). See Pub. L. No. 96–592, § 203, 94 Stat.

3437, 3441, (Dec. 24, 1980). Section 203 of the 1980

Act substantially revised former section 2.3 of the

Act, which set forth the lending authorities of the

FICBs. The new OFI eligibility criteria in section

203 of the 1980 Act were incorporated into former

section 2.3(d) of the Act. Section 401 of the 1987

Act, which set forth the powers and obligations of

the FCBs, recodified the requirements in former

section 2.3(d) as section 1.7(b)(4) of the Act. See

Pub. L. No. 100–233, § 401, 101 Stat. 1568, 1625

(Jan 6, 1988).

7See 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).

8 Id.

9A recent study indicates that loan-to-deposit

ratios at commercial banks of all sizes that

substantially engage in agricultural lending have

risen from 53.6 percent in 1987 to 86.2 percent as

of June 30, 1995. See Economic Research Service,

U.S. Dep’t of Agriculture, (AIS–60), Agricultural

Income and Finance Situation and Outlook Report,

11, 53. (Feb. 1996).

10The FCA is aware that Congress is considering

proposals that would provide non-System financial

institutions greater access to funding and discount

relationships with System banks. These legislative

proposals go substantially beyond what the existing

statute allows. Should any of these proposals be

enacted, the FCA would review the regulations in

light of the new statutory provisions.

11Section 1.10(b) of the Act allows FCBs and

ACBs to extend financial services to PCAs, ACAs,

and OFIs so they can make: (1) Aquatic loans that

mature within 15 years; and (2) loans to farmers,

ranchers, farm-related businesses, and non-farm

rural homeowners that mature within 7 years,

unless the bank’s board, under the regulations of

the FCA, approve loans that are repayable within

10 years.

credit to persons and for purposes that

cannot be financed by a PCA under title

II of the Act. According to the legislative

history to section 1.7(b)(4) of the Act,6

Congress intended that Farm Credit

banks act as a primary funding and

liquidity source for small, local OFIs so

they in turn could meet certain shortand intermediate-term credit needs in

their rural communities.7 However, the

legislative history to section 1.7(b)(4) of

the Act also indicates that Congress did

not intend to exclude other agricultural

creditors from funding or discounting

loans with System banks,8 so long as

they have a need for supplementary

funds that cannot be met through access

to national or regional capital markets.

Section 1.7(b) of the Act requires

FCBs and ACBs to extend credit to

qualified OFIs (within the confines of

safety and soundness) as part of their

mission to finance agriculture,

aquaculture, and other specified rural

credit needs. While many OFIs often

compete directly with PCAs and

agricultural credit associations (ACAs)

that own voting stock in the FCB or

ACB, the Act requires Farm Credit

banks to extend funding on a safe and

sound lending basis to any qualified OFI

so that farmers, ranchers, aquatic

producers and harvesters, farm-related

businesses and rural homeowners have

access to affordable and dependable

credit.

The number of OFIs that fund or

discount loans with System banks has

declined from a peak of 327 in 1982 to

22 on December 31, 1995. Furthermore,

the amount of credit that System banks

have extended to OFIs has decreased

from almost $914 million in 1981 to

$230.8 million as of December 31, 1995.

The farm crisis of the 1980s caused a

decline in overall agricultural debt,

which in turn, substantially reduced the

number of OFIs and their demand for

System financing. The FCS also

experienced significant financial stress

between 1984 and 1989, and many OFIs

terminated their discounting

relationship with System banks because:

(1) They sought to reduce their exposure

to loss by retiring their investments in

FCS banks; (2) the FCS no longer offered

competitive rates; or (3) several OFIs

ceased operations as a result of merger

or closure. Many rural commercial

banks, including some OFIs, merged

with regional banks or bank holding

company networks that did not qualify

for OFI status because they were no

longer significantly engaged in

agricultural lending.

The financial strength of Farm Credit

banks has significantly improved in the

past several years. As a result, FCBs and

ACBs are better positioned to help

increase the availability of reasonably

priced and dependable credit in many

of America’s rural communities. Efforts

by Federal and State governments to

balance their budgets may reduce direct

assistance to agriculture and rural

development in future years. As rural

areas require greater private sector

investment to sustain their economic

viability, local financial institutions are

seeking alternative means to provide

affordable credit to their communities

on a sustainable basis. Rural lenders

also face liquidity problems from timeto-time. Loan-to-deposit ratios at rural

depository institutions are now at

historically high levels.9 As the

commercial banking industry continues

to consolidate into large national and

regional networks it is unclear how the

credit needs in rural communities will

be affected.

Today, several non-System financial

institutions are once again expressing

interest in obtaining FCS funding for

their short- and intermediate-term loans

to agricultural and other rural

borrowers. However, many of these nonSystem institutions perceive barriers

that impede their access to System

funding. Although a variety of factors

may have contributed to the historical

decline in the OFI lending program, the

FCA wants to eliminate any regulatory

restrictions that are not required by the

Act and its legislative history or do not

promote safety and soundness of the

FCS.

The FCA wants to ensure that the

relationship between Farm Credit banks

and OFIs provides another means for

meeting the short- and intermediateterm credit needs of agricultural

producers and other rural borrowers, as

Congress intended. The existing

regulations were enacted in 1981, after

Congress amended the OFI provisions in

the Act. See 46 FR 51886 (Oct. 22,

1981). As a result of external

developments over the past 15 years, the

FCA believes that it is now time to

review these regulations in subpart P of

part 614 to determine whether they are

appropriately addressing the credit

needs of non-System institutions that

lend to agriculture and rural

communities. An ANPRM will give all

interested parties an opportunity to

provide the FCA with information to

assist it in developing proposed

regulations that will be responsive to

the credit needs of OFIs and their

borrowers.10 Furthermore, the FCA

seeks guidance about how new

regulations can best promote equitable

treatment of OFIs and System

associations by FCBs and ACBs.

Comments from non-System lenders are

encouraged so that the FCA can

consider the needs and concerns of

eligible financial institutions that the

Agency does not examine or regulate.

The Act establishes certain

requirements that OFIs must meet in

order to initiate and maintain a

relationship with the FCS. For example,

section 1.10(b) of the Act authorizes

FCBs and ACBs to extend credit to OFIs

so they can make short- and

intermediate-term loans to persons who

would be eligible to obtain credit from

PCAs.11 Additionally, each OFI is

required by section 4.3A(c)(1)(D)(iii) of

the Act to purchase non-voting equity in

its funding FCB or ACB. Finally, the

same borrower rights that PCAs must

provide also apply to OFI loans that are

funded by a Farm Credit bank.

Safety and soundness issues will also

be addressed when the FCA proposes

new OFI regulations. OFIs may pose

different safety and soundness

considerations for the FCA than direct

lender associations. For example, OFIs

may merit a different regulatory

treatment than System associations for

questions relating to collateral and lien

perfection because, in contrast to

System associations, OFIs can borrow
Federal Register / Vol. 61, No. 97 / Friday, May 17, 1996 / Proposed Rules 24909

12Section 4.12(b) of the Act grants the FCA

‘‘exclusive power and jurisdiction to appoint a

conservator or receiver’’ for FCS banks and

associations.

13For the past 65 years, the Federal courts have

interpreted various Farm Credit Acts as authorizing

the FCA to determine the priority of claims for

System institutions in liquidation. See Wheeler v.

Greene, 280 US 49 (1929); Knox National Farm

Loan Associations v. Phillips, 300 US 194 (1937);

Little v. First South Production Credit Association,

CA No. J890021 (W) (S.D. Miss. May 16, 1990).

from other lenders without the

permission of their System funding

banks. In contrast to the authorities visa`-vis FCS institutions, the FCA lacks

broad authority to: (1) Appoint a

conservator or receiver for insolvent

OFIs; 12 or (2) determine the priority of

claims against OFIs in liquidation.13

The FCA requests comments and

information that address the following

questions:

I. Eligibility for OFI Status

A. Significant Involvement in

Agricultural or Aquatic Lending

1. What criteria (such as assets,

income, composition of the loan

portfolio, or other factors) best

determine whether an OFI is

significantly involved in agricultural or

aquatic lending as required by section

1.7(b)(4)(B)(i) of the Act and what

specific threshold, if any, should new

regulations use? Please explain your

recommendation.

2. How should the FCA define an

agricultural lender? Would the profiles

of agricultural lenders established by

other Federal agencies be useful? Please

explain your recommendation.

B. An OFI’s Need for Supplemental

Sources of Funds

What criteria should be used to

determine whether depository and nondepository OFIs demonstrate a

continuing need for supplementary

sources of funds to meet the credit

requirements of their agricultural or

aquatic borrowers, as required in section

1.7(b)(4)(B)(ii) of the Act? Please explain

your recommendations.

C. OFI Access to National or Regional

Capital Markets

1. Has the existing regulatory

definition of ‘‘national or regional

capital markets’’ in § 614.4540 become

outmoded? If so, what factors in today’s

financial environment demonstrate that

an OFI has limited access to ‘‘national

or regional capital markets?’’ 2. The Riegle-Neal Interstate Banking

and Branching Efficiency Act of 1994

will enable bank holding companies and

their commercial bank affiliates to

expand, over time, their interstate

banking and branching networks. How

will this law affect the concept of

limited access to ‘‘national or regional

capital markets’’ in section

1.7(b)(4)(B)(iii) of the Act?

D. Mergers, Consolidations, and

Acquisitions of OFIs

When an OFI merges, consolidates, or

is acquired by another financial

institution, the eligibility of the

successor entity to borrow from an FCB

or an ACB must be established anew.

Under what conditions, if any, should a

successor to an existing OFI be entitled

to ‘‘grandfather’’ rights?

E. Parent and Affiliate Relationships

1. What factors should determine

whether an OFI applicant is considered

together with its parents and affiliates as

a single entity? 2. Section 1.7(b)(4)(D) of the Act

establishes specific criteria for FCA

review of OFI application denials based

on the OFI’s subsidiary or affiliate

relationships. Under §§ 614.4550 and

614.4555, the FCA creates a review

procedure when an FCB or ACB rejects

an OFI’s request for financing for any

reason. In the interest of eliminating

unnecessary prior approvals and caseby-case reviews, the FCA requests

comments on whether there is a

compelling need for the regulations to

continue to require an FCA review of all

OFI applications that have been denied.

Please explain your recommendation.

F. Eligibility of Major Financial

Institutions

The statute and the legislative history

indicate that agricultural lenders that do

not meet the criteria of sections

1.7(b)(4)(B) (ii) and (iii) of the Act could

still fund or discount certain loans with

System banks. What restrictions, if any,

should the regulations impose on

System funding to these types of

institutions?

II. Place of Discount

1. Should new regulations continue

the territorial restrictions in existing

§ 614.4660 which require that an OFI

must obtain financing from the FCB or

ACB (designated System bank) in whose

territory: (1) The OFI maintains its

headquarters; or (2) more than 50

percent of the OFI’s borrowers is

concentrated? If not, what criteria

should determine which Farm Credit

bank should finance an OFI? Please

explain your recommendation. 2. Under what circumstances, if any,

should new regulations allow an FCB or

ACB to extend financing to an OFI that

does not operate in its chartered

territory if the designated System bank

does not approve the OFI’s application?

3. Are there any aspects of the RiegleNeal Interstate Banking and Branching

Efficiency Act of 1994 that the FCA

should consider as it develops new

regulatory provisions that determine the

place of discount for commercial banks

and nonbank affiliates of bank holding

companies whose networks operate in

the chartered territories of more than

one Farm Credit bank? Please explain

your recommendation.

III. Safety and Soundness

A. Supplemental Collateral

Under what circumstances, if any,

should OFIs be required by the new

regulations to pledge cash and readily

marketable securities or other assets as

additional collateral for their loans from

System banks?

B. OFI Lending Limit

Current regulations at § 614.4565

impose a lending limit on OFIs. Is this

limit appropriate? If not, what

alternatives do you suggest and why?

How should concentration risk be

addressed in a general financing

agreement between an OFI and a Farm

Credit bank?

C. Insolvency of an OFI

How should new regulations

safeguard the interests of an FCB or ACB

when an OFI is liquidated?

IV. Fair Treatment Between OFIs and

Direct Lender Associations

1. Do current regulations adequately

and appropriately ensure that FCBs and

ACBs accord impartial and equitable

treatment to both FCS associations and

OFIs? If not, what changes should be

made and why?

2. The regulations currently require,

with certain limited exceptions, that

OFIs must be treated in a manner that

is comparable to direct lender

associations. To the extent feasible, the

FCA seeks to ensure that OFIs and FCS

associations are treated equitably by

their funding banks. What

circumstances, if any, justify different

standards concerning equity investment

in the funding bank, interest rate

charges, and servicing fees?

V. Other Issues

Are there other regulatory changes,

not addressed above, that would

improve an FCS bank’s ability to serve

an OFI and its agricultural customers?

Please explain your recommendations.

Dated: May 13, 1996.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 96–12411 Filed 5–16–96; 8:45 am]

BILLING CODE 6705–01–P