Source: http://www.fca.gov/preambles_historical.nsf/3cd4c307304299078525721700705e5d/43b988f73071db7e8525729d00437240?OpenDocument
Timestamp: 2013-05-24 02:40:46
Document Index: 364101222

Matched Legal Cases: ['art 627', 'art 627', 'art 627', 'art 650', 'arts 627', 'art 627']

Title:	PROPOSED RULE--Title IV Conservators, Receivers, and Voluntary Liquidations; Joint and Several Liability--Priority of Claims--12 CFR Part 627	Issue Date:	03/12/2007
Federal Register Cite:	72 FR 10939
Title IV Conservators, Receivers, and Voluntary Liquidations; Joint and Several Liability--Priority of Claims
SUMMARY: The Farm Credit Administration (FCA, Agency, we), proposes to amend the priority of claims regulations to provide priority of claims rights to Farm Credit System (System, FCS, Farm Credit) banks if they make payments under a reallocation agreement to holders of consolidated and System-wide obligations on behalf of a defaulting System bank. We also propose to clarify that payments to a class of claims will be on a pro rata basis.
DATES: You may send comments on or before May 11, 2007.
ADDRESSES: We offer a variety of methods for you to submit comments. For accuracy and efficiency reasons, we encourage commenters to submit comments by e-mail or through the Agency’s Web site or the Federal eRulemaking Portal. You may also send comments by mail or by facsimile transmission. Regardless of the method you use, please do not submit your comment multiple times via different methods. You may submit comments by any of the following methods:
E-mail: Send us an e-mail at reg-comm@fca.gov. Agency Web site: http://www.fca.gov. Once you are at the Web site, select “Legal Info,” then “Pending Regulations and Notices.”
System associations obtain funding by means of direct loans from their affiliated Farm Credit banks. The banks in turn obtain their funding primarily by issuing System-wide obligations to investors through the Federal Farm Credit Banks Funding Corporation (Funding Corporation).1 The banks' authority to issue System-wide obligations is provided in section 4.2(d) of the Farm Credit Act of 1971, as amended (Act).2 Section 4.2 (c) of the Act also authorizes the banks to obtain funding by issuing consolidated obligations with other banks operating under the same title of the Act, but all of the System's joint funding at the present time is through System-wide obligations.3
Investors in consolidated and System-wide obligations have three levels of repayment sources. Under section 4.4(a)(2)(A) of the Act, each bank is primarily liable for the portion of any consolidated or System-wide obligation made on its behalf.4 If the bank that is primarily liable is unable to pay, payment must be made by the Farm Credit System Insurance Corporation (FCSIC), created in 1988. The FCSIC insures the timely payment of interest and principal on consolidated and System-wide obligations (these obligations are referred to as “insured obligations”). The source of payments by the FCSIC is the Farm Credit Insurance Fund (Insurance Fund), whose assets consist primarily of premiums paid by the System banks (as well as earnings on the premiums).5 The Insurance Fund must be used to make payments on behalf of System banks defaulting on their insured obligations, but the FCSIC also has discretion to make other expenditures out of the Insurance Fund.6 If a System bank is unable to pay the portion of any insured obligations issued on its behalf and the Insurance Fund is exhausted, section 4.4(a)(2) of the Act provides that the other (nondefaulting) System banks are jointly and severally liable for such timely payments as follows:
The FCA will make calls on nondefaulting banks in proportion to each bank's proportionate share of the aggregate available collateral held by all nondefaulting banks.7 If the aggregate available collateral does not fully satisfy the insured obligations of the defaulting bank, the FCA will make calls on all nondefaulting banks in proportion to each bank's remaining assets.
A bank's “available collateral” is defined in section 4.4(a)(2)(C) as “the amount (determined at the close of the last calendar quarter ending before such call) by which a bank's collateral . . . exceeds the collateral required to support the bank’s outstanding notes, bonds, debentures, and other similar obligations.”
[O]n the payment to an owner of an insured obligation issued on behalf of an insured System bank in receivership, the [FCSIC] shall be subrogated to all rights of the owner against the bank to the extent of the payment. . . . Subrogation . . . shall include the right on the part of the [FCSIC] to receive the same dividends from the proceeds of the assets of the bank as would have been payable to the owner on a claim for the insured obligation.8 With respect to System banks, section 4.4(a)(2)(E) provides: Any System bank that, pursuant to a call by the [FCA], makes a payment of principal or interest to the holder of any consolidated or System-wide obligations issued on behalf of another System bank shall be subrogated to the rights of the holder against such other bank to the extent of such payment.
C. System Banks’ Petition to Amend Regulations
At the present time, the System banks and associations are well capitalized, and no bank or association has been placed in receivership since 1989. The FCA has never made joint and several calls on System banks to pay consolidated and System-wide bondholders, and monies from the Insurance Fund have never been used for that purpose. Nonetheless, the potential effect of a joint and several call based on banks' aggregate available collateral has caused System banks to consider possible alternative methodologies based on an agreement among the banks. In recent years, the banks have discussed the benefits and feasibility of using a methodology for joint and several calls based on the proportion of total System-wide debt on which each nondefaulting bank is primarily liable. The banks have explored the possibility of entering into a reallocation agreement among themselves to pay a defaulting bank's maturing insured obligations as the Insurance Fund is nearing exhaustion but before statutory joint and several calls are triggered. The banks have informed us that, while they are in general agreement on the outlines of an agreement for payment based on individual banks' outstanding System-wide debt, a key to an agreement is that payments made under the banks' agreement would be entitled to the same payment rights as if the banks had made the payments under a statutory joint and several call.
Existing � 627.2755 contains several provisions that apply to some or all types of System institutions that may be placed in receivership by the FCA under part 627 of our regulations.9 We propose to amend paragraph (a) by deleting language limiting the pro rata requirement to association receiverships. This will clarify that, in all System institution receiverships, if there are insufficient funds to pay a class of claims in full, payments to such class must be on a pro rata basis.
212 U.S.C. 2153(d). 312 U.S.C. 2153(c).
5Section 5.55 of the Act (12 U.S.C. 2277a-4).
6Section 5.60(c) of the Act (12 U.S.C. 2277a-9).
7Section 4.4(a)(2)(F) of the Act requires the FCA to appoint a receiver upon making a joint and several call.
812 U.S.C. 2277a-10(c). 9We note that part 627 of FCA's regulations does not apply to the Federal Agricultural Mortgage Corporation, also known as Farmer Mac. Regulations applicable to Farmer Mac are in part 650 of FCA's regulations.
List of Subjects in 12 CFR Parts 627
For the reasons stated in the preamble, we propose to amend part 627 of chapter VI, title 12 of the Code of Federal Regulations to read as follows:
3. Amend � 627.2755(a) by removing the words "described in � 627.2745" in the last sentence.