Title: PROPOSED RULE--Organization; General Provisions; Disclosure to Shareholders; Technical Assistance and Financially Related Services; Member Insurance--12 CFR Parts 611, 618, and 620
Issue Date: 10/31/1994
Agency: FCA
Federal Register Cite: 59 FR 54399
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 618, and 620

RIN 3052-AB43

Organization; General Provisions; Disclosure to Shareholders; Technical Assistance and Financially Related Services; Member Insurance


ACTION: Proposed rule.

[*54399]

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), proposes to amend the regulations governing Technical Assistance and Financially Related Services and Member Insurance. Subpart A of the proposed regulation defines what constitutes technical assistance, financial assistance and financially related services and what types of activities the Farm Credit System (System) institutions are authorized to provide. The proposed regulation allows greater flexibility in this area, while maintaining the FCA's ability to regulate safety and soundness risks. The FCA's existing prior approval requirement is eliminated and replaced with a post-review process for all services, except for those that have never been authorized by the FCA. The FCA also proposes to amend the Member Insurance regulation to clarify existing rules and reduce regulatory burdens wherever possible.

DATES: Comments should be received on or before December 30, 1994.

ADDRESSES: Comments may be mailed or delivered (in triplicate) to Patricia W. DiMuzio, Associate Director, Regulation Development, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090. Copies of all communications received will be available for examination by interested parties in the Office of Examination, Farm Credit Administration, McLean, Virginia.

FOR FURTHER INFORMATION CONTACT:

Linda C. Sherman, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444, or

Joy E. Strickland, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Background and Statutory Authorities

Under title I, section 1.12; title II, sections 2.5 and 2.12 (15); and title III, section 3.7 of the Farm Credit Act of 1971, as amended (the Act), the FCA is responsible for promulgating regulations governing the offering and administering of technical assistance, financial assistance, and financially related services by banks and associations (hereinafter referred to as "related services").

System institutions have offered credit life insurance and a variety of other credit-related services over the past 40 years. Pursuant to regulations adopted in 1984, the FCA is responsible for the review and approval of bank financial services policies and must also approve each new related service program on a case-by-case basis before it is offered by a bank or its affiliated associations. The FCA took no further Systemwide action until 1993, when the Board adopted a policy statement (58 FR 36410, July 2, 1993) and subsequently issued a bookletter (366-OE, September 3, 1993) authorizing the providing of related services outside an institution's chartered territory, under certain circumstances.

On December 2, 1993, FCA Board Chairman Billy Ross Brown completed a study entitled "The Farm Credit System's Authorized Services" and directed staff to use it as a basis for revising the existing regulations. The proposed regulation also incorporates the intent of the FCA Board's Policy Statement on Regulatory Philosophy published in the Federal Register on February 17, 1994 (59 FR 32189).

II. Regulatory Burden Comments and Petitions for Rulemaking

On June 23, 1993, the FCA Board published a "Statement of Regulatory Burden" (58 FR 34003) that requested comments regarding how the FCA could lessen the regulatory burden on System institutions. In response, the agency received three comment letters on related services, including one on Member Insurance. These comments are addressed in this proposed regulation and are referred to as "Regulatory Burden Comments."

Also in 1993, the Farm Credit Banks' Presidents Planning Committee (PPC) authorized an initiative to review the FCA regulations and make recommendations concerning those that the System believes are not directly related to safety and soundness or unduly restrict the full exercise of authorities granted by the Act. This [*54400] initiative produced a System work group on related services (PPC work group) which included representatives from associations and banks in the AgriBank, Baltimore, Columbia, Springfield, and Western Farm Credit Districts. In July 1993, FCA met with the PPC work group to hear its concerns and objectives.

The PPC work group completed its study on November 2, 1993, and provided the results to the FCA Board for its consideration in this proposed rule. The study recommended:

(1) Elimination of existing prior approval requirements;

(2) revision of coordination requirements to provide for increased flexibility in providing intra- and inter-district services;

(3) revision of the requirement for bank annual review of service programs;

(4) increased flexibility in how banks and associations administer related service programs; and

(5) various technical and clarifying changes in subparts A and B.

On April 4, 1994, the FCA received a "Petition for Rulemaking to Revise 12 CFR part 618-subpart A, Concerning Financially Related Services" (hereinafter referred to as "FRS petition"), submitted by a Washington, D.C., law firm on behalf of one agricultural credit association (ACA), three Federal land credit associations (FLCAs) and five production credit associations (PCAs) in California and Michigan. The petitioners supported the PPC work group's recommendations, but suggested that, in light of the FCA Board's February 17, 1994 Policy Statement on Regulatory Philosophy (59 FR 32189), the FCA should consider a broader rulemaking proceeding and more fundamental changes in the regulation than may have originally been contemplated.

The petitioners focused on areas where expanded authorities could be considered and requested that the FCA:

(1) Define related services (although no definition was suggested);

(2) authorize the offering of other services for a fee;

(3) provide for a nonexclusive list of approved related services;

(4) eliminate the prior approval requirement;

(5) eliminate the annual bank review of related service programs; and

(6) encourage innovative means for offering related services that meet borrower needs.

On May 4, 1994, the FCA received a petition from an ACA in Michigan (hereinafter referred to as "Insurance petition") asking the FCA to reconsider the requirement in the Member Insurance regulations (subpart B) that insurance only be sold to members who have a debtor/creditor relationship.

In addition to the above petitions and System input, over the past 18 months the FCA has received prior approval requests and technical/interpretive questions that have raised issues regarding what types of services are authorized, what types of institutions can offer services, and who the recipients of these services can be. Issues included questions about incidental authorities, sale of insurance out-of-territory, and sale of fee appraisals other than directly to members or borrowers.

III. Proposed Regulatory Approach

System institutions desire greater flexibility to use their statutory authority for providing related services in order to serve the evolving needs of farmers and ranchers and to meet competitive pressures. Although the FCA understands the System's desire to expand current related service activities, the agency's primary concerns continue to focus on safety and soundness issues and whether the System remains within the limits of current statutory authorities.

Underlying these proposed regulations, is FCA's conclusion that, under most circumstances, it would be appropriate to replace the current prior approval requirement with specific criteria for determining what services can be offered and under what circumstances. However, the FCA, in its role as a safety and soundness regulator, wishes to reserve the right to review new services in order to ensure that they would not present excessive risk to the System. Because it is difficult to foresee what types of new services will be proposed, it is impracticable to prescribe specific regulations for new services that have yet to be offered by the System. The FCA, therefore, proposes to remove as much of the regulatory burden as possible, while maintaining its ability to apply the statute, achieve regulatory objectives, and preserve flexibility. The FCA has also reduced the role the funding bank is required, by regulation, to play in overseeing such programs. This allows the institution offering a service to take the primary responsibility for the related services it provides.

The proposed regulation in part 618 defines terms and establishes specific authorizing criteria so that each institution can evaluate the services it would like to offer its customers. Thus, the proposed regulation clarifies the FCA's primary safety and soundness concerns and distinguishes between the types of services that can be offered and the programs for delivering these services.

Subpart A has been rewritten and reorganized because of the wholesale nature of the regulatory changes proposed by the FCA. In proposed 618.8000, the FCA sets forth a definition of "related service" which includes insurance and encompasses activities previously referred to as technical assistance, financial assistance, or financially related services. The proposed regulation also details regulatory eligibility requirements for recipients of such services.

In proposed 618.8010 ("Related Services Authorization Process"), the FCA replaces the prior approval in the existing regulation in part, by communicating to all institutions those services it has approved, which may then be offered without further regulatory approval. The proposed regulation also describes the process for the FCA's review of new services.

Proposed 618.8015 ("Policy Guidelines") requires each institution offering related services to adopt a policy addressing related services. Proposed 618.8020 ("Feasibility Requirements") contains criteria for the feasibility analysis that must be performed in conjunction with developing a new service program.

Proposed 618.8025 ("Feasibility Reviews") addresses the statutory requirement for the board of directors of each funding bank to determine that association-related service programs are feasible. The proposed regulation requires the association to perform a feasibility analysis and requires the bank's board of directors to verify that this analysis has been done, and limits the scope and frequency of reviews that the bank must perform.

The final section in subpart A, 618.8030 ("Out-of-Territory Related Services"), establishes a regulatory basis for providing out-of-territory related services. The FCA's policy statement and bookletter on offering services outside an institution's chartered territory would be superseded by these provisions.

The proposed Member Insurance regulation in subpart B remains largely unchanged with two exceptions: (1) The requirement for a debtor/creditor relationship would no longer be necessary for sales of certain types of insurance; and (2) employee compensation for insurance sales would be allowed within certain limits. [*54401]

IV. Section-by-Section Analysis

A. Subpart A-Related Services

1. Section 618.8000-Definitions

Section 618.8000 of the proposed regulation would define the term "program" to mean the method or procedure by which an institution provides a related service. The purpose of the definition is to distinguish between the concept or type of activity that will be provided, such as farm business consulting, and the manner in which an institution will provide the particular service. The distinction between the type of related service and the institution's program for providing the service will be addressed further in the discussion of proposed 618.8010. "Related services" would be defined to mean any activity provided by a System bank or association that pertains to the recipient's on-farm, aquatic or cooperative operation, including control of related financial matters. The definition is intended to be broadly construed in order to encompass services, other than the making of loans, that an institution may want to offer to persons or entities eligible to borrow. It should be noted that the proposed definition does not rely upon whether the institution charges fees or makes a profit from offering a service in making a determination as to whether it is considered a "related service." The FCA recognizes that institutions may offer related services at cost or at a slight loss in order to increase customer satisfaction or attract new customers. Such decisions are considered business decisions that will be reviewed in the examination context. The proposed definition of related services is not intended to include advertising or purely promotional activities.

Although other terms, such as "technical assistance," "financial and technical assistance," and "financially related services," are referenced in the Act, the distinction among these types of services has become negligible. In fact, the legislative history for the enactment of the Farm Credit Act of 1971 n1 does not distinguish among these terms. Therefore, in order to reduce any confusion, the proposed definition would include all services referred to above.

n1 Pub. L. 92-181, Dec. 10, 1971.

The PPC work group commented that the on-farm requirement should not be interpreted to limit authorized related services to only those services that relate to the physical operations of the farm. The FCA agrees that Congress did not intend the on-farm requirement to be interpreted in such a restrictive manner and, historically, the FCA has not done so in approving related service programs. The FCA interprets the on-farm requirement to mean that related services must pertain to the farming or aquatic operations of the recipients or be useful in managing the financial matters of such operations. In fact, many of the services specifically mentioned by Congress when it enacted the related services authority in 1971 are related to farming and aquatic operations and controlling the risks associated with such operations rather than being a direct part of the physical operation. Those services specifically mentioned in the statute or legislative history include insurance, estate planning, and tax services.

Finally, the proposed regulation would also define "System banks and associations" to include Farm Credit Banks (FCBs), Agricultural Credit Banks (ACBs), banks for cooperatives (BCs), production credit associations (PCAs), agricultural credit associations (ACAs), Federal land bank associations (FLBAs), and Federal land credit associations (FLCAs). The Federal Agricultural Mortgage Corporation and the Farm Credit Banks Funding Corporation would not be included because these and other similar Farm Credit institutions are not authorized to provide related services. Although service corporations are not included within the term "System banks and associations," these entities would continue to be authorized to offer related services, except insurance, based on section 4.25 of the Act. n2

n2 Section 4.25 of the Act states that service corporations may perform all the functions and services of the banks, with the exception of extending credit and providing insurance.

2. Section 618.8005-Eligibility

Based on the provisions of sections 1.12, 2.5, 2.12(15) and 3.7 of the Act, proposed 618.8005 requires that related services n3 be offered by an institution to persons or entities eligible to borrow from the System. The proposed regulation would determine eligible recipients for related services by reference to persons eligible to borrow as defined in the lending regulations at part 613 of this chapter. Proposed 618.8005(a) would authorize FCBs and associations to offer related services to the persons eligible to borrow as defined in 613.3010; 613.3020(a)(1), (a)(2), and (b); and 613.3045. For BCs, proposed 618.8005(b) would authorize related services to be provided to eligible borrowers as defined in 613.3110 and 613.3120. Proposed 618.8005(c) would authorize ACBs to offer related services appropriate to on-farm and aquatic operations to persons eligible to borrow as specified in paragraph (a) of this section and to offer related services appropriate to cooperative operations to entities eligible to borrow as specified in paragraph (b) of this section.

n3 Although insurance is included within the definition of related services, more specific eligibility requirements are provided in revised 618.8040; those requirements govern eligibility for receipt of insurance.

The FCA is currently developing proposed amendments to the lending eligibility regulations. Once any lending eligibility amendments become final, 618.8005 would be modified as necessary to conform to lending eligibility.

The FCA believes that marketers and processors that meet the eligibility requirements of 613.3045 would also be included within the recipients that Congress considered eligible to receive related services. For any processing and marketing unit to be eligible to borrow, there must be a portion of the operation's throughput that is produced on-farm by the entity or its owners. The FCA believes that related services provided to marketing and processing units would be appropriate to the on-farm or aquatic operations of the unit or its owners. Therefore, these entities would be included within the eligible recipients specified in proposed 618.8005(a). Because rural home residents and farm-related businesses do not have farming or aquatic operations, services provided to them would not meet the statutory "on-farm" requirement and, therefore, they would continue to be excluded from the eligible recipients specified in proposed 618.8005.

The proposed regulation would approach the eligibility provisions for related services offered by ACBs in the same manner as eligibility is treated for FCBs and BCs. An ACB would be authorized under proposed 618.8005(c) to provide related services to persons eligible to borrow from FCBs. Such related services would have to be appropriate to the on-farm and aquatic operations of the recipients. Further, an ACB could provide related services to its cooperative customers, as long as the service is appropriate to their cooperative operations. Therefore, although an FCB and BC will be combined into an ACB, the services that can be provided to each type of borrower under titles I, II, and III of the Act would not change under the proposed regulation.

Recent requests from System institutions have led the FCA to [*54402] consider whether there are situations in which persons eligible to borrow may be denied the ability to receive the benefit of related services merely because an intermediary or other person or entity involved would not meet the eligibility requirements of the Act. The FCA believes that all farmers, ranchers, and other eligible persons and entities should be able to receive the full benefit of the related services authorized in the Act. Similar requests have been received asking the FCA to consider allowing the System to provide fee appraisals for agricultural real estate to entities such as the Farmers Home Administration (FmHA), commercial banks, and other lenders in connection with loan applications from persons eligible to borrow, and loan servicing actions (including bankruptcies and foreclosures) involving agricultural assets. The FCA also received a letter from the FmHA requesting that System institutions be authorized to provide the appraisals.

The FmHA and certain System institutions have stated that there is a shortage of qualified agricultural appraisers in certain areas of the country, especially following the Financial Institutions Reform, Recovery and Enforcement Act. n4 System personnel, who have developed an expertise in agricultural appraisals, could help meet this need. The availability of qualified appraisers would benefit farmers and ranchers in that their property would be fairly valued in situations such as loan applications and loan servicing. Under current regulations, System institutions have not been able to provide the appraisals when they are provided directly to the FmHA or a commercial bank, entities not eligible to borrow from a System institution. Also, the FmHA procedures provide that the FmHA will contract for appraisals rather than having each borrower obtain an appraisal.

n4 Pub. L. 101-73, Aug. 9, 1989.

Therefore, proposed 618.8005(d) would provide that related services may be offered to recipients that do not otherwise meet the eligibility requirements, as long as such service is offered in connection with loan applications, loan servicing, and other transactions between these recipients and persons or entities eligible to borrow under the criteria in proposed 618.8005(a), (b), or (c) discussed above.

The service in question would have to be a part of or pertain to the transaction. For example, if a System institution offered a soil testing service, a natural food store wishing to purchase produce from a farmer could utilize the System institution's service to test the soil for pesticides. Although the eligible farmer directly benefits from the service and could arrange for the testing from the institution, the food store may wish to contract for the service directly in order to ensure independence of the testing. The System institution could not, however, offer tax planning services to the natural food store because tax planning does not pertain to the store's transaction with the farmer and does not directly benefit the eligible farmer. In addition, the authority to provide related services in 618.8005(d) would not depend on which party arranges for or pays for the related services. Finally, for BCs and ACBs, proposed 618.8005(d) would not change the requirements of 613.3120 of this chapter that a voting stockholder must substantially benefit from services provided in connection with foreign export or import transactions.

One of the Regulatory Burden comments stated that System institutions should have the authority to provide related services to non-eligible entities as long as such services did not comprise the majority of the institution's program. The FCA does not believe that statutory or regulatory eligibility requirements depend on the percentage of an institution's services that are provided to the person or entity whose eligibility is in question, and did not include this suggestion in the proposed regulation.

Finally, the FCA does not agree with the view advanced by the Farm Credit Council (FCC) and FRS petitioners that appraisals and other services could be provided to non-eligible entities pursuant to the institutions' incidental authorities under sections 1.5(21), 2.2(20), 2.12(20), and 3.2(16) of the Act. System institutions were created for the express purpose of providing lending and related services. It is a general principle of corporate law that incidental powers are those powers that are directly and immediately appropriate to the execution of powers expressly granted and cannot be used to waive a specific limitation on an express power. n5 Therefore, any use of incidental authorities for activities derived from either lending or related services express powers would still be subject to the limitations on those express powers.

n5 Fletcher Cyc. Corp. 2485 (rev. perm. ed. 1989).

3. Section 618.8010-Related Services Authorization Process

As part of its commitment to reducing the regulatory burden, the FCA proposes to eliminate the existing regulatory requirement that each System bank or association obtain the FCA's prior approval before providing a related service program. In addition, System institutions requested a change in the approval process to lessen the burden and speed up the process. A number of suggestions were made regarding the process; many of these have been incorporated into the proposed regulation.

The proposed regulation sharply reduces the FCA's up-front role in two ways. First, the FCA would only evaluate proposals for new related services up front, that is, only services that have not previously been approved by the FCA. Second, only the service itself, not an institution's program, would initially be evaluated. This means that the FCA's evaluation of new services could occur before the proposing institution prepares a complete feasibility analysis or its funding bank completes its review. In fact, while the FCA would expect well-documented service proposals, an institution would not need to devote valuable resources to developing its operational program before submitting a new related service for the FCA's evaluation. Following the FCA's authorization of the service, any authorized institution could develop and offer a program based on regulatory criteria in proposed 618.8020 and 618.8025 without obtaining prior approval from the FCA. The institution's program would then be subject to review in the course of the examination process.

The first step in the proposed new process would be the compilation of related services that have been determined to meet the definition and other criteria specified in this regulation (the Related Service List or simply "the list"). As provided in proposed 618.8010(c)(2), the list would briefly describe each related service, capturing key distinguishing aspects of the activity, as well as a designation of the types of institutions authorized to offer the specific services. Institutional restrictions would mainly be due to statutory limitations related to eligible recipients. Finally, any special conditions placed on offering a given service would be identified on the list. It is anticipated that these conditions would be the exception rather than the rule and would apply mainly to [*54403] complex services, with readily identifiable safety and soundness risks.

Appendix A contains a sample list consisting of all previously approved related services known to have at least one active program among System banks and associations and those services specifically mentioned in the statute. The sample list is included as an attachment to this Federal Register document for informational purposes only and will not become part of the final regulation.

Although every attempt has been made to identify existing services, the FCA recognizes that its historical records may not be complete. Therefore, System banks and associations currently offering services that meet the related service definition, but are not part of the sample list, should submit such services during the comment period if they wish to continue providing them after the revised regulation becomes effective. Institutions should provide the title of the service and a brief description, including any previous action taken by the FCA on the related service. If there is no existing documentation, then the institution should provide sufficient information for the FCA to consider the service based on the provisions in proposed 618.8010(b). These services may be included on the initial list to be published concurrently with the final regulation. If some services require further study, they will be considered for inclusion on the list after the regulation is finalized.

Once a service is determined to meet the regulatory criteria and is placed on the list, proposed 618.8010(b) would provide that System banks and associations could develop programs and subsequently offer the related service, subject to any special conditions and institutional restrictions identified on the list. This proposal would eliminate the requirement in existing 618.8000(c) that the FCA approve each institution's related services program. The FCA believes that an institution's program for offering the service and its capacity to offer that service can be reviewed during the examination process. Proposed 618.8010(c)(4) would require that when a listed service is first offered by an institution, the institution must notify the FCA's Office of Examination field office responsible for examining that institution.

An institution that wishes to offer a related service not previously evaluated by the FCA would need to submit a written proposal pursuant to proposed 618.8010(b). Neither a formal bank review nor a detailed operational program (per existing regulations) would be required prior to requesting that the FCA review the service. In the event of complex or controversial proposals, proposed 618.8010(b)(3) acknowledges that the FCA, at its discretion, may publish the proposed service in the Federal Register for public comment.

No later than 60 days after receipt of a complete proposal, including any additional information the FCA may require, System institutions would be notified of the FCA's action pursuant to 618.8010(b)(4). Although the FCA would normally act promptly on a proposed service, for good cause and prior to the expiration of the 60 days, the review period could be extended for up to a total of 120 days. The FCA would formally notify all System institutions of its action by bookletter or other appropriate forms of communication.

Proposed new related services would be evaluated by the FCA based on the provisions of proposed 618.8010(b). The FCA would consider two key aspects in evaluating a related service. The first aspect is whether the service is authorized; that is, whether it meets the definition of a related service in proposed 618.8000(b). For example, a service provided by a title I or title II lending institution would have to be appropriate to on-farm operations and would have to be targeted to the defined eligible recipients. When evaluating that service, the FCA would also consider whether the service would be appropriate to cooperative operations and, if so, include BCs and ACBs as authorized institutions.

The second key aspect the FCA would consider is whether significant risk factors are inherent in the service and whether they can be managed or eliminated. This evaluation would involve assessing the degree of risks in the areas of financial liability, operational matters, and conflicts of interest.

Financial liability includes any liability that could arise as a result of offering the service. For example, such liability could arise if institution personnel make management decisions on a customer's behalf. The primary concern is whether such liability has the potential to materially impact an institution's financial condition.

Operational risk is the risk involved in implementing a service. This risk could occur if an institution fails to properly prepare for or administer a service. Examples of how this could arise are: (1) If significant staff training is required in order to competently offer the service, but is not contemplated or planned; or (2) if there are substantial up-front costs in setting up a new service that may not be recouped.

Finally, conflict of interest would include any conflict that might arise between the interests of the institution and those of the recipient as a result of offering the service. An example would be the conflict that could arise when, as part of the farm business consulting service, an institution employee suggests a management strategy that requires the recipient to borrow more money.

If risks were identified in any of these areas but some modification could eliminate, minimize, or control them, the service could be added to the list with special conditions or institutional restrictions. In addition, in order to better evaluate risk areas, a service could be placed on the list subject to the condition that it only be offered on a pilot basis by one or more institutions. If such risks could not be minimized to a degree that would make the service appropriate for System institutions to provide, approval to provide the service would be denied. In considering the risks associated with a proposed new service, the FCA would evaluate the risks as they pertain to any System institution or the System as a whole. Program weaknesses would be addressed through the examination or enforcement functions of the FCA.

In considering the agency's role in reviewing proposed related services, the FCA considered a range of options, including the current prior approval approach and the proposal by the PPC work group. Under the PPC's proposal, institutions would notify the FCA of their intent to offer an existing or new related service program. If the FCA did not object within specified time periods, the institution could offer the service. Although this suggestion would reduce the current regulatory burden, the FCA believes that because it would require every institution to submit a program proposal to the FCA, it would still be more burdensome than necessary. The FCA proposes instead to evaluate each new service only once. If an institution concludes that the service meets the criteria for authorization, it could then offer such service once a feasibility analysis was prepared in accordance with the regulatory requirements. The FCA believes this proposed process will reduce time needed for staff review and the regulatory burden placed on System institutions, while appropriately minimizing the risks of offering unauthorized or unsafe and unsound services. [*54404]

4. Section 618.8015-Policy Guidelines

Existing 618.8000(b) authorizes district and bank boards to establish policies pertaining to related service programs. This section also includes general policy guidelines and requires that the FCA approve the policies. The FCA proposes to amend existing 618.8000(b) primarily by eliminating the requirements that a district bank establish a single related services policy for the district and that the FCA approve these policies.

Section 618.8015 of the proposed regulation would require that each System institution offering related services formulate policies pertaining to the development, implementation, marketing, and offering of related services. This change would reduce the supervisory burden of the funding bank and appropriately place the responsibility on the offering institutions. This change would not, however, absolve the funding bank from providing the necessary guidance on districtwide issues, such as its approach for verifying the feasibility analyses of associations' related service programs.

Proposed 618.8015 would also eliminate the requirement that the FCA approve district and bank policies. This proposed change is consistent with the FCA's intent to remove unnecessary prior approval functions and rely instead on the examination function to evaluate compliance, performance, and safety and soundness.

The FCA proposes to modify the existing guidance for the content of the related services policy. The proposed regulation would require the policy to include clearly stated purposes, objectives, and operating parameters. In addition, the proposed regulation would require institutions to link each related service program it offers to its business plan and long-term strategic goals. Proposed 618.8015(b) and (c) retain the requirements in existing 618.8000(b)(1) and (2) that all related services be offered on an optional basis and that all fees associated with a service be identified and disclosed to the recipient.

The FCA proposes to eliminate as unnecessary the specific requirements in existing 618.8000(b)(4) that banks and associations maintain detailed records because other regulatory provisions exist that require maintaining such records in order to comply with the institutions' internal control policies.

The FCA also proposes to eliminate the requirement in existing 618.8000(b)(4) that the bank annually review each service offered in the district. This change was also supported by the PPC work group and in the FRS petition. As discussed above, the FCA has concluded that the emphasis on accountability is at the institution level, and regularly reviewing an activity and reporting the results to the board should be a standard part of managing an institution.

5. Section 618.8020-Feasibility Requirements

Sections 1.12, 2.5, 2.12, and 3.7 of the Act authorize FCBs, ACBs, PCAs, ACAs, FLBAs, FLCAs and BCs, respectively, to offer related services. Each section specifies that there be a determination of feasibility before a related service is offered. The FCA believes that the ultimate accountability and responsibility in offering related services rests with the institution offering the service. Therefore, although the funding bank has a statutory role to determine that related services are feasible, each offering institution should document the feasibility of providing a related service.

Neither the statute nor the existing regulation defines feasibility. Under the existing approval process for related service programs, a definition is not critical because the feasibility determination is centralized at the bank level and reviewed by the FCA in the prior approval process. However, the proposed rule moves to a post-review environment, which creates a need to specify the feasibility criteria.

Section 618.8020 of the proposed regulation would enumerate minimum feasibility requirements. The FCA proposes that the feasibility analysis include support that a proposed related service is an FCA-authorized service. (If a proposed service is not authorized, the institution can request that it be authorized via the process outlined in 618.8010(b).) The feasibility analysis would also include an overall cost/benefit analysis based on the evaluation of the market, pricing, competition, expected financial returns, operational risks, financial liability, and conflicts of interest. This would also include an analysis to show that the service is compatible with the offering institution's business plan and strategic goals. These requirements should not be interpreted as all-encompassing, and in many instances there will be other issues that will also need to be addressed.

6. Section 618.8025-Feasibility Reviews

Section 2.5 of the Act authorizes a PCA to offer related services as determined feasible by the board of directors of the FCB. Section 2.12(15) of the Act authorizes an FLBA to offer related services that it determines, with FCB approval, are feasible. Therefore, the FCB has a statutory role in the determination of whether a related service program is feasible for an association to offer. Historically, the FCB has conducted reviews of each related service, at least annually, at both the bank and association level. Additionally, existing 618.8000(a)(5) requires that the bank board annually determine the financial feasibility of its related service programs.

As stated in the preceding discussion of proposed 618.8020, the FCA believes the determination of feasibility of a proposed program should ultimately be the responsibility of the offering institution. Nonetheless, the funding bank does have a statutory responsibility. Therefore, the FCA proposes in 618.8025 to require the funding bank to verify that the association performed the feasibility analysis pursuant to 618.8020. It would permit the funding bank to prevent the offering of the related service only if it determines that the feasibility analysis is inadequate or that the analysis fails to indicate that the program can be feasibly provided by the association. Any conclusion by the bank that the feasibility analysis is incomplete or fails to demonstrate the program's feasibility must be fully supported and communicated to the association in writing within 60 days of its submission to the bank.

The FCA concludes that this approach creates the least amount of burden, maintains the funding bank's statutory role, supports the bank's ability to supervise its credit, and permits greater association autonomy. The FRS petitioners suggested making the bank's determination of feasibility automatic, in the absence of extraordinary circumstances, for those proposed services that the FCA has authorized. The FCA does not agree that either the bank's or association's determination of feasibility should be automatic. The FCA's determination of whether a particular service should be authorized is fundamentally different from the determination of whether an individual service program is feasible for a given association. Moreover, the FCA does not accept the premise that the funding bank could fulfill its statutory role by making an automatic assumption of feasibility for those services that the FCA has already authorized. [*54405]

7. Section 618.8030-Out-of-territory Related Services

Proposed 618.8030 would allow a System bank or association to offer a related service outside of its chartered lending territory. It would replace guidance provided in FCA Bookletter 366-OE, which implemented the FCA Board policy statement concerning the offering of out-of-territory related services (58 FR 36410, July 2, 1993). Presently, an institution is required to obtain the concurrence of all System banks or associations serving the territory before it can offer its related services. The other chief conditions are: (1) A common program requirement within a district (associated with existing related service regulations); and (2) a requirement that the service provided within the institution's territory remain as the primary component of its services.

The proposed regulation eliminates the common program feature in 618.8000(b)(3) because the FCA recognizes that this feature reflects an out-of-date system structure. In addition, the PPC work group and FRS petition both requested that the FCA drop the common program requirement in favor of greater flexibility.

The requirement that related services provided within an institution's own territory remain the institution's primary service component is not part of the proposed regulation. The FCA concludes that as long as an institution is able to adequately serve the needs of eligible borrowers in its chartered territory, there should not be a limit on how much business it conducts out of its territory. The FCA agrees with a comment made by the PPC work group that services can have a positive effect on an institution's credit program by providing diversity and an additional income stream.

Under the proposed regulation, the requirement for consent before offering related services out-of-territory would be modified. In proposed 618.8030(a), an institution would be required to obtain the concurrence of at least one institution chartered to service that outside territory. The FCA believes it is important to preserve the rights of all System institutions within their chartered territories. The fact that some territories overlap is irrelevant to the right of an institution to determine what services it wishes to provide in its own territory. Thus, the FCA believes that if a bank or association wishes to make a related service available to its customers, it can arrange with any other System institution to provide the service in its chartered territory without any other institution's consent. This outcome is no different from the current situation in which an institution can offer a service itself or it can contract with a non-System entity to offer the service; in either case, the institution is not required to obtain the consent of any other institution.

The proposed regulation also requires that for services provided out of its territory, the providing institution must meet all of the requirements of subparts A and B of part 618, including adopting a related services policy and determining feasibility. It should be noted that if the providing institution is expanding an existing program, a new feasibility analysis and bank verification would be needed. An institution that gives consent to another bank or association to provide a related service in its chartered territory need must meet the requirements of proposed 618.8030, but need not comply with the other requirements of subparts A and B, unless the program consented to imposes on the consenting institution a financial obligation, in which case the consenting institution must comply with 618.8015, 618.8020, and 618.8025.

Another aspect to the out-of-territory issue is whether an institution that initially concurs in another institution providing related service programs in its territory can later withdraw its approval. One example could be a situation in which an institution has approved a service in its territory because that service is not currently offered, but later that institution wishes to begin exclusively offering the same service. The FCA believes that by entering into a written agreement with specific terms, conditions, and timeframes, the consenting institution can best protect its interests. One example could be that the institutions enter into a formal contractual arrangement that provides for termination by either party with proper notice.

B. Subpart B-Member Insurance

1. Section 618.8040-Authorized Insurance Services, Debtor/Creditor Relationship

The PPC work group and the Insurance petition raised questions concerning the authority in section 4.29 of the Act for banks (excluding banks for cooperatives) and associations to provide to members and borrowers credit or term life and credit disability insurance appropriate to protect the loan commitment. When it enacted section 4.29 of the Act, Congress stated that for System institutions to "sell credit or term life, there must be a debtor-creditor relationship and the amount of insurance should be appropriate to protect but not exceed the total loan commitment to the member-borrower." n6 Therefore, current regulations require that a debtor-creditor relationship exist for the sale of credit or term life and credit disability insurance. Although the Insurance petition requested that this requirement be removed from the regulations, the FCA concludes that this is a statutory requirement, not only a regulatory requirement.

n6 See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 43 (1980).

Questions have also arisen as to whether the debtor-creditor relationship must exist with the institution offering credit or term life or credit disability insurance. For example, in situations in which related services may be offered out-of-territory, a borrower may have a debtor-creditor relationship with the bank or association in the territory, but an out-of-territory association may be offering the insurance. The FCA interprets section 4.29 of the Act and its legislative history to mean that there must be a borrowing relationship with a System institution, but not necessarily with the institution offering the service. Therefore, as long as the recipient of credit or term life or credit disability insurance has a debtor-creditor relationship with a bank or association of the System, the insurance can be offered by any institution authorized to provide insurance to that recipient. Accordingly, in proposed 618.8040(b)(1), the FCA would add a statement that the debtor-creditor relationship does not necessarily have to be with the offering institution.

Another question related to the debtor-creditor requirement was raised by the PPC work group. The issue involves situations in which a borrower relies upon a spouse's income for repayment of the loan and wishes to purchase credit or term life and disability insurance on the spouse, but the spouse is not a co-maker of the loan. The FCA considers it to be unlikely that a spouse who significantly contributes to the loan's repayment would not have signed the note. Nevertheless, because spouses may have contractual liability for the debt by operation of state law, the proposed regulation would permit the sale of credit insurance on a borrower's spouse. As with all other situations, the amount of insurance offered could not exceed the total amount of the loan commitment to the borrower. [*54406]

The FCA's review of the legislative history on the enactment of section 4.29 of the Act indicates that a debtor-creditor relationship is not necessary for System institutions to provide other insurance necessary to protect the member's farm or aquatic unit, such as hail and multiple-peril crop insurance. n7 Accordingly, this restriction has been deleted in the proposed regulation. Purchasers of other insurance would, however, have to be either members or borrowers. Proposed 618.8040(b)(2) would define members (for subpart B only) to include a stockholder or participation certificate holder who acquired stock or participation certificates to obtain a loan, for investment purposes, or to qualify for other services of the association or bank. Therefore, the reference in existing 618.8030(b)(1) to eligibility for landlords of tenants and tenants of landlords having a debtor-creditor relationship would be removed as unnecessary. Such tenants or landlords would be eligible to receive hail or multiple-peril crop insurance upon becoming members of a bank or association. Similar to the debtor-creditor requirement in proposed 618.8040(b)(1), the purchaser of other types of insurance does not have be to a borrower or member of the offering bank or association, but can be a borrower or member of any System bank or association.

n7 See, H.R. Rep. No. 1287, 96th Cong., 2nd Sess., 44 (1980).

2. Section 618.8040(b)(5)-Incentive Compensation for Sale of Insurance

Section 618.8040(b)(5) is proposed to be amended to clarify how incentive compensation for sale of insurance may be provided to employees. The existing regulation states that "Bank or association personnel shall not benefit, directly or indirectly, from insurance sales by receipt of commissions, gifts, or incentive awards." The proposed regulations would allow incentive compensation for sale of insurance with some limitations.

The prohibition of compensation for insurance sales was included in the existing regulation to prevent conflicts of interest between System employees and borrowers and to implement the requirement in section 4.29 of the Act that borrowers not be coerced into buying insurance from System institutions. The FCA believes that unrestricted compensation of loan officers or other employees, based on volume of insurance sales can lead to abusive, high-pressure sales practices. In addition, other Federal financial regulators agree and continue to place limitations on employee compensation derived from insurance sales. At the same time, however, the FCA recognizes that if sale of insurance is a part of an employee's regular job, incentive compensation should be allowed to some extent. Additionally, the FCA is aware that some institutions have instituted bonus pools that are shared by employees who may not be involved in selling insurance. The proposed regulation accommodates those arrangements as well.

The issue of employee compensation for insurance sales was raised in 1992 when it became known that some institutions had employee compensation programs that allowed direct compensation for insurance sales. On May 20, 1992, the FCA issued Bookletter 327-OE, which recognized that some System employees were compensated for insurance sales in one of two ways: (1) Incentive bonuses were directly tied to the insurance sales generated by each employee; or (2) incentive bonuses were tied in some way to the net income of the institution, part of which was derived from sales of insurance. The bookletter stated that compensation that is tied directly to insurance sales is not in compliance with current regulations. However, the FCA did not intend to apply that determination to the second type of plan where compensation is tied to the net income of an institution. Since that bookletter was issued, the FCA has received a number of inquiries from System institutions requesting clarification on whether specific compensation plans would be considered acceptable. In addition, the PPC work group requested that the FCA consider the issue of compensation for sale of insurance as part of its project to amend 618.8000.

Proposed 618.8040(b)(6) allows for incentive compensation for sale of insurance in line with what is currently allowed in the commercial banking industry. In any single year, the amount of incentive compensation attributable to insurance sales cannot exceed 5 percent of the recipient's annual base salary. This limitation applies to individual incentive plans, as well as bonus pools or any other type of plan. If an employee participates in both an individual plan and some form of bonus pool, the amount of incentive compensation attributable to sale of insurance received from each plan must be aggregated for purposes of determining whether it meets the 5-percent limitation.

It should be noted that insurance is the only related service for which there is any restriction on employee incentive compensation. At this time, the FCA has concluded that there is no need for similar limitations on other related services because those services are not as directly linked to the loan-making process. Furthermore, customers may be able to more readily evaluate the benefit of other related services.

3. Section 618.8040-Other Regulatory Changes

The requirement in 618.8040(b)(10) that the bank review annually the individual association member insurance services would be eliminated. This provision was originally included to be consistent with other related service requirements in subpart A, which are now also to be removed. The proposed rule removes the annual review requirement from both subparts A and B. As previously discussed, the FCA believes the review function is most appropriately handled at the level of the institution offering the program. The FCA expects that each institution offering insurance will review its program periodically to determine that it is operating in a safe and sound manner and that it remains consistent with the institution's business plan and long-term strategic goals.

In order to reflect the creation of Agricultural Credit Banks, the FCA clarifies that under proposed 618.8040(a) ACBs may provide insurance to the persons eligible to borrow as identified in titles I and II of the Act and corresponding regulations. This would not be a change from the existing regulations.

Technical changes were also made to parts 611 and 620 in order to conform with the proposed regulatory changes in part 618, subparts A and B.

List of Subjects

12 CFR Part 611
Agriculture, Banks, Banking, Rural areas.

12 CFR Part 618
Agriculture, Archives and records, Banks, Banking, Insurance, Reporting and recordkeeping requirements, Rural areas, Technical assistance.

12 CFR Part 620
Accounting, Agriculture, Banks, Banking, Reporting and recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, parts 611, 618, and 620 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be amended to read as follows: [*54407]

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, 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, 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 G-Mergers, Consolidations, and Charter Amendments of Associations

611.1125 -- [Amended]

2. Section 611.1125 is amended by removing the word "financially" in paragraph (b)(2).

PART 618-GENERAL PROVISIONS

3. The authority citation for part 618 is revised to read as follows:

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

618.8030 -- [Redesignated as 618.8040]

4. In subpart B, 618.8030 is redesignated as new 618.8040.

5. Subpart A is revised to read as follows:

Subpart A-Related Services

Sec.

618.8000 Definitions.

618.8005 Eligibility.

618.8010 Related services authorization process.

618.8015 Policy guidelines.

618.8020 Feasibility requirements.

618.8025 Feasibility reviews.

618.8030 Out-of-territory related services.

Subpart A-Related Services

618.8000 -- Definitions.

For the purposes of this subpart, the following definitions shall apply:

(a) Program means the method or procedures used to deliver a related service. This distinguishes the particulars of how a related service will be provided from the type of activity or concept.

(b) Related service means any service or activity provided by a System bank or association that pertains to the recipient's on-farm, aquatic, or cooperative operations, including control of related financial matters. The term "related service" includes, but is not limited to, technical assistance, financial assistance, financially related services and insurance, but does not include lending or leasing activities.

(c) System banks and associations means Farm Credit Banks, agricultural credit banks, banks for cooperatives, agricultural credit associations, production credit associations, Federal land bank associations and Federal land credit associations.

618.8005 -- Eligibility.

(a) Farm Credit Banks and associations may offer related services to persons eligible to borrow as defined in 613.3010, 613.3020(a)(1), (a)(2), (b), and 613.3045 of this chapter.

(b) Banks for cooperatives may offer related services to entities eligible to borrow as defined in 613.3110 and 613.3120 of this chapter.

(c) Agricultural credit banks may offer related services appropriate to on-farm and aquatic operations to the persons eligible to borrow specified in paragraph (a) of this section and may offer related services appropriate to cooperative operations of entities eligible to borrow as specified in paragraph (b) of this section.

(d) System banks and associations may provide related services to recipients that do not otherwise meet the requirements of paragraphs (a), (b), and (c) of this section in connection with loan applications, loan servicing, and other transactions between these recipients and persons eligible to borrow as defined in paragraphs (a), (b), or (c) of this section, as long as the service provided is a part of or pertains to the transaction between the parties. Such services include, but are not limited to, fee appraisals of agricultural assets performed for the Farmers Home Administration, commercial banks and other lenders.

618.8010 -- Related services authorization process.

(a) Authorities. (1) The Farm Credit Administration (FCA) shall authorize related services that meet the criteria specified in this regulation. System banks and associations may only offer related services that are authorized by the FCA.

(b) New service proposals. (1) A System bank or association that wishes to offer a related service that the FCA has not previously authorized must submit to the FCA, in writing, a proposal that includes a description of the service, how it meets the regulatory definition of "related services" in 618.8000(b), and the risk analysis cited in 618.8020(b)(3). The FCA will evaluate the proposed service based on the information submitted, and may also consider whether there are extenuating circumstances or other compelling reasons that justify the proposed service or support a determination that the service is not authorized. This evaluation will focus primarily on Systemwide issues rather than on institution or program-specific factors.

(2) When authorizing a proposed related service, at its discretion, the FCA may impose special conditions or limitations on any program to offer a related service.

(3) At its discretion the FCA may, during its evaluation of a proposed related service, publish the proposed related service in the Federal Register for public comment.

(4) Within 60 days of the FCA receiving a completed proposal, including any additional information the FCA may require, the FCA will act on the request. The FCA shall approve the request, deny the request, or notify the requesting institution that the service shall be published for public comment in the Federal Register. For good cause and prior to the expiration of the 60 days, the FCA may extend this period for an additional 60 days.

(5) The FCA shall notify all System banks and associations by bookletter or other means each time it determines whether a proposed related service is or is not authorized.

(c) Previously authorized services. (1) For related services that have been authorized by the FCA, any System bank or association may develop a program and subsequently offer the related service to eligible recipients, subject to any special conditions or institutional limits placed by the FCA. These programs will be subject to review and evaluation during the examination process.

(2) The FCA shall make available to all Farm Credit institutions a list of such related services ("related services list" or "list") and will update it in accordance with paragraph (b)(5) of this section. The list will contain the following:

(i) A description of each related service;

(ii) Identification of any special conditions on how the related service may be offered; and

(iii) The types of institutions authorized to offer each type of related service.

(3) Within 30 days of implementing a related service program already on the list, the System bank or association must notify the FCA Office of Examination field office responsible for examining that institution.

618.8015 -- Policy guidelines.

(a) The board of directors of each institution providing related services shall adopt a policy addressing related services. The policy should include clearly stated purposes, objectives, and operating [*54408] parameters for offering related services and a requirement that each service offered be consistent with the institution's business plan and long-term strategic goals. Such policy should also be subject to review under the institution's internal control policy.

(b) All related services must be offered to recipients on an optional basis. If the institution requires a related service as a condition to borrow, it must inform the recipient that the related service can be obtained from the institution or from any other person or entity offering the same or similar related services.

(c) All fees for related services shall be separately identified from loan interest charges and disclosed to the recipient of the service.

618.8020 -- Feasibility requirements.

For every related service program an institution provides, it must document program feasibility. The feasibility analysis shall include the following:

(a) Support for the determination that the related service is authorized; and

(b) An overall cost-benefit analysis of offering the program that demonstrates its feasibility, taking into consideration the following items:

(1) An analysis of how the program relates to or promotes the institution's business plan and strategic goals;

(2) An analysis of the expected financial returns of the program which, at a minimum, must include an evaluation of market, pricing, competition issues, and whether the program would be expected to make a profit or if its purpose is to be combined with a broader objective aimed at contributing to the overall financial health of the institution or the individual borrower; and

(3) An analysis of the risk in the program, including:

(i) An evaluation of the operational costs and risks involved in offering the program, such as management and personnel requirements, training requirements, and capital outlays;

(ii) An evaluation of the financial liability that may be incurred as a result of offering the program and any insurance or other measures that are necessary to minimize these risks; and

(iii) An evaluation of the conflicts of interest, whether real or perceived, that may arise as a result of offering the program and any steps that are necessary to reduce these conflicts.

618.8025 -- Feasibility reviews.

Prior to an association offering a related service program for the first time, the board of directors of the funding bank must verify that the association has performed a feasibility analysis pursuant to 618.8020. The bank's review is limited to a determination that the feasibility analysis is complete and that the analysis establishes that it is feasible for the association to provide the program. Any conclusion by the bank that the feasibility analysis is incomplete or fails to demonstrate the program's feasibility must be fully supported and communicated to the association in writing within 60 days of its submission to the bank.

618.8030 -- Out-of-territory related services.

System banks and associations may offer related services outside their chartered territories subject to the following condition. Any System bank or association desiring to offer related services outside its chartered territory must obtain the consent of at least one institution chartered to serve the territory in which the related service is to be provided. Such consent shall be in the form of a written agreement with specific terms and conditions, including timeframes.

(a) The providing institution must fulfill all requirements of subparts A and B of this part 618.

(b) An institution that consents to another bank or association providing a related service in its chartered territory must meet the requirements of this section, but need not comply with the other requirements of subparts A and B of this part 618, unless the program consented to imposes a financial obligation on the consenting institution. In such cases, the consenting institution must comply with 618.8015, 618.8020 and 618.8025.

6. Newly designated 618.8040 is amended by revising paragraph (b)(1); by removing paragraph (b)(10); by redesignating existing paragraphs (b)(2) through (b)(9) as paragraphs (b)(3) through (b)(10); by adding a new paragraph (b)(2); by removing the reference " 618.8030(b)(3)(i)" and adding in its place, the reference " 618.8040(b)(4)(i)" in newly designated paragraph (b)(3); and by revising newly designated (b)(6) to read as follows:

Subpart B-Member Insurance

618.8040 -- Authorized insurance services.

* * * * *

(b) Bank and association board policies governing the provision of member insurance programs shall be established within the following general guidelines:

(1) A System bank or association may provide credit or term-life or credit-disability insurance only to persons who have a loan or lease with a System bank or association. The loan or lease does not necessarily have to be with the institution providing the insurance. Term-life insurance coverage may continue after the loan has been repaid or the lease terminated, provided the member can reasonably be expected to borrow again within 2 years, and provided the continuation of insurance is not contrary to state law.

(2) A debtor-creditor relationship is not required for the sale of other insurance specified in paragraph (a) of this section, as long as purchasers are members or borrowers of a System bank or association. For the purposes of this section, "member" means a stockholder or participation certificate holder who acquired stock or participation certificates to obtain a loan, for investment purposes, or to qualify for other services of the association or bank.

* * * * *

(6) Bank or association personnel shall not benefit from insurance sales by receipt of commissions or gifts from underwriting insurance companies. However, an employee may participate in an institution's incentive plan under which incentive compensation is provided for the sale of insurance. In any single year, such compensation shall not exceed an amount equivalent to more than 5 percent of the recipient's annual base salary.

* * * * *

PART 620-DISCLOSURE TO SHAREHOLDERS

1. 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]

2. Section 620.5 is amended by removing the word "financial" and adding in its place, the word "related" each place it appears in paragraph (a)(3).

Dated: October 26, 1994.

Floyd Fithian,

Acting Secretary, Farm Credit Administration Board. [*54409]


APPENDIX A TO THE PREAMBLE—SAMPLE RELATED SERVICES LIST 1
Authorized institutions
Type of service
Description
Special Conditions
ACB (Title I and II), FCB, ACA, PCA,FLBA, FLCAEstate Planning Service.Providing information and assistance concerning development of estate plans. Does not include providing legal counsel or advice or executing the estate planning documents.
ACB, FCB, BC, ACA, PCA, FLBA, FLCAFee Appraisal Service.Providing real and personal property appraisals and evaluations. (Note: appraisals done in conjunction with making or servicing System loans are not considered related services for the purpose of this regulation.)
ACB, FCB, BC, ACA, PCA, FLBA, FLCARecordkeeping Service (including Agrifax).Providing recordkeeping systems tailored to recipient’s needs.
ACB, FCB, BC, ACA, PCA, FLBA, FLCATax Planning and Preparation.Preparing tax returns and assisting recipients in understanding tax implications of alternative management decisions and strategies.
ACB (Title I and II), FCB, BC, ACA, PCA,FLBA, FLCAFarm Business Consulting.Assisting with business planning for on-farm or aquatic operations. Includes such activities as assisting individuals in defining business goals, identifying management problems, and formulating or analyzing alternative strategies for achieving for achieving goals. Institution personnel may not be involved in making management decisions.Institution must have procedures in place to ensure conflicts of interest do not occur between the credit and business consulting function.
ACB (Title III), BCCooperative Business Consulting.Providing consulting services to cooperatives or other eligible recipients to assist management and directors in making business decisions. May include educational seminars, development of computer services, business analysis, feasibility studies, and activity coordination (e.g., coordination of activities on mergers or formation of joint ventures). Institution personnel may not be involved in making management decisions.Institution must have procedures in place to ensure conflicts of interest do not occur between the credit and business consulting functions.
ACB (Title III), BCForeign Currency Exchange.Providing foreign currency exchange services necessary to individual transactions that may be financed under Title III, section 3.7(b) of the Farm Credit Act of 1971, as amended.Subject to the criteria under 12 CFR 614.4900.
ACB (Title III), BCFinancial Risk Management for CustomersProviding risk management products that enable customers to hedge interest rate risk inherent in their balance sheets. Limited to the following derivative products:
Interest rate swaps, caps, collars and floors;
Forward rate agreements; and
Exchange-traded and over-the-counter interest rate options on eligible interest rate futures contracts.

(Products may be offered as part of loan packages or as stand-alone hedging tools.)
(1) Interest rate swaps should be included with the borrower’s total debt when calculating lending limits under 12 CFR part 614, subpart J. For swaps where the bank keeps an offsetting position, it must include the credit risk of the swaps with the borrower’s total debt when calculating lending limits. Credit limits for each counterparty should be determined by reviewing the potential magnitude of adverse payment increases over the life of the swap.
(2) Related services programs are subject to annual audits by a CPA.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Credit Life Insurance or Mortgage Life Insurance.Coverage that pays off an outstanding loan or mortgage in the event of the policy holder’s death.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Group Term Life Insurance.One-year group life insurance coverage that is renewable at the end of each year.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Credit Disability and Accident Insurance or Mortgage Disability Insurance.Insurance that provides for loan or mortgage payments, or some degree of income protection if the insured is disabled.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Hospital Income InsuranceInsurance that provides a specific amount of income while the insured is hospitalized. A form of credit disability insurance, and subject to the debtor-creditor requirement.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Multiple-peril Crop insurance (including insurance provided by the Federal Crop Insurance Corporation).Insurance covering hazard incident to the growing and storage of crops.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Crop Hail Insurance.Insurance providing protection against damage or loss of crops due to hail or certain other named perils.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Hay (or Other Crop) Fire Insurance.Insurance that covers loss of hay or other crops due to fire.
ACB (Title I and II), FCB, ACA, PCA, FLBA, FLCA.Title InsuranceInsurance against loss or damage resulting from defects or failure of title or from the enforcement of liens existing against title at the time of the insurance.
fn 1 The sample list is included as an attachment to this
Federal Register document for informational purposes only. The
attachment will not become part of the final regulation.

[FR Doc. 94-26839 Filed 10-28-94; 8:45 am]

BILLING CODE 6705-01-P