Title: PROPOSED RULE--Loan Policies and Operations--12 CFR Part 614
Issue Date: 07/07/1981
Agency: FCA
Federal Register Cite: 46 FR 35109
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 614

Loan Policies and Operations

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

SUMMARY: The Farm Credit Administration, by its Federal Farm Credit Board, publishes for comment proposed new and amended regulations which would implement two of the major authorities conferred on institutions of the Farm Credit System by the Farm Credit Act Amendments of 1980 (Pub. L. 96-592), and a proposed amendment to its regulation concerning interest rates. The major authorities under the Farm Credit Act Amendments of 1980 proposed to be implemented by these regulations relate to: (1) the financing of international transactions by banks for cooperatives; and (2) the discounting of agricultural paper with Federal intermediate credit banks by other financial institutions, including commercial banks.

In addition, 614.4080 is being amended to provide district Farm Credit boards with greater flexibility in setting interest rates and in approving individual interest rate changes by Farm Credit banks either on a case-by-case basis or pursuant to an interest rate plan within which bank management may establish rates. The recent volatility of debt interest rates has required that Farm Credit banks be more responsive in adjusting loan rates to maintain earnings and capital levels and to avoid shifts in loan volume, and the current practice of adjusting rates monthly does not provide the necessary responsiveness.

DATES: Written comments must be received on or before August 31, 1981.

ADDRESSES: Submit any comments in writing to Donald E. Wilkinson, Governor, Farm Credit Administration, Washington, DC 20578. Copies of all communications received will be available for examination by interested persons in the Office of Director, Public Affairs Division, Office of Administration, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:


Larry H. Bacon, Deputy Governor, Office of Administration, Farm Credit Administration, 490 L'Enfant Plaza, S.W., Washington, DC 20578 (202-755-2181)

For the convenience of the reader, a redesignation table showing the old sections of Part 614 and the new is shown below.

PART 614 -- LOAN POLICIES AND OPERATIONS


Section Previous section

Subpart A -- General
614.4000 Basic responsibilities Same.
614.4010 Supervision by the Farm Credit Administration Same.
614.4020 Delegation Same.
614.4030 Intent of delegation Same.
614.4031 Policies for delegation of authority Same.
614.4040 Bank guideline responsibilities Same.
614.4050 Bank supervision of associations Same.
614.4051 Federal land bank and Federal intermediate credit bank reviews Same.
614.4060 Association responsibilities Same.
Subpart B -- Chartered Territories
614.4070 Loans outside the established territory -- Federal land bank associations, and production credit associations Same.
614.4080 Loans outside of bank's territory -- banks for cooperatives Same.
Subpart C -- Lending Authorities
614.4090 Federal land banks Same.
614.4100 Federal intermediate credit banks Same.

614.4110 Production credit associations Same.
614.4120 Banks for cooperatives Same.
614.4130 Approval Same.
Subpart D -- General Loan Policies for Banks and Associations
614.4140 Sound loan Same.
614.4150 Credit factors Same.
614.4160 Lending objective Same.
614.4165 Special credit needs Same.
614.4170 Borrower liability Same.
Subpart E -- Loan Terms and Conditions
614.4180 Federal land banks Same.
614.4190 Federal intermediate credit banks Same.
614.4200 Production credit associations Same.
614.4210 Banks for cooperatives Same.
Subpart F -- Security Requirements
614.4220 General Same.
614.4230 Federal land banks Same.
614.4240 Federal intermediate credit banks Same.
614.4250 Production credit associations Same.
614.4260 Banks for cooperatives Same.
614.4261 Security and appraisal standards -- banks for cooperatives Same.
Subpart G -- Interest Rates and Changes
614.4270 Policy Same.
614.4280 Interest rates Same.
614.4281 Discounts and related fees -- banks for cooperatives New.

614.4290 Interest on past due loans Same.
614.4300 Other charges and fees Same.
614.4310 Interest rate limitations for Federal intermediate credit banks Same.
614.4320 Production credit associations Same.
614.4321 Interest rate program Same.
Subpart H -- Loan Participations
614.4330 General Same.
614.4331 Federal land banks Same.
614.4332 Federal intermediate credit banks Same.
614.4333 Production credit associations Same.
614.4334 Banks for cooperatives Same.
Subpart I -- Loss-Sharing Agreements
614.4340 General Same.
614.4345 Guaranty agreements Same.
Subpart J -- Lending Limits
614.4350 General Same.
614.4351 Federal land banks Same.
614.4352 Federal intermediate credit banks Same.
614.4353 Production credit associations Same.
614.4354 Banks for cooperatives Same.
614.4360 Computation of obligation for lending limit determination Same.
Subpart L -- Notice of Action and Appeals
614.4440 Notice of action on loan application Same.
614.4441 Applicant's right to appeal Same.

614.4442 Records Same.
Subpart M -- Loan Approval Requirements
614.4450 General requirements Same.
614.4460 Loan approval responsibility Same.
614.4470 Loans subject to bank prior approval Same.
Subpart N -- Loan Servicing Requirements
614.4510 General Same.
614.4511 Federal land bank association compensation Same.
614.4512 Compromise of indebtedness Same.
Subpart O -- Special Lending Programs
614.4520 General Same.
614.4530 Special loans, production credit associations Same.
Subpart P -- Federal Intermediate Credit Bank Financing of Other Financial Institutions
614.4540 General 614.4540 and 614.4550.
614.4550 Eligibility 614.4560 and 614.4570.
614.4555 Appeal rights New.
614.4560 Requirements for establishing and maintaining the discount privilege 614.4560.
614.4565 Lending limit New.
614.4570 General collateral 614.4600.
614.4580 Use of funds New.
614.4590 General financing agreement 614.4660.
614.4600 Methods of financing 614.4590, 614.4630, 614.4631, and 614.4632.

614.4610 Loans eligible for discount New.
614.4620 Multiple applicants New.
614.4630 Insolvency of other financing institutions 614.4640.
614.4640 Rates and fees New.
614.4650 Loss of discount privileges 614.4620.
Subpart Q -- Banks for Cooperatives Financing International Trade
614.4700 Financing foreign trade receivables New.
614.4710 Bankers acceptance financing New.
614.4720 Letters of credit New.
614.4800 Guarantees -- banks for cooperatives New.
614.4810 Standby letters of credit New.
614.4900 Foreign exchange -- banks for cooperatives New.


Therefore, it is proposed to amend 12 CFR, Chapter VI, by revising and recodifying the table of contents as follows:

TEXT:
PART 614 -- LOAN POLICIES AND OPERATIONS


Subpart A -- General

Sec.

614.4000 Basic responsibilities.

614.4010 Supervision by the Farm Credit Administration.

614.4020 Delegation.

614.4030 Intent of delegation.

614.4031 Policies for delegation of authority.

614.4040 Bank guideline responsibilities.

614.4050 Bank supervision of associations.

614.4051 Federal land bank and Federal intermediate credit bank credit reviews.

614.4060 Association responsibilities.

Subpart B -- Chartered Territories

614.4070 Loans outside the established territory -- Federal land bank associations, and production credit associations.

614.4080 Loans outside of bank's territory -- banks for cooperatives.

Subpart C -- Lending Authorities

614.4090 Federal land banks.

614.4100 Federal intermediate credit banks.

614.4110 Production credit associations.

614.4120 Banks for cooperatives.

614.4130 Approval.

Subpart D -- General Loan Policies for Banks and Associations

614.4140 Sound loan.

614.4150 Credit factors.

614.4160 Lending objective.

614.4165 Special credit needs.

614.4170 Borrower liability.

Subpart E -- Loan Terms and Conditions

614.4180 Federal land banks.

614.4190 Federal intermediate credit banks.

614.4200 Products credit associations.

614.4210 Banks for cooperatives.

Subpart F -- Security Requirements

614.4220 General.

614.4230 Federal land banks.

614.4240 Federal intermediate credit banks.

614.4250 Production credit associations.

614.4260 Banks for cooperatives.

614.4261 Security and appraisal standards -- banks for cooperatives.

Subpart G -- Interest Rates and Changes

614.4270 Policy.

614.4280 Interest rates.

614.4281 Discounts and related fees -- banks for cooperatives.

614.4290 Interest on past due loans.

614.4300 Other charges and fees.

614.4310 Interest rate limitations for Federal intermediate credit banks.

614.4320 Production credit associations.

614.4321 Interest rate program.

Subpart H -- Loan Participations

614.4330 General.

614.4331 Federal land banks.

614.4332 Federal intermediate credit banks.

614.4333 Production credit associations.

614.4334 Banks for cooperatives.

Subpart I -- Loss-Sharing Agreements

614.4340 General.

614.4345 Guaranty agreements.

Subpart I -- Loss-Sharing Agreements

614.4340 General.

614.4345 Guaranty agreements.

Subpart J -- Lending Limits

614.4350 General.

614.4351 Federal land banks.

614.4352 Federal intermediate credit banks.

614.4353 Production credit associations.

614.4354 Banks for cooperatives.

614.4360 Computation of obligation for lending limit determination.

Subpart L -- Notice of Action and Appeals

614.4440 Notice of action on loan application.

614.4441 Applicant's right to appeal.

614.4442 Records.

Subpart M -- Loan Approval Requirements

614.4450 General requirements.

614.4460 Loan approval responsibility.

614.4470 Loans subject to bank prior approval.

Subpart N -- Loan Servicing Requirements

614.4510 General.

614.4511 Federal land bank association compensation.

614.4512 Compromise of indebtedness.

Subpart O -- Special Lending Programs

614.4520 General.

614.4530 Special loans, production credit associations.

Subpart P -- Federal Intermediate Credit Bank Financing of Other Financial Institutions

614.4540 General.

614.4550 Eligibility.

614.4555 Appeal rights.

614.4560 Requirements for establishing and maintaining the discount privilege.

614.4565 Lending limit.

614.4570 General collateral.

614.4580 Use of funds.

614.4590 General financing agreement.

614.4600 Methods of financing.

614.4610 Loans eligible for discount.

614.4620 Multiple applicants.

614.4630 Insolvency of other financing institutions.

614.4640 Rates and fees.

614.4650 Loss of discount privileges.

Subpart Q -- Banks for Cooperative Financing International Trade

614.4700 Financing foreign trade receivables.

614.4710 Bankers acceptance financing.

614.4720 Letters of credit.

614.4800 Guarantees -- banks for cooperatives.

614.4810 Standby letters of credit.

614.4900 Foreign exchange -- banks for cooperatives.

1. Section 614.4080 is amended by adding paragraph (d) to read as follows:

Subpart B -- Chartered Territories

614.4080 Loans outside of bank's territory -- banks for cooperatives.

* * * * *

(d) A bank is authorized to provide a full range of credit services to eligible cooperatives enabling them to engage in international trade. This includes making technical and financial assistance available to a domestic or foreign party to facilitate the import or export of agricultural commodities, farm supplies, or aquatic products, and to make or participate in loans and commitments for the same, provided an eligible cooperative benefits substantially as a result of such transactions.

Subpart C -- Lending Authorities

2. Section 614.4120 is revised to read as follows:

614.4120 Banks for cooperatives.

The banks are authorized to make loans and commitments to eligible cooperatives and to extend to them other financial assistance, including, but not limited to, discounting notes and other obligations, guarantees, collateral custody, or participation with other banks for cooperatives and commercial banks or other financial institutions in loans to eligible cooperatives. The banks are authorized to make or participate in loans, commitments, and extend other technical and financial assistance to a domestic or foreign party with respect to its transactions with an eligible cooperative for the export or import of agricultural commodities, farm supplies, or aquatic products through purchases, sales, or exchanges. The domestic or foreign party must be one in which an eligible cooperative has at least a minimum ownership interest and the eligible cooperative must substantially benefit as a result of such a loan, commitment, or assistance for the purpose of facilitating the eligible cooperative's export or import operations. This type of activity shall be made under policies determined by the board of directors and approved by Farm Credit Administration.

Subpart G -- Interest Rates and Changes

3. Section 614.4280 is revised to read as follows:

614.4280 Interest rates.

(a) Loans made by each bank shall bear interest at a rate or rates as may be determined by the district board with the approval of the Farm Credit Administration. A district board shall set interest rates or approve individual interest rate changes either on a case-by-case basis or pursuant to an interest rate plan within which management may establish rates. Any interest rate plan shall set loan-pricing policies and objectives, provide guidance regarding the circumstances under which management may adjust rates, and provide the upper and lower limits on management authority. A district board may not delegate its ultimate responsibilities for setting interest rates, and any interest rate plan adopted shall be reviewed on a continuing basis by the district board, as well as in conjunction with its review and approval of the bank's annual fiscal plan and long-range financial plan.

(b) Interest rate policies require the approval of the Farm Credit Administration.

4. Section 614.4281 is added to read as follows:

614.4281 Discounts and related fees -- banks for cooperatives.

Banks for cooperatives may discount notes, drafts, acceptances, and other negotiable paper at such rates as may be determined by bank management under policies of the bank board as approved by the Farm Credit Administration. Requests to the Farm Credit Administration for approval of such board policies shall include justification for the policy or change in the policy.

5. The entire Subpart P is revised to read as follows:

Subpart P -- Federal Intermediate Credit Bank Financing of Other Financing Institutions

614.4540 General.

The Federal intermediate credit banks have a responsibility to extend financial assistance to any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, or any association of agricultural producers engaged in the making of loans to farmers and ranchers, and any corporation engaged in the making of loans to producers or harvesters of aquatic products, provided the institution meets the criteria set forth in these regulations. The financial assistance may be provided through a direct loan to the institution or by purchasing or discounting individual loans made by the institution. An institution desiring to avail itself of the financial assistance will be expected to demonstrate:

(a) That it is duly organized and qualified to make loans under the laws of each jurisdiction in which it operates;

(b) That it has a significant involvement in agricultural or aquatic lending;

(c) That it has a continuing need for supplementary sources of funds for such purposes;

(d) That it has limited access to national or regional capital markets; and

(e) That it would continue to use the same proportion of its resources (other than that derived from the financial assistance provided by the Federal intermediate credit bank) for agricultural or aquatic lending. An institution meeting these criteria shall have its application evaluated on the basis of its ability to make and service a stable loan portfolio and its managerial and financial strength. The presence of other lending institutions serving the same territory or the failure of the institution to enter into loan participation with production credit associations shall not be considered in evaluating the application.

614.4550 Eligibility.

A financing institution which requests access to a Federal intermediate credit bank as a source of funds shall meet all of the eligibility criteria set forth below:

(a) The financing institution must be significantly involved in lending for agricultural or aquatic purposes. The institution, and each affiliate organization, if any, shall have at least 15 percent of its loan volume at the seasonal peak in agricultural and/or aquatic loans. The Federal intermediate credit bank shall consider requests with a lesser percent if the institution demonstrates that it is making a special and sustained effort to serve agricultural or aquatic producers and the 15 percent will be attained in a reasonably short period. Only agricultural and aquatic loans eligible for the financing institution to discount shall be considered in determining that this requirement has been met.

(b) Where the financing institution is a commercial bank, or is affiliated with a commercial bank, the commercial bank must demonstrate a continuing need for supplementary sources of funds to meet the credit requirements of its agricultural or aquatic borrowers. The institution's gross loan-to-deposit ratio shall be not less than 60 percent at the seasonal peak for the last 3 consecutive years. Where failure to meet this criteria in one of the last 3 consecutive years is the result of a general decrease in borrowings caused by an economic decline, the Federal intermediate credit bank shall consider the application as an exception to the criteria when the applicant has otherwise maintained ratios equivalent to banks of comparable size. For purposes of this paragraph, gross loans shall include all direct credit extended by the institution in its trade area. Such items as loans purchased from or participated in with other financial institutions shall be excluded.

(c) The financing institution must have limited access directly, or indirectly through affiliates, to national or regional money markets as an alternate source of funds and must fully utilize locally generated funds to finance local needs. Institutions with access to the national money markets are those whose bankers acceptances, commercial paper, negotiable certificates of deposit, and other similar instruments are sold or traded nationally. Institutions with access to regional money markets are those whose instruments are sold on a regional basis. Evidence of access shall be determined by the extent to which the applicant institution, or institutions of similar size and circumstances, have the ability to utilize, on a regular basis, bankers acceptances, commercial paper, or negotiable certificates of deposit, or other similar instruments as a source of funds. Affiliates of an institution having access to national or regional money markets shall not be considered eligible for access to the Federal intermediate credit bank discount privilege unless they demonstrate that all resources available to the consolidated entity are being utilized to alleviate the shortage of funds for agriculture.

(d) When the financing institution is a credit corporation which is not affiliated with a commercial bank, approval shall be further conditioned on the following requirements. The institution shall be a corporate entity primarily engaged in the business of extending short- and intermediate-term credit, to farmers, ranchers, and/or producers or harvesters of aquatic products. An institution engaged in other business activities is not eligible to obtain credit from a Federal intermediate credit bank merely because it has the power to make loans to farmers and ranchers and/or producers or harvesters of aquatic products. The fact that a corporation has powers not related to such credit or receives income from other sources shall not of itself render it ineligible. A credit institution whose primary function is to finance the sale of products by the institution, or any affiliates, shall not be eligible for access to the discount privilege.

(e) In dealing with any financing institution which is affiliated with a cooperative (through stock ownership, management, interlocking directorates, or otherwise) the Federal intermediate credit ban shall consider the possible effects of such relationship on the operations and credit policies of the applicant institution. An otherwise eligible affiliate may discount or borrow on the security of notes of farmers, ranchers, or producers or harvesters of aquatic products (as distinguished from notes of cooperatives), evidencing loans to finance the cost of supplies, equipment, or services, obtained from such affiliated cooperative, if the bank board finds that an additional source of credit is needed to facilitate financing of such transactions and the primary benefits of such credit will insure to the borrowing farmers, ranchers, or producers or harvesters of aquatic products.

(f) Any institution eligible under previous regulations which cannot meet the eligibility requirements of these regulations and is discounting with a Federal intermediate credit bank on the effective date of these revisions shall not become ineligible provided it does not make material changes in operations or ownership.

614.4555 Appeal rights.

A Federal intermediate credit bank which rejects an application for discount privileges shall promptly notify the institution in writing of the reasons for the reject and the applicant's right to appeal. An institution receiving a rejection shall, upon request, be entitled to an informal hearing before the bank board of directors on the issue of eligibility. An adverse bank board of directors' determination may be appealed to the Farm Credit Administration.

614.4560 Requirements for establishing and maintaining the discount privilege.

Any financial institution seeking financial assistance from a Federal intermediate credit bank shall demonstrated that it is able to establish and maintain a sound lending program.

(a) Each Federal intermediate credit bank shall develop standards to evaluate an applicant institution relative to:

(1) A capital structure adequate to support an economically feasible lending operation;

(2) The amount of collateral required to be deposited with or invested in the bank to support the extension of credit to the institution; and

(3) The ability of the institution to extend and administer the anticipated loan portfolio on a sound basis.

(b) These criteria shall be subject to the following limitations:

(1) The amount required to capitalize the OFI shall be determined by an analysis of the economic feasibility of the proposal presented in the request, the credit risk involved, and the servicing cost to the Federal intermediate credit bank. Any uniform minimum capital requirement based on the Federal intermediate credit bank's administrative costs shall be supported by documented costs which clearly demonstrate the need for the minimum requirement.

(2) The initial capital required to be invested in the Federal intermediate credit bank shall be no greater than the average investment required of production credit associations in the district. Institutions with established relationships may be assessed for additional capital if the contract is renegotiated to permit a larger volume of loans or when a general capital equalization or assessment is made. Capital invested in the bank by an other financing institution shall be retired in accordance with bank policy.

(3) No paper shall be purchased from or discounted for, and no loans shall be made or other similar financial assistance extended by a Federal intermediate credit bank to any entity if the amount of such paper added to the aggregate liabilities of such entity, whether direct or contingent (other than bona fide deposit liabilities), exceeds ten times the paid-in and unimpaired capital and surplus of such entity or the amount of such liabilities permitted under the laws of the jurisdiction creating such institution, whichever is the lesser. It shall be unlawful for any national bank which is indebted to any Federal intermediate credit bank, upon paper discounted or purchased, to incur any additional indebtedness, if by virtue of such additional indebtedness its aggregate liabilities, direct or contingent, will exceed the limitation herein contained. A debt-to-capital ratio less than that permitted by statute may be imposed to assure that the institution maintains its eligibility to borrow and provides adequate
capital from a credit standpoint. Any lesser ratio imposed initially shall not be less than one ratio point below the district average for production credit associations. Once the institution has established and maintained a satisfactory discount relationship, the debt-to-capital standard shall be the same as that used in evaluating production credit associations.

(4) General collateral securing the entire discount line may be required in accordance with 614.4570 of these regulations. The amount to be required shall be based on the credit risk presented by the institution and shall not be proportionally greater than is required of a production credit association under similar circumstances.

(5) Discount lines shall be established according to projections of loan volume provided by the institution and accepted by the Federal intermediate credit bank. A credit line shall be established for at least a 3-year term in support of the institution's continuing need for the discount privilege. Failure to maintain an annual average daily balance of loans discounted equal to at least 70 percent of the projected average daily balance shall subject the institution to payment of an annual loan commitment fee. The fee shall be equal to 1 percent of the difference between the projected and approved average daily balance and the actual average daily balance of loans outstanding or discounted. Exceptions can be made when failure to comply with this requirement is caused by the normal business cycle of the discounting institution. Repeated failure to utilize the line of credit at an acceptable level may result in loss of discount privileges. Institutions with inactive discount relationships on the effective date o
f these regulations shall be notified and given a reasonable opportunity to activate or cancel the relationship. No fee shall be assessed if the relationship is terminated by the Federal intermediate credit bank.

(c) Failure of an other financing institution to comply with State or Federal laws applicable to it will be cause for revocation of the borrowing and discounting rights if the violations relate to the soundness of the institution or the integrity of its management. Special attention shall be given to the institution's articles of incorporation and bylaws, capital stock, and other securities transactions. In the case of corporations doing business in more than one jurisdiction, evidence will be required that it has complied with the laws of each jurisdiction in which it operates.

614.4565 Lending limit.

A financing institution discounting with a bank shall not accept liability on any loan or similar extension of credit, or obtain any endorsement or guarantee from a borrower where the aggregate of such liabilities or indebtedness to the discounting institution would exceed 50 percent of the institution's capital and surplus or such lesser amount as may be established by other State or Federal statute. Institutions which have loans in excess of this limitation shall have 2 years from the effective date of these regulations to reduce individual risk exposure to within this limitation.

614.4570 General collateral.

As a condition precedent to borrowing from or discounting with a Federal intermediate credit bank, other financing institutions (except commercial banks) shall pledge as collateral for any and all obligations to the bank, cash, or readily marketable securities of high rating, in an amount to be determined by the Federal intermediate credit bank. At the discretion of the bank, commercial banking institutions may be required (unless prohibited by law or by supervisory authority) to deposit acceptable collateral. Securities and obligations pledged with the bank shall be deposited under a collateral pledge agreement pursuant to which all securities and obligations so pledged, including all substitutions and additions and the proceeds of any such collateral, including all income derived, shall be available to secure any and all obligations to the Federal intermediate credit bank, whether direct or contingent, present or future.

614.4580 Use of fund.

Funds obtained by discounting with or borrowing from the Federal intermediate credit bank may not be used to expand the financial institution's lending activity to loans which would be ineligible for discount.

614.4590 General financing agreement.

Any institution desiring to discount loans with or receive loans from the Federal intermediate credit bank will execute a general financing agreement. This agreement shall state the general terms and conditions under which loans will be discounted or made and shall provide for the institution to periodically furnish the bank acceptable financial reports and any data necessary to assure that the institution remains in compliance with these regulations. The scope of annual review as required by the bank's policy for credit review ( 614.4051) shall be expanded to include any additional test, audit, or fiscal analysis necessary. The agreement shall further provide that the institution shall agree to examination by the Farm Credit Administration if requested by the Governor.

614.4600 Methods of financing.

A Federal intermediate credit bank may provide funds to other financing institutions by discounting or purchasing individual loans or by direct loan to the institution, all subject to the following:

(a) Direct discount or purchase is normally made at full face value of the individual loan of acceptable quality. At the option of the Federal intermediate credit bank, a loan of less than acceptable quality may be discounted or purchased at less than the full amount of such loans. In such transactions the institution shall be required to apply all repayments toward repayment of the amount of the less than acceptable loan purchased or discounted by the bank.

(b) A Federal intermediate credit bank is authorized to make loans and advances to financing institutions, provided that such loan or advance shall be secured by notes or other such obligations of eligible borrowers defined in these regulations, unless such loan or advance is made to enable the financing institution to make or carry loans to such bona fide farmers and ranchers or to producers or harvesters of aquatic products.

(1) Classes of obligations approved as collateral. The following classes of obligations are approved as collateral for direct loans and advances to other financing institutions subject to approval of the bank to which such securities are to be pledged:

(i) Obligations of eligible borrowers defined in the regulations arising from direct credit extension by the financing institution.

(ii) Loan participations purchased will be eligible for discount. The Federal intermediate credit bank is authorized to take corrective measures if this authority is being used to circumvent the intent of these regulations.

(iii) Obligations set forth in 615.5140(a) which have been approved by the Farm Credit Administration for investment by institutions of the System.

614.4610 Loans eligible for discount.

Any loan which would be eligible for a production credit association in the district to make directly to a borrower shall be eligible for discount by a financing institution. These eligibility standards are set forth in Part 613 of these regulations. The Federal intermediate credit banks shall be responsible for providing financing institutions with any additional lending and eligibility guidelines which may be provided to production credit associations.

614.4620 Multiple applicants.

Two or more entities may combine resources to form a subsidiary corporation to apply for discount privileges with the Federal intermediate credit bank. in this event, the individual entities, any affiliates, and the combined entity must each meet the criteria set forth in these regulations for establishing and maintaining the discount privilege.

614.4630 Insolvency of other financing institutions.

(a) If a financing institution having a discount or financing agreement with the bank becomes insolvent or is in process of liquidation, or if it fails to service its loans properly and where supervision or orderly liquidation will be facilitated by direct handling of the obligations of the note makers, the Federal intermediate credit bank may, with the consent of the Farm Credit Administration, take over such paper for orderly liquidation. Notes or other obligations pledged with the bank by a financing institution, either as collateral for a direct loan or as additional security for any and all indebtedness of the institution to the bank, also may be taken over and handled directly with the makers after a title has been acquired in accordance with the provisions of applicable laws and the terms of the pledge agreements executed by the institution involved. The bank's authority to handle paper directly includes the authority to make additional advances, to grant renewals and extensions and to take such other
actions as may be necessary to collect the loans. Direct liquidation of paper carried for a financing institution should be resorted to only in cases where other measures have failed, and it is apparent that direct liquidation is the only practicable means available to the bank for protection of its interest.

(b) Paper handled for an insolvent financing institution as provided in this section shall not be assigned as collateral for bonds without the approval of the Farm Credit Administration.

(c) On paper which a bank has taken over from a defaulting financing institution for liquidation, interest shall be collected according to the terms of the loans. Renewals of such notes, when directly payable to the bank, shall bear interest at a rate not to exceed the maximum rate that may be charged by financing institutions on paper eligible for discount by the banks at the time of renewal.

614.4640 Rates and fees.

Interest on loans to financing institutions shall be charged and collected at the same rate and on the same basis as production credit associations. No paper offered for discount by a financing institution shall be accepted if the rate charged the borrower exceeds by more than 4 percent the FICB rate in effect on the date the loan was made or, with respect to variable rate loans, the FICB rate in effect from time to time throughout the loan.

614.4650 Loss of discount privileges.

The Federal intermediate credit bank may revoke or suspend the discount or loan privileges for cause. The following will cause revocation.

(a) Failure to comply with these regulations or the terms of the contract between the Federal intermediate credit bank and the institutions.

(b) Repeated violations of State or Federal statutes or failure to correct violations brought to the attention of the institution where the nature of the violation brings into question the safety of the loan or discount relationship or the integrity of the institution's management.

(c) Failure to maintain management or credit practices satisfactory to the bank.

(d) Failure to use the established credit line to the extent contemplated in 614.4555 of these regulations.

(e) Changes in the operation of the institution which render it ineligible under 614.4550 of these regulations.

During any period of suspension no new paper shall be purchased from or discounted for the institution and no further advances shall be made to it pending correction, except to the extent necessary to cover commitments on paper held by the bank or to preserve the security and protect the interest of the bank in obligations held by it. Before making additional advances to any institution whose right to borrow or discount has been suspended because the ratio of its total liabilities to unimpaired capital and surplus equals or exceeds the maximum permitted under law, the bank shall satisfy itself that the corporation will not violate any applicable law by assuming liability for such additional advances.

6. Subpart Q is revised to read as follows:

Subpart Q -- Banks for Cooperatives Financing International Trade

614.4700 Financing foreign trade receivables -- banks for cooperatives.

(a) The banks for cooperatives, under policies determined by their boards of directors and approved by the Farm Credit Administration, are authorized to finance foreign trade receivables on behalf of eligible cooperatives to include the following:

(1) Advances against collections

(2) Trade acceptances

(3) Factoring

(4) Open account

(b) To reduce credit, political, and other risks associated with foreign trade receivable financing, the banks for cooperatives shall avail themselves of such guarantee and insurance plans as are available in the United States and other countries. Exceptions may be made for borrowers with long-standing successful business relationships with the banks for cooperatives customers and who are well established with a high credit rating.

(c) When financing a draft drawn on a foreign importer, the banks should retain recourse to the exporter unless its credit evaluation of and experience with the importer indicate recourse is not necessary or unless appropriate guarantees or insurance plans are used.

(d) The financing of foreign trade receivables shall be limited by the policies of each bank's board of directors. The policies shall provide a method of determining the maximum amount in dollars, by country, to be financed and establishing a maximum percentage of the amount of a draft drawn on a foreign party against which the bank may advance funds. The banks shall take into consideration the following factors:

(1) The reputation and financial strength of the foreign importer.

(2) The reputation and payment record of the class of importers in the same country as the subject importer in regard to prompt payment of drafts drawn upon them.

(3) The quality of the supporting documents offered with the draft.

(4) The degree of ease with which necessary foreign exchange conversion can be made, or the extent to which foreign currency exposure may be hedged by forward or future contracts.

(5) Credit strength and reputation of the exporter.

(e) The banks may establish foreign trade receivable financing programs by which eligible parties pledge collections to the bank, and then may borrow from the bank up to a stated maximum percentage of the total amount of receivables pledged at any one time.

(f) When financing foreign trade receivables, the banks shall take such precautions and obtain such credit information as necessary to ascertain that all parties to the transaction(s) being financed are reputable and capable of performing their responsibilities under the contract of sale.

(g) When financing foreign trade receivables, the banks shall determine that all shipments are covered by maritime insurance while on the high seas.

(h) Countries where credit is to be extended will be analyzed periodically and systematically on a centralized basis. The resulting country studies will be disseminated to all banks for cooperatives to be used as inputs in credit-grading decisions.

614.4710 Bankers acceptance financing.

The Fiscal Agency is authorized to accept drafts or bills of exchange drawn upon banks for cooperatives. With the exception of acceptances eligible for purchase by the Federal Open Market Committee and rediscounted, acceptances shall be subject to the provisions of 614.4350, 614.4354, and 614.4360 of the Regulations for Banks and Associations of the Farm Credit System, and must be combined with any other loans to the account party by the banks for cooperatives for the purpose of applying the lending limits of 614.4354.

(a) District Banks for Cooperatives. (1) The Fiscal Agency's authority to accept drafts or bills of exchange includes the authority to accept drafts or bills of exchange drawn upon a district bank for cooperatives having not more than 6 months sight to run, exclusive of days of grace, that are derived from transactions involving the importation or exportation of goods from the United States; or are derived from transactions involving the domestic shipment of goods that were produced from agriculture or that have an agriculturally related purpose; or are secured at the time of acceptance by title covering readily marketable staples.

(i) The dollar amount of such acceptances outstanding at any one time to any one borrower, exclusive of participations sold to others, shall be limited to 10 percent of the net worth of a district bank for cooperatives as of the preceding June 30 or December 31, whichever is more recent, or an interim date determined by the Farm Credit Administration as a result of material changes in a bank's net worth. However, if such acceptances are secured either by attached documents or by some other actual security growing out of the same transaction as the acceptance, the 10-percent limit shall not apply.

(ii) The sum of all acceptance liabilities outstanding described in paragraph (a)(1) of this section, exclusive of participations sold to others, issued to all borrowers shall not exceed 100 percent of the bank for cooperatives' net worth but the aggregate of acceptances growing out of domestic transactions shall not exceed 50 percent of net worth calculated on the date indicated in paragraph (a)(1)(ii) of this section.

(2) The limit specified in paragraph (a)(1)(i) of this section is separate from and in addition to the lending limits of 614.4354 of the Regulations if the acceptances are rediscounted.

(3) During any period within which a bank for cooperatives holds its own acceptance, having given value therefore, the amount thereof shall be included against the 614.4354 lending limits of the customer for whom the acceptance was made.

(4) The terms and requirements for the offering and purchase of participations in acceptance financing shall be the same as those for loans issued under 614.4334 of the Regulations.

(5) Acceptance financing should be self-securing and self-liquidating, with greater latitude exercised only when the credit worthiness of the party is unquestioned and the transaction financed is in the ordinary course of its business.

(6) Except under exceptional circumstances with well-established customers, disbursements should not be made prior to the physical receipt of all pertinent documents.

(7) When acceptances denominated in foreign currencies are not funded in the same currency, the bank for cooperatives will take corresponding action to minimize foreign exchange risk.

(b) Central Bank for Cooperatives. (1) Drafts and bills of exchange discounted directly by the Central Bank for Cooperatives at any one time, exclusive of participations sold to others, shall not exceed the acceptance limit percentage prescribed in paragraph (a)(1)(i) of this section for district banks for cooperatives.

(c) Total system. Liabilities for drafts accepted at any one time from all the district banks for cooperatives and the Central Bank for Cooperatives shall not exceed 100 percent of the combined net worth of the banks for cooperatives. However, the aggregate of acceptances growing out of domestic transactions shall not exceed 50 percent of net worth. Discounted acceptances outstanding at any one time to any one borrower from one or more district banks for cooperatives and the Central Bank for Cooperatives, exclusive of participations sold to institutions other than banks for cooperatives, shall not exceed the percentage specified in paragraph (a)(1) of this section applied to the combined net worth of the banks for cooperatives. Acceptances created or discounted within previously established limits that have become excessive because of changes in accepting and/or discounting limits prescribed herein may be held and liquidated in accordance with terms individually specified by the Farm Credit Administration.

(d) Purchase of participations in bankers acceptances. (1) A district bank for cooperatives shall determine limits on purchasing participations in discounted acceptances of another bank for cooperatives on the same basis as prescribed in 614.4354 of the Regulations for purchasing participations in loans of another bank for cooperatives.

(2) Participations in discounted acceptances shall be offered in accordance with 614.4334 of the Regulations.

(e) Fiscal Agency. All acceptances created by the 13 banks for cooperatives shall be physically accepted by the Fiscal Agency when intended for rediscount.

614.4720 Letters of credit.

The banks for cooperatives, under policies determined by the board of directors and approved by Farm Credit Administration, may issue, advise, or confirm import or export letters of credit in accordance with the Uniform Commercial Code, or the Uniform Customs and Practice for Documentary Credits, to or on behalf of its customers. Until such individual district bank board policies are approved by the Farm Credit Administration, the Central Bank for Cooperatives will issue, advise, or confirm import or export letters of credit on behalf of the district banks for cooperatives. In addition, as a matter of sound banking practice, letters of credit shall be issued in conformity with the following:

(a) Each letter of credit shall conspicuously state that it is a letter of credit, or be conspicuously entitled as such.

(b) The letter of credit shall contain a specified expiration date or be for a definite term.

(c) The letter of credit shall contain a sum certain.

(d) The bank's obligation to pay should arise only upon fulfilling the terms and conditions as specified in the letter of credit. The bank must not be called upon to determine questions of fact or law at issue between the account party and the beneficiary.

(e) The bank's customer should have an unqualified obligation to reimburse the bank for payments made under the letter of credit.

(f) All letters of credit shall be irrevocable.

(g) The bank shall charge a fee for either issuing or confirming a letter of credit.

614.4800 Guarantees and sureties -- banks for cooperatives.

A bank for cooperatives, under a policy approved by the bank's board of directors and the Farm Credit Administration, may lend its credit, be itself a surety to indemnify another, or otherwise become a guarantor if an eligible cooperative substantially benefits from the performance of the transaction involved. A bank for cooperatives may guarantee the debt of eligible cooperatives and foreign parties or otherwise agree to make payments on the occurrence of readily ascertainable events if the guarantee or agreement specifies a maximum monetary liability. Guarantees may be secured or unsecured, and can include, but are not limited to, such events as nonpayment of taxes, rentals, customs duties, costs of transport, and loss or nonconformance of shipping documents. The bank's customer shall have an unqualified obligation to reimburse the bank for payments made under a guarantee.

614.4810 Standby letters of credit -- banks for cooperatives.

(a) The banks for cooperatives are authorized to issue on behalf of parties eligible for financing under Regulations 614.4120 standby letters of credit that represent an obligation to the beneficiary on the part of the issuer:

(1) To repay money borrowed by, advanced to, or for the account of the account party, or

(2) To make payment on account of any indebtedness undertaken by the account party, or

(3) To make payment on account of any default by the account party in the performance of an obligation.

(b) As a matter of sound banking practice, banks for cooperatives shall evaluate applications for standby letters of credit on the basis of credit factors listed in 614.4150 of the Regulations.

614.4900 Foreign exchange.

(a) Before a bank for cooperatives may engage in any financial transaction which transports monetary instruments:

(1) From any place within the United States to or through any place outside the United States, or

(2) To any place within the United States from or through any place outside the United States, the Farm Credit Administration must have already approved that bank's policies governing such transactions and determined that the bank has established procedures necessary to safeguard the interests of the stockholders of the bank in regard to such transactions.

(b) Under policies approved by the Farm Credit Administration, a bank for cooperatives may engage in currency exchange activities necessary to service individual transactions that may be financed under the regulations authorizing export, import, and other internationally related credit and financial services. These currency exchange activities shall not include any loans or commitments intended to finance speculative futures transactions by eligible borrowers in foreign currencies. The bank may engage on behalf of its eligible borrowers or on its own behalf in bona fide hedging transactions and positions, where such transactions or positions normally reduce risks in the conduct and management of international financial activities. The bank's policies should include established guidelines for:

(1) Net overnight positions, by currency.

(2) Maturity distribution, by currency, of foreign currency assets, liabilities, and foreign exchange contracts.

(3) Outstanding contracts with individual customers and banks.

(4) Credit approval procedures safeguarding against delivery or settlement risk.

(5) Total value of outstanding contracts, spot, forward, and future.

(c) A bank for cooperatives is responsible for its compliance with the laws of the United States in regard to reporting requirements of the Department of the Treasury pertaining to currency exchange activities and international transfers of monetary instruments.

(d) A bank for cooperatives engaged in foreign exchange trading shall have written policies describing the scope of trading activity authorized, delegation of authority, types of services offered, trading limits, reporting requirements, and internal accounting controls.

(e) The bank's trading guideline policies should provide for reporting procedures adequate to properly inform management of trading activities and to facilitate detection of lack of compliance with policy directives.

(f) The bank's policies shall establish foreign exchange delivery limits for eligible customers with relationship to the customer's financial capability to bear the financial risks assumed. The bank will be expected to maintain documentary evidence that a customer's delivery exposure is reasonable, and that responsible bank officers routinely review outstanding delivery exposure of individual customers.

(g) The bank's personnel policies shall include written standards of conduct for those involved with foreign exchange activities, including the following which should be prohibited:

(1) Trading with entities affiliated with the bank or with members of the board of directors.

(2) Foreign exchange and deposit transactions with other bank employees.

(3) Personal business relationships with foreign exchange and money brokers with whom the bank deals.

(h) The bank's policies should provide detailed instructions regarding the need for bank officers to disclose the limits of responsibility and liability of the bank when it holds positions or executes contracts for the account of eligible parties. The bank's policies regarding the respective procedures should provide reasonable assurance that reports on trading activities are current and complete, and that the opportunity for concealment of unauthorized transactions is kept at the absolute minimum.

(i) The 13 banks for cooperatives shall use the Fiscal Agency for purposes of trading foreign exchange. All foreign exchange transactions shall be made by the Fiscal Agency on behalf of the banks consistent with instructions received from the respective bank.

(j) Paragraphs (b) through (i) of this section will not apply if a bank purchases or sells foreign exchange through a commercial bank.

(Secs. 5.9, 5.12, 5.18, Pub. L. 92-181, 85 Stat. 619, 620, 621, 12 U.S.C. 2243, 2246 and 2252)

C. T. Fredrickson,

Acting Governor.

[FR Doc. 81-19897 Filed 7-6-81; 8:45 am]


BILLING CODE 6705-01-M