Title: FINAL RULE--Organization; Eligibility and Scope of Financing; Loan Policies and Operations; Disclosure to Shareholders; Accounting and Reporting Requirements; Title V Conservators and Receivers--12 CFR Parts 611, 613, 614, 620, 621, and 627
Issue Date: 09/20/1993
Federal Register Cite: 58 FR 48780
FARM CREDIT ADMINISTRATION
12 CFR Parts 611, 613, 614, 620, 621, and 627
Organization; Eligibility and Scope of Financing; Loan Policies and Operations; Disclosure to Shareholders; Accounting and Reporting Requirements; Title V Conservators and Receivers
ACTION: Final rule.
SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), adopts final regulations on accounting for high-risk assets. The final regulations update existing accounting and reporting requirements, promote consistency with industry practices pertaining to problem loan accounting and reporting issues, and ensure that the regulatory requirements and standards remain consistent with those of generally accepted accounting principles (GAAP). Among other changes, the final regulations revise the loan performance categories to eliminate the term "nonperforming" and the categories of "other high-risk loans" and "other restructured and reduced rate loans." The definitions of the revised loan performance categories clarify the required reporting treatment of problem loans to improve the utility of disclosures to shareholders and the FCA and obviate potential conflicting interpretations of problem loan classification among reporting institutions. Subpart C of the final regulation contains a "sunset" type of provision that states that Farm Credit System (System) institutions will no longer have to comply with this subpart once they implement the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, issued by the Financial and Accounting Standards Board (FASB) n1 . Technical and conforming changes are made throughout the agency's regulations
n1 Statement of Financial Accounting Standards No. 114, Accounting by Creditors for Impairment of a Loan, an amendment of FASB Statement Nos. 5 and 15, dated May 1993.
EFFECTIVE DATE: These final regulations shall become effective on December 31, 1993, or upon the expiration of 30 days after publication, during which either or both Houses of Congress are in session, whichever is later. Notice of the effective date will be published in the Federal Register.
FOR FURTHER INFORMATION CONTACT:
Linda C. Sherman, Policy Analyst, Regulation Development Division, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4498, TDD (703) 883-4444,
William L. Larsen, Senior Attorney, Regulatory Operations Division, Office of General Counsel, Farm Credit Administration, McLean, Virginia 22102-5090, (703) 883-4020, TDD (703) 883-4444.
On March 13, 1986, the FCA adopted its current regulations on Accounting and Reporting Requirements, 12 CFR part 621 (See 51 FR 8661). These regulations were developed in large part to set requirements and standards for institutions to use in accounting for high-risk assets and disclosing loan performance characteristics.
Part 621 contained specific standards for nonperforming loan categories, which include nonaccrual, formally restructured, other restructured and reduced rate, and other high-risk loans. The impetus for using the nonperforming designation and various nonperforming categories came from guidelines issued by the Securities and Exchange Commission (SEC) in the early 1980's through their Guide 3-"Statistical Disclosure by Bank Holding Companies." The FCA used the terms "nonperforming loans" and "nonperforming assets" (nonperforming loans and acquired property) in part 621 because the terms were widely used by the financial services industry, and their use by the System would promote consistency in reporting and financial disclosures.
Since FCA's regulations were issued in 1986, the SEC has revised Guide 3. Diverse problem loan accounting practices have emerged within the financial services industry due, at least partially, to varying regulatory interpretations of problem loan accounting. The FCA has attempted to [*48781] develop interpretive guidance for problem loan accounting that would achieve consistency and uniformity in reporting among System institutions and comparability with the financial services industry. However, the FCA believes that further regulatory guidance is necessary to maintain consistency with the latest industry practices.
A. History of the Current Rulemaking
Prior to developing a revised approach to problem loan accounting in part 621, the FCA sought public comment through an advance notice of proposed rulemaking (ANPRM). See 57 FR 58997 (December 14, 1992). In general, all commentors supported FCA's efforts to update and revise the accounting and reporting requirements relating to reporting and disclosure of problem loan assets. The FCA considered the 22 comment letters received in response to the ANPRM in developing a proposed rule, which was published for public comment in the Federal Register (58 FR 32071) on June 8, 1993.
B. The Proposed Regulation
To promote comparability of financial disclosures of problem loans by System institutions with similar disclosures by other financial institutions prepared in accordance with SEC's revised Guide 3 and other regulatory guidance, the FCA proposed to amend part 621 as it pertained to performance categories and related issues. The proposed amendments developed specific standards and reporting requirements for certain loan performance categories, including nonaccrual, formally restructured, and loans 90 days past due still accruing interest. The proposed regulations also eliminated the terms "nonperforming loans and/or assets" and instead referred to one of three "performance" categories. Finally, the proposed regulations clarified issues regarding the rule of aggregation, application of payments on nonaccrual loans, criteria for returning loans to accrual status, and accounting for the allowance for loan losses and chargeoffs.
II. General Comments and Accounting Developments
A total of 21 comment letters were received on the Accounting and Reporting regulations at 12 CFR part 621. Comments were received from the Farm Credit Council (FCC), Price Waterhouse (PW), the American Institute of Certified Public Accountants (AICPA), the Federal Agricultural Mortgage Corporation, the Baltimore and Western Farm Credit banks (FCBs), 10 direct lender associations (ACAs) in the Baltimore district, and two ACAs in the Columbia district. No other written comments were received from any of the associations, although the Western associations adopted a resolution endorsing their bank's letter as a group. On July 21, 1993, FCA staff met with representatives of the System and PW, who elaborated on their written comments discussed below.
In addition, the FCA Board and senior management held six "FCA/Association Meetings" in early 1993 n2 . During the course of these meetings, association board chairmen and chief executive officers (CEOs) brought up a number of concerns regarding the ANPRM and anticipated proposed rule on high-risk asset accounting issues.
n2 FCA/Association meetings were held February 23rd in Kansas City, Missouri; February 25th in Dallas, Texas; March 16th in Columbus, Ohio; March 18th in Atlanta, Georgia; March 23rd in Sacramento, California; and March 25th in Denver, Colorado.
A. General Comments
All commentors supported elimination of the nonperforming designation and the performance categories of "Other High Risk" and "Other Restructured or Reduced Rate," and felt these were very positive changes that would result in disclosure of loan information consistent with other financial institutions. Other than technical changes and/or clarifications, which are discussed in the section-by-section analysis below, there were two prevalent concerns addressed in the comment letters.
The first concern was that placing specific accounting and reporting guidelines on problem loans in the regulations may result in Regulatory Accounting Practices (RAP) that are different from GAAP. These commentors asserted that GAAP for high-risk assets is a rapidly changing environment, as is evidenced by recently adopted SFAS No. 114, which amends FASB Statement Nos. 5 and 15. (See discussion, infra.) They argued that since amending regulations might take a considerable amount of time, a change in GAAP could result in non-GAAP regulations until the regulations can be revised. The commentors further suggested that if a RAP situation results, in the worst case, the System's external auditors would render a qualified opinion on the System's financial statements.
The second concern, expressed primarily by the FCC and the banks, was that the specificity of the proposed rules would limit the System institutions" ability to apply judgment in the accounting for high-risk assets. To provide more flexibility, the commentors urged the FCA to use less formal agency issuances such as bookletters, examiner guidance, or call report instructions to provide detailed accounting and reporting guidance and interpretations of GAAP rather than regulations. In this regard, the FCC, supported by other System commentors, recommended that the FCA eliminate all or most of subpart C (§§ 621.6 through 621.10) from the proposed regulations, and issue examination guidance or interpretations of GAAP in a bookletter format, similar to the regulatory approach of the Office of the Comptroller of the Currency (OCC). The FCC felt a bookletter format was preferable to a regulation because it allows for more judgment to be used by an institution, in special circumstances.
While System institutions must prepare and issue financial statements in accordance with GAAP, circumstances could occur in the future that would cause the FCA to require disclosure or reporting in addition to what is required under GAAP. However, such an action would only be taken after appropriate analysis of all the facts and circumstances and would be based on an evaluation of what is needed for effective regulation of System institutions to ensure their safe and sound operation.
The application of GAAP to a particular area is not always well defined. Until recently, GAAP has not always provided specific or extensive authoritative guidance in the area of high-risk asset accounting and reporting. The FCA continues to believe that, while by no means the only method, promulgating regulations in areas not specifically addressed by GAAP can be an effective method of promoting consistent accounting and reporting by System institutions. In this regard, the FCA believes that the final regulations will improve the consistency of System financial disclosures and comparability with the financial services industry's current approach to accounting and reporting for high-risk assets. If, however, GAAP subsequently provides further guidance and direction in an area where FCA regulations have been promulgated, it is important for the FCA to be responsive to the changes in GAAP. The FCA believes that it can act in a timely fashion to address any inconsistencies between its regulations and GAAP, should the need arise.
Three commentors suggested that the FCA convene a negotiated rulemaking to develop high-risk accounting regulations. The FCA believes that [*48782] negotiated rulemaking, while a useful adjunct to the conventional rulemaking procedure in some situations, is not appropriate at this stage of the rulemaking process for this regulation. From the comments received in response to the ANPRM and the proposed rule, as well as from comments during meetings with System institutions, the FCA has received a broad range of views concerning high-risk asset accounting issues. It is unlikely that a negotiated rulemaking held this late in the high-risk asset accounting rulemaking process would result in more complete information for the FCA's use in formulating these accounting regulations. Of course, the decision not to use negotiated rulemaking in this situation is in no way intended to discourage ongoing public participation in the formulation of regulatory policy in the future regarding accounting treatment of high-risk assets.
B. Accounting Developments
The issuance of SFAS No. 114 will significantly change high-risk asset accounting in the financial services industry. Subsequent to FCA publication of the proposed rule to amend 12 CFR part 621, the FASB issued SFAS No. 114 addressing accounting for impaired loans. This new accounting standard deals with loan valuation and income reporting issues that will have a significant impact on the requirements of 12 CFR part 621. SFAS No. 114 provides guidance and direction in the area of establishing and maintaining a valuation allowance on specifically identified impaired loans. This statement will affect the final regulation adopted herein in the following ways.
First and most importantly, SFAS No. 114 introduces the concept of an "impaired" loan and provides specific requirements for the recognition, measurement, accounting, and disclosure of impaired loans. This brings into question how the concept of nonaccrual loans and related areas (i.e., disclosure, income recognition, and reinstatement criteria on nonaccrual loans) will fit into the loan impairment framework.
Second, this statement amends SFAS No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, by requiring a creditor to measure future loans that are restructured in a troubled debt restructuring (that involves a modification of terms) in accordance with SFAS No. 114. As a result, this may change the performance category for restructured loans contained in the regulation as now adopted. SFAS No. 114 also revises the accounting for in-substance foreclosures by requiring that a collateral-dependent loan be classified as acquired property only if the lender has taken possession of the collateral. SFAS No. 114 is effective for fiscal years beginning after December 15, 1994, with earlier application allowed.
III. Adoption of Final Regulation With Sunset Provision
When System institutions implement SFAS No. 114, much of 12 CFR part 621, subpart C, Loan Performance and Valuation Assessment, as now adopted, will be outdated or in conflict with the new standard. However, many implementation issues concerning SFAS No. 114 have yet to be resolved. As a result, several efforts are currently underway by the FCA, System institutions, other financial institution regulators, and the FASB to address these issues. After considering various options, the FCA has determined that the most appropriate course of action at this time is to adopt as a final rule 12 CFR part 621 largely as proposed, with certain technical changes. (See the section-by-section analysis, infra).
In response to the impending implementation of SFAS No. 114, the FCA is including a sunset type of provision in § 621.11 of subpart C. Section 621.11 provides that the requirements of subpart C will no longer apply to a System institution when it implements the provisions of SFAS No. 114. In conjunction with this change, § 621.5 on Accounting for the allowance for loan losses and chargeoffs, has been moved from proposed subpart C to subpart B of the final regulation. The FCA believes that this approach will come closest to achieving the objectives of enhancing consistency within the System, comparability with the financial services industry, and accommodating the changing GAAP environment. Moreover, this change will allow the FCA sufficient time to fully assess the impact of SFAS No. 114 and to provide any necessary additional guidance in the area of high-risk asset accounting.
IV. Section-by-Section Discussion of Changes
A. Subpart A-Purpose and Definitions
Commentors suggested that two of the definitions contained in proposed § 621.2 be revised slightly to reflect current GAAP. The FCA agrees with these recommended changes and, as a result, has revised the definition of "material" to be consistent with the one contained in Statement of Financial Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information.
Similarly, the word "holding" has been deleted from the definition for "net realizable value" in order to be consistent with the current GAAP position that holding costs are period costs. Finally, a definition for "recorded investment" has been added to the definition section to accommodate the substitution of the term "recorded investment" for the term "principal" in § 621.8.
B. Subpart B-General Rules
Proposed § 621.5, Accounting for the allowance for loan losses and chargeoffs, has been moved from subpart C to subpart B to prevent its elimination as subpart C is phased out with the implementation of SFAS No. 114. Section 621.5 addresses general requirements for maintaining an allowance for losses in accordance with SFAS No. 5, Accounting for Contingencies. These general requirements are not likely to be affected by SFAS No. 114. Similarly, requirements for recording chargeoffs are not addressed by SFAS No. 114, and will, therefore, remain in § 621.5. However, § 621.5 (d)(1) and (d)(2), which deals with earned but uncollected interest income in current and prior fiscal years, may be affected by the implementation of SFAS No. 114 and have, therefore, been added to § 621.8.
C. Subpart C-Loan Performance and Valuation Assessment
The final regulation has been amended to accommodate the implementation of SFAS No. 114 by System institutions whether they choose early implementation or choose to implement on the mandatory date set by the FASB, i.e., the first fiscal year beginning after December 15, 1994. Therefore, § 621.11, Exceptions, has been added to the final regulation which states that the requirements of subpart C will not apply to any institution after the date upon which SFAS No. 114 becomes mandatory with respect to such institution, and shall not apply to any institution that implements the provisions of SFAS No. 114 before the mandatory implementation date.
In the future, the FCA may choose to provide guidance and direction on the implementation of SFAS No. 114, or set new disclosures, accounting and reporting requirements in any number of different formats, to include but not be limited to new regulations or bookletters. In the absence of further regulatory direction, System institutions [*48783] must continue to prepare their financial statements in accordance with GAAP.
1. Section 621.6-Performance Categories and Other Property Owned
The public comment letters unanimously supported elimination of "other high risk" and "other restructured and reduced rate" loan performance categories and the term "nonperforming," and encouraged FCA to implement these changes as soon as possible. The same commentors also urged the FCA to eliminate § 621.6, and utilize other less formal means, such as bookletters, to communicate accounting guidelines so as to permit more timely responses to accounting industry changes. The FCA declines this suggestion and adopts § 621.6, generally as proposed, for the reasons stated above.
The FCC stated that judgment is a crucial component of loan performance and high-risk asset accounting determinations and urged the FCA to include a comment in the regulation on the use of judgment in determining the treatment and classification of high-risk assets. The FCA agrees that judgment is crucial to applying loan performance definitions and applying accounting treatment to these assets, but declines to insert such language in the regulation because this concept is already implicit in the final regulation. Whenever decisions are made on high-risk asset accounting issues, the FCA fully expects institution personnel to fully consider all facts and circumstances and to thoroughly document their decisions.
The FCC commented that the proposed regulations require all loans to be categorized as described in proposed § 621.6, but do not provide a category for loans that are performing as agreed. The FCA agrees with the commentor's concern that all assets are not necessarily categorized as described in § 621.6, and the final regulation language is amended to clarify that it is high-risk assets that should be assigned the various performance categories.
The FCC suggested that the word "collection" be substituted for the word "payment" in proposed § 621.6(a)(1) to clarify that collection of the principal and interest could occur over the term of the loan and need not occur on a specified contractual payment date. The FCA accepts this clarifying point and has revised the regulation language to read, "Collection of any amount of outstanding principal and all past and future interest accruals, considered over the full term of the asset is not expected." The FCA also reinserted the phrase "all past and future" before the words "interest accruals" to clarify that no change from the existing regulations is intended.
The commentors were concerned that if § 621.6(a)(1) was narrowly interpreted, loans could be classified nonaccrual when a scheduled contractual payment of principal or interest is not expected to be made in accordance with the payment schedule. To avoid an inappropriate GAAP treatment, the commentors suggested modifying the regulatory language slightly. FCA did not intend for the regulation to be so narrowly interpreted, and considers it unlikely that the final regulation, which uses the same language as the existing regulation, would be so narrowly interpreted by an institution as to cause an inconsistency with GAAP. Consequently, the suggestion was not accepted.
Commentors suggested that misunderstandings could be reduced by adding language to proposed § 621.6(a)(2) to exclude loans with chargeoffs associated with a troubled debt restructuring from the nonaccrual criteria. In response to this comment, the FCA added language to exclude those loans with prior chargeoffs that were taken as part of a formal restructuring of the loan. Such loans will not necessarily meet the criteria for nonaccrual unless they also meet one of the other criteria.
One commentor recommended that proposed § 621.6(a)(3)(ii) be modified to explicitly indicate that legal action taken to collect a loan allows the loan to be considered "in process of collection," provided: (a) The loan is adequately secured (either by tangible collateral and/or an acceptable guarantor); and (b) collection is proceeding in due course, and is expected to result in full payment or a restoration of the loan to a current status within 180 days of original maturity, as is required by the Federal Reserve System Guidelines. The FCA agrees with the Federal Reserve's position but determined additional language was not necessary because this criteria is already covered in other portions of this section. The final regulation requires that loans in bankruptcy or subject to other legal action meet all the criteria for "in process of collection." Being subject to a pending legal proceeding is not, in itself, sufficient to qualify a loan as "in process of collection."
One commentor proposed that consumer loans and loans secured by 1 to 4 family residential properties should be exempted from nonaccrual requirements in § 621.6(a)(3) to be consistent with Federal Reserve System Guidelines. In fact, the Federal Reserve System Guidelines state that "Consumer loans and loans secured by 1 to 4 family residential properties on which principal or interest is due and unpaid for 90 days or more are not required to be placed in nonaccrual status. Nevertheless, such loans should be subject to other alternative methods of evaluation to assure that the bank's net income is not materially overstated." The FCA believes that few System borrowers would actually fall into this category. Moreover, all System loans should be subject to the same regulatory guidelines in order to achieve consistency in reporting and disclosing high-risk assets.
Also, with respect to § 621.6(a)(3)(ii), the FCC asserted that the definition of a loan in process of collection requires that "There must be documented evidence that collection in full of amounts due and unpaid is expected within a reasonable time period, not to exceed 90 days, or a maximum of 180 days from the date that payment was due." is too specific and restrictive. The FCC stated that this requirement would not permit management to use sound judgment in assessing whether a loan is collectible or should be classified as nonaccrual. They further maintained that other financial regulatory agencies have no similarly restrictive written guidelines.
The FCA has not deleted the "reasonable time period" requirement in the final regulation. The FCA believes that the specificity of the 180-day rule is needed to achieve uniformity in reporting and, therefore, a definition for a reasonable time period is essential. FCA believes that, generally, if no loan payments have been received within 180 days, it creates doubt as to collectibility in full of all principal and interest. Therefore, any loan that is over 180 days delinquent is considered to be in severe default, and § 621.6(a)(3)(ii) requires it to be classified nonaccrual. This is not inconsistent with the OCC guidelines for national banks, which define "in process of collection" as a period of time not to exceed 30 days, with an exception if payment is expected in the immediate future.
In further support of the FCC's recommendation to delete the definition of a reasonable time period, the FCC also contends that, under the borrower rights provisions of the Farm Credit Act of 1971, as amended (the Act), it may take longer than 180 days in certain circumstances to collect a particular payment even though the principal and interest on that loan are fully collectible. In response, the FCA notes that while the borrower rights provisions relate primarily to credit administration and loan management decisions on problem [*48784] loans, accounting practices should measure and reflect proper credit administration practices and not dictate them. The borrower's right to restructure a loan does not require the institution to do anything that would change the accounting treatment of such a loan, unless such loan became a troubled debt restructuring under SFAS No. 15. The institution should not decide to restructure solely to prevent a loan from being categorized as nonaccrual, but should also consider restructuring as a means to achieve a reasonable repayment plan with the borrower.
commentors also suggested deleting the reference to 90 days in proposed § 621.6(a)(3)(ii). The FCA has accepted this recommendation due to the potential ambiguity and misunderstanding that may result from having two numbers apply to the same requirement. The final regulation is amended to read, "There must be documented evidence that collection in full of amounts due and unpaid is expected to occur within a reasonable time period, not to exceed 180 days from the date that payment was due."
In proposed § 621.6(a)(3)(ii), the commentors suggested inserting the language "or other credible documentation of the borrower's intention" between "borrower's agreement" and "to complete." The FCA believes this change would allow institutions to circumvent the credit administration practice of obtaining the borrower's acknowledgement and commitment to completing certain actions to repay the loan in full or bring the loan to current status. The commitment to repay a loan is strongest with a written agreement and is essential; therefore, the FCA declines to change the proposed regulation language.
In the proposed regulations, the FCA had deleted proposed § 621.6(d)(2), which describes collateral for loans which have been "in-substance foreclosed" and transferred to other property owned, with recognition of appropriate losses. This term has become obsolete as evolving GAAP maintains that a loan for which foreclosure is probable should continue to be accounted for as a loan rather than being reclassified as an acquired property. This change is consistent with the policies of other financial industry regulators who eliminated the term in their recent "Interagency Policy Statement n3 ."
n3 Joint Statement issued by the Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Federal Reserve Board, and Office of Thrift Supervision on June 10, 1993.
Finally, the FCC believes it is important to include in the final rule, the "di minimus" concept relative to a loan's past-due status. The FCC requested the same language, as in the existing regulation, be added to § 621.6(c)(2). The FCA agrees with the concept of the "di minimus" level in that immaterial amounts necessary to bring a loan to current status should not automatically cause the loan to be considered contractually past due. However, the FCA also believes that System institutions should be able to exercise reasonable judgment in establishing internal policies and procedures to deal with this issue rather than the FCA imposing specific requirements. As a result, the FCA decided not to include this provision in the final regulations.
2. Section 621.7-Rule of Aggregation
While agreeing with FCA's focus on the independent credit risk of a particular loan, the FCC stated that the provisions of proposed § 621.7(a) were too restrictive because they require all loans to a borrower to be designated as "nonaccrual" when one loan is classified nonaccrual. In particular, the FCC objected to the requirement of proposed § 621.7(a)(1) that a loan be fully guaranteed in order for it to be considered an "independent credit risk." In response to this concern, the final regulation substitutes "substantially" for "fully," as suggested by the FCC. The FCA interprets the term "substantial" to mean 80 percent or more guaranteed, provided that all the terms, including interest accrual, of the guarantee are being met.
However, guaranteed loans may still be subject to the provisions of § 621.6, depending on the terms of the guarantee. In general, transfer to nonaccrual status should occur when it becomes clear that the institution will have to rely on the guarantee for repayment. In such cases, accrual of interest should stop at the point in time when the guarantor can no longer be expected to cover interest accruals under the guarantee.
Contrary to the FCC comments on § 621.7(a)(2)(ii), when a nonaccrual loan is cross-collateralized with other loans to the same borrower, each of the loan's repayment (as originally agreed or through liquidation) is interrelated and, therefore, the loans must be classified nonaccrual.
The FCC also suggested eliminating proposed § 621.7(a)(2)(iii) because it was too broad. The FCA has not eliminated this provision because it is intended to provide consistency between the single credit criteria in the lending limit attribution rules (defined in § 614.4358 of this chapter) and the independent credit criteria in the accounting rules.
One commentor requested that the requirement in § 621.7(c) for a re-evaluation of the credit risk be limited to an evaluation of loans by System lenders. This change was not made because the FCA believes that when any of the borrower's loans are determined to be nonaccrual, it is important for the System lender to re-evaluate its credit risk with that borrower.
3. Section 621.8-Application of Payments on Nonaccrual Loans; Income Recognition
The FCC requested several technical changes to this area of the proposed regulation. In § 621.8(a), they suggested replacing the term "principal" with the term "recorded investment" as per GAAP. The FCA agrees that this change is reasonable, and has added a definition of "recorded investment" in § 621.2(j) as well.
Regarding § 621.8(b)(2), the FCC suggested that the regulation be modified to require that payment come from "an expected source of repayment or other reliable sources" instead of "a source of repayment detailed in the plan of collection," as proposed. While the source of payment is not the only indicator of collectibility of the loan, the FCC's recommendation makes the criterion broader and takes some of the emphasis away from the plan to collect the loan. The FCA believes a plan to collect the loan should be dynamic and should be modified according to the circumstances. In order to recognize interest income that comes from unanticipated sources, such as liquidation of collateral, an institution would simply need to update its records to reflect anticipated reliable sources of repayment in the future. Therefore, no change was made to this section in the final regulation.
Commenting on proposed § 621.8(b)(3), the FCC asserted that either curing the delinquency or establishing a repayment pattern to cure the delinquency should be sufficient to keep the loan in cash basis. The FCC also suggested combining paragraphs (b)(3) and (b)(4) together. The FCA has accepted this suggestion and merged the two paragraphs into § 621.8(b)(3) because it provides institutions with additional flexibility in recognizing income on loans where borrowers were making good faith efforts to resolve their problems. In addition, the revision is [*48785] consistent with other financial institution regulators" recently issued Interagency Policy Statement on Nonaccrual Loans n4 .
4. Section 621.9-Reinstatement to Accrual Status
In proposed § 621.9, the FCC commented that the introductory phrase "When the factors that caused a loan to be transferred to nonaccrual status no longer exist * * *" should not be considered an additional criterion for transferring a loan back to accrual status. The FCA did not intend for this to be a threshold criterion for determining a loan's reinstatement and has deleted this language to clarify the final regulation. However, the factors that caused a loan to be transferred to nonaccrual status should be considered in the overall analysis of whether to transfer a loan back to accrual status and should be evaluated by the institution in determining whether to reinstate a loan to accrual status.
The FCC also commented that the requirement in proposed § 621.9(a) to bring a loan current through repayment of principal and interest in order to transfer it out of nonaccrual status is too stringent, since it would mean that a renewed or reamortized loan would never be eligible for reinstatement. It is not the FCA's position that a renewed or reamortized loan could never be reinstated to accrual status. However, any loan that is in nonaccrual status must show performance (i.e., repayment) in order to be reinstated. Therefore, no change has been made to this paragraph of the final regulation.
Section 621.9(b) of the final regulation requires prior chargeoffs to be recovered (except for troubled debt restructures) before a loan may be reinstated to accrual status. This language was added to clarify the FCA's position on recovering prior chargeoffs, and, in particular, to make it clear that loans restructured under SFAS No. 15 are excluded from this provision.
Proposed § 621.9(b), was renumbered as § 621.9(c), and the phrase "willingness or" was added to the final regulation before "ability" in order to clarify that the borrower must not only be able but also willing to repay the loan.
Finally, the FCC commented that the repayment requirements set forth in proposed § 621.9(c) were too rigid and that some loans may not be considered nonaccrual under GAAP. The FCA does not agree, and has not made any changes to this paragraph other than to renumber it as § 621.9(d). This paragraph was included in the proposed regulations in response to concerns raised during meetings held between the FCA and associations in early 1993. During these meetings, many associations requested that specific repayment requirements be included in the regulations to provide clear criteria for transferring a "performing" loan to accrual status. Any perceived rigidity of this provision is alleviated by the FCA's use of the word "generally" before the sustained performance criteria are listed, and the expectation that institutions will use their judgment in measuring sustained performance. Section 621.9(d) formalizes a prevailing System practice that the FCA finds acceptable, reasonable, and consistent with GAAP.
5. Section 621.10-Monitoring of Performance Categories and Other Property Owned
As proposed, § 621.10 requires institutions to perform a quarterly review of all loans to determine whether they have been appropriately assigned to performance categories, and to determine the collectibility of accrued but uncollected interest income. The FCC agreed that timely review of the portfolio is essential, but did not believe that either a quarterly review, or a review of all loans, is necessary. The FCA believes that a system of internal controls, which includes an adequate loan review process, should provide the institution with the data necessary to evaluate its portfolio. Further, a quarterly review of the high-risk loan portfolio is needed to accurately evaluate performance status as well as the collectibility of accrued but uncollected interest income. Quarterly evaluation is both necessary and prudent to ensure proper disclosure in the quarterly and annual financial statements. The final regulations have been modified to clarify that quarterly review and reporting is only required for high-risk assets, as identified through an institution's internal review process, while annual disclosure in the management discussion and analysis section of the annual report to shareholders is required for the balance of loans which represent "potential credit risks."
D. Subpart D-Report of Condition and Performance
No comments were received on this subpart. No changes have been made to the proposed rule.
E. Subpart E-Reports Relating to Securities Activities of the Federal Agricultural Mortgage Corporation (Farmer Mac)
The FCA only received comments from Farmer Mac on this provision. In general, Farmer Mac viewed the proposed regulations as a significant improvement and clarification of its FCA reporting requirements, but suggested certain modifications for further clarification.
With respect to proposed § 621.20(a), Farmer Mac noted that it might be difficult to make an FCA filing "contemporaneously" with a late-day SEC filing because the FCA is located outside Washington, DC. The FCA accepts Farmer Mac's suggestion that the required copies of SEC filings be allowed to be filed with the FCA on the next business day if necessary.
Proposed § 621.20(b) was designed to require filing with the FCA of offering circulars or other information in securities transactions where Farmer Mac is not required to file with the SEC under the Securities Act of 1933. In its comments, Farmer Mac suggested that, for improved clarity, this provision should distinguish between securities guaranteed by Farmer Mac under each of its two programs. In addition, Farmer Mac pointed out that the proposed language would require no FCA filing for its "Linked Portfolio" transactions, where it (or a subsidiary) is the buyer of guaranteed securities and thus prepares no offering circular or information statement. Further, Farmer Mac expressed concern that proposed § 621.20(b) might require filing of information regarding subordinate securities, which Farmer Mac does not guarantee, and information which is prepared and distributed by third parties rather than Farmer Mac.
To address these concerns, the FCA has revised proposed § 621.20(b) to clarify that filings should be made regarding securities that are either issued or guaranteed by Farmer Mac. Specific reference is made to securities backed by qualified loans under section 8.0(9)(A) and (9)(B) of the Act. With respect to securities backed by qualified loans as defined in section 8.0(9)(B) of the Act (Farmer Mac II securities), Farmer Mac will normally be required to provide summary information on a quarterly basis in conjunction with the report of condition and performance filed pursuant to § 621.11.
In regards to proposed § 621.20, Farmer Mac questioned the extent of its "correspondence" with the SEC and the Treasury Department that must be filed with the FCA. The FCA has clarified [*48786] this paragraph to require copies of all substantive correspondence between Farmer Mac and the two agencies relating to securities activities or regulatory compliance. Under paragraph (c), non-substantive transmittal letters accompanying SEC filings, for example, would not be required to be filed with the FCA. On the other hand, the FCA has particular interest in interpretive rulings of the SEC or the Treasury Department that bear on Farmer Mac's ongoing business activities and would expect that such correspondence be filed in the quarter in which it occurred.
V. Conforming Amendments
The conforming amendments are adopted as proposed, except as follows.
The term "nonaccrual" is replaced in §§ 611.1130, 614.4512, 614.4514, 614.4516, 614.4520 and 614.4517 by "noninterest-earning." This synonymous substitution for the term nonaccrual is being made to ensure regulatory continuity in anticipation of the implementation of SFAS No. 114, which will affect the continuing utility of the nonaccrual description.
Those parts of the FCA regulations where the phrase "nonperforming loans" was proposed to be deleted and replaced by the phrase "nonaccrual, formally restructured, and loans 90 days past due still accruing interest" are revised in the final regulation by substituting the phrase "high-risk assets" instead. This substitution was made in order to prevent confusion when the sunset provision of subpart C becomes effective, and the performance categories are no longer defined. This does not imply any change in the FCA's position on the use of performance categories prior to an institution's implementation of SFAS No. 114, and will be clarified when the full effects of SFAS No. 114 are known.
List of Subjects
12 CFR Part 611
Agriculture, Banks, banking, Rural areas.
12 CFR Part 613
Aged, Agriculture, Banks, banking, Civil rights, Credit, Fair housing, Marital status discrimination, Religious discrimination, Rural areas, Sex discrimination, Signs and symbols.
12 CFR Part 614
Agriculture, Banks, banking, Foreign trade, Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 620
Accounting, Agriculture, Banks, banking, Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 621
Accounting, Agriculture, Banks, banking, Penalties, Reporting and recordkeeping requirements, Rural areas.
12 CFR Part 627
Agriculture, Banks, banking, Claims, Rural areas.
For the reasons stated in the preamble, parts 611, 613, 614, 620, 621, and 627 of chapter VI, title 12 of the Code of Federal Regulations is amended to read as follows:
1. Part 621 is revised to read as follows:
PART 621-ACCOUNTING AND REPORTING REQUIREMENTS
Subpart A-Purpose and Definitions
621.1 Purpose and applicability.
Subpart B-General Rules
621.3 Application of generally accepted accounting principles.
621.4 Audit by qualified public accountant.
621.5 Accounting for the allowance for loan losses and chargeoffs.
Subpart C-Loan Performance and Valuation Assessment
621.6 Performance categories and other property owned.
621.7 Rule of aggregation.
621.8 Application of payments and income recognition on nonaccrual loans.
621.9 Reinstatement to accrual status.
621.10 Monitoring of performance categories and other property owned.
Subpart D-Report of Condition and Performance
621.12 Applicability and general instructions.
621.13 Content and standards-general rules.
621.14 Certification of correctness.
Subpart E-Reports Relating to Securities Activities of the Federal Agricultural Mortgage Corporation
621.20 Form and content.
Authority: Secs. 5.17, 8.11 of the Farm Credit Act; 12 U.S.C. 2252, 2279aa-11.
Subpart A-Purpose and Definitions
§ 621.1 -- Purpose and applicability.
This part sets forth accounting and reporting requirements to be followed by all banks, associations, and service organizations chartered under the Act; the Federal Farm Credit Banks Funding Corporation; and, where specifically indicated, the Federal Agricultural Mortgage Corporation. The requirements set forth in this part are of both general and specific applicability. Certain requirements focus on areas of financial condition and operating performance that are of special importance for generating, presenting, and disclosing accurate and reliable information.
§ 621.2 -- Definitions.
For the purposes of this part, the following definitions shall apply:
(a) Accrual basis of accounting means the accounting method in which expenses are recorded when incurred, whether paid or unpaid, and income is reported when earned, whether received or not received.
(b) Borrowing entity means the individual(s), partnership, joint venture, trust, corporation, or other business entity, or any combination thereof, that is primarily obligated on the loan instrument.
(c) Generally accepted accounting principles means that body of conventions, rules, and procedures necessary to define accepted accounting practices at a particular time, as promulgated by the Financial Accounting Standards Board (FASB) and other authoritative sources recognized as setting standards for the accounting profession in the United States. Generally accepted accounting principles include not only broad guidelines of general application but also detailed practices and procedures that constitute standards by which financial presentations are evaluated.
(d) Generally accepted auditing standards means the standards and guidelines adopted by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) to govern the overall quality of audit performance.
(e) Institution means any bank, association, or service organization chartered under the Act; the Federal Farm Credit Banks Funding Corporation, and where specifically noted, the Federal Agricultural Mortgage Corporation.
(f) Loan means any extension of credit or lease that is recorded as an asset of a reporting institution, whether made directly or purchased from another lender. The term "loan" includes, but is not limited to:
(1) Loans originated through direct negotiations between the reporting institution and a borrower;
(2) Purchased loans or interests in loans, including participation interests, retained subordinated participation interests in loans sold, and interests in [*48787] pools of subordinated participation interests that are held in lieu of retaining a subordinated participation interest in loans sold;
(3) Contracts of sale; notes receivable; and
(4) Other similar obligations and lease financing.
(g) Material means the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
(h) Net realizable value means the net amount the lender would expect to be realized from the acquisition and subsequent sale or disposition of a loan's underlying collateral. Generally, net realizable value is equal to the estimated selling price in the ordinary course of business, less estimated costs of acquisition, completion, and disposal.
(i) Qualified public accountant means a person who:
(1) Holds a valid and unrevoked certificate, issued to such person by a legally constituted State authority, identifying such person as a certified public accountant;
(2) Is licensed to practice as a public accountant by an appropriate regulatory authority of a State or other political subdivision of the United States;
(3) Is in good standing as a certified and licensed public accountant under the laws of the State or other political subdivision of the United States in which is located the home office or corporate office of the institution that is to be audited;
(4) Is not suspended or otherwise barred from practice as an accountant or public accountant before the Securities and Exchange Commission (SEC) or any other appropriate Federal or State regulatory authority; and
(5) Is independent of the institution that is to be audited. For the purposes of this definition the term "independent" shall have the same meaning as under the rules and interpretations of the AICPA.
(j) Recorded investment means the face amount of the loan increased or decreased by applicable accrued interest and unamortized premium, discount, finance charges, or acquisition costs, and may also reflect a previous direct write-down of the investment.
Subpart B-General Rules
§ 621.3 -- Application of generally accepted accounting principles.
Each institution shall:
(a) Prepare and maintain, on an accrual basis, accurate and complete records of its business transactions as necessary to prepare financial statements and reports, including reports to the Farm Credit Administration, in accordance with generally accepted accounting principles, except as otherwise directed by statutory and regulatory requirements;
(b) Prepare its financial statements and reports, including reports to the shareholders, investors, boards of directors, institution management and the Farm Credit Administration, in accordance with generally accepted accounting principles, except as otherwise directed by statutory and regulatory requirements; and
(c) Prepare and maintain its books and records in such a manner as to facilitate reconciliation with financial statements and reports prepared from them.
§ 621.4 -- Audit by qualified public accountant.
(a) Each institution shall, at least annually, have its financial statements audited by a qualified public accountant in accordance with generally accepted auditing standards.
(b) The qualified public accountant's opinion of each institution's financial statements shall be included as a part of each annual report to shareholders.
(c) If an institution disagrees with the opinion of a qualified public accountant required by paragraph (b) of this section, the following actions shall be taken immediately:
(1) The institution shall prepare a brief but thorough written description of the scope and content of the disagreement, noting each point of disagreement and citing, in all cases, the specific provisions of generally accepted accounting principles and generally accepted auditing standards upon which the institution's position in the disagreement is based;
(2) A copy of the institution's final description of the disagreement shall be given to the accountant who provided the opinion with which the institution disagrees;
(3) The accountant shall have 10 business days to develop and provide a brief but thorough final response to the institution's description of the disagreement, including all items believed to be incorrect or incomplete, and citing, in all cases, the specific provisions of generally accepted accounting principles and generally accepted auditing standards upon which the accountant's position in the disagreement is based;
(4) Both the institution's final description of the disagreement and the accountant's final response to it shall be included in the institution's annual report to shareholders directly following the accountant's opinion of the institution's financial statements; and
(5) The institution shall immediately notify the Chief Examiner, Farm Credit Administration, of any disagreement with its accountant and shall furnish the Farm Credit Administration with the written documentation required by paragraphs (c) (1) through (4) of this section.
(d) If an institution selects a qualified public accountant to audit its financial statements and provide an opinion thereon for its annual report who is different from the accountant whose opinion appeared in the institution's most recent annual report, the following items shall be sent to the Farm Credit Administration no later than 15 days after the end of the month in which the change took place and shall be included in the institution's annual meeting information statement and annual report to shareholders for the year in which the change of accountants took place:
(1) The name and address of the accountant whose opinion appeared in the institution's most recent annual report to shareholders;
(2) A brief but thorough statement of the reasons the accountant selected for the most recent annual report was not selected for the current annual report. If the change resulted from a disagreement with the accountant, the statement shall describe the institution's disagreement with the accountant's opinion and the accountant's final response to the institution's disagreement prepared pursuant to paragraph (c) of this section; and
(3) The identification of the highest ranking officer, committee of officers, or board of directors, as appropriate, that recommended, approved, or otherwise made the decision to change qualified public accountants.
§ 621.5 -- Accounting for the allowance for loan losses and chargeoffs.
Each institution shall:
(a) Maintain at all times an allowance for loan losses that is adequate to absorb all probable and estimable losses that may reasonably be expected to exist in the loan portfolio.
(b) Develop, adopt, and consistently apply policies and procedures governing the establishment and maintenance of the allowance for loan losses which, at a minimum, conform to the rules, definitions, and standards set forth in this part and any other applicable requirements. [*48788]
(c) Charge-off loans, wholly or partially, as appropriate, at the time they are determined to be uncollectible.
(d) Ensure that when an institution or the Farm Credit Administration determines that the value of a loan or other asset recorded on its books and records exceeds the amount that can reasonably be expected to be collectible, or when the documentation supporting the recorded asset value is inadequate, the institution shall immediately charge off the asset in the amount determined to be uncollectible. If the amount determined to be uncollectible by the institution is different from the amount determined to be uncollectible by the Farm Credit Administration, the institution shall charge off such amount as the Farm Credit Administration shall direct.
Subpart C-Loan Performance and Valuation Assessment
§ 621.6 -- Performance categories and other property owned.
Each institution shall employ the following practices with respect to categorizing high-risk loans and loan-related assets. No loan shall be put into more than one performance category. At a minimum, loans meeting the criteria for both nonaccrual and another performance category shall be classified as nonaccrual.
(a) Nonaccrual loans. A loan shall be considered nonaccrual if it meets any of the following conditions:
(1) Collection of any amount of outstanding principal and all past and future interest accruals, considered over the full term of the asset, is not expected;
(2) Any portion of the loan has been charged off, except in cases where the prior chargeoff was taken as part of a formal restructuring of the loan; or
(3) The loan is 90 days past due and is not both adequately secured and in process of collection.
(i) A loan is considered adequately secured only if:
(A) It is secured by real or personal property having a net realizable value sufficient to discharge the debt in full; or
(B) It is guaranteed by a financially responsible party in an amount sufficient to discharge the debt in full.
(ii) A loan is considered in process of collection only if collection efforts are proceeding in due course and, based on a probable and specific event, are expected to result in the prompt repayment of the debt or its restoration to current status. There must be documented evidence that collection in full of amounts due and unpaid is expected to occur within a reasonable time period, not to exceed 180 days from the date that payment was due. The commencement of collection efforts through legal action, including bankruptcy or foreclosure, or through collection efforts not involving legal action, including ongoing workouts and reamortizations, do not, in and of themselves, provide sufficient cause to keep a loan out of nonaccrual status. If full collection of the debt or its restoration to current status is dependent upon completion of any action by the borrower, the institution must obtain the borrower's written agreement to complete all such actions by the specific dates set forth in agreement.
(b) Formally restructured loans. A loan is considered formally restructured if it meets the "troubled debt restructuring" definition set forth in Statement of Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as promulgated by the FASB.
(c) Loans 90 days past due still accruing interest.
(1) Loans 90 days past due still accruing interest means loans that are 90 days or more contractually past due, and that are both adequately secured and in process of collection, as described in this section.
(2) A loan shall be considered contractually past due when any principal repayment or interest payment required by the loan instrument is not received on or before the due date. A loan shall remain contractually past due until it is formally restructured or until the entire amount past due, including principal, accrued interest, and penalty interest incurred as the result of past due status, is collected or otherwise discharged in full.
(d) Other property owned means any real or personal property, other than an interest-earning asset, that has been acquired as a result of full or partial liquidation of a loan, through foreclosure, deed in lieu of foreclosure, or other means.
§ 621.7 -- Rule of aggregation.
(a) When one loan to a borrower is placed in nonaccrual, an institution must immediately evaluate whether its other loans to that borrower, or related borrowers, should also be placed in nonaccrual. All loans on which a borrowing entity, or a component of a borrowing entity, is primarily obligated to the reporting institution shall be considered as one loan unless a review of all pertinent facts supports a reasonable determination that a particular loan constitutes an independent credit risk and such determination is adequately documented in the loan file.
(1) A loan shall be considered an independent credit risk if a substantial portion of the loan is guaranteed as to principal and interest by a government agency.
(2) Other loans shall be considered independent credit risks if and so long as:
(i) The primary sources of repayment are independent for each loan;
(ii) The loans are not cross-collateralized; and
(iii) The principal obligors are different person(s) and/or entity(ies). Related loans will not be considered independent credit risks if the operations of a related borrower are so financially interdependent with the borrower's operations that the economic survival of one will materially affect the economic survival of the other, determined in accordance with § 614.4358(a)(2) of this chapter.
(b) If the evaluation required by paragraph (a) of this section results in a determination that the borrower's other loans with the institution do not represent an independent credit risk, and full collection of such loans is not expected, then all of the borrower's loans must be aggregated and classified as nonaccrual. If such other loans represent an independent credit risk and are fully collectible, then they may remain in their current performance category.
(c) When an institution becomes aware that a borrower has a loan that has been classified nonaccrual by any other lender, the institution must re-evaluate the credit risk in its loan to the borrower and then determine whether an independent credit risk exists.
§ 621.8 -- Application of payments and income recognition on nonaccrual loans.
Each institution shall employ the following practices with respect to application of cash payments on nonaccrual loans:
(a) If the ultimate collectibility of the recorded investment, in whole or in part, is in doubt, any payment received on such loan shall be applied to reduce the recorded investment to the extent necessary to eliminate such doubt.
(b) Once the ultimate collectibility of the recorded investment is no longer in doubt, payments received in cash on such loan may qualify for recognition as interest income if all of the following characteristics are met at the time the payment is received:
(1) The loan does not have a remaining unrecovered prior chargeoff [*48789] associated with it, except in cases where the prior chargeoff was taken as part of a formal restructuring of the loan;
(2) The payment received has come from a source of repayment detailed in the plan of collection;
(3) The loan, after considering the payment, is not contractually past due more than 90 days and is not expected to become 90 days past due, or a repayment pattern has been established that reasonably demonstrates future repayment capacity.
(c) The institution shall employ the following practices with respect to earned but uncollected interest income on loans, leases, contracts, and similar assets that are determined not to be fully collectible:
(1) Earned but uncollected interest income that was accrued in the current fiscal year and is determined to be uncollectible shall be reversed from interest income; and
(2) Earned but uncollected interest income that was accrued in prior fiscal years and is determined to be uncollectible shall be charged off against the allowance for loan losses.
§ 621.9 -- Reinstatement to accrual status.
A loan may be reinstated to accrual status, when each of the following criteria are met:
(a) All contractual principal and interest due on the loan is paid and the loan is current;
(b) Prior chargeoffs are recovered, except for troubled debt restructures;
(c) No reasonable doubt remains regarding the willingness and ability of the borrower to perform in accordance with the contractual terms of the loan agreement; and
(d) Reinstatement is supported by a period of sustained performance in accordance with the contractual terms of the note and/or loan agreement. Sustained performance will generally be demonstrated by 6 consecutive monthly payments, 4 consecutive quarterly payments, 3 consecutive semi-annual payments, or 2 consecutive annual payments.
§ 621.10 -- Monitoring of performance categories and other property owned.
(a) Each institution shall:
(1) Account for, report, and disclose to shareholders, investors, boards of directors, and the Farm Credit Administration all material items with respect to performance categories and other property owned in accordance with the rules and definitions set forth in this part and any other applicable requirements;
(2) In accordance with § 620.5(g)(1)(iv)(A) of this chapter, disclose to shareholders, investors, boards of directors, and the Farm Credit Administration the nature and extent of significant potential credit risks within the loan portfolio, or other information that could adversely impact performance of the loan portfolio in the near future;
(3) Develop, adopt, and consistently apply policies and procedures governing performance categories and other property owned, which, at a minimum, conform to the definitions, rules, and standards set forth in this part and such other requirements and procedures as may be required by the Farm Credit Administration;
(4) Review the loan portfolio at least quarterly to ensure that all high-risk loans have been assigned the appropriate performance category; and
(5) Review all high-risk loans in the loan portfolio at least quarterly to determine the collectibility of accrued but uncollected income, if any.
(b) Measures taken to enhance the collectibility of a loan shall not be deemed to relieve an institution of the requirement to monitor and evaluate the loan for the purpose of determining its performance status.
§ 621.11 -- Exceptions.
Subpart C shall not apply to any Farm Credit System institution after the date upon which SFAS No. 114, Accounting by Creditors for Impairment of a Loan, becomes mandatory with respect to such institution and shall not apply to any Farm Credit System institution that implements the provisions of SFAS No. 114 before the mandatory implementation date. Pursuant to the Financial Accounting Standards Board, although early implementation is encouraged, SFAS No. 114 shall be effective for financial statements for fiscal years beginning after December 15, 1994. Copies of SFAS No. 114 may be obtained by writing the Financial Accounting Standards Board of the Financial Accounting Foundation at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116, or by calling (203) 847-0700.
Subpart D-Report of Condition and Performance
§ 621.12 -- Applicability and general instructions.
(a) Each institution, including the Federal Agricultural Mortgage Corporation, shall prepare and file such reports of condition and performance as may be required by the Farm Credit Administration.
(b) Reports of condition and performance shall be filed four times each year, and at such other times as the Farm Credit Administration may require. The reports shall be prepared on the accrual basis of accounting and shall fairly represent the financial condition and performance of each institution at the end of, and over the period of, each calendar quarter, provided that such additional reports as may be necessary to ensure timely, complete, and accurate monitoring and evaluation of the affairs, condition, and performance of Farm Credit institutions may be required, as determined by the Chief Examiner, Farm Credit Administration.
(c) All reports of condition and performance shall be filed with the Farm Credit Administration, Office of Examination, 1501 Farm Credit Drive, McLean, Virginia, 22102-5090.
§ 621.13 -- Content and standards-general rules.
Each institution, including the Federal Agricultural Mortgage Corporation, shall prepare reports of condition and performance:
(a) In accordance with all applicable laws, regulations, standards, and such instructions and specifications and on such media as may be prescribed by the Farm Credit Administration;
(b) In accordance with generally accepted accounting principles and such other accounting requirements, standards, and procedures as may be prescribed by the Farm Credit Administration; and
(c) In such manner as to facilitate their reconciliation with the books and records of reporting institutions.
§ 621.14 -- Certification of correctness.
Each report of financial condition and performance filed with the Farm Credit Administration shall be certified as having been prepared in accordance with all applicable regulations and instructions and to be a true and accurate representation of the financial condition and performance of the institution to which it applies. The reports shall be certified by the officer of the reporting institution named for that purpose by action of the reporting institution's board of directors. If the board of directors of the institution has not acted to name an officer to certify the correctness of its reports of condition and performance, then the reports shall be certified by the president or chief executive officer of the reporting institution. [*48790]
Subpart E-Reports Relating to Securities Activities of the Federal Agricultural Mortgage Corporation
§ 621.20 -- Form and content.
(a) The Federal Agricultural Mortgage Corporation (Corporation) shall provide the Office of Secondary Market Oversight with three copies of any filings made with the SEC pursuant to the Securities Act of 1933 or the Securities and Exchange Act of 1934. Such copies shall be filed with the FCA no later than 1 business day after any SEC filing.
(b) The Corporation shall make the following filings with the Office of Secondary Market Oversight for securities either issued or guaranteed by the Corporation that are not registered under the Securities Act of 1933.
(1) Three copies of any offering circular, private placement memorandum, or information statement prepared in connection with the securities offering shall be filed with the Office of Secondary Market Oversight at or before the time of the securities offering.
(2) For securities backed by qualified loans as defined in section 8.0(9)(A) of the Act, the Corporation shall file one copy of the following within 1 business day of the finalization of the transaction:
(i) The private placement memoranda for securities sold to investors; and
(ii) The pooling and servicing agreement when the security is purchased by the Corporation as authorized by section 8.6(g) of the Act.
(3) For securities backed by qualified loans as defined in section 8.0(9)(B) of the Act, the Corporation shall provide summary information on such securities issued during each calendar quarter in the form prescribed by the Office of Secondary Market Oversight. Such summary information shall be provided with each report of condition and performance filed pursuant to § 621.11, and at such other times as the Office of Secondary Market Oversight may require.
(c) The Corporation shall file with the Office of Secondary Market Oversight copies of all substantive correspondence between the Corporation and the Securities and Exchange Commission and the Department of the Treasury relating to securities activities or regulatory compliance. Such correspondence should be filed no later than the date of filing of the report of condition and performance for the calendar quarter in which the correspondence was received or sent.
(d) The Corporation shall promptly notify the Office of Secondary Market Oversight if it becomes exempt or claims exemption from the filing requirements of the Securities and Exchange Act of 1934.
2. 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 E-Transfer of Authorities
§ 611.515 -- [Amended]
3. Section 611.515 is amended by removing the words "nonperforming loans and related assets," and adding, in their place, the words "high-risk assets and other property owned," in paragraph (b)(6)(ii)(E).
Subpart G-Mergers, Consolidations, and Charter Amendments of Associations
4. Section 611.1122 is amended by removing the words "nonperforming loans and related assets" and adding, in their place, the words "high-risk assets and other property owned," in the second sentence of paragraph (e)(6)(iii); and by revising paragraph (e)(9) to read as follows:
§ 611.1122 -- Requirements for mergers or consolidations.
* * * * *
(e) * * *
(9) A presentation for each constituent association regarding its policy on accounting for loan performance, together with the number and dollar amount of loans in all performance categories, including those categorized as high-risk assets.
* * * * *
Subpart H-Rules for Inter-System Fund Transfers
§ 611.1130 -- [Amended]
5. Section 611.1130 is amended by removing, respectively, the words "nonaccrual" and "acquired property," and adding, in their respective places, the words "noninterest-earning" and "other property owned," in paragraph (b)(4)(iii).
Subpart N-Conservators and Conservatorships of Banks and Associations
§ 611.1182 -- [Amended]
6. Section 611.1182 is amended by removing the reference "§ 621.12" and adding in its place "§ 621.14" in the second sentence of paragraph (c).
Subpart O-Special Reconsideration of Mergers
§ 611.1197 -- [Amended]
7. Section 611.1197 is amended by removing the words "nonperforming loans and related assets," and adding, in their place, the words "high-risk assets and other property owned," in paragraph (b)(6)(ii)(E).
Subpart P-Termination of Farm Credit Status-Associations
§ 611.1225 -- [Amended]
8. Section 611.1225 is amended by removing the words "nonperforming loans and related assets" and adding, in their place, the words "high-risk assets and other property owned," in paragraph (t)(2).
§ 611.1240 -- [Amended]
9. Section 611.1240 is amended by removing the reference "§ 621.2(a)(21)," and adding in its place "§ 621.2(i)," in the second sentence of paragraph (c).
PART 613-ELIGIBILITY AND SCOPE OF FINANCING
10. The authority citation for part 613 is revised to read as follows:
Authority: Secs. 1.5, 1.7, 1.9, 1.10, 1.11, 2.2, 2.4, 2.12, 3.1, 3.7, 3.8, 3.22, 5.9, 5.17 of the Farm Credit Act; 12 U.S.C. 2013, 2015, 2017, 2018, 2019, 2073, 2075, 2093, 2122, 2128, 2129, 2143, 2243, 2252; 42 U.S.C. 3601 et seq.; 15 U.S.C. 1691 et seq.; 12 CFR part 202, 24 CFR parts 100, 109, and 110.
Subpart B-Eligibility To Borrow From Farm Credit Banks, Agricultural Credit Banks, Production Credit Associations, Agricultural Credit Associations and Federal Land Credit Associations
§ 613.3045 -- [Amended]
11. Section 613.3045 is amended by removing the words "performing loans" and adding, in their place, the words "loans that are current as to both principal and interest that are" in paragraph (c)(3)(i).
PART 614-LOAN POLICIES AND OPERATIONS
12. The authority citation for part 614 continues to read as follows: [*48791]
Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act; 12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5; sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart C-Bank/Association Lending Relationship
§ 614.4130 -- [Amended]
13. Section 614.4130 is amended by removing the words "(as defined in 12 CFR 621.2(a)(20))" in paragraph (a).
Subpart N-Loan Servicing Requirements; State Agricultural Loan Mediation Programs; Right of First Refusal
§ 614.4512 -- [Amended]
14. Section 614.4512 is amended by removing the words "a loan as a nonperforming asset;" and adding, in their place, the words "a loan classified as a high-risk asset;" in paragraph (c)(2) and removing the word "nonaccrual" and adding in its place, the words "noninterest-earning asset" in paragraph (e)(1).
§ 614.4514 -- [Amended]
15. Section 614.4514 is amended by removing the word "nonaccrual" and adding, in its place, the words "a noninterest-earning" in the first sentence of paragraph (d).
§ 614.4516 -- [Amended]
16. Section 614.4516 is amended by removing the word "nonaccrual" and adding, in its place, the words "a noninterest-earning" in paragraph (b)(2).
§ 614.4517 -- [Amended]
17. Section 614.4517 is amended by removing the word "nonaccrual" and adding, in its place, the words "noninterest-earning" in paragraph (a)(5).
§ 614.4520 -- [Amended]
18. Section 614.4520 is amended by removing the words "in nonaccrual status" and adding, in their place, the words "a noninterest-earning asset" in the first sentence of paragraph (a).
§ 614.4522 -- [Amended]
19. Section 614.4522 is amended by revising the heading for paragraph (a)(1) to read "Acquired real estate."; by removing the words "acquired property" and adding, in their place, the words "acquired real estate" in paragraph (b), the first sentence of paragraphs (c)(3) and (c)(4) and paragraph (e); and by removing the words "acquired property, or any portion of such real estate," and adding, in their place, the words "acquired real estate, or any portion of such property," in the introductory text of paragraphs (c) and (d).
PART 620-DISCLOSURE TO SHAREHOLDERS
20. 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.
§ 620.1 -- [Amended]
21. Section 620.1 is amended by removing the words "loans properly identifiable as "nonperforming" as defined in § 621.2(a)(17) of this chapter." and adding, in their place, the words "adversely classified loans." in the second sentence of paragraph (i).
§ 620.2 -- [Amended]
22. Section 620.2 is amended by removing the reference "§ 621.12" and adding in its place "§ 621.14" in paragraph (b)(1).
Subpart B-Annual Report to Shareholders
23. Section 620.5 is amended by removing the reference "§ 621.9(c) and (d)" and adding in its place "§ 621.4(c) and (d)" in paragraph (l); by removing the reference "§ 621.2(a)(21)" and adding in its place "§ 621.2(i)" in paragraph (m)(1); and by revising paragraphs (f)(1)(i)(F) and (g)(1)(iv)(A) to read as follows:
§ 620.5 -- Contents of the annual report to shareholders.
* * * * *
(f) * * *
(1) * * *
(i) * * *
(F) Other property owned.
* * * * *
(g) * * *
(1) * * *
(iv) * * *
(A) An analysis of high-risk assets and loan performance categories, to include, but not limited to, a discussion of the nature and extent of significant potential credit risks within the loan portfolio, or other information that could adversely impact performance of the loan portfolio in the near future;
* * * * *
Subpart C-Quarterly Report to Shareholders
§ 620.10 -- [Amended]
24. Section 620.10 is amended by removing the reference "§ 621.12" and adding in its place "§ 621.14" in paragraph (e)(1).
Subpart D-Association Annual Meeting Information Statement
§ 620.21 -- [Amended]
25. Section 620.21 is amended by removing the reference "§ 621.9(c) and (d)" and adding in its place "§ 621.4(c) and (d)" in paragraph (f).
26. Subpart F is revised to read as follows:
Subpart F-Annual Report of Condition of the Federal Agricultural Mortgage Corporation
§ 620.40 -- Content, timing, and distribution of Federal Agricultural Mortgage Corporation's annual report of condition.
(a) The Federal Agricultural Mortgage Corporation shall prepare and publish an annual report of its condition that is equivalent in content to the annual report to shareholders required by section 14 of the Securities and Exchange Act of 1934.
(b) The Corporation shall distribute the annual report of condition to its shareholders within 120 days of its fiscal year-end.
(c) Upon receiving a request for an annual report of condition, the Corporation shall promptly mail or otherwise furnish to the requestor a copy of the most recent annual report described in this section.
(d) The Corporation shall file three copies of the annual report of condition with the Farm Credit Administration's Office of Secondary Market Oversight within 120 days of its fiscal year-end.
PART 627-TITLE V CONSERVATORS AND RECEIVERS
27. The authority citation for part 627 continues to read as follows:
Authority: Secs. 4.2, 5.9, 5.10, 5.17, 5.51, 5.58 of the Farm Credit Act; 12 U.S.C. 2183, 2243, 2244, 2252, 2277a, 2277a-7.
Subpart C-Conservators and Conservatorships
§ 627.2785 -- [Amended]
28. Section 627.2785 is amended by removing the reference "§ 621.12" and adding in its place "§ 621.14" in the second sentence of paragraph (c). [*48792]
Dated: September 9, 1993.
Curtis M. Anderson,
Secretary, Farm Credit Administration Board.
[FR Doc. 93-22525 Filed 9-17-93; 8:45 am]
BILLING CODE 6705-01-P