Title: FINAL RULE--Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; General Provisions--12 CFR Parts 614, 615, 618
Issue Date: 04/24/1995
Agency: FCA
Federal Register Cite: 60 FR 20008
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615, 618

RIN 3052-AB53

Loan Policies and Operations; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; General Provisions

ACTION: Final rule.

[*20008]

SUMMARY: The Farm Credit Administration (FCA), by order of the FCA Board (Board), adopts a final rule that repeals several regulations concerning loan policies and operations, funding, and miscellaneous items as well as two Agency prior-approval requirements. These repeals are part of an ongoing effort by the FCA to reduce unnecessary regulatory burdens on Farm Credit System (FCS or System) institutions.

EFFECTIVE DATE: This rule shall become effective upon the expiration of 30 days after publication in the Federal Register, during which either or both Houses of Congress are in session. Notice of the effective date will be published in the Federal Register.

FOR FURTHER INFORMATION CONTACT:

W. Eric Howard, Policy Analyst, Regulation Development, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,

or

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

SUPPLEMENTARY INFORMATION:

I. Background


On June 10, 1993, the FCA Board approved a Statement on Regulatory [*20009] Burden seeking public comment on the appropriateness of requirements that the FCA regulations impose on the FCS. More specifically, the FCA asked the public to identify regulations that either duplicate other governmental requirements, are not effective, or impose a burden that is greater than the benefit derived. The notice of intent was published in the Federal Register (58 FR 34003) on June 23, 1993. After reviewing all responses to the notice of intent, the FCA proposed on January 10, 1995, to delete the following regulatory provisions: 615.5104; 615.5105(c); 615.5170 (b) through (e); 615.5190; 615.5498; 615.5500; 615.5520; 615.5530; and 618.8220. Additionally, the FCA proposed the repeal of the Agency prior-approval requirements in 614.4470 (b)(1) and (b)(3). See 60 FR 2552 (January 10, 1995).

The Farm Credit Council (Council), on behalf of its members, and a production credit association (PCA) submitted comments concerning the proposed deletions. The Council strongly supported the repeal of the above-cited regulations and Agency prior-approval requirements, and encouraged the FCA to adopt the entire proposal as a final rule. Although the PCA lauded the FCA's effort to reduce regulatory burdens on System institutions, it offered no comments about the FCA's proposal to repeal the above-cited regulations and prior-approval requirements. Instead, the PCA petitioned the FCA to address three regulatory burden issues that were not included in the proposed rule.

In response, the FCA emphasizes that its proposal of January 10, 1995, represents the first phase in an ongoing process to reduce regulatory burdens on FCS institutions. As the FCA explained in the preamble to the proposed rule, the FCA is in the process of evaluating all recommendations for reducing regulatory burdens that System commentors submitted to the Agency in response to the notice of intent. The FCA will address all remaining regulatory burden issues, including those raised by the PCA, either in (1) Regulatory projects that the FCA Board identifies in the Unified Agenda of Federal Regulations, which is routinely published in the Federal Register, or (2) subsequent phases of this project.

The FCA now adopts its January 10, 1995 proposal as a final rule without amendment. The regulations that the FCA now repeals are not necessary to implement or interpret the Farm Credit Act of 1971, as amended (Act), or to promote the safe and sound operations of FCS institutions. For this reason, the repeal of these regulations and Agency prior-approval requirements will relieve unnecessary regulatory burdens on the FCS. The following is a brief explanation of the rationale for repealing each of these regulatory requirements.

II. Analysis of Changes and Comments by Section

A. Loans Subject to Bank Approval


The FCA now eliminates from both 614.4470 (b)(1) and (b)(3) the requirement that the Agency preapprove certain insider loan transactions at System associations. Section 614.4470(a) requires funding banks to preapprove loans that their affiliated associations make to: (1) Their own directors or employees; (2) directors or employees of a jointly managed association; or (3) bank employees. Until now, 614.4470(b) required FCA approval of loans to any borrower whenever certain institution-affiliated parties: (1) Received proceeds of a loan in excess of an amount established by the funding bank; or (2) endorsed, guaranteed, or co-made a loan in excess of the amount established by the funding bank.

These Agency prior-approval requirements in 614.4470 (b)(1) and (b)(3) are inconsistent with the FCA's status as an arm's-length regulator. Furthermore, these insider activities can be adequately evaluated and controlled through means other than prior approval by the FCA. Sections 612.2140 and 612.2150 establish adequate safeguards to prevent directors, officers, and employees of System institutions from using their positions for personal gain. In addition, 620.5 requires System institutions to disclose insider loan transactions in their annual reports to shareholders. The FCA has sufficient examination and enforcement powers to ensure that loans to institution-affiliated parties do not undermine the solvency of any FCS bank or association. Once the repeal of the Agency prior-approval requirements in 614.4470(b) becomes effective, the FCA shall rely upon its examination authority to determine whether: (1) Bank policy adequately deters insider abuses at System institutions; and (2) associations are complying with bank policy. The FCA is currently reviewing whether other prior-approval requirements that are not mandated by the Act should be retained.

B. Debt Policy and Consolidated Systemwide Notes

The FCA now repeals 615.5104 and 615.5105(c) because they have been superseded by a new regulation, 615.5135. Section 615.5104 requires each bank to adopt a policy for the management of its debt, while 615.5105(c) requires the debt management policy of each bank to identify the maximum amount of discount notes that can be outstanding at any one time. Each FCS bank is now required by 615.5135 to adopt an asset/liability management policy. Furthermore, 615.5135 requires the policies of System banks to address the management of both assets and liabilities in a more comprehensive manner than 615.5104 and 615.5105(c). Because 615.5135 has rendered 615.5104 and 615.5105(c) obsolete, the Agency is deleting these two regulations. In the FCA's opinion, the new investment regulations in subpart E of part 615 enhance the ability of Farm Credit banks to control liquidity and solvency risks in their portfolios.

C. Real and Personal Property

The FCA now repeals 615.5170 (b) through (e). These regulations are not needed to: (1) Implement or interpret provisions in the Act that govern the acquisition of real or personal property by FCS banks and associations; or (2) promote safety and soundness. In FCA's opinion, these provisions impose burdens on System institutions that are no longer justified by the benefits derived. These regulatory provisions prescribe detailed operational standards, rather than performance criteria, for ensuring the safe and sound operation of System banks and associations. The FCA also believes that 615.5170 (d) and (e) are no longer necessary because the safety and soundness concerns posed by information system processing technology are now adequately addressed in FCA Information Systems Bulletins. Additionally, Information Systems Bulletin 92-1 addresses information system risks in mergers and acquisitions. The FCA also observes that paragraphs (b), (c), and (d) of 615.5170 contain obsolete references to the "district boards" that were abolished by section 409(d) of the Agricultural Credit Technical Corrections Act of 1988. n1

n1 Pub. L. 100-399, section 409(d), 102 Stat. 989, 1003, (August 17, 1988).

The FCA will, however, retain 615.5170(a) because this provision implements sections 1.5(5) and 3.1(5) of the Act. These sections authorize each bank, subject to regulation by the FCA, to acquire, hold, dispose, and otherwise exercise all the usual incidents of ownership of real and personal property necessary or convenient to its business. Sections 2.2(5) and 2.12(5) of the Act provide associations with similar [*20010] authorities subject to the supervision by their funding bank and regulation by the FCA. Section 615.5170(a) implements these sections of the Act by specifically stating that the ownership of real estate for office quarters of any bank or association "shall be limited to facilities reasonable and necessary to meet the foreseeable requirements of the institution." Furthermore, 615.5170(a) expressly prohibits any FCS institution from acquiring real property "if it involves, or appears to involve, a bank or association in the real estate or other unrelated business." This restriction also serves a safety and soundness purpose because such extraneous business activities may increase the exposure of System institutions to loss.

D. Deposits of Funds

The FCA is repealing 615.5190 because sections 1.5(14), 2.2(10), 2.12(18) and 3.1(12) of the Act provide the requisite authority for FCS institutions to deposit current funds in commercial banks that are either members of the Federal Reserve System or are insured by the Federal Deposit Insurance Corporation (FDIC).

The FCA is also repealing 615.5190(b) because there is no statutory basis for requiring CoBank to make foreign deposits for the other banks for cooperatives (BCs). The FCA originally adopted this provision in 1981 because, at that time, only the former Central Bank for Cooperatives (CBC) had expertise to reduce the safety and soundness risks that derive from currency exchange transactions. See 46 FR 51881 (October 22, 1981). After the CBC and most district BCs merged to form CoBank, the FCA amended 615.5190(b) to require CoBank to assume the CBC's function. See 56 FR 2671 (January 24, 1991). The rationale for 615.5190(b) no longer exists because: (1) Individual BCs have acquired greater international lending experience since 1981; and (2) most BCs have consolidated into CoBank. In this context, 615.5190(b) unnecessarily restricts BCs, other than CoBank, from becoming active in the international arena. The FCA has determined that the safety and soundness risks inherent in currency exchange transactions should not be controlled by a regulation that unduly restricts the business flexibility of BCs and ACBs to offer a full range of high-quality, low-cost international financial and credit services to their customers independently of CoBank. Rather, the FCA will rely upon its examination and enforcement powers to ensure that all BCs and ACBs conduct their currency exchange transactions in a safe and sound manner. Another FCA regulation, 614.4900 establishes safety and soundness standards for currency exchange transactions by BCs and ACBs.

Another provision in 615.5190(b) prohibits FCS banks from holding certificates of deposit that are denominated in foreign currencies as investments under 615.5140. This provision predates the recent revision of 615.5140, which now requires System banks to acquire investments that are denominated only in United States dollars. Hence, 615.5190(b) is unnecessary.

E. Farm Credit Securities as Illustrations

The FCA also repeals 615.5498, which regulates the illustration of Farm Credit securities that are used for educational or illustrative purposes. The purpose of this regulation is to deter counterfeiting of definitive FCS securities. Since virtually all FCS securities are now issued in book-entry form, 615.5498 is obsolete. The Federal Farm Credit Banks Funding Corporation and individual System banks can implement adequate safeguards to minimize the risk of counterfeiting of the few securities that are still issued in definitive form.

F. Open Registered Mail and Express Policy

The FCA now repeals subpart P of part 615, which consists of 615.5500, 615.5520, and 615.5530. These three regulations govern the shipment of negotiable securities through the United States Postal Service. The regulations of subpart P of part 615 were designed to eliminate the System's exposure to loss at a time when FCS negotiable securities were routinely shipped by mail between the Bureau of Printing and Engraving and the Federal Reserve Bank of New York. The practice of shipping negotiable securities through the mail was discontinued several years ago. The advent of electronic and computer technology for transferring negotiable securities through the book-entry system has rendered subpart P of part 615 obsolete.

G. Contributions and Membership in Other Organizations

The FCA is repealing 618.8220, which requires the boards of directors of FCS banks and associations to approve: (1) Charitable contributions; and (2) the payment of membership dues in any voluntary association, club, or society. The regulation further requires boards of directors, during the approval process, to consider the business benefits and tax consequences of such contributions and memberships for the bank or association.

In the FCA's opinion, 618.8220 unnecessarily interferes in the internal operations of System institutions and imposes a regulatory burden that is not commensurate with the safety and soundness risks posed by System charitable and social activities. The FCA's examination and enforcement powers can adequately deter System institutions from conducting these activities in an unsafe and unsound manner.

List of Subjects

12 CFR Part 614


Agriculture, Banks, banking, Foreign trade, Reporting and recordkeeping requirements, Rural areas.

12 CFR Part 615


Accounting, Agriculture, Banks, banking, Government securities, Investments, Rural areas.

12 CFR Part 618


Agriculture, Archives and records, Banks, banking, Insurance, Reporting and recordkeeping requirements, Rural areas, Technical assistance.

For the reasons stated in the preamble, parts 614, 615, and 618 of chapter VI, title 12 of the Code of Federal Regulations are hereby amended to read as follows:

PART 614--LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 continues to read as follows:

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 M--Loan Approval Requirements

614.4470 -- [Amended]


2. Section 614.4470 is amended by removing the words "and approved by the Farm Credit Administration" from paragraphs (b)(1) and (b)(3). [*20011]

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS

3. The authority citation for part 615 continues to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

Subpart C--Issuance of Bonds, Notes, Debentures and Similar Obligations

615.5104 -- [Removed]


4. Section 615.5104 is removed.

615.5105 -- [Amended]

5. Section 615.5105 is amended by removing paragraph (c).

Subpart F--Property and Other Investments

615.5170 -- [Amended]


6. Section 615.5170 is amended by removing paragraphs (b), (c), (d), (e) and the designation for paragraph (a).

Subpart G--[Removed and reserved]

7. Subpart G, consisting of 615.5190, is removed and reserved.

Subpart O--Issuance of Farm Credit Securities

615.5498 -- [Removed and reserved]


8. Section 615.5498 is removed and reserved.

Subpart P--[Removed and reserved]

9. Subpart P, consisting of 615.5500, 615.5520, and 615.5530 is removed and reserved.

PART 618--GENERAL PROVISIONS

10. The authority citation for part 618 continues to read as follows:

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

Subpart F--Miscellaneous Provisions

618.8220 -- [Removed and reserved]


11. Section 618.8220 is removed and reserved.

Dated: March 13, 1995.

Floyd Fithian,

Secretary, Farm Credit Administration Board.

[FR Doc. 95-10007 Filed 4-21-95; 8:45 am]


BILLING CODE 6705-01-P