Title: PROPOSED RULE--Farm Credit System: Provisions Miscellaneous--12 CFR Parts 611, 614, 615, and 618
Issue Date: 05/08/1986
Agency: FCA
Federal Register Cite: 51 FR 17035
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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 614, 615, and 618

Farm Credit System: Provisions

Miscellaneous

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

SUMMARY: The Farm Credit Administration (FCA), by the Acting Chairman of the Farm Credit Administration Board (Board), publishes for comment proposed regulations implementing recently enacted provisions of its enabling statute relating to matters involving stockholder/borrower rights; mergers, consolidations, and territory transfers; and conservatorships and receiverships. The Farm Credit Amendments Act of 1985 (1985 Amendments) amended a number of sections of the Farm Credit Act of 1971 (Act) relating to the topics of stockholder/borrower rights; mergers, consolidations, and territory transfers; and conservatorships and receiverships.

DATE: Written comments must be received on or before June 6, 1986.

ADDRESSES: Submit any comments in writing to Chairman, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090. Copies of all communications received will be available for examination by interested parties in the Office of Director, Congressional and Public Affairs Division, Office of Administration, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT: Gary L. Norton, Senior Attorney, Office of General Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090, (703) 883-4020.

TEXT: SUPPLEMENTARY INFORMATION: The Farm Credit Amendments Act of 1985 (1985 Amendments) amended a number of sections of the Farm Credit Act of 1971 (Act) relating to the topics of stockholder/borrower rights; mergers, consolidations, and territory transfers; and conservatorships and receiverships.

I. Stockholder/Borrower Rights

The 1985 Amendments amended several sections of the Act to require the FCA to issue regulations to require Farm Credit System (System) institutions to provide their borrowers and stockholders with certain information in connection with their dealings with System institutions and to follow specific procedures in conducting certain aspects of their operations. These proposed regulations cover the areas of forbearance policies; disclosure of loan documents; access to stockholder lists; practices related to loan applications and review of denials; disclosure of loan terms; and notice of stock retirement.

Section 4.13(b) of the Act, as added by the 1985 Amendments, requires each System institution, in accordance with FCA regulations, to develop a policy governing forbearance. Proposed regulation 12 CFR 614.4513 provides guidance to System institutions regarding the content of their forbearance policies and clarifies the limits of their legal obligation to compromise indebtedness. Section 614.4513, and the proposed regulation concerning denials of loan applications (§ 614.4440), clarify that the loan application regulations apply only to new borrowers or borrowers seeking additional funds for a new purpose. The loan application regulations do not apply to borrowers who are seeking to renew or refinance loans on which the borrower is or will soon be in default. Such borrowers must look to the institution's policies developed in accordance with the forbearance regulation for any special consideration.

The 1985 Amendments added a new section 4.13A to the Act which directs the FCA to issue regulations that require System institutions to provide copies of loan documents and other related documents to their borrower/stockholders. Section 4.13A does not specify whether such documents should only be provided upon the initial application for a loan or whether they should also be provided upon subsequent amendments or renewals of an existing loan. In the case of both the initial application and the subsequent modifications to the loan contract, the signing of new documents typically entails a change in that person's legal rights and responsibilities. In light of the underlying intent of Congress, the agency concluded that the regulations should require System institutions to provide borrowers with copies of any documents they sign at the time the loan is made, as well as documents related to subsequent modifications of the contract and that borrowers should be able, at any time, to request and obtain copies of such documents.

Consistent with the intent of Congress, the term "borrower" is defined broadly to include any person who signs the loan contract and any person who assumes either primary or secondary liability on the loan, including guarantors, endorsers, and cosigners. If a person is subject to legal liability on the contract, that person is entitled under the regulation to a copy of the document creating such obligation.

Proposed regulation § 618.8310 addresses the circumstances under which institutions must provide stockholders with stockholder lists. There has been considerable controversy over this issue in the past arising from various interpretations of FCA regulations governing the release of information by System institutions (12 CFR Part 618, Subpart G). The FCA has taken the position that existing FCA regulations do not prohibit release of stockholder lists to stockholders, and that such matters are governed by general principles of corporate law. In light of the numerous provisions in the 1985 Amendments that emphasize borrower access to certain types of documents and information, the FCA determined that the regulations should be amended to set forth the specific circumstances and conditions under which stockholders must be afforded access to stockholder lists.

Proposed regulation § 618.8310 is divided into two subsections. The first restates and clarifies the current regulation authorizing borrower lists to be released to parties who deal in commodities or goods where such transactions could involve collateral pledged to an institution. The second subsection provides for the disclosure of stockholder lists to a stockholder seeking to communicate with other stockholders regarding the business operations of the bank or association. This provision incorporates the basic rule of corporate law, that stockholders must be given access to stockholder lists in order to communicate with other stockholders on matters related to the business of the corporation.

In light of the unique operating characteristics of System institutions, it was determined that some restrictions should be placed on the distribution of stockholder lists. The FCA recognizes that a list of stockholders of a System institution is also a list of its borrower/customers and, as such, is an important corporate asset. The unrestricted disclosure of such lists could have negative effects on the financial health of the institution. Additionally, FCA regulations have implicitly recognized a privacy interest of individual borrowers against unrestricted disclosure of their names to third parties. The proposed regulation balances the interests of stockholders in access to this information with the need to protect the institution and its stockholders from the unauthorized disclosure of its stockholder list.

The proposed regulation prohibits the disclosure of stockholder lists except in connection with "matters relating to the business operations of the institution." This is defined to include discussions of the effectiveness of management, waste of corporate assets, performance of directors, and other related matters. Lists need not be disclosed to persons who will use the list for the purpose of giving another institution a competitive advantage or in furtherance of a social or political cause.

Proposed regulation § 618.8310 provides that as an alternative to disclosure of the list, the institution may, with the agreement of the requesting stockholder, mail a communication to its stockholders on behalf of a requesting stockholder. The stockholder must, however, agree to defray the institution's reasonable costs in providing such communication and the communication must be related to the business operations of the institution. This regulation does not apply to Federal land banks, Federal intermediate credit banks, and the Capital Corporation, whose stockholders are other System institutions.

The 1985 Amendments amended existing provisions of the Act regarding the internal procedures of System institutions concerning review of denials on loan applications. As amended, section 4.14 requires System institutions to establish credit review committees, which must include at least one member of its institution's board of directors. Proposed regulations §§ 614.4440-614.4444 implement these statutory provisions. The activities of the credit review committees relate solely to the denial of credit applications by persons who are not current borrowers and by current borrowers applying for a new loan. They do not include credit to persons seeking forbearance through requests for renewals, deferrals, reamortizations, etc., of existing loans that have matured or will soon mature. Reviews of such requests are governed by the proposed forbearance regulation at § 614.4513.

This distinction is consistent with prior FCA regulations and congressional intent. The language in sections 4.13B and 4.14 of the Act refers to a "loan application," a term that implies a request for a new loan. The FCA has previously interpreted the term "loan application" under old sections 4.13 and 4.14 to exclude amendments or modifications of preexisting loans. The provisions of the 1985 Amendments which amended section 4.13 to require institutions to develop forbearance policies for use with existing loans reinforce this interpretation since most forbearance actions involve requests for deferrals, reamortizations, etc., of existing loans.

The statutory requirement for board representation on review committees presents special operating difficulties for System districts that have only one or very few production credit associations (PCAs) or Federal land bank associations (FLBAs). Such districts have a small number of directors in relation to the potential number of decisions to be reviewed by the credit review committees. Required board attendance at every review session could present a serious burden to the board members and interfere with the efficient functioning of the board. Generally, a System institution's board of directors, like any other corporate board, has the authority to delegate many functions to other officials of the institution. However, in light of the special concerns of Congress regarding board input into review decisions, the FCA determined that a unanimous vote of the association board is required in order for the board member on the committee to delegate his or her duties to another person.

Section 4.14 of the Act requires each institution to establish credit review committees. Since only PCAs and Federal land banks (FLBs) are primary lenders to individual (noncooperative) borrowers, the proposed regulations do not apply to banks for cooperatives, which do not make loans to individuals; or to the Capital Corporation, which does not take applications from borrowers. Additionally, to accommodate the unique relationship between FLBs and FLBAs, the proposed regulations provide that the FLB shall establish guidelines under which the FLBA boards establish their committees and provide further that the FLB can, at its discretion, have representation on such boards.

Section 4.13 of the Act, as added by the 1985 Amendments, requires the FCA to issue regulations governing access to certain loan information by borrowers. Proposed regulations §§ 614.4366-614.4367 implementing this section apply to all System institutions, including the Capital Corporation. The proposed regulations require System institutions to disclose the interest rates charged borrowers, explain whether the rates are subject to change, and describe the standard factors affecting the rate, in accordance with the specific requirements for such disclosures contained in the Act. In addition, the proposed regulations require that, not later than 10 days prior to an adjustment on a variable rate loan, the institution must disclose the effective date of the new rate and a statement of the factors, other than standard factors, used in computing the rate. The proposed regulations also require System institutions to send interest rate notices to current borrowers within 90 days after the effective date of the regulations. The appendix to § 614.4367 contains model forms that System institutions may use to satisfy the disclosure requirements contained in the regulation.

Section 615.5255 is the proposed regulation implementing the provision of the 1985 Amendments that requires PCAs and FLBAs to provide notice to borrowers whose loans are in default prior to retiring their stock. The proposed regulation sets forth the procedure FLBAs and PCAs must follow prior to retiring a borrower's stock.

II. Mergers, Consolidations, and Territorial Transfers

The proposed regulations contain numerous amendments to §§ 611.1090-611.1125 regarding mergers, consolidations, and territory transfers of banks and associations. Section 5.17(a)(2) of the Act, as amended by the 1985 Amendments, requires that territorial adjustments initiated by institutions receive stockholder approval. That section also contains new prohibitions against unequal treatment of associations that decline to participate in mergers or consolidations.

The 1985 Amendments did not affect the authority of the FCA under sections 1.3, 1.13, 2.0, 2.10, 3.0, and 5.17(a)(2) of the Act and § 611.1120(c) to amend charters and transfer territories on its own initiative.

The proposed amendments to § 611.1124 address the requirement for stockholder approval of territory transfers involving associations. The regulation establishes disclosure requirements for territorial transfers that are based on existing disclosure requirements relating to mergers, but without the same requirements for detailed financial information. The purpose of the disclosure is to appraise borrowers of how the transfer will affect them personally and the future operations of their institution.

In accordance with the 1985 Amendments, the proposed regulations do not require the approval of the district bank as a precondition to FCA approval. However, the proposed regulation provides that the FCA will consider the bank's position on the transfer prior to granting or denying approval. The FCA will communicate directly with the associations involved in territorial transfers and provide the bank with copies of such communications. Similar changes to the merger regulations are proposed that also will provide for direct communication between the FCA and the institutions proposing to merge. Consistent with the amendment to section 5.17(a)(2) of the Act, an amendment has been proposed to § 611.1090 that requires stockholder approval in connection with transfers of territories between banks or districts.

The 1985 Amendments contain several provisions (such as section 5.17(a)(2)) that emphasize a strong congressional intent that decisions regarding mergers of System institutions are to be decided by the stockholders of the affected institutions. Existing regulation § 611.1123(7) requires that a merger or consolidation agreement must contain a statement of the rights of the constituent associations to terminate the agreement before the effective date of the merger. As written, this provision is subject to abuse and could result in the board of an association or bank arbitrarily overriding the vote of the stockholders of an institution. In order to prevent such abuse, the regulation is amended to limit the circumstances in which a merger or consolidation can be terminated after a favorable stockholder vote.

The proposed regulation limits the authority of association directors to terminate a merger or consolidation that has been approved by stockholders to circumstances where: (1) The information disclosed to stockholders contained material errors, (2) misrepresentations were made to stockholders regarding the impact of the merger or consolidation, (3) fraudulent activities were used to obtain stockholder approval, or (4) any other intervening event of a significant nature occurred subsequent to a stockholder vote that could have had an impact on that stockholder vote. To ensure compliance with these limitations, the proposed regulation requires that any decision by an association board to withdraw from a merger that was agreed to by the stockholders shall not be effective until approved by the FCA.

Existing § 611.1122(2)(3) contains procedures applicable to the merger or consolidation of associations. Consistent with principles of general corporate law, the regulation provides that any proposed merger or consolidation request must be approved by the boards of directors of each association involved. The requirement for board approval does not present problems for mergers or consolidations involving only a few associations, since such mergers or consolidations are generally initiated by the association boards. However, the requirement for director approval could cause some operational problems when associations are involved in districtwide or statewide reorganizations. Under the present regulations, even if stockholders have indicated a willingness to participate in a districtwide merger, they would not have an opportunity to vote on the merger unless their board passed a resolution supporting the merger.

This provision has created the potential for problems in connection with two districtwide mergers. In addition, several provisions in the 1985 Amendments emphasize the need for stockholders to have a greater say in the operations of their associations. In view of this, the proposed amendment to § 611.1122(a) eliminates the requirement for association directors to approve mergers or consolidations that are initiated by the district bank and endorsed by a district board resolution. In such cases, the association board would include a statement either endorsing or opposing the merger in the stockholder disclosure statement.

Proposed amendments to §§ 611.1121-611.1123 provide for direct communications between the FCA and associations that have proposed mergers or other types of charter amendments. These amendments are consistent with similar provisions contained in § 611.1124 regarding territorial adjustments.

III. Receiverships and Conservatorships

The 1985 Amendments completely revised section 4.12(b) relating to conservators and receivers for System institutions. In accordance with the statutory changes, the existing regulations governing liquidation and receivership have been reorganized and amended. The reorganization provides for a new Subpart K -- Appointment of Conservators and Receivers, and a New Subpart N -- Conservator of Banks and Association.

New Subpart K contains provisions common to both conservators and receivers, such as grounds for their appointment and actions for their removal. New Subpart N contains those provisions applicable to conservators of both banks and associations.

Proposed regulation § 611.1156, which concerns the grounds for the appointment of a conservator or receiver, adopts the terminology used in the Act, with additional language explaining the definition of the term "insolvency." The regulation establishes that insolvency may only be determined pursuant to an examination conducted or adopted by the FCA. In addition, the provision clarifies that even though member stock is "capital," for purposes of this regulation it is considered an "obligation" of the institution. Thus, under the statutory standard, an institution is insolvent when its stock is impaired. The definition of obligation includes all stock and participation certificates, but does not include other member "equities" such as retained earnings.

Section 611.1157 describes the purpose, responsibilities, and powers of conservators and receivers. This section clarifies that a conservator is directed to operate an institution as a continuing business whereas a receiver is appointed to wind up the affairs of an institution, sell assets, and distribute proceeds to creditors and stockholders. Section 611.1158 set forth the procedure that must be followed by an institution in seeking the removal of a conservator or receiver.

Section 611.1160 of Subpart L is amended to delete the provision establishing a preference for the appointment of a district bank as the receiver of an association. A conforming change was made to § 611.1161 to delete the reference to a district bank's authority to adopt procedures governing its operations as a receiver.

Section 611.1165 is amended to provide that a receiver may sell loans to the Capital Corporation.

The provisions of §§ 611.1167 and 611.1175 relating to the FCA's examination of an association or bank in receivership were amended to conform with amended section 5.19 of the Act, which deleted the authority of the FCA to delegate the examination function to an independent auditor. The proposed regulation retains the authority of the FCA to either conduct audits of associations and banks in receivership or, at its discretion, delegate such audits.

New § 611.1180 of Subpart N parallels §§ 611.1160 and 611.1170. This section provides for: the grounds and procedures for the appointment of a conservator for a System bank, association, or service organization; notice to the institution and its borrowers of the conservatorship; the vesting of the institution's powers exclusively in the conservator; and subjecting the conservator to the direction and supervision of the FCA. Section 611.1181 grants conservators most of the power granted to receivers, but provides that certain of those powers are subject to the prior approval of the FCA. The action subject to approval are those that involve economic decisions that can have a significant financial impact on the institution. These powers are divided into three categories. First, are the conservator's powers, which are identical to those possessed by a receiver, that may be exercised at his or her sole discretion. These include the power to: borrow funds for the conservatorship; execute any instrument necessary for the conservatorship; pay the costs and expenses of the conservatorship from the institution's assets; exercise any power necessary and incident to a specific power; and possess any additional powers, privileges, rights, and responsibilities as FCA may direct.

Second, are the powers identical to the receiver's except that such powers may not be exercised without the prior approval of the FCA. These include the power to: hire employees necessary for the proper administration of the conservatorship; sell any real or personal, tangible or intangible property of the institution; release any assets or property of the institution or repudiate, for cause, any lease or executory contract of the institution; settle or release any claims or demands by or against the institution or the conservator; and pay all approved claims of indebtedness from the assets of the institution.

Third, are the powers comparable to the powers of a receiver except that certain specific actions require the prior approval of the FCA or are carried out under the supervision of the FCA General Counsel. These include the power to: exercise all powers of the institution's board of directors, officers, and employees, except that dividends may not be declared or paid without the prior approval of the FCA; pay any sums necessary to protect the institution's property, except that improvements to property may not be made without the prior approval of the FCA; extend credit to existing borrowers and, unlike in a receivership, to new borrowers; investigate any matter relating to the business affairs of the institution and, under the supervision of the General Counsel of the FCA, institute and defend legal actions affecting the interests of the institution; purchase property and services and lease property for less than a year necessary to the conservatorship and, with the prior approval of the FCA, enter into leases for longer than 1 year; and take such other action as the conservator deems necessary to the conservatorship.

Section 611.1182 provides for the conservator to make an inventory of the assets and liabilities of the institution in accordance with this regulation. The provision also provides for the FCA to conduct examinations and audits of institutions in conservatorship.

Section 611.1183 specifies the conditions for the final discharge of a conservator. The provision is similar to §§ 611.1168 and 611.1176, which provide for the final discharge of a receiver.

List of Subjects in 12 CFR Parts 611, 614, 615 and 618

Accounting, Agriculture, Archives and records, Banks, Banking, Credit, Government securities, Investments, Organization and functions (Government agencies), Rural areas.

As stated in the preamble, it is proposed that Parts 611, 614, 615 and 618 of Chapter VI, Title 12, of the Code of Federal Regulations, be amended as follows:

PART 611 -- ORGANIZATION

1. The authority citation for Part 611 is revised to read as follows, and any other authority citations in the part are removed.

Authority: Secs. 1.13, 2.10, 4.11, 4.12, 4.28A-4.28L, 5.9, 5.10, 5.15, and 5.17, Pub. L. 99-205, 99 Stat. 1678.

Subpart F -- General Rules for Districts

2. Section 611.1090 is revised to read as follows:

§ 611.1090 Request for district changes -- general.

District boards may recommend the merger of two or more districts, the transfer of territories between districts, or a change in the name of a district. The recommendation and justification for the recommendation shall be submitted by the district boards to the Farm Credit Administration for preliminary approval by the Farm Credit Administration Board before they are submitted for stockholder approval. Following approval by the stockholders, the proposed change shall again be submitted to the Farm Credit Administration for final approval by the Farm Credit Administration Board. District name changes do not require stockholder approval.

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

3. Section 611.1121 is amended by revising paragraphs (b), (c), and (d) to read as follows:

§ 611.1121 Charter amendment procedures.

This section shall apply to any request by an association to amend its charter.

* * * * *

(b) Upon receipt of a proposed amendment from an association, the district bank shall review the materials submitted and provide the association with its analysis of the proposal within a reasonable period of time. Concurrently, the bank shall communicate its recommendation on the proposal to the Farm Credit Administration, including the reasons for the recommendation, and any analysis the bank believes appropriate. Following review by the bank, the association shall transmit the proposed amendment with attachments to the Farm Credit Administration.

(c) Upon receipt of an association's request for a charter amendment, the Farm Credit Administration shall review the materials submitted and either approve or disapprove the request. The Farm Credit Administration may require submission of any supplemental materials it deems appropriate.

(d) The Farm Credit Administration shall notify the association of its approval or disapproval of the amendment request, and provide a copy of such communication to the bank. A notification of approval shall be accompanied by a copy of the charter, as amended.

4. Section 611.1122 is amended by revising paragraphs (a), introductory text, (a)(3), (b), (c), (e), introductory text, (e)(4), (g), and (i) to read as follows:

§ 611.1122 Requirements for mergers or consolidations.

* * * * *

(a) Where two or more associations plan to merger or consolidate, or where the district board has adopted a reorganization plan for the associations in the district, the associations involved shall jointly submit a request to the district bank containing the following:

* * * * *

(3)(i) A certified copy of the resolution of the board of directors of each association recommending approval of the merger or consolidation; or

(ii) Where the board of an association disapproves the merger or consolidation and the merger or consolidation is part of a district reorganization plan, a certified copy of the resolution of the district board recommending approval of the proposal.

* * * * *

(b) Upon receipt of a request for approval of an association merger or consolidation, the district bank shall review the materials submitted to determine whether they comply with the requirements of these regulations and shall communicate with the associations concerning any deficiency. When the bank approves the request to merge or consolidate it shall notify the associations and the Farm Credit Administration of its approval together with the reasons for its approval and any supporting analysis the bank deems appropriate. The associations shall jointly submit the proposal together with required documentation to the Farm Credit Administration for preliminary approval.

(c) Upon receipt of an association merger or consolidation request, the Farm Credit Administration shall review the request and either deny or give its preliminary approval to the request. When a request is denied, written notice stating the reasons for the denial shall be transmitted to the associations and a copy provided to the bank. When a request is preliminarily approved, written notice of the preliminary approval shall be given to the associations and a copy provided to the bank. Preliminary approval by the Farm Credit Administration shall not constitute approval of the merger or consolidation. Approval of a merger or consolidation shall be only pursuant to paragraph (g) of this section

* * * * *

(e) Notice of the meeting to consider and act upon a proposed merger or consolidation of associations shall be accompanied by the following information covering each constituent association.

* * * * *

(4) A brief statement by the boards of directors of the constituent associations setting forth the basis for the board's recommendation on the merger or consolidation.

* * * * *

(g) Upon approval of a proposed merger or consolidation by the stockholders of the constituent associations, a certified copy of the stockholders' resolution shall be forwarded to the Farm Credit Administration. The merger or consolidation shall be effective when thereafter finally approved and on the date as specified by the Farm Credit Administration. Notice of final approval shall be transmitted to the associations and a copy provided to the bank.

* * * * *

(i) The notice and accompanying information required under paragraphs (e) of this section shall not be sent to stockholders until preliminary approval of the merger or consolidation has been given by the Farm Credit Administration.

* * * * *

5. Section 611.1123 is amended by revising paragraphs (a) introductory text and (a)(7) to read as follows:

§ 611.1123 Merger or consolidation agreements.

(a) Associations operating under the same title of the Act may merge or consolidate voluntarily only pursuant to a written agreement. The agreement shall set forth all of the terms of the transaction, including, but not limited to, the following:

* * * * *

(7) A statement that the board of directors of each constituent association can terminate the agreement before the effective date upon a determination by an association, with the concurrence of the Farm Credit Administration, that:

(i) The information disclosed to stockholders contained material errors or omissions;

(ii) Material misrepresentations were made to stockholders regarding the impact of the merger or consolidation;

(iii) Fraudulent activities were used to obtain stockholder's approval; or

(iv) An event occurred between the time of the vote and the merger that would have a significant adverse impact on the future viability of the continuing institution.

* * * * *

6. Section 611.1124 is revised to read as follows:

§ 611.1124 Territorial adjustments.

This section shall apply to any request submitted to the Farm Credit Administration to modify association charters for the purpose of transferring territory from one association to another.

(a) Territorial adjustments, except as specified in paragraph (m) of this section, require approval of a majority of the voting stockholders of each association present and voting or voting by written proxy at a duly authorized meeting at which a quorum is present.

(b) When two or more associations agree to transfer territory, each association shall submit a proposal to its district bank containing the following:

(1) A statement of the reasons for the proposed transfer and the impact the transfer will have on its stockholders and holders of participation certificates;

(2) A certified copy of the resolution of the board of directors or each association approving the proposed territory transfer;

(3) A copy of the agreement to transfer territory that contains the following information;

(i) A description of the territory to be transferred.

(ii) Transferor association's plan to transfer loans and the types of loans to be transferred.

(iii) Transferor association's plan to retire and transferee association's plan to issue equities held by holders of stock, participation certificates, and allocated equities, if any, and a statement that the book value of the equities is at least equal to par.

(iv) An inventory of the assets to be sold by the transferor association and purchased by the transferee association.

(v) An inventory of the liabilities to be assumed from the transferor association by the transferee association.

(vi) A statement that the holders of stock and participation certificates whose loans are subject to transfer have 60 days from the effective date of the territory transfer to inform the transferor association of their decision to remain with the transferor association for normal servicing until the current loan is paid.

(vii) A statement that the transfer is conditioned upon the approval of the stockholders of each constituent association.

(viii) The effective date of the proposed territory transfer.

(4) A copy of the stockholder disclosure statement provided for in paragraph (f) of this section; and

(5) Any additional relevant information or documents that the association wishes to submit in support of its request or that may be required by the Farm Credit Administration.

(c) Upon receipt of documents supporting a proposed territory transfer, the district bank shall review the materials submitted and provide the associations with its analysis of the proposal within a reasonable period of time. The bank shall concurrently advise the Farm Credit Administration of its recommendation regarding the proposed territory transfer. Following review by the bank, the associations shall transmit the proposal to the Farm Credit Administration together with all required documents.

(d) Upon receipt of an association's request to transfer territory, the Farm Credit Administration shall review the request and either deny or give preliminary approval to the request. When a request is denied, written notice stating the reasons for the denial shall be transmitted to the associations, and a copy provided to the bank. When a request is preliminarily approved, written notice of the preliminary approval shall be transmitted to the associations, and a copy provided to the bank. Preliminary approval by the Farm Credit Administration shall not constitute approval of the territory transfer. Final approval shall be granted only in accordance with paragraph (h) of this section.

(e) Upon receipt of preliminary approval by the Farm Credit Administration, each constituent association shall, by written notice, and in accordance with its bylaws, call a meeting of its voting stockholders. The affirmative vote of a majority of the voting stockholders of each association present and voting or voting by written proxy at a meeting at which a quorum is present shall be required for stockholder approval of a territory transfer.

(f) Notice of the meeting to consider and act upon a proposed territory transfer shall be accompanied by the following information covering each constituent association:

(1) A statement either on the first page of the materials or on the notice of the stockholders' meeting, in capital letters and bold face type, that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE CONTRARY SHALL BE MADE OR RELIED UPON.

(2) A copy of the Agreement to Transfer Territory and a summary of the major provisions of the Agreement.

(3) The reason the territory transfer is proposed.

(4) A map of the association's territory as it would look after the transfer.

(5) A summary of the differences, if any, between the transfer and transferee associations' interest rates, interest rate policies, collection policies, service fees, bylaws, and any other items of interest that would impact a borrower's lending relationship with the institution.

(6) A statement that all loans of the transferor association that finance operations located in the transferred territory shall be transferred to the transferee association except as otherwise provided for in this section or in accordance with agreements between the associations as provided for in § 614.4070 of this chapter.

(7) Where proxies are to be solicited, a form of written proxy, together with instructions on the purpose and authority for its use, and the proper method for signature by the stockholders.

(8) A statement that the financial statements and related information and bylaws of the association are available on request.

(g) No bank or association, or director, officer, or employee thereof, shall make any untrue or misleading statement of a material fact, or fail to disclose any material fact necessary under the circumstances to make statements made not misleading, to a stockholder of any association in connection with a territory transfer.

(h) Upon approval of a proposed territory transfer by the stockholders of the constituent associations, a certified copy of the stockholders' resolution and one executed Agreement to Transfer Territory for each constituent association shall be forwarded to the Farm Credit Administration. The territory transfer shall be effective when thereafter finally approved and on the date as specified by the Farm Credit Administration. Notice of final approval shall be transmitted to the associations and a copy provided to the bank.

(i) No director, officer, or employee of a bank or an association shall make an oral or written representation to any person that a preliminary or final approval by the Farm Credit Administration of territory transfer constitutes, directly or indirectly, either a recommendation on the merits of the transaction or an assurance concerning the adequacy or accuracy of any information provided to any association's stockholders in connection therewith.

(j) The notice and accompanying information required under paragraph (f) of this section shall not be sent to stockholders until preliminary approval of the territory transfer has been granted by the Farm Credit Administration.

(k) Where a territory transfer is proposed simultaneously with a merger or consolidation, both transactions may be voted on by stockholders at the same meeting. Only stockholders of a transferee or transferor association shall vote on a territory transfer.

(l) All borrowers whose real estate or operations are located in adjusted territories shall be informed in writing of the territory adjustment and the transfer of their loans to and exchange of related equities for equities of like kinds and amounts in the transferee association. If a like kind of equity is not available in the transferee association, similar equities shall be offered that will not adversely affect the interest of the owner. This Notice of Territory Transfer shall give borrowers 60 days from the effective date of the territory transfer to notify the transferor association in writing if the borrower decides to stay with the transferor association for normal servicing until the current loan is paid. Any application by the borrower for renewal or for additional credit shall be made to the transferee association, except as otherwise provided for any an agreement between associations in accordance with § 614.4070 of this chapter. This notice shall be made immediately after the Farm Credit Administration has given final approval of the territory transfer.

(m) This section shall not apply to territory transfers initiated by order of the Chairman of the Farm Credit Administration or to territory transfer due to the liquidation of the transferor association.

7. Section 611.1125 is revised to read as follows:

§ 611.1125 Treatment of associations not approving districtwide mergers.

(a) Issuance of charters. When issuing charters or certificates of territory for districtwide mergers or consolidations of associations, the Farm Credit Administration will not issue any charters or certificates of territory that include the territory of one or more associations whose stockholders voted to disapprove the merger or consolidation.

(b) District banks shall not take any of the following actions with respect to an association that has determined to not participate in a districtwide merger:

(1) Discriminate in the provision of any financial service and assistance, including, but not limited to, access to loan funds and rates of interest on loans and discounts offered by a district bank to the association and their member/borrowers;

(2) Discriminate in the provision of any financially related services that are offered by a district bank to the associations and their member/borrowers;

(3) Discriminate in the provision of any professional assistance that may be normally provided by the bank to its associations; or

(4) Discriminate in the provision of any technical assistance that may be normally provided by the bank to its associations.

(c) This regulation does not prohibit a district bank from charging differential rates of interest or differential costs for other services to an association and its members if such costs are warranted based on additional risks and servicing costs incurred by the district bank in dealing with the association. Such differential costs charged shall be based on a fully documented analysis which supports the additional costs.

8. Part 611 is amended by adding Subpart K, Appointment of Conservators and Receivers, to read as follows:

Subpart K -- Appointment of Conservators and Receivers

Sec.

611.1155 General.

611.1156 Grounds for appointment of conservators and receivers.

611.1157 Conservators and receivers.

611.1158 Actions for removal of conservator or receiver.

Subpart K -- Appointment of Conservators and Receivers

§ 611.1155 General.

The Farm Credit Administration has exclusive authority to appoint conservators or receivers for System institutions and to establish the procedures under which conservatorships and receiverships are operated. This subpart sets forth the basis for the appointment of conservators and receivers and establishes general guidance for the operations of conservatorships and receiverships. Subparts L and M of this part set forth the specific powers and procedures for receivers of associations and banks, respectively. Subpart N of this part sets forth the powers and procedures applicable to conservatorships of banks and associations.

§ 611.1156 Grounds for appointment of conservators and receivers.

(a) Upon a determination by the Farm Credit Administration of the existence of one or more of the factors set forth in paragraph (b) of this section, with respect to any bank, association, or other institution of the System, the Farm Credit Administration may, at its discretion, appoint a conservator or receiver for such institution.

(b) The grounds for the appointment of a conservator or receiver for a System institution are:

(1) The Institution is insolvent. For purposes of this paragraph, "insolvent" means that the assets of the institution are less than its obligations to its creditors and others, including its members. A determination of insolvency is made when a examination conducted or adopted by the Farm, Credit Administration reveals that the capital stock or participation certificates of an institution are worth less than their par or stated value;

(2) There has been a substantial dissipation of the assets or earnings of the institution due to the violation of any law, rule, or regulation, or the conduct of an unsafe or unsound practice;

(3) The institution is in an unsafe or unsound condition to transact business;

(4) The institution has committed a willful violation of a final cease-and-desist order issued by the Farm Credit Administration; or

(5) The institution is concealing its books, papers, records, or assets, or is refusing to submit its books, papers, records, assets, or other material relating to the affairs of the institution for inspection to any examiner or to any lawful agent of the Farm Credit Administration.

§ 611.1157 Conservators and receivers.

(a) A Farm Credit Administration conservator is a person appointed by the Chairman of the Farm Credit Administration pursuant to section 4.12(b) of the Act and § 611.1156 of the regulations to take possession of an institution in accordance with the terms of the appointment. Upon appointment, a conservator shall direct the institution's further operation until the Farm Credit Administration decides either to liquidate the institution, or, on the correction or resolution of the problem or condition that provided the basis for the appointment and upon a determination by the Farm Credit Administration that the institution can be returned to normal operations, the institution may be turned over to such management as the Farm Credit Administration may direct. A conservator shall exercise all powers necessary to continue the ongoing operations of the institution, to conserve and preserve the institution's assets and property, and otherwise protect the interests of the institution, its stockholders, and creditors as provided in Subpart N of this part.

(b) A Farm Credit Administration receiver is a person appointed by the Chairman of the Farm Credit Administration pursuant to section 4.12(b) of the Act and § 611.1156 of the regulations to take possession of a System institution in order to wind up the business operations of such institution, collect the debts owed to the institution, liquidate its property and assets, pay its creditors, and distribute the remaining proceeds to its stockholders. A receiver shall exercise all powers necessary to the efficient termination of an institution's operation, as provided for a Subparts L and M of this Part.

§ 611.1158 Action for removal of conservator or receiver.

Upon the appointment of a conservator or receiver to a System institution by the Farm Credit Administration, the institution may, within 30 days of such appointment, bring an action in the United States District Court for the judicial district in which the home office of the institution is located, or in the United States District Court for the District of Columbia, for an order requiring the Farm Credit Administration to remove such conservator or receiver. Notwithstanding any other provisions of Subparts L, M, or N of this part, the institution's board of directors is empowered to meet subsequent to such appointment and authorize the filing of a action for removal. An action for removal may only be authorized by such institution's board of directors.

9. Subpart L of Part 611 is revised to read as follows:

Subpart L -- Liquidation of Associations

Sec.

611.1160 Appointment of receiver.

611.1161 Powers and duties of the receiver.

611.1165 Sale and transfer of loans.

611.1167 Inventory, examination, audit, and report to stockholders.

Subpart L -- Liquidation of Associations

§ 611.1160 Appointment of receiver.

(a) The board of directors of an association, by the adoption of an appropriate resolution, may vote to liquidate the association, and upon approval of the resolution by the Farm Credit Administration after consultation with the supervisory bank, the Chairman by order may place the association in receivership and appoint a receiver.

(b) The Farm Credit Administration may, at its discretion, appoint a receiver for any System association in accordance with the grounds for appointment set forth in § 611.1156.

(c) Upon the appointment of a receiver and acceptance by the receiver of the appointment, the Chairman shall immediately notify the institution and its supervisory bank and notice of the appointment shall be published in the Federal Register.

(d) Upon the issuance of the order placing an association in liquidation, all rights, privileges, and powers of the board of directors, officers, and employees of the association are vested exclusively in the receiver, and said individuals are suspended except as provided for in paragraph (g) of this section.

(e) The voluntary or involuntary liquidation of an association shall be conducted by the receiver as agent of the Farm Credit Administration. The receiver shall be responsible for collecting the assets, paying the creditors, and paying any liquidating dividend to stockholders of the association. Upon completion of the liquidation and discharge of the receiver by the Farm Administration, the Chairman will cancel the charter of the association.

(f) The Chairman may at any time remove or replace the receiver or may terminate the receivership and direct the receiver to turn over the association to its previous management or such other management as the Chairman may order, in which event the provisions of this subpart shall no longer apply.

(g) In the case of the voluntary liquidation of an association where grounds for the appointment of a receiver pursuant to § 611.1156 do not exist, the Chairman may appoint a receiver, taking into consideration the recommendations of the board of directors of the liquidating association. The board of directors of the association may, at the discretion of the Chairman, remain in office to provide advice and recommendations to the receiver during the pendency of the liquidation.

§ 611.1161 Powers and duties of the receiver.

The receiver of an association serves as the trustee of the receivership estate and conducts its operations for the benefit of the creditors and stockholders of the association. In this capacity, as trustee of the estate, the receiver is an agent of and is subject to the specific procedures and approval requirements established by the Farm Credit Administration and enjoys the same immunities against personal liability that exist for all employees and agents of the Farm Credit Administration. As the agency of the Farm Credit Administration and acting on behalf of the association in receivership, the receiver is authorized and empowered to:

(a) Exercise all powers as are conferred upon the officers and directors of the association under law and the charter, articles, and bylaws of the association.

(b) Take any action the receiver considers appropriate or expedient to carry on the business of the association during the process of liquidating its assets and winding up its affairs..

(c) Extend credit to existing borrowers as necessary to honor existing commitments and to effectuate the purposes of the receivership.

(d) Borrow such sums as necessary to effectuate the purposes of the receivership.
(e) Pay any sum the receiver deems necessary or advisable to preserve, conserve, or protect the association's assets or property, or rehabilitate or improve such property and assets.

(f) Pay any sum the receiver deems necessary or advisable to preserve, conserve, or protect any asset or property on which the association has a lien or in which the association has a financial or property interest, and pay off and discharge any liens, claims, or charges of any nature against such property.

(g) Investigate any matter related to the conduct of the business of the association, including, but not limited to, any claim of the association against any individual or entity, and institute appropriate legal or other proceedings in the name of the association to prosecute such claims.

(h) Institute, prosecute, maintain, defend, intervene, and otherwise participate in the name of the association in any legal proceeding by or against the association or in which the association or its creditors or members have any interest, and represent in every way the association, its members, and creditors.

(i) Employ attorneys, accountants, appraisers, and other professionals to give advice and assistance to the receivership generally or on particular matters, and pay their retainers, compensation, and expenses, including litigation costs.

(j) Hire any employees necessary for proper administration of the receivership, which employees shall be covered by a bond satisfactory to the receiver and the Farm Credit Administration;

(k) Execute, acknowledge, and deliver, in person or through a general of specific delegation, any instrument necessary for any authorized purpose, and any instrument executed under this paragraph shall be valid and effectual as if it had been executed by the association's officers by authority of its board of directors.

(l) Sell for cash or otherwise, any mortgage, deed of trust, chose in action, note, contract, judgment or decree, stock, or debt owed to the association, or any property (real or personal, tangible or intangible).

(m) Purchase or lease office space, automobiles, furniture, equipment, and supplies, and purchase insurance, professional, and technical services necessary for the conduct of the receivership.

(n) Release any assets or property of any nature, regardless of whether the subject of pending litigation, and repudiate, with cause, any lease or executory contract the receiver considers burdensome.

(o) Settle, release, or obtain release of, for cash or other consideration, claims and demands against or in favor of the association or the receiver.

(p) Pay out of the assets of the association, all expenses of the receivership and all costs of carrying out or exercising the rights, powers, privileges, and duties as receiver.

(q) Pay out of the assets of the association, all approved claims of indebtedness in accordance with priorities established in this subpart.

(r) Take all actions in the name of the association in receivership, and have such rights, powers, and privileges as are necessary and incident to the exercise of any specific power.
(s) Take such actions, and have such additional rights, powers, privileges, immunities, and duties as the Farm Credit Administration authorizes, directs, confers, or imposes by order or by amendment of any order or by regulation.

§ 611.1165 Sale and transfer of loans.

(a) The receiver is authorized to sell loans to the Capital Corporation or to any commercial lending institution at fair market value (including any amount borrowed to purchase stock in the association). All loans not purchased by other Farm Credit System institutions are eligible for purchase by the Capital Corporation.

(b) The receiver is authorized to sell loans to an association (hereafter referred to as "purchasing association") that has been authorized, by charter amendment, agreement, or otherwise, to make loans in the territory heretofore served by the association in liquidation only on the following basis:

(1) A loan may be sold at not less than its fair market value (including the amount borrowed to purchase stock or participation certificates in the liquidating association) and the borrower will immediately make the required capital investment in the purchasing association by providing cash sufficient therefore or by increasing the loan by an amount necessary to make such capital investment.

(2) The loan may be sold at not less than its fair market value (including the amount borrowed to purchase stock or participation certificates in the liquidating association) in conjunction with an agreement between the borrower, the receiver, the supervising bank, and the purchasing association, which provides for a loan from the supervising bank to the borrower or the purchasing association in the amount of the required capital investment in the purchasing association, to be repaid on or before the completion of the liquidation of the association, or terms set forth in the agreement.

(c) An association to which the receiver proposes to sell a loan shall have not less than 90 days to purchase the loan. The association may purchase any such loan at its discretion provided that the borrower agrees to buy stock and become a member of the association.

§ 611.1167 Inventory, examination, audit, and report to stockholders.

(a) As soon as practicable after taking possession of an association, the receiver shall make an inventory of the assets and liabilities as of the date possession was taken. Such inventory shall include the book value and the fair market value of the association's assets. The method of listing assets must provide such information to the satisfaction of the Farm Credit Administration. One copy of the inventory shall be filed with the Farm Credit Administration.

(b) The association in receivership shall be examined on an annual basis by the Farm Credit Administration. The association shall be audited by the Farm Credit Administration or, at the discretion of the Farm Credit Administration, by an independent certified public accountant at such times as the Farm Credit Administration determines. The cost of such examination and audit, as determined by the Farm Credit Administration, shall be paid from the assets of the association in receivership.

(c) The Farm Credit Administration may from time to time prescribe accounting practices to be followed and require such audit or other reports covering any matters related to the operations of the association or the receivership as it deems appropriate on such forms as it may prescribe. One copy of the reports required by this section shall be filed with the Office of Examination and Supervision, Farm Credit Administration, and one copy shall be retained in the receiver's principal office.

(d) The receiver shall cause to be sent to each stockholder of record of the association, not later than 90 days following the end of each fiscal year, a report on the financial condition of the association in receivership. Upon the final liquidation of the association, the receiver shall cause to be sent to each stockholder of record, a report summarizing the activities of the receiver and describing the disposition of the assets of the receivership and claims against the receivership.

10. Subpart M of Part 611 is revised to read as follows:

Subpart M -- Liquidation of Banks

Sec.

611.1170 Appointment of receiver.

611.1175 Inventory, examination, and audit.

Subpart M -- Liquidation of Banks

§ 611.1170 Appointment of receiver.

(a) The board of directors of a bank, by the adoption of appropriate resolution, may vote to liquidate the bank, and upon approval of the resolution by the Farm Credit Administration, the Chairman may, by order, place the bank in receivership and appoint a receiver.

(b) The Farm Credit Administration may, at its discretion, appoint a receiver for any System bank in accordance with the grounds for appointment set forth in § 611.1156.

(c) Upon the issuance of an order placing a bank in liquidation, all rights, privileges, and powers of the board of directors, officers, and employees of the bank are vested exclusively in the receiver, and such individuals are suspended, except as provided for in paragraph (g) of this section.

(d) Upon the appointment of a receiver, and acceptance by the receiver of the appointment, the Chairman shall immediately notify the institution, and notice of the appointment shall be published in the Federal Register.

(e) A voluntary or involuntary liquidation of a bank shall be conducted by the receiver, as agent of the Farm Credit Administration. The receiver shall be responsible for collecting the assets, paying the creditors, paying any liquidating dividend to stockholders, and winding up the affairs of the bank. Upon completion of the liquidation, the Chairman will revoke the charter of the bank.

(f) The Chairman may at any time remove and replace the receiver or may direct the receiver to return the bank to the previous management or such other management as the Chairman may order, in which event the provisions of this subpart shall no longer apply.

(g) In the case of the voluntary liquidation of a bank, where the grounds for the appointment of a receiver pursuant to § 611.1156 do not exist, the Chairman may appoint a receiver, taking into consideration the recommendations of the board of directors of the liquidating bank. The board of directors may at the discretion of the Chairman, remain in office to provide advice and recommendations to the receiver during the pendency of the liquidation.

(h) For purposes of this subpart, the term "bank" includes each bank, the Farm Credit System Capital Corporation, and any service organization chartered pursuant to Part D of Title IV of the Act.

§ 611.1175 Inventory, examination, and audit.

(a) As soon as practicable after taking possession of a bank, the receiver shall make an inventory of the assets and liabilities of the bank as of the date possession was taken. Such inventory shall include the book value and fair market value of the bank's assets and the book value of the bank's liabilities and any security therefore. The method of listing assets and liabilities must provide such information to the satisfaction of the Farm Credit Administration. One copy of the inventory shall be filed with the Farm Credit Administration.

(b) The Bank in receivership shall be examined on an annual basis by the Farm Credit Administration. The bank shall be audited by the Farm Credit Administration or, at the discretion of the Farm Credit Administration, by an independent certified public accountant at such times as the Farm Credit Administration determines. The cost of such examination and audit, as determined by the Farm Credit Administration, shall be paid from the assets of the bank in receivership.

(c) The Farm Credit Administration may from time to time prescribe accounting practices to be followed and require such audit or other reports covering any matters related to the operations of the bank or the receivership as it deems appropriate on such forms as it may prescribe. One copy of the reports required by this section shall be filed with the Office of Examination and Supervision, Farm Credit Administration, and one copy shall be retained in the receiver's principal office.

11. Part 611 is amended by adding a new Subpart N, Conservators and Conservatorships of Banks and Associations, to read as follows:

Subpart N -- Conservators and Conservatorships of Banks and Associations.

Sec.

611.1180 Appointment of a conservator.

611.1181 Powers and duties of conservators.

611.1182 Inventory, examination and audits, accounting practices.

611.1183 Final discharge and release of conservator.

Subpart N -- Conservators and Conservatorships of Banks and Associations

§ 611.1180 Appointment of a conservator.

(a) The Farm Credit Administration may appoint ex parte and without notice a conservator for any Farm Credit System institution provided the grounds for appointment as set forth in § 611.1156 exist.

(b) Upon the appointment of a conservator and acceptance by the conservator of the appointment, the Chairman of the Farm Credit Administration shall immediately notify the institution and, in the case of an association, the district bank, and notice of the appointment shall be published in the Federal Register. As soon as practicable after the conservator takes possession of the institution, the conservator shall notify, by first class mail, each holder of stock and participation certificates in the institution of the establishment of the conservatorship and shall describe the effect of the conservatorship on the institution's operations and on the borrower's loan and equity holdings.

(c) Upon the issuance of the order placing a Farm Credit System institution in conservatorship, all rights, privileges, and powers of the members, board of directors, officers, and employees of the institution are vested exclusively in the conservator.

(d) The conservatorship of a Farm Credit System institution shall be conducted by the conservator as agent of the Farm Credit Administration. The conservator, under the direction and supervision of the Farm Credit Administration, shall be responsible for conserving and preserving the assets of the institution and continuing the ongoing operations of the institution until the conservatorship is terminated by order of the Chairman.

(e) The Chairman may, at any time, remove or replace the conservator or may terminate the conservatorship and direct the conservator to turn over the institution's operations to such management as the Chairman may designate, in which event the provisions of this subpart shall no longer apply.

(f) For purposes of this subpart, "System institutions" includes each bank, association, the Farm Credit System Capital Corporation, and the service organizations chartered under Part D of Title IV of the Act.

§ 611.1181 Powers and duties of conservators.

(a) The conservator may, with respect to System institutions, exercise the powers that a receiver of an association may exercise under § 611.1161 (d), (k), (p), (r), and (s). The conservator may, with the prior approval of the Farm Credit Administration, exercise the powers that a receiver of a System bank or association may exercise under §§ 611.1161 (i), (j), (l), (n), (o), and (q) and 611.1171. In interpreting those paragraphs for purposes of this section, the term "conservator" and "conservatorship" shall be read for "receiver" and "receivership," and "institution" shall be read for "association."

(b) The conservator may also, subject to the restrictions contained in this section:

(1) Exercise all powers as are conferred upon the officers and directors of the institution under law and the charter, articles, and by-laws of the institution, except that the conservator may not declare, credit, pay, or otherwise distribute dividends on stock or other equities of a System institution without the prior approval of the Farm Credit Administration;

(2) Pay any sum the receiver deems necessary or advisable to preserve, conserve, or protect the institution's assets or property, or with prior approval of the Farm Credit Administration, rehabilitate or improve such property and assets;

(3) Extend credit to new and existing borrowers as is necessary to the continuing operating of the institution and to effectuate the purposes of the conservatorship;

(4) Investigate any matter related to the conduct of the business of the institution including, but not limited to, any claim of the institution against any individual or entity and, under the supervision of the General Counsel of the Farm Credit Administration, institute, prosecute, maintain, defend, intervene, and otherwise participate in legal or other proceedings in the name of the institution in which the institution, its creditors, or stockholders have any interest, and otherwise represent in every way the institution, its creditors, or stockholders;
(5) Purchase or lease, for 1 year or less, property and supplies, and purchase insurance, professional, and technical services necessary for the conduct of the conservatorship, or with the prior approval of the Farm Credit Administration, lease property for greater than 1 year; or

(6) Take any action the conservator considers appropriate or expedient to the continuing operation of the institution subject to the restrictions contained in this section.

§ 611.1182 Inventory, examination and audits, accounting practices.

(a) As soon as practicable after taking possession of a Farm Credit System institution the conservator shall, as may be directed by the Farm Credit Administration, make an inventory of the assets and liabilities of the institution as of the date possession was taken. Such inventory shall include the scheduling of the book value and fair market value of the institution's assets and the book value of the institution's liabilities and any security therefrom. The inventory must be in a form acceptable to the Farm Credit Administration and contain such other information as the Farm Credit Administration may require. One copy of the inventory shall be filed with the Farm Credit Administration.

(b) The institution in conservatorship shall be examined by the Farm Credit Administration on an annual basis. The institution shall also be audited by the Farm Credit Administration or at the discretion of the Farm Credit Administration by an independent certified public accountant at such times as the Farm Credit Administration may determine. The cost of such examination and audit, as determined by the Farm Credit Administration, shall be paid from the assets of the institution in conservatorship unless otherwise ordered by the Farm Credit Administration.

(c) The Farm Credit Administration may from time to time prescribe accounting practices to be followed and require such audit or other reports covering any matters related to the operations of the institution or the conservatorship as it deems appropriate on such forms as it may prescribe. One copy of the reports required by this section shall be filed with the Farm Credit Administration and one copy shall be retained in the conservator's principal office.

§ 611.1183 Final discharge and release of conservator.

(a) Final report. At such time as the conservator shall be relieved of the conservatorship duties, the conservator shall file with the Farm Credit Administration a detailed report in a form satisfactory to the Farm Credit Administration.

(b) Discharge. At such time as the conservator shall be relieved of the conservatorship duties, the Chairman may direct an examination of the institution and/or an audit of the books and records of the institution in connection with the final report of the conservator. The accounts of the conservator shall be approved or disapproved by the Farm Credit Administration and, if approved, the conservator shall thereupon be completely and finally released.

12. The authority citation for Part 614 is revised to read as follows; and any other authority citations in the part are removed.

Authority: Secs. 4.12, 4.13, 4.13A, 4.13B, 4.14, 5.9, 5.10, and 5.17, Pub. L. 99-205, 99 Stat. 1678.

13. Part 614 is amended by adding a new Subpart K, Disclosure of Loan Information, to read as follows:

Subpart K -- Disclosure of Loan Information

Sec.

614.4365 Applicability.

614.4366 Definitions.

614.4367 Required disclosures.

Subpart K -- Disclosure of Loan Information

§ 614.4365 Applicability.

This subpart applies only to System institution loans that are not subject to the Truth in Lending Act.

§ 614.4366 Definitions.

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

(a) "Adjustable rate loan" means a loan on which the interest rate payable over the term of the loan may be changed by a System institution. The term includes loans which are titled "adjustable rate" or "variable rate" or any other similar designation.

(b) "Effective interest rate" means the interest rate applicable to the loan at a point in time adjusted to take into consideration the amount of any stock or participation certificates as a percentage of the initial net proceeds of the loan which the borrower is required to hold in order to obtain the loan.

(c) "Fixed rate loan" means any loan on which the interest rate on the loan is not subject to adjustment or variation over the term of the loan, even though the effective interest rate on the loan may be so subject.

(d) "Interest rate" means the stated rate of interest applicable to the loan at a point in time, excluding any fees payable by the borrower in obtaining the loan.

(e) The term "standard adjustment factors" are those financial elements, including, but not limited to, an institution's costs of funds, operating expenses, and provision for loan losses, which are typically taken into consideration by an institution in adjusting the interest rate on loans.

§ 614.4367 Required disclosures.

(a) Each association shall furnish the following information in writing to a prospective borrower at or before the time the person executes the loan agreement:

(1) The current interest rate on the loan; and

(2) In the case of an adjustable rate loan:

(i) The amount and frequency by which the interest rate can be adjusted during the term of the loan or, if there are no limitations on the amount or frequency of such adjustments, a statement to that effect; and

(ii) An identification of the specific standard adjustment factors that are taken into account in making adjustments to the interest rate on the loan; and

(3) The current effective interest rate on the loan with one or more representative examples of the impact of stock or participation certificate ownership requirements on the current interest rate computed on an annualized basis.

(b) Not later than 90 days after the effective date of these regulations, each association shall furnish in writing to each of its borrowers the information specified in paragraph (a) of this section with respect to each loan outstanding to that borrower as of the date the information is furnished.

(c) Each association that adjusts the interest rate on an outstanding loan shall furnish the following information in writing to the borrower not later than 10 days before the effective date of such adjustment:

(1) The new interest rate on the loan;

(2) The date on which the new rate is effective; and

(3) A statement of any factors other than standard factors which were taken into account in establishing the new interest rate.

(d) Each association that takes any action that changes the amount of stock or participation certificates that borrowers are required to own and that modifies the effective interest rate on a loan shall furnish the following information in writing to the borrower at least 10 days before the date on which such action takes effect:

(1) The new effective interest rate;

(2) The date on which the new rate is effective; and

(3) A statement of the action(s) taken by the institution that have resulted in the new effective interest rate.

(e) Each bank for cooperatives shall provide to each loan applicant, who is not a borrower, on or before the date of the loan closing, the following information:

(1) The current interest rate; or

(2) In the case of an adjustable rate loan:

(i) The amount and frequency by which the interest rate can be adjusted during the terms of the loan, or if there are no limitations on the amount or frequency of such adjustments, a statement to that effect; and

(ii) An identification of the specific standard adjustment factors that are taken into account in making adjustments to the interest rate on the loan; and

(3) The projected average effective interest rate on the loan for the next 12-month period, taking into consideration:

(i) The current interest rate;

(ii) Current stock requirements;

(iii) Projected allocated patronage distributions; and

(iv) Projected distributions of annual patronage.

(f) Each bank for cooperatives shall provide each borrower, within 90 days after the effective date of this regulation, and thereafter 30 days after the end of each fiscal year, a statement of such borrower's average effective interest rate for such fiscal year, taking into consideration the criteria specified in paragraph (e)(3) of this section.

Appendix to 12 CFR 614.4367 -- Required Disclosures

Model Disclosure Forms

General

The following are model disclosure forms which System institutions may use to satisfy the notification requirements of section 4.13(a) of the Act and of 12 CFR 614.4367. The forms have been developed in order to give System institutions an idea of the type and extent of information that should be contained therein. It should be understood that System institutions are not required to follow the format of the sample forms. System institutions may develop and use other forms provided the statements contain comparable disclosures in clear, understandable English and otherwise meet the requirements of the Act and regulations.

This loan is NOT subject to the Truth in Lending Act, 15 U.S.C. 1601, et seq. The following disclosure is made in accordance with section 4.13(a) of the Farm Credit Act of 1971, as amended, 12 U.S.C. XXX .
________________________________________________________________________________

Form 1. -- Interest Rate Disclosure
DATE:
LENDER: (Name) BORROWER: (Name)
STATED: EFFECTIVE
INTEREST INTEREST
RATE RATE*
The rate of interest The stated rate of
currently applicable interest adjusted to
to your loan take into account the
purchase of stock
(Percentage) (Percentage)
Check Applicable Box
square This is a FIXED RATE LOAN -- the
stated rate of interest is not subject
to change during the life of the loan.
square This is an ADJUSTABLE RATE LOAN
-- the stated rate of interest is
subject to change during the life of
the loan.
If an Adjustable Rate Loan --
The interest rate on the loan may be
changed (Period).
The interest rate may be changed a
maximum # (Percentage).
*This if a projection subject to change
should particular loan provisions be
modified during the term of the loan,
such as the amount of stock or
participation certifies held or the
timing of repayment. You will be
notified prior to any change in the
effective rate.
The Standard Adjustment Factor(s) which
the institution takes into account in
making adjustments to the interest rate
is (are) (list the factors).
The Standard Adjustment Factors may
square or may not square be changed
during the life of the loan.
See your contract documents for further
information on loan terms and
conditions.
Should you have any questions
concerning the information contained in
this form contact us at (Telephone
Number).
________________________________________________________________________________

This loan is not subject to the Truth-in-Lending Act, 15 U.S.C. 1601, et seq. The following disclosure is made in accordance with section 4.13(a) of the Farm Credit Act of 1971, as amended, 12 U.S.C. XXX .

Form 2. -- Disclosure of a Change in the Effective Interest Rate

DATE: XXXXXXXXX

LENDER: (Name) Borrower: (Name)

This is to inform you that on (loan and loan number),

square The effective rate of interest will be adjusted effective (Date).

The effective rate of interest on your loan is changed to (Percentage) from (Percentage).

This change resulted from a:

square 1. Change in the amount of stock borrowers are required to hold in the lender to (Percentage) from (Percentage).

square 2. Change in the stated rate of interest on your loan effective (Date).

The stated rate of interest on your loan changed to (Percentage) from (Percentage).

The change was computed based on the:

square Standard Adjustment Factors -- factors mentioned on the initial interest rate disclosure.

square Other -- describe.

square 3. Change for other reasons -- describe.

Should you have any questions concerning the information contained herein, please contact us at (Telephone Number).

This loan is not subject to the Truth-in-Lending Act, 15 U.S.C. 1601, et seq. The following disclosure is made in accordance with section 4.13(a) of the Farm Credit Act of 1971, as amended, 12 U.S.C XXX .
________________________________________________________________________________

Form 3. -- Interest Rate Disclosures -- Cooperatives
DATE:
LENDER: (Name) BORROWER: (Name)
CURRENT EFFECTIVE
INTEREST INTEREST
RATE RATE*
(Percentage) (Percentage)
Check applicable box
square This is a FIXED RATE LOAN
square This an ADJUSTABLE RATE LOAN
If an ADJUSTABLE RATE LOAN --
The interest rate on the loan may be
changed (state frequency of changes).
The interest rate on the loan may be
adjusted a maximum of (limitation).
The Standard Adjustment Factor(s) which
the institution takes into account in
making adjustments to the interest rate
on the loan is (are) (list the
factors).
The Standard Adjustment Factors may
square may not square be changed during
the life of the loan.
*This is a projection of the average
effective interest rate for the
12-month period following the execution
of the loan.
Should you have any questions
concerning the information contained in
this form please contact us at
(Telephone Number).
________________________________________________________________________________

This loan is not subject to the Truth-in-Lending Act, 15 U.S.C. 1601, et seq. The following disclosure is made in accordance with section 4.13(a) of the Farm Credit Act of 1971, as amended, 12 U.S.C XXX .

Form 4. -- Annual Effective Interest Rate Disclosure -- Cooperatives

DATE: XXXXXXXXX

LENDER: (Name) BORROWER: (Name)

This is to inform you that the effective rate of interest for your outstanding loans for the year ended (Date) is as follows:
________________________________________________________________________________

Loan Type Loan Number Effective Interest Rate

________________________________________________________________________________

Should you have any questions concerning the information contained in this form please contact us at (Telephone Number).

14. Subpart L of Part 614 is revised to read as follows:

Subpart L -- Notice of Action and Review

Sec.

614.4440 Definitions.

614.4441 Notice of action on loan application.

614.4442 Credit review committees.

614.4443 Review process.

614.4444 Records.

Subpart L -- Notice of Action and Review

§ 614.4440 Definitions.

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

(a) "Adverse credit decision" means a decision on a formal loan application to deny the credit applied for, or approve an extension of credit in an amount less than the amount applied for.

(b) "Applicant" means any person who completes and executes a formal application for an extension of credit from a System bank or association. "Applicant" does not include persons seeking forbearance on an existing loan through a request for deferral or rescheduling of the payment of principal or interest or for renewing or extending the terms of an existing loan. Requests for forbearance are governed by § 614.4513.

(c) "System institution" means the following institutions chartered under the Farm Credit Act of 1971, as amended:

(1) Federal land bank associations; and

(2) Production credit associations.

§ 614.4441 Notice of action on loan application.

Each System institution shall render its decision on an applicant's loan application in as expeditious a manner as is practicable. Upon reaching a decision on a loan application, the institution shall provide prompt written notice of its decision to the applicant. When the institution makes an adverse credit decision, the notice shall include:

(a) The reasons for the institution's action;

(b) Notification that the applicant can request a review of the decision;

(c) Notification that any request for review must be made in writing within 30 days after the applicant's receipt of the institution's notice; and

(d) A brief explanation of the process for seeking review of the decision, including the right to appear before the credit review committee.

§ 614.4442 Credit review committees.

(a) Each Federal land bank is the primary lender for loans that originate in the Federal land bank associations in its district. As primary lenders, each Federal land bank shall establish guidelines under which the boards of directors of each Federal land bank association establish one or more credit review committees. Such guidelines shall include, among other things, the required level of Federal land bank representation on each credit review committee. The membership of each committee shall include at least one member of the association board, and a majority of each committee shall be composed or persons who were not involved in making the adverse credit decision under review. The duties of the members of the review committees may not be delegated to any other person, except the duties of the association board member on the committees may be delegated upon the unanimous vote of the association board.

(b) The board of directors of each production credit association shall establish one or more credit review committees. The membership of each committee shall include at least one member of the association board, and a majority of each committee shall be composed of persons who were not involved in making the adverse credit decision under review. The duties of the members of the review committees may not be delegated to any other person, except that the duties of the association board member on the committees may be delegated upon the unanimous vote of the association board.

§ 614.4443 Review process.

Each applicant who has received an adverse credit decision can request that such decision be reviewed by the institution's credit review committee. The applicant may submit any documents or other evidence which the applicant believes will demonstrate that the loan applied for is an eligible loan that satisfies the credit standards of the institution. The applicant may also appear in person before the committee. The credit review committee shall reach a decision on the application in its sole discretion. The credit review committee shall make every reasonable effort to conduct reviews and render decisions in as expeditious a manner as possible. Upon reaching a decision, the committee shall notify the applicant in writing of its decision and the reasons therefore.

§ 614.4444 Records.

System institutions shall maintain a complete file of all requests for reviews, including the disposition of the review by the credit review committee, and other written inquiries concerning adverse credit actions. Such file shall not include confidential documents prepared by the institution for the purpose of evaluating the quality of loans.

15. Subpart N of part 614 is amended by revising the table of contents and § 614.4510 (d), and by adding a new § 614.4513 to read as follows:

Subpart N -- Loan Servicing Requirements

Sec.

614.4510 General.

614.4511 Federal land bank association compensation.

614.4512 Compromise of indebtedness.

614.4513 Forbearance.

Subpart N -- Loan Servicing Requirements

§ 614.4510 General.

* * * * *

(d) In the development of bank and association loan servicing policies and procedures, the following criteria shall be included:

(1) Term loans. The objective shall be to provide borrowers with prompt and efficient service with respect to actions in such areas as personal liability, partial release of security, insurance requirements or adjustments, loan division or transfers, or conditional payments. Procedures shall provide for adequate inspections, reanalysis, reappraisal, controls on payment of insurance and taxes (and for payment when necessary), and prompt exercise of legal options to preserve the lender's collateral position or guard against loss. Loan servicing policies for rural home loans shall recognize the inherent differences between agricultural and rural home lending.

(2) Operating loans. The objective shall be to service such loans to assure disbursement in accordance with the basis of approval, repayment from the sources obligated or pledged, and to minimize risk exposure to the lender. Procedures shall require:

(i) The procurement of periodic operating data essential for maintaining control, for the proper analysis of such data, and prompt action as needed;

(ii) Inspections, reappraisals; and borrower visits appropriate to the nature and quality of the loan; and

(iii) Controls on insurance, margin requirements, warehousing, and the prompt exercise of legal options to reserve the lender's collateral position and guard against loss.

§ 614.4513 Forbearance.

(a) Each System institution has an obligation to its borrowers, stockholders, and investors in System debt obligations to collect all debts owed to the institution. In pursuit of that obligation, when a borrower is encountering financial difficulties the institution should consider alternative actions that will increase the likelihood of the borrower being able to repay the debt in an orderly fashion or that will improve the ability of the institution to collect the indebtedness.

(b) For purposes of this section, the term "forbearance" means a voluntary refraining by a System institution from the enforcement of the terms of any loan document relating to a borrower's obligation to make any payment of principal or interest or comply with any other provision of such document, or the exercise by the institution of its rights under those documents or applicable law with respect to the loan. The types of forbearance actions available to an institution include, but are not limited to, the deferral or rescheduling of the payment of principal or interest, or the renewal or extension of the terms of a loan. The term "forbearance" does not include a reduction in the amount or rate of principal or interest due on a loan. Such actions constitute compromises of indebtedness and may only be entered into in accordance with the criteria contained in § 614.4512.

(c) Each district board and the Farm Credit System Capital Corporation board shall develop a written policy regarding the exercise of forbearance. The policy shall address, at a minimum, the following areas:

(1) The general circumstances under which the institutions will consider forbearance;

(2) The general criteria which the institutions will use in deciding whether to engage in forbearance;

(3) The person(s) responsible for making forbearance decision; and

(4) The nature and timing of communications which the institution will provide to a borrower concerning its consideration of a request for forbearance, its decision on whether to forebear, the nature and duration of any forbearance action which it proposes to take, and any change in its decision as to whether to forbear.

(d) Each institution shall provide a copy of the applicable policy to the borrower at least 10 days prior to the commencement of any collection action and shall make a copy of the policy available at its offices to any party upon request.

(e) All Federal land bank association and production credit association procedures concerning forbearance shall be approved by the bank for which the association serves as agent or which is the principal creditor of that association.

(f) Each System institution shall conduct its operations in a manner which is consistent with the applicable forbearance policy. No institution is authorized to take any forbearance action unless it determines, taking into consideration all relevant facts and legal options, including the effect of such action on the liability of cosigners or guarantors, that such action will result in the greatest net return to the institution for the ultimate benefit of its borrowers, stockholders, and investors.

16. The authority citation for Part 615 is revised to read as follows; and any other authority citations in the part are removed.

Authority: Secs. 5.9, 5.10, and 5.17, Pub. L. 99-205, 99 Stat. 1678.

17 Subpart J of Part 615 is amended by revising the table of contents and by adding a new § 615.5255 with the table of contents to read as follows:

Subpart J -- Prescription, Subscription, and Retirement of Stock

Sec.

615.5250 Responsibility.

615.5255 Notice of retirement of capital stock.

615.5260 Early retirement of capital stock and allocated equities of banks for cooperatives.

615.5270 Purchase of class B stock of the Federal intermediate credit bank by production credit associations.

615.5280 Equalization of Federal intermediate credit bank class B stock and allocated reserve owned be production credit associations.

615.5290 Purchase of Federal intermediate credit bank participation certificates by other financing institutions.

615.5320 Retirement of Federal intermediate credit bank class B stock, participation certificates, and allocated legal reserve.

* * * * *

Subpart J -- Prescription, Subscription, and Retirement of Stock

§ 615.5255 Notice of retirement of capital stock.

(a) Where the debt of a borrower of a production credit association or Federal land bank association is in default, the association may, but shall not be required to, retire at book value, not exceeding par or face value, all or part of the capital stock or any other equity owned by a borrower on which the association has a lien as collateral for the debt, in total or partial liquidation of the debt.

(b) Any retirements made by a production credit association or Federal land bank association under this section shall be made only upon the specific approval procedures issued by the district Federal intermediate credit bank or Federal land bank, respectively. (c) Prior to making any retirement pursuant to this section, the association shall, at least 10 days prior to the retirement, provide the stockholder with written notice of the following matters:

(1) A statement that the association has declared the borrower's loan to be in default;

(2) A statement that the association will retire the stock of the borrower in total or partial liquidation of his or her loan;

(3) A description of the effect of the retirement on the relationship of the borrower to the association;

(4) A listing of the amount that will still be owed the association after the retirement of the stock; and

(5) The date on which the association will retire the stock of the borrower.

18. Authority citation for Part 618 is revised to read as follows:

Authority: Secs. 4.12A, 5.9, 5.10, and 5.17, Pub. L. 99-205, 99 Stat. 1678.

19. Subpart G is amended by revising the table of contents and § 618.8310, and by adding a new § 618.8325 to read as follows:

Subpart G -- Releasing Information

Sec.

618.8300 General regulation.

618.8310 Lists of borrowers and stockholders.

618.8320 Data regarding borrowers and loan applicants.

618.8325 Disclosure of loan documents.

618.8330 Director, officer, or employee summoned as a witness.

618.8340 Information regarding personnel.

618.8350 Authority reserved to release information.

Subpart G -- Releasing Information

* * * * *

§ 618.8310 Lists of borrowers and stockholders.

(a) Any System institution, for the purpose of protecting the security position of the institution, may provide lists of borrowers to buyers, warehousemen, and others who deal in produce or livestock of the kind that secures such loans. Lists of borrowers or stockholders shall not otherwise be released by any bank or association except in accordance with paragraph (b) of this section.

(b) (1) Each bank for cooperatives, Federal land bank association, and production credit association shall provide a copy of a current list of its stockholders within 10 days of the receipt of a written request by a stockholder. As a condition to providing the list, the bank or association may require that the stockholder agree and certify in writing that he or she will:

(i) Utilize the list exclusively for communicating with stockholders for permissible purposes; and

(ii) Not make the list available to any person, other than the stockholder's attorney or accountant, without first obtaining the written consent of the institution.

(2) A bank or association may, as an alternative to providing a list of its stockholders, mail or otherwise furnish to each stockholder a communication for a permissible purpose on behalf of the requesting stockholder. This alternative may be used only with the consent of the requesting stockholder and the agreement of the requestor to defray the reasonable costs of the communication. The bank or association shall provide the requesting stockholder a written estimate of the costs of handling and mailing the communication as soon as practicable after receipt of the stockholder's request to furnish a communication.

(3) For purposes of paragraph (b) of this section "permissible purpose" is defined to mean matters relating to the business operations of the bank or association. This shall include matters relating to the effectiveness of management, the use of corporate assets, and the performance of directors and officers. This shall not include communications involving commercial, social, political, or charitable causes, communications relating to the enforcement of a personal claim or the redress of a personal grievance, or proposals advocating that the bank or association violate any Federal, State, or local law or regulation.
§ 618.8325 Disclosure of loan documents.

(a) For purposes of this section, the following definitions shall apply:

(1) "Borrower" means any signatory to a loan contract who is either primarily or secondarily liable on such contract, including guarantors, endorsers, cosigners or the like.

(2) "Execution of the loan" means the time at which the borrower and the System bank or association have entered into a legal, binding, and enforceable loan contract and any subsequent amendment or modification of such contract.
(3) "Loan contract" means any written agreement under which a System bank or association loans or agrees to loan funds to a borrower in consideration for, among other things, the borrower's promise to repay the loaned funds at an agreed upon rate of interest.

(4) "Loan document" means any form, application, agreement, contract, instrument, or other writing to which a borrower affixes his or her signature or seal and which the lending bank or association intends to retain in its files as evidence relating to the loan contract entered into between it and the borrower, but shall not include any document related to a loan which the borrower has not signed.

(b) Each System bank and association shall provide copies of all loan documents to the borrower or the borrower's legal representative at the execution of the loan. Subsequently, upon written request of a borrower or a borrower's legal representative, a bank or association shall provide, as soon as practicable, copies of any loan documents signed by the borrower or other documents delivered by such borrower to that bank or association.

(c) Each System bank and association shall have available in its offices, copies of the institution's articles of incorporation or charter, and bylaws for inspection, and shall furnish a copy of such documents to any owner of stock or participation certificates upon request.

(d) The Farm Credit System Capital Corporation (Capital Corporation) shall, upon written request of a borrower or a borrower's legal representative, provide copies of any loan document signed by the borrower or other documents delivered by such borrower to the Capital Corporation.

Kenneth J. Auberger,

Acting Chairman.
[FR Doc. 86-10216 Filed 5-5-86; 2:04 pm]

BILLING CODE 6705-01-M