Title: FINAL RULE--Loan Policies and Operations; Funding and Fiscal Affairs; Definitions--12 CFR Parts 614, 615 and 619
Issue Date: 12/05/1983
Agency: FCA
Federal Register Cite: 48 FR 54469
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 614, 615 and 619

Loan Policies and Operations; Funding and Fiscal Affairs; Definitions

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit Administration ("FCA"), by its Federal Farm Credit Board ("Federal Board"), adopts new regulations and amends existing regulations concerning general loan policies and operations to allow loan participations among banks and associations of the Farm Credit System ("System"). These new regulations and amendments implement various provisions to the Farm Credit Act Amendments of 1980 (Pub. L. 96-592 ("1980 Amendments")).

EFFECTIVE DATE: Thirty days from this publication date, provided either or both Houses of Congress are in session. Notice of date will be published.

FOR FURTHER INFORMATION CONTACT: Joseph M. Beltramo, Projects and Planning Division, (202) 755-6255;

or

Rose M. Ferguson, Bank Services Division, (202) 755-5943, Farm Credit Administration, 490 L'Enfant Plaza, SW., Washington, D.C. 20578.

TEXT:
SUPPLEMENTARY INFORMATION: On May 6, 1983, the FCA noticed and published for public comment proposed new and amended Regulations 12 CFR Parts 614, 615, and 619 (48 FR 20426-20431). The new regulations are 12 CFR 619.9135 and 619.9195. The amended regulations are 12 CFR 614.4090, 614.4100, 614.4110 614.4120, 614.4180, 614.4190, 614.4230, 614.4240, 614.4330, 614.4331, 614.4332, 614.4333, 614.4334, 614.4350, 614.4351, 614.4352, 614.4353, 614.4354, 614.4510, 615.5050, and 615.5060. Detailed explanations of the proposed regulations may be found in the preamble to the proposed rulemaking in the Federal Register (48 FR 20426-20427). For purposes of the supplementary information, certain terms are designated as follows: Farm Credit Administration (FCA); Federal Farm Credit Board (Federal Board); Farm Credit System (System); Federal land bank (FLB); Federal intermediate credit bank (FICB); production credit association (PCA); bank for cooperatives (BC); other financing institutions (OFIs); Farm Credit Act of 1971, as amended, 12 U.S.C. 2001-2260 (Act).

Fifteen parties commented on the proposed regulations, including 12 System banks, 2 divisions of a trade association, and 2 commercial banks. The Federal Board considered all of the comments received and adopted final regulations in the course of its September 1983 meeting. Only those comments expressing objections to the regulations or substantive changes are discussed in detail below. A number of comments suggested technical or editorial changes, and while many of these suggestions were adopted by the Federal Board, they are not discussed in this preamble.

One party suggested deleting the phrase "as specified by the Farm Credit Administration" in 614.4090. The Federal Board rejected this suggestion and decided to retain the wording in the proposed regulation as it is consistent with section 1.6 of the Act.

One commentator suggested that 614.4100 should be amended to permit FICBs to participate in loans with non-System financial institutions that have an approved discount OFI agreement in effect. The Federal Board declined to adopt this change because the Act does not authorize FICBs to participate in loans with non-System institutions.

One party suggested substitution "other lenders" for "other financial institutions" in the second sentence in 614.4120. The Federal Board did not adopt this suggestion because "other lenders" is substantially broader than "other financial institutions," which is a term used in section 3.1 of the Act authorizing the BCs to participate in loans.

One party suggested that the last sentence in 614.4180 be amended to include other System institutions and to specify the other types of lenders with which an FLB may participate in loans. The Federal Board adopted both of these suggestions.

Several comments were received on 614.4330. Several parties objected to the limitation placed on the amount of participations that a System bank may purchase. Another commentator stated that if the intent was to limit risk, the 15-percent limitation should be based on net loans for district BCs. Another commentator did not see the need for the participation volume limitation as long as individual lending limits are observed and credit administration follows sound banking practices. Another stated that limitations should be imposed for all participations, whether originated by System or non-System institutions. Finally, a party suggested that district boards develop policies covering the total amount of loan participations that a System institution may purchase. After considering these comments, the Federal Board amended the regulation to allow district boards to set loan participation volume limitation for district institutions. The purpose of the loan participation volume limit is to prevent any System bank from becoming a bank of participation to other System and commercial banks rather fulfilling its primary function of serving the credit needs of eligible borrowers in its district. Accordingly, FCA will use 15 percent of a bank's total new loan volume as a general guideline in approving district board loan participation volume limits of district banks.

Several parties commented on the requirement that loan participation agreements provide for arbitration of controversies under the agreement between System institutions. The Federal Board has amended the regulation to make this clear. The Federal Board did not agree that arbitration should be required in agreements between System and non-System institutions since it believes such a requirement might set up an unnecessary and artificial barrier to loan participations between System and non-System institutions and might be injurious to future System/non-System lending institution relationships. On the other hand, due to numerous intra-System relationships, it is in the System's best interest to avoid litigation among System institutions and use arbitrators to settle disputes. Dispute resolution between System and non-System institutions should be resolved by contract or the judicial system. However, the regulation does not preclude System banks from negotiating an arbitration clause in a participation agreement with a non-System institution.

Several commentators suggested adding spreading of risk to the objectives to be accomplished by loan participations in 614.4330(a)(1). The Federal Board declined to adopt this suggestion, but has made several modifications to the regulation to aid in containing risks related to loan participations. A requirement has been added that loan participation agreements providing for other than pro rata sharing of the loan in risk must be approved by the FCA. Such a provision is currently required of BC participation agreements and has been extended to all System bank participation agreements. In addition, 614.4330(c)(10) prohibits the inclusion in loan participation agreements of any clause requiring the seller of a loan participation to repurchase the participation. Permitting mandatory loan participation repurchase clauses could have the effect of lessening the degree to which purchasing institutions properly analyze loans based on an incorrect belief that the loan risk is thereby reduced. The Federal Board also amended 614.4330(b) requiring the banks to safeguard the interests of all stockholders where loans are participated among jointly staffed or managed institutions. This is designed to preclude jointly managed institutions from selling participations between themselves where such loans are likely to have an adverse impact on the present or future financial condition of the purchasing System institution even though the sale of the participation may be advantageous to the borrowers of the selling System institution. The banks must develop procedures for ensuring such safeguards in 614.4330(d)(1). Finally, the Federal Board adopted several restructuring and editorial changes to the regulation at the suggestion of several commentators.

A number of parties commented on the terms and conditions under which an FLB could participate with non-System lenders. Three commentators noted that the authorization to participate with non-System lenders does no parallel that of PCAs. One party suggested that the PCA authorization should be made as restrictive as the FLB's. Two parties suggested that the FLB authorization should be liberalized to be identical with the PCA authorization. Two parties stated that the FLB limitation on participation with non-System lenders denied commercial banks full and fair access to FLB participations contrary to the clear intent of Congress in the passage of the 1980 Amendments. One party stated that the proposed 614.4331(b) is vague and ambiguous and does not specifically outline the terms and conditions whereby an FLB may participate with a non-System lender. The Federal Board did not agree with the comments that the 1980 Amendments provide commercial banks with a right to access FLBs and PCAs through loan participations. The 1980 Amendments amended section 1.6 of the Act to permit FLBs to participate with other lenders in loans as defined by the FCA. The House Committee on Agriculture, in favorably recommending the 1980 Amendments, noted that the FCA supported loan participations with non-System lenders in order to meet the expanded credit needs of farmers. H.R. Rep. No. 1287, 96th Cong., 2d Sess. 55 (1980). The primary reason for granting authority to participate loans with non-System lenders was to provide FLBs with more flexible tools to meet the credit and financial needs of agricultural and aquatic producers. Loan participations between PCAs and other lenders developed similarly nearly a decade ago. Because FLBs have had no prior exposure to loan participations with non-System lenders, the Federal Board believed that it would be appropriate for the regulation governing this activity to emphasize agricultural and aquatic producers as the primary beneficiaries of any FLB/non-System loan participation. The Federal Board agreed that the regulation should be modified to clarify the framework under which FLBs and non-System lenders may participate. Accordingly, the final regulation has been amended to require that a borrower must receive significantly better terms, conditions, or services not obtainable through a direct FLB loan in order for an FLB to participate with a non-System lender.

One commentator suggested that 614.4333(a) does not allow for instances where an FICB has delegated authority to an association to enter into loan participation agreements without prior approval. The Federal Board agreed and has modified the regulation accordingly.

This party also suggested amending the regulation to limit PCAs to participating with non-System lenders in loans that PCAs are authorized to make under the Act and FCA Regulations. The Board also agreed with this suggestion and has added 614.4333(c)(3) to address this issue.

One party commented that a paragraph should be added to 614.4334 establishing that BC loan participations are subject to the requirements of 614.4330 and the circumstances in which a BC can participate a loan with commercial banks and financial institutions. The Federal Board adopted the suggestion and has added 614.4334(a) to address these issues. Another party commented that district BCs should be allowed to participate with non-System financial institutions and commercial banks if the loan is less than the district BC's lending limit. The Federal Board agreed and has amended the regulation to reflect this. Another party stated that the proposed regulation is overly restrictive in requiring Central Bank concurrence for a BC to offer participation to other lenders in all cases. This party stated that the present regulations implied that only Central Bank concurrence is necessary if the Central Bank declines to accept the participation offered. This is not correct. The Federal Board did not change the portion of the regulation requiring BCs to offer the Central Bank participations in loans in excess of the BC lending limit.

A number of commentators objected to the general lendings of 614.4350 and the specific BC lending limits of 614.4354. The commentators recommended adopting the System task force proposal on loan participations that would set a lending limit at 10 percent of the capital and surplus of the 37 Farm Credit banks for all System loans outstanding to one borrower. Some commentators stated that it was discriminatory to maintain a lending limit for the BC system without having similar limits for the FLB and FICB system banks. Some commentators stated that maintaining the current BC lending limit negates the purpose for which Congress amended the Act -- to permit inter-System loan participation. They stated that the BC system wanted to be able to handle the total needs of its large borrowers within the System and therefore supported the legislative change. The Federal Board has considered all of these comments very carefully and has decided to retain the current lending limits for System banks. The current BC lending limit permits a loan to a single borrower of over $500 million. Allowing the FLBs and FICBs to participate in BC loans spreads the risk of large loans to large cooperatives throughout the System and fulfills one of the main purposes of the inter-System loan participation authority. The Federal Board considered FCA staff's research on the legal and self-imposed lending limits of national and foreign financial institutions and concluded that it would be imprudent to waive the current BC lending limit to a single borrower.

A party pointed out that the proposed 614.4510 requires FICB loan servicing policies to be followed in a loan participation between a PCA and an FICB. The effect of this requirement may force some PCAs to liberalize their policies in some instances. The Federal Board agreed with the suggestion and has eliminated the last sentence from subsection (b) in the final regulation.

One party commented that 615.5050 needs amending to reflect that the value of any participation pledged as collateral be limited to the bank or association portion of the loan purchased. The Federal Board acknowledged the party's concern and has amended the regulation to limit the collateral carrying value on loans on which an FLB participates to the FLB's portion of the appraised value of the loan.

One party suggested that 615.5060 relating to FLB special collateral requirements be expanded to apply to loan participations with non-System lenders as well as System institutions. The Federal Board agreed and amended the regulation accordingly.

Finally, two comments were received regarding the definition of loan participation in 619.9195. Both parties suggested that the regulation be amended to include non-System lenders in the definition of loan participation. The Federal Board agreed and has amended the regulation accordingly.

List of Subjects in 12 CFR Parts 614, 615, and 619

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

For reasons set out in the preamble, Parts 614, 615, and 619 of Chapter VI, Title 12 of the Code of Federal Regulations are amended as shown:

PART 614 -- LOAN POLICIES AND OPERATIONS

Subpart C -- Lending Authorities

1. Section 614.4090 is revised to read as follows:

614.4090 Federal land banks.

The banks are authorized to make long-term real estate mortgage loans in rural areas as defined by the Farm Credit Administration or to producers or harvesters of aquatic products, for a term of not less than 5 years nor more than 40 years. Federal land banks may participate in loans with other Farm Credit System banks, production credit associations, and lenders which are not Farm Credit System institutions as set forth in 614.4330 and 614.4331. Subject to limitations applicable to making long-term real estate mortgage loans, the banks are authorized to make continuing commitments to make loans and to extend financial assistance of a similar nature. Policies established by the bank's board shall be followed in making loans, in continuing commitments for loans, and in extending other financial assistance. Borrowers shall be permitted to make advance payments on their loans or, under agreement with the banks, to make advance conditional payments to be applied to future maturities or to be available for return to the borrower for purposes for which the bank would increase their existing loans. Banks may pay interest on advance conditional payments for the time the funds are held unapplied at a rate not to exceed the rate charged on the related loan(s).

2. Section 614.4100 is amended by revising paragraph (a) to read as follows:

614.4100 Federal intermediate credit banks.

(a) The banks are authorized to make loans and extend other similar financial assistance to, and to discount for or purchase from, production credit associations, with their endorsement or guaranty, any note, draft, and other obligation presented by such association. In addition, the banks may participate in loans with other Farm Credit System institutions, as set forth in 614.4330 and 614.4332.

* * * * *

3. Section 614.4110 is revised to read as follows:

614.4110 Production credit associations.

Each production credit association, under policies established by the bank board and procedures prescribed by the bank, may make or guarantee short- and intermediate-term loans and provide other similar financial assistance to eligible borrowers. Short- and intermediate-term loans may be made for a term not exceeding 7 years, or such longer periods, not to exceed 10 years as provided in 614.4200. Loans to eligible producers or harvesters of aquatic products for the purposes enumerated in 614.4200(d) may be for a term not exceeding 15 years. In addition, production credit associations may participate in loans and other similar financial assistance with other Farm Credit System institutions and with other lenders which are not Farm Credit System institutions as set forth in 614.4330 and 614.4333.

4. Section 614.4120 is amended by revising paragraph (a) to read as follows:

614.4120 Banks for cooperatives.

(a) The banks are authorized to make loans and commitments to eligible cooperatives and to extend to them other financial assistance, including, but not limited to, discounting notes and other obligations, guarantees, and collateral custody. The banks may participate with other Farm Credit System banks, production credit associations, and other financial institutions in loans as set forth in 614.4330 and 614.4334. The banks are authorized to make or participate in loans, commitments, and extend other technical and financial assistance to a domestic or foreign party with respect to its transactions with a voting stockholder of the bank and to a domestic or foreign party in which such stockholder has at least a minimum ownership interest for the export or import of agricultural commodities, farm supplies, or aquatic products through purchases, sales, or exchanges. The voting stockholder must substantially benefit as a result of such a loan, commitment, or assistance for the purpose of facilitating the cooperative's export or import operations. This type of activity shall be made under policies established by the bank's board of directors and approved by the Farm Credit Administration.

* * * * *

Subpart E -- Loan Terms and Conditions

5. Section 614.4180 is amended by revising paragraph (a) to read as follows:

614.4180 Federal land banks.

(a) Loans may be made for not less than 5 years nor more than 40 years. The basis of approval shall set out the terms and conditions under which a loan is approved. When necessary to assure proper understanding, provide needed controls, and protect the lender, a formal written loan agreement shall be developed between the borrower and the bank. In addition, the banks may participate in loans with other Farm Credit System institutions and other lenders which are not Farm Credit System institutions as set forth in 614.4330 and 614.4331.

6. Section 614.4190 is amended by revising paragraph (a) to read as follows:

614.4190 Federal intermediate credit banks.

(a) Loan participants between Federal intermediate credit banks and production credit associations shall be made under the same terms and conditions prescribed in 614.4200 for production credit associations. Loan participations with Farm Credit System banks [Federal land banks and banks for cooperatives and other Federal intermediate credit banks] shall be made as set forth in 614.4330 and 614.4332.

* * * * *

Subpart F -- Security Requirements

7. Section 614.4230 is amended by revising paragraphs (a) and (c) and by adding a new paragraph, (d), to read as follows:

614.4230 Federal land banks.

(a) Primary security for a Federal land bank loan shall consist of a first lien on an interest in real estate comprising agricultural property, an eligible farm-related business, an eligible rural residence, or real estate used as an integral part of an eligible aquatic operation, whichever is most appropriate for the type of loan being made. The real estate interest must be mortgageable under deeds or leases which reasonably may be considered adequate to allow the bank to have the security of a first lien upon such interest. Collateral closely aligned with, an integral part of, and normally sold with real estate may be included in the appraised value of the primary security upon which a loan is based. Values shall be determined according to the appraisal standards approved by the bank.

* * * * *

(c) Personal property used in farming or aquatic operations and considered as collateral for short- and intermediate-term credit will normally not be included as additional security. Before taking such personal property as additional security, the Federal land bank and Federal land bank associations shall consider whether all or a portion of the credit needs might be met more satisfactorily by a short- or intermediate-term loan such as may be obtained through a production credit association in accordance with district board policies established under 616.6020.

(d) Security requirements for loan participations shall be as set forth in 614.4330 and 614.4331.

8. Section 614.4240 is amended by revising paragraph (a) to read as follows:

614.4240 Federal intermediate credit banks.

(a) Loans made by a Federal intermediate credit bank in participation with a production credit association or another Federal intermediate credit bank shall adhere to the same security requirements as prescribed in 614.4250 for production credit associations. Security requirements for loan participations with Federal land banks or banks for cooperatives shall be as set forth in 614.4330.

* * * * *

Subpart H -- Loan Participations

9. Section 614.4330 is revised to read as follows:

614.4330 General.

(a) Under policies established by the district boards and boards of directors of the respective banks and approved by the Farm Credit Administration, Farm Credit System banks and production credit associations may enter into loan participation agreements, as set forth in this subpart, to enable joint financing of individuals or legal entities authorized by the Act and the FCA Regulations to borrow from Farm Credit System institutions. District boards desiring to implement a loan participation program shall establish such policies and modify existing policies as necessary. These policies shall be submitted to the Farm Credit Administration for approval prior to implementation of the program in the district. These policies shall address:

(1) The basis under which district banks and production credit associations may enter into loan participations.

(2) Capitalization guidelines with respect to the portion of loans purchased.

(3) Criteria regarding the credit quality of loan participations that Farm Credit System institutions in the district may purchase.

(4) Identification and reporting of loans which are participated.

(5) Credit, financial, and administrative reviews of loans which are participated.

(6) The aggregate amount of loan participations that district Farm Credit System institutions may purchase based on a percentage of total net loan volume.

(7) Any limitations or conditions to the district program that the board deems appropriate, including arbitration.

(b) Loan participations shall accomplish one or more of the following objectives:

(1) Facilitate the sharing of credit expertise on specific loans.

(2) Provide servicing arrangements that are advantageous to Farm Credit System institutions in accommodating borrowers having special needs.

(3) Prudently meet the financing needs of larger borrowers.

(4) Improve the quality of credit service to the agricultural sector.

Loan participations shall not be used to circumvent the operations or financial requirements of any Farm Credit System institution. In loan participations between or among two or more jointly managed Farm Credit System institutions in the same district, the jointly managed institutions shall safeguard the interests of all affected stockholders.

(c) Loan participation agreements shall define the duties and responsibilities of both the originating institution and participating institution(s) consistent with the aforementioned objectives and sound business practices. At a minimum, loan participation agreements shall:

(1) Identify the particular loan or loans to be covered by the agreement;

(2) Provide for disbursement and repayment of loan funds;

(3) Provide for sharing, dividing, or assigning collateral;

(4) Provide for a loan service plan;

(5) Provide for collection procedures;

(6) Set forth authorization and conditions for action in the event of borrower distress or default;

(7) Provide for loss sharing;

(8) Set forth conditions for the offering and acceptance of the loan participation and termination of the agreement;

(9) Provide for capitalization requirement fees, interest charges, and cost sharing between participating institutions;

(10) Provide for arbitration of controversies or disagreements arising under the agreement between two or more Farm Credit System institutions;

(11) Contain any other term necessary for the appropriate administration of the loan and the protection of the interests of Farm Credit System institutions; and

(12) Not contain any provision requiring the seller of a loan participation to repurchase any portion of the loan participation sold.

(d) Additionally, loan participations should meet the following requirements:

(1) Each participating bank or association shall analyze each loan independently or, in the case of loan participations between or among two or more jointly managed institutions in the same district, provide procedures for each loan, to ensure that the interests of the stockholders of each institution are protected.

(2) Any Farm Credit System institution shall have the option to accept or reject a loan participation.

(3) Participating institutions, except in the case of two or more banks for cooperatives, shall be issued certificates evidencing an undivided interest in the loan.

(4) The amount of any loan retained or purchased by an individual Farm Credit System bank or association shall be subject to any prior approval requirements for that bank or association and shall be in accordance with the lending limits of Subpart J under this part.

(e) In addition to the other requirements of this section, loan participations between Farm Credit System institutions shall meet the following criteria:

(1) Borrower eligibility, membership, loan term, loan amount, loan security, and the requirement for the purchase of stock or participation certificates by the borrower shall be in accordance with the statutory and regulatory provisions under which the institution that originates the loan operates.

(2) All other terms shall be by agreement of the institutions consistent with the intent of these regulations for loan participations between Farm Credit System institutions.

(3) Farm Credit System banks originating loan participations and desiring to utilize differential interest rates to the borrower shall submit differential interest rate policies to the Farm Credit Administration in accordance with 614.4280. Production credit associations originating loan participations shall obtain approvals for the use of differential interest rates to the borrower from the supervising Federal intermediate credit bank.

(4) Loan participation agreements between Farm Credit System banks which provide for other than pro rata sharing of the loan and risk require approval of the Farm Credit Administration.

10. Section 614.4331 is revised to read as follows:

614.4331 Federal land banks.

(a) Federal land banks may enter into loan participation agreements with other Farm Credit banks and production credit associations as set forth in 614.4330.

(b) Federal land banks may also participate, in accordance with 614.4330, with lenders that are not Farm Credit System institutions in loans that Federal land banks are authorized to make under the Act and FCA Regulations provided the loan participation results in significantly beneficial or improved loan terms or conditions or services to the borrower which could not be obtained as a result of a direct Federal land bank loan. Such benefits to the borrower shall be documented in the loan file.

(c) Loan participation agreements between Federal land banks and production credit associations or lenders that are not Farm Credit System institutions shall be limited to loan financing operations located within the Federal land bank's chartered territory, or outside the Federal land bank's chartered territory in accordance with 614.4070.

(d) In addition to the provisions contained in 614.4330, participation agreements between Federal land banks and lenders which are not Farm Credit System institutions shall be subject to the following limitations.

(1) To assure that such a loan participation agreement does not result in a lender which is not a Farm Credit System institution substantially shifting its lending away from agricultural, aquatic, farm-related service, and rural home loans, the lender with which the Federal land bank participates shall fulfill one of the following:

(i) Retain at least 50 percent of the total of each participated loan; or

(ii) Retain at least 10 percent of the total of each participated loan provided that the lender does not materially reduce its ratio of agricultural loans to total loans from the ratio maintained during the preceding 3 years; or

(iii) Retain the maximum amount of the participated loan permitted by Federal or state regulations to which the lender is subject.

(2) The lender shall provide evidence of financial responsibility and capability to service and control loans being made as a prerequisite to approval of a loan participation agreement.

11. Section 614.4332 is revised to read as follows:

614.4332 Federal intermediate credit banks.

A Federal intermediate credit bank may enter into loan participation agreements with one or more Farm Credit System banks or production credit associations as set forth in 614.4330.

12. Section 614.4333 is revised to read as follows:

614.4333 Production credit associations.

(a) The associations may enter into participation agreements with one or more other production credit associations, Federal intermediate credit banks, Federal land banks, banks for cooperatives, commercial banks, or other lenders. All such agreements shall be subject to the prior approval of the supervising Federal intermediate credit bank unless the authority to enter into such agreements has been delegated to the association by the supervising bank, and shall be in accordance with 614.4330. When the production credit association is the participant, the Federal intermediate credit bank shall evaluate, in addition to the overall terms of the proposed loan participation, the adequacy of the association's risk funds, the capability of the association to administer the loan properly in accordance with the loan participation agreement, and any other factors relating to the ability of the production credit association to carry out the terms of the agreement within the intent of 614.4330.

(b) A production credit association shall only enter into loan participation agreements with lenders other than production credit associations on loans financing operations located within the production credit association's chartered territory, or outside the chartered territory in accordance with 614.4070.

(c) In addition to the provisions contained in 614.4330, participation agreements between production credit associations and commercial banks or other lenders which are not Farm Credit System institutions shall be subject to the following limitations:

(1) To assure that such a loan participation agreement does not result in a lender which is not a Farm Credit System institution substantially shifting its lending away from agricultural, aquatic, farm-related service, and rural home loans, the participating lender shall fulfill one of the following:

(i) Retain at least 50 percent of the total of each participated loan; or

(ii) Retain at least 10 percent of the total of each participated loan provided that the lender does not materially reduce its ratio of agricultural loans to total loans from the ratio maintained during the preceding 3 years; or

(iii) Retain the maximum amount of the participated loan permitted by Federal or state regulations to which the lender is subject.

(2) The lender shall provide evidence of financial responsibility and capability to service and control loans being made as a prerequisite to approval of a loan participation agreement.

(3) Production credit associations shall only enter into loan participations with lenders which are not Farm Credit System institutions on loans that production credit associations are authorized to originate under the Act and FCA Regulations.

13. Section 614.4334 is revised to read as follows:

614.4334 Banks for cooperatives.

(a) The banks may enter into loan participation agreements with other Farm Credit System banks, production credit associations, commercial banks, or other financial institutions as set forth in 614.4330. Banks for cooperatives may enter into plan participations with financial institutions which are not Farm Credit System institutions only on loans that banks for cooperatives are authorized to originate under the Act and FCA Regulations.

(b) A district bank for cooperatives shall first offer to the Central Bank for Cooperatives a participation in loans to a borrower when such loans exceed the lending limit of the bank. With the concurrence of the Central Bank, participations in loans in excess of a bank's lending limit may be offered to other Farm Credit System banks and production credit associations, commercial banks, or other financial institutions. A bank for cooperatives may offer a participation to other Farm Credit System banks, production credit associations, commercial banks, or other financial institutions in loans which are less than its lending limit; however, when total loans to such borrowers exceed the lending limit of the originating bank for cooperatives, further loans must be offered first to the Central Bank for Cooperatives. Loans in excess of the lending limit established by the Farm Credit Administration for banks for cooperatives on a consolidated basis may be made only when such excess amounts are sold as participations to commercial banks, or other financial institutions that are not Farm Credit System institutions.

(c) The form and terms of each participation agreement between the Central Bank for Cooperatives and a district bank of cooperatives shall be subject to Farm Credit Administration approval. In addition, supplemental agreements and modifications to existing agreements which directly affect capitalization, interest, and other items identified by the Farm Credit Administration shall be subject to Farm Credit Administration approval.

Subpart J -- Lending Limits

14. Section 614.4350 is revised to read as follows:

614.4350 General.

No Farm Credit System bank or association shall make a loan, advance, commitment, or provide financial assistance which will result in any one borrower being obligated to such bank or association in excess of limits stated in this subpart. When these limitations are approached, banks or associations should consider the feasibility of arranging participation in large loans with other banks, associations, and other lenders to properly serve the credit needs of deserving large credit worthy borrowers. Included in the calculation of lending limits to any one borrower shall be the amount of any participation in a loan(s) to that borrower purchased by the Farm Credit System bank or association.

15. Section 614.4351 is revised to read as follows:

6145.4351 Federal land banks.

The total amount of loans, advances, commitments, financial assistance, and funds through the purchase of loan participation(s) that a Federal land bank may extend to any one borrower shall not exceed 20 percent of the capital and surplus of the bank.

16. Section 614.4352 is revised to read as follows:

614.4352 Federal intermediate credit banks.

The total amount of funds that a Federal intermediate credit bank may extend through a loan participation(s) with Farm Credit System banks or production credit associations to any one borrower shall not exceed 20 percent of its capital and surplus.

17. Section 614.4353 is revised to read as follows:

614.4353 Production credit associations.

The total amount of loans, advances, commitments, financial assistance, and funds through the purchase of a loan participation(s) that an association may extend to any one borrower shall not exceed 50 percent of the capital and surplus of the association. A lending limit of 100 percent of the capital and surplus of the association shall apply whenever an approved loss-sharing agreement is in force.

18. Section 614.4354 is amended by revising paragraphs (b), (c)(1), and (c)(2) to read as follows:

614.4354 Banks for cooperatives.

* * * * *

(b) Total system. Loans outstanding at any one time to any one borrower from one or more district banks and the Central Bank for Cooperatives, exclusive of participations sold to lenders that are not Farm Credit System institutions, shall not exceed the percentages specified in paragraph (a)(1) applied to the combined net worth of the 13 banks for cooperatives as determined by the Farm Credit Administration. Loans made within previously established limits that become excessive because of changes in lending limits prescribed herein may be held and liquidated in accordance with terms individually specified by the Farm Credit Association.

(c) * * *

(1) Direct loans outstanding at any one time to any one borrower as defined by these regulations, exclusive of participations sold to others, shall not exceed the same lending percentages prescribed in paragraph (a)(1) for district banks.

(2) Participations in loans at any one time to any one borrower as defined by these regulations, exclusive of participations resold to institutions other than Farm Credit System institutions, shall not exceed amounts greater than the lending limit described in paragraph (b) less amounts held by Farm Credit System institutions.

* * * * *

Subpart N -- Loan Servicing Requirements

19. Section 614.4510 is amended by revising the introductory paragraph and paragraphs (b), (c), and (d) to read as follows:

614.4510 General.

The bank and associations that are originating lenders shall be responsible for the servicing of the loans which they make. However, loan participation agreements may designate specific loan servicing efforts to be accomplished by a participating institution. The bank board of directors shall direct the bank and associations to adopt loan servicing policies and procedures to assure that loans will be serviced fairly and equitably for the borrower while minimizing the risk for the bank and associations. Procedures shall include specific plans which help preserve the quality of sound loans and which help credit deficiencies as they develop.

* * * * *

(b) The supervisory Federal intermediate credit bank shall provide guidelines for the production credit associations to use in establishing their loan servicing policies and procedures plus any limitations requiring the approval of the bank.

(c) The servicing of loans which are participated in by Farm Credit System institutions shall be in accordance with 614.4330.

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

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PART 615 -- FUNDING AND FISCAL AFFAIRS

Subpart B -- Collateral

20. Section 615.5050 is amended by revising paragraph (d) to read as follows:

615.5050 Policy.

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(d) When there is loan servicing, such as reamortization, extension, deferment, or partial release, the new unpaid balance may be used as the collateral carrying value:

(1) In loans originated by a Federal land bank, the carrying value shall not exceed 85 percent (97 percent if guaranteed by Federal, state, or other governmental agencies) of the appraised value established by the most recent appraisal report of the primary security.

(2) In loans which a Federal land bank participates with a lender which is not a Farm Credit System institution, the carrying value shall not exceed 85 percent (97 percent if guaranteed by Federal, state, or other governmental agencies) of the Federal land bank's portion of the appraised value, corresponding to the portion of the loan purchased by the bank divided by the total loan made to the borrower, established by the most recent appraisal report of the primary security.

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21. Section 615.5060 is amended by adding "provisions of the Act." to the end of the last sentence in paragraph (b) and adding a new paragraph (c), to read as follows:

615.5060 Special collateral requirement -- Federal land banks.

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(c) A loan participation agreement to which a Federal land bank is a participant and involving a loan originated by another lender shall constitute an obligation meeting the collateral requirements of 615.5050(a).

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PART 619 -- DEFINITIONS

22. 12 CFR Part 619 is amended by adding 619.9135 to read as follows:

619.9135 Farm credit system institutions.

All institutions chartered and supervised by the Farm Credit Administration, including the Federal land banks, the Federal land bank associations, the Federal intermediate credit banks, the production credit associations, the banks for cooperatives, and service organizations chartered under Title IV, Part D, of the Act.

23. 12 CFR Part 619 is amended by adding 619.9195 to read as follows:

619.9195 Loan participation.

A loan having two or more lenders. The originating lender makes the loan and sells part of an undivided interest in the loan to one or more other lenders pursuant to a participation agreement.
(Secs. 5.9, 5.12, 5.18, Pub. L. 92-181, 85 Stat. 619, 620, 621 (12 U.S.C. 2243, 2246 and 2252))

Donald E. Wilkinson,

Governor.

[FR Doc. 83-32231 Filed 12-2-83; 8:45 am]