Title: FINAL RULE--Loan Policies and Operations; Funding and Fiscal Affairs--12 CFR Parts 614 and 615
Issue Date: 11/06/1981
Federal Register Cite: 46 FR 55085
FARM CREDIT ADMINISTRATION
12 CFR Parts 614 and 615
Loan Policies and Operations; Funding and Fiscal Affairs
AGENCY: Farm Credit Administration.
ACTION: Final rule.
SUMMARY: The Farm Credit Administration, by its Federal Farm Credit Board, adopts and publishes new and amended regulations to implement authorities conferred on institutions of the Farm Credit System by the Farm Credit Act Amendments of 1980 (Pub. L. 96-592) relating to: (1) the lending authorities of Federal intermediate credit banks; (2) the loan terms and conditions of the banks for cooperatives; (3) the lending limits of the banks for cooperatives; (4) the development of debt maturity guidelines, priorities, and objectives for Farm Credit System banks; (5) the authority for banks for cooperatives to invest in foreign business entities; (6) the authority for banks for cooperatives to pay patronage refunds in participation certificates; and (7) the authority for banks for cooperatives to contribute more than 25 percent of earnings to allocated surplus.
EFFECTIVE DATE: December 7, 1981.
FOR FURTHER INFORMATION CONTACT:
Larry H. Bacon, Deputy Governor, Office of Administration, 490 L'Enfant Plaza, SW, Washington, DC 20578 (202-755-2181).
SUPPLEMENTARY INFORMATION: On August 6, 1981, the Farm Credit Administration noticed and published for public comment proposed new and amended regulations to 12 CFR Parts 614 and 615 (46 FR 40028-40031). The new regulation is § 615.5143 and the amended regulations are §§ 614.4100, 614.4210, 614.4354, 615.5103, 614.5330, and 615.5370. For the purposes of this supplementary information, certain terms are designated as follows: Farm Credit Administration (FCA); Federal Farm Credit Board (Federal Board); Farm Credit System (System); Federal Intermediate Credit Bank (FICB); Bank for Cooperatives (BC); Farm Credit Act of 1971, as amended, 12 U.S.C. 2001, et seq. (Act).
Fourteen parties commented on the proposed regulations. These included 12 System banks, one trade association, and one Federal banking agency. The Federal Board considered each of the comments received and adopted final regulations in the course of its October 1981 meeting.
12 CFR 614.4100 is amended to define the eligibility requirements for institutions wanting to have their loans discounted or purchased by FICBs. The regulation also establishes the basis on which such activities of the FICB are to be conducted. All commentators were in favor of the proposed regulation.
12 CFR 614.4210 is amended to reflect the expanded authorities of BCs under section 3.7(b) of the Act. The regulation sets out the terms and conditions of term loans authorized under § 614.4120 by BCs to finance certain export or import transactions of eligible foreign or domestic parties. One commentator concurred with the proposal while five commentators suggested that loans by BCs to finance international trade be denominated in a currency that would eliminate foreign exchange risk upon repayment. In addition, the commentators stated that such an approach would eliminate the foreign risk for the borrower. FCA studied the suggestion and agreed that this approach may help minimize or eliminate foreign exchange risk. The suggestion was incorporated under § 614.4210(c)(1).
12 CFR 614.4354 is amended to accommodate the new types of international trade financing and leveraged lease financing authorized under a number of provisions of Title III of the Act. The regulation also establishes the lending limits of the BCs for various transactions. Four of the five commentators endorsed the proposal. One commentator suggested limiting all third-party loans by BCs to 10 percent of net worth and limiting direct leases to eligible cooperatives to 25 percent of net worth. The Federal Board rejected the suggestion as too restrictive.
12 CFR 615.5103 is amended to require the finance committee of each group of System banks to develop debt maturity guidelines, priorities, and objectives to help guide the System's Fiscal Agency in the marketing of System securities. Eleven commentators endorsed the proposal. One commentator suggested that priorities and objectives of the debt marketing programs of the Fiscal Agency continue to provide flexibility for individual System banks to stay within their debt maturity policies. The language contained in the proposal and the final regulation reflects the suggestion.
12 CFR 615.5143 is a new regulation authorizing BCs to invest in foreign business entities for the purpose of providing credit information and servicing for members in connection with international activities. All parties commenting on the proposal were in favor of the new regulation.
12 CFR 615.5330 authorizes the BCs to pay patronage refunds in participation certificates as well as in stock or cash. The amended regulation also eliminates the 1 1/2 -percent allowance for loan losses, which is a requirement contrary to generally accepted accounting principles. One commentator suggested that the regulation should be withdrawn because: (1) the approval mechanism contained in the regulation is inconsistent with those required of other System institutions; (2) the 1 1/2 -percent requirement is a reasonable minimum allowance for loan losses; and (3) the requirement could be a point of negotiation with the Internal Revenue Service in the future. The Federal Board did not accept the suggestion because it considers the requirement as having little, if any, effect on bank dealings with the Internal Revenue Service. In addition, the amended regulation does not prohibit a BC from maintaining an allowance for loan losses at any level that it believes reasonable. Different loan loss allowance requirements among System institutions are justifiable based on different treatment under the Act.
Finally, an amendment to 12 CFR 615.5370 authorizes the BCs to apply more than 25 percent of net earnings as determined by the bank board after payment of operating expenses, to restore or maintain an allocated surplus account. No comments were received on the proposal.
For the reasons set out in the preamble, Parts 614 and 615 of Chapter VI, Title 12 of the Code of Federal Regulations is amended as shown.
PART 614 -- LOAN POLICIES AND OPERATIONS
1. Section 614.4100 is amended by revising paragraphs (a) and (b) 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 discount for 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 to eligible borrowers with such associations or other Federal intermediate credit banks.
(b) The banks are authorized to make loans and extend other similar financial assistance to, discount for, and purchase with recourse from any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, or any association of agricultural producers engaged in the making of loans to farmers and ranchers, and any corporation engaged in the making of loans to producers or harvesters of aquatic products, notes, drafts, and other obligations for loans which have been made for eligible purposes in accordance with provisions of subpart P of Part 614 of these regulations. All such financial instruments shall bear the endorsement or guaranty of the originating lender.
* * * * *
2. Section 614.4210 is amended by revising paragraph (b) and adding new paragraph (c) to read as follows:
§ 614.4210 Banks for cooperatives.
(a) * * *
(b) The document(s) evidencing a loan approval by a bank shall set out the terms and conditions under which a loan is approved. A loan agreement shall be executed between the borrower and the bank.
(c) Term loans authorized under § 614.4120 to finance a foreign or domestic party with respect to export or import transactions with an eligible cooperative and to finance such transactions of a foreign or domestic party in which an eligible cooperative has at least a minimum ownership interest shall be subject to the following conditions:
(1) The loan shall be denominated in a currency to eliminate foreign exchange risk on repayment.
(2) The borrower's obligation shall be guaranteed or insured against default under such policies as are available in the United States and other countries. Exceptions may be made where the prospective borrower has had a long-standing successful business relationship with an eligible cooperative borrower or an eligible cooperative which is not a borrower if the prospective borrower has a high credit rating as determined by the bank.
(3) For a borrower in which an eligible cooperative has a majority ownership interest, financing may be extended for the full value of the transaction; otherwise, financing may be extended only to approximate the percentage of ownership.
(4) Unless otherwise designated by the Farm Credit Administration, each loan shall be submitted to it for prior approval.
* * * * *
Section 614.4354 is amended by revising paragraphs (a)(1)(i) through (v) and by adding paragraphs (a)(1)(vi) through (xi), and revising (a)(2), (a)(3), (a)(4); (b); (c)(1) and (2); (d)(1) and (d)(3); and (e) introductory text to read as follows:
§ 614.4354 Banks for cooperatives.
(a) * * *
(1) * * *
(i) Term loans to eligible cooperatives: 25 percent.
(ii) Term loans to foreign and domestic parties: 10 percent.
(iii) Lease loans qualifying under § 614.4120 and applying to the lessee: 25 percent.
(iv) Standby letters of credit qualifying under § 614.4810: 35 percent.
(v) Guarantees qualifying under § 614.4800: 35 percent.
(vi) Seasonal loans exclusive of seasonal loans qualifying under § 614.4260(c): 35 percent.
(vii) Foreign trade receivables qualifying under § 614.4700: 50 percent.
(viii) Bankers acceptances held qualifying under § 614.4710 and seasonal loans qualifying under § 614.4260(c): 50 percent.
(ix) Export and import letters of credit qualifying under § 614.4720: 50 percent.
(x) The sum of term and seasonal loans exclusive of seasonal loans qualifying under § 614.4260(c): 35 percent.
(xi) The sum of (i) through (ix): 50 percent.
(2) Loans to an eligible borrower secured by notes of individuals or business entities which are current and carry a full recourse endorsement or unconditional guarantee by the borrower, if the bank determines the financial condition, repayment capacity, and other factors of the original maker reasonably justify the credit granted by the endorser, qualify for the basic lending limits provided in paragraph (a)(1) which may be applied for each original notemaker, provided the following listed documents fully support such a determination and are in the files of the bank:
(i) * * *
(ii) * * *
(iii) * * *
(3) Net worth for the calculation of lending limits at June 30 shall exclude 20 percent of the bank's undistributed earnings and shall not include any portion of Central Bank for Cooperatives' undistributed earnings.
(4) Loans made within the established lending limits that become excessive because of a subsequent decrease in the bank's net worth shall be reduced to the lending limits in an orderly manner over a reasonable period, in accordance with a plan submitted to the Farm Credit Administration.
(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 institution(s) other than banks for cooperatives, shall not exceed the percentages specified in paragraph (a)(1) applied to the combined net worth of 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 Administration.
(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 lending limit percentages prescribed in paragraph (a)(1) of this section 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 banks for cooperatives, shall not exceed amounts greater than the lending limit described in paragraph (b) of this section less amounts held by the district banks.
(d) * * *
(1) Determine its balance sheet net worth total as of the preceding June 30 or December 31, whichever is more recent, or at any interim date determined by the Farm Credit Administration as a result of material changes in the bank's net worth.
(2) * * *
(3) Apply the lending limit percentages outlined in paragraph (a)((1) of this section.
(4) * * *
(e) For purposes of this section, the term "one borrower" means a cooperative organization or foreign or domestic party, together with any other organization which is controlled by a common directorate or management or in which the primary organization owns more than 50 percent of the net worth or voting stock, provided that a bank for cooperatives may determine to consider such other organization as a separate borrower under certain circumstances subject to the approval of the Farm Credit Administration. Any determination to consider related organizations as separate borrowers shall be based primarily on the conclusion that one organization separately considered would be financially viable in the event of the demise of the other. Particular consideration should be given to, but not limited to, the following items:
* * * * *
PART 615 -- FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS
4. Section 615.5103 is revised to read as follows:
§ 615.5103 Debt maturity program.
The three Finance Committees directly or through their subcommittees shall develop and maintain Systemwide debt maturity guidelines based on individual bank maturity policies and requirements of the market, and shall plan and set funding priorities and objectives for each banking system and for the 37 Farm Credit banks to be provided to the Fiscal Agency. These guidelines, priorities, and objectives shall be designed to ensure that the debt marketing responsibilities of the Fiscal Agency will continue to provide flexibility for the banks and are fiscally sound. These guidelines, priorities, and objectives shall be subject to the approval of the Farm Credit Administration.
5. Section 615.5143 is added to read as follows:
§ 615.5143 Banks for cooperatives.
As may be authorized by the banks for cooperatives' boards of directors and approved by the Farm Credit Administration, ownership investment may be made in foreign business entities solely for the purpose of obtaining credit information and other services needed to facilitate transactions which may be financed under section 3.7(b) of the Farm Credit Act Amendments of 1980. Such an investment shall not exceed the level required to access credit and other services of the entity and shall not be made for earnings purposes. The business entity shall be deemed to be principally engaged in providing credit information to and performing such servicing functions for its members where such activities constitute a materially important line of business to its members. Also, investments must be made by a bank for cooperatives for its own account and not on behalf of its members. The bank for cooperatives shall use only those services provided by the business entity as necessary to facilitate transactions authorized by section 3.7(b) of the Farm Credit Act Amendments of 1980.
6. Section 615.5330 is amended by revising paragraphs (a) and (c) to read as follows:
§ 615.5330 Banks for cooperatives.
(a) For the purpose of this section, "surplus" means the net accumulation of net savings which has not been appropriated by the board of directors for a specific purpose and has not been distributed as a patronage dividend in the form of Class C stock, participation certificates, or cash. Amounts of surplus may be allocated to patrons or unallocated. Amounts of surplus not allocated shall not be distributed as patronage refunds. Each bank shall maintain in surplus an amount not less than 25 percent of all capital stock and participation certificates outstanding unless otherwise approved by the Farm Credit Administration.
(b) * * *
(c) Allowance for loan losses. Each bank shall maintain an allowance for loan losses account sufficient to fairly present the realizable value of loans and loan-related assets on the bank's balance sheet. In determining the adequacy of the allowance for loan losses account, the banks should consider, at a minimum, the estimated potential losses in loans or loan-related assets, historical loan loss experience, the specialized agricultural enterprises being financed, the current economic environment, and the current phase of the industry's business cycle.
7. Section 615.5370 is amended by revising paragraph (a) as follows:
§ 615.5370 Banks for cooperatives' earnings.
(a) Whenever at the end of any fiscal year a bank shall have no outstanding capital stock held by the Governor, the net savings shall first be applied to the restoration of the amount of the impairment, if any, of capital stock, as determined by the bank board. Any remaining net savings or losses shall be distributed as authorized by the bank board. Twenty-five percent of such remaining net savings, or such other percentage as determined by the bank board, derived from business done with or for patrons may be used to maintain an allocated surplus account. Not more than 10 percent of the net savings derived from business done with or for patrons, plus the total amount of any net earnings derived from nonpatronage (including nonmember) sources, may be used to create or maintain an unallocated surplus or unallocated reserve account. The amount so determined shall be first reduced by related income taxes. For purposes of this regulation, all net savings shall be deemed to be from patronage sources unless otherwise determined by the bank. Cash patronage refunds shall not exceed 25 percent of the total amount of net savings allocated or paid to patrons except with Farm Credit Administration approval. Patronage refunds not paid in cash or allocated in surplus shall be paid in capital stock and participation certificates as determined by the bank board. A net loss in any fiscal year shall be absorbed on the basis determined by the bank board. Any costs or expenses attributable to a prior year shall not be charged to reserves, surplus, or patronage allocations without the approval of the Farm Credit Administration.
* * * * *
(Secs. 5.9, 5.12, 5.18, Pub. L. 92-181, 85 Stat. 619,. 620, 621, 12 U.S.C. 2243, 2246 and 2252)
Kenneth J. Auberger,
[FR Doc. 81-32182 Filed 11-5-81; 8:45 am]
BILLING CODE 6705-01-M