Title: FINAL RULE--Implementation of Farm Credit Act Amendments of 1980--12 CFR Parts 611, 613, 614, 615, 616, 617, and 618
Issue Date: 03/22/1982
Agency: FCA
Federal Register Cite: 47 FR 12136
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 613, 614, 615, 616, 617, and 618

Implementation of Farm Credit Act Amendments of 1980

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit Administration, by its Federal Farm Credit Board, adopts and publishes new, amended, and revised regulations to Title 12, Code of Federal Regulations, Chapter VI. These additions, revisions and amendments are adopted primarily for the purpose of implementing the Farm Credit Act Amendments of 1980 (Pub. L. 96-592) and for clarification.

EFFECTIVE DATE: April 18, 1982.

FOR FURTHER INFORMATION CONTACT:

Larry H. Bacon, Deputy Governor, Office of Administration, Farm Credit Administration, 490 L'Enfant Plaza, S.W., Washington, DC 20578 (202-755-2181).

TEXT:
SUPPLEMENTARY INFORMATION: On November 23, 1981, the Farm Credit Administration noticed and published for public comment proposed new and amended regulations to 12 CFR Parts 611, 613, 614, 615, 616, 617, and 618 (46 FR 57308-57322). The new regulations are 611.1160 and 615.5325. The amended or revised regulations are Part 611, Subpart A, Subpart B, Subpart D, 611.1010, 611.1055, 611.1060, 611.1070, 611.1090, 611.1100, 611.1110, 611.1120; Part 613, 613.3000, 613.3020, 613.3110, 613.3020, 613.3110; Part 614, 614.4051, 614.4070, 614.4180, 614.4230, 614.4310, 614.4340, 614.4511, 614.4520; Part 615, 615.5000, 615.5010, 615.5050, 615.5101, 615.5102, 615.5135, 615.5140, 615.5141, 615.5142, 615.5260, 615.5270, 615.5320, 615.5335, 615.5360, 615.5451; Part 616, 616.6000, Subpart B, 616.6020, 616.6030, 616.6050, 616.6060, Part 617, 617.7000, 617.7020, 617.7060, 617.7080, 617.7090, Subpart B, 617.7100, 617.7110, 617.7120, Subpart C, 617.7160, Part 618, 618.8000, Subpart B, Subpart C, 618.8050, Subpart D, Subpart E, Subpart F, Subpart G, Subpart H, Subpart I, and Subpart J. Also, the following 10 regulations are being deleted or combined with another regulation: 613.3030, 613.3070, 613.3080, 613.3090, 613.3100, 613.3120, 615.5020, 615.5300, 615.5310, and 618.8240. For 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); Production Credit Association (PCA); Federal Land Bank (FLB); Federal Land Bank Association (FLBA); Bank for Cooperatives (BC); Farm Credit Act of 1971, as amended, 12 U.S.C. 2001, et seq. (Act); Farm Credit Act Amendments of 1980, Pub. L. 96-592 (1980 Amendments).

Seven parties commented on the proposed regulations -- six System banks and one trade association. The Federal Board considered each of the comments received and adopted final regulations in the course of its January 1982 meeting.

Title 12, Code of Federal Regulations, Part 611, Subpart A, is amended to reference the 1980 Amendments in the introductory section of Part 611. No comments were received on the proposal.

Subpart B of Part 611 is amended to include "producers or harvesters of aquatic products" among those individuals benefiting from services provided by the system. No substantive comments were received on the proposal.

Subpart D of Part 611 is amended to expand the definition of the System to include unincorporated service organizations and service organizations incorporated under section 4.25 of the Act.

12 CFR 611.1010 is amended for clarity and to include producers or harvesters of aquatic products among those individuals served by the System. No comments were received on the proposal.

12 CFR 611.1055 is amended to extend the requirement for the maintenance of full and complete minutes of meetings of the Governing Body, applicable under the prior regulation to Farmbank Services, to all service organizations, unincorporated and incorporated. The requirement that minutes be sent to FCA is revised to allow FCA flexibility to impose the requirement as the supervisory need arises. No comments were received on the proposal.

12 CFR 611.1060 is amended by making clarifying editorial changes. No comments were received on the proposal.

12 CFR 611.1070 is amended to extend requirements for establishing branch offices, applicable to System banks, to service organizations. No comments were received on the proposal.

12 CFR 611.1090 is amended by changing the title from "Mergers of Districts" to "District Changes" and making clarifying editorial changes. No comments were received on the proposal.

12 CFR 611.1100 is amended to make clarifying editorial changes and incorporate a reference to the 1980 Amendments. No comments were received on the proposal.

12 CFR 611.1110 is amended to make clarifying editorial changes and to incorporate a reference to the 1980 Amendments. No comments were received on the proposal.

12 CFR 611.1120 is amended by changing the format, making editorial changes to achieve greater clarity and readability, and incorporating a reference to the 1980 Amendments. No comments were received on the proposal.

A new regulation, 12 CFR 611.1160, is added which makes regulations applicable to System banks and associations applicable to service organizations created by System banks. No comments were received on the proposal.

12 CFR 613.3000 is amended to (1) reflect the expanded authority of the FLBs to make loans to producers or harvesters of aquatic products, (2) reflect the new authority of the BCs to finance certain international transactions benefiting eligible cooperatives and certain projects of parties in which eligible cooperatives have an ownership interest, and (3) delete the reference to the extension of credit by FICB to persons. No comments were received on the proposal.

12 CFR 613.3020 is revised, combining the provisions of 613.3020 and 613.3030 and incorporating a reference to the new authority granted to the FLBs by the 1980 Amendments to make loans to producers or harvesters of aquatic products. 12 CFR 613.3030 is removed. Two comments were received regarding the proposed regulation. One commentor suggested the regulation should provide that an individual who has devoted his or her career to farming and ranching and subsequently retires from active employment shall be deemed a bona fide farmer or rancher. Another commentor recommended that the definition of "bona fide farmer or rancher" be restricted to persons owning or leasing agricultural land who are or intend to become directly engaged in agricultural production. The Federal Board did not accept the first suggestion because it believes the Act was intended to serve the credit needs of agricultural enterprises, rather than the credit needs of persons who formerly engaged in agricultural enterprises. Of course, a retired farmer who retains ownership of agricultural land would continue to be eligible to borrow for agricultural purposes. The second suggestion was rejected because the Federal Board believes that the credit needs of agriculture are best served when reasonably priced credit for agricultural purposes is widely available without regard to the production arrangements for a particular parcel of land.

12 CFR 613.3110 is revised, combining the provisions of 613.3070, 613.3090, 613.3100, 613.3110, and 613.3120. The revised 613.3110 also incorporates the 1980 Amendments, which clarified that BCs may extend credit to cooperative associations which furnish aquatic business services. The revised regulation also reflects the reduction by the 1980 Amendments of the minimum percentage of voting control which must be held by farmers, ranchers, producers or harvesters of aquatic products, and eligible cooperatives, for rural electric, telephone and public utility cooperatives (from 70 to 60 percentum) and for service cooperatives and local farm supply cooperatives, in certain circumstances (from 80 to 60 percentum). "Service cooperative" has been defined in the regulation, but discretion to determine which services qualify under the definition is reserved by FCA. In addition, with FCA prior approval, the bank board may, by resolution, set voting control percentage requirements higher than statutory requirements for a particular type of cooperative. Two comments were received regarding the regulation. One commenter pointed out that the law does not require FCA prior approval of board resolutions which establish higher voting control percentages for particular types of cooperatives. The Federal Board recognizes that the statute does not expressly require such approvals but believes that the prior approval requirement is necessary and appropriate to the discharge of FCA's supervisory responsibility for the achievement of the Act's purposes. The second commentor suggested the restriction on dividends be raised from 10 to 12 percent or the limit imposed by State law. The Federal Board rejected this suggestion because it fears that a higher limit would encourage the cooperative to shift its emphasis from providing service to realizing greater stockholder returns.

12 CFR 614.4051 is amended to allow association credit reviews to be used in the bank's review process upon certain conditions. Two comments were received regarding the regulation. One commentor suggested that the requirement that the review be supervised by a bank credit officer be changed to require supervision by a bank officer with credit experience and ability. The commentor noted that review departments are separate from credit departments and, in any event, the review should be conducted by an individual having "credit skills" as distinguished from "lending authority." The other commentor suggested deleting the words "relative progress being made by individual borrowers" or otherwise limiting its application to reviews of lending by PCAs. The Federal Board concurred with the first suggestion, deleting the word "credit" as a modifier of "officer" in paragraph (a)(1). The Federal Board responded to the second comment by adding wording to 614.4051(a)(7) to indicate that information about individual borrower progress need only be obtained in the course of usual borrower contacts.

12 CFR 614.4070 is amended by deleting the requirement that farming or livestock operations which are partially within and partially outside the territory of an association be regarded as one farming or livestock unit for the purpose of determining whether the operation conducted outside the territory may be financed. The concurrence of the supervising bank(s) in whose territory(ies) the operation is conducted is still required to finance out-of-territory operations. No comments were received on the proposal.

12 CFR 614.4180 is amended to implement the authority granted FCA by the 1980 Amendments to set a higher permissible loan-to-value ratio for loans guaranteed by a governmental entity than the statutory 85-percent ratio applicable to loans not so guaranteed. The regulation adopts the 97-percent statutory ceiling for the loan-to-value ratio for Government-guaranteed loans as the permissible higher ratio for such loans. No comments were received on the proposal.

12 CFR 614.4230 is amended by adding real estate used as an integral part of eligible aquatic operations to the real estate interests which are eligible as primary security for an FLB loan. No comments were received on the proposal.

12 CFR 614.4310 is revised to permit the limitations on rates charged the borrower by non-System institutions on loans discounted or purchased by the FICB to be applied differently to fixed and variable rate loans. The limitation (no more than 4 percent higher than the FICB rate) would be applied to fixed rate loans at the time the loan is made, but to variable rate loans at all times during the life of the obligation. One commentor suggested that the absolute 4-percent limitation be eliminated and that the limitation be set by FCA periodically. The Federal Board rejected this suggestion because it believes that its statutory obligation to provide agricultural credit at reasonable rates is best met by setting an absolute limitation.

12 CFR 614.4340 is revised to reflect the 1980 expansion of authority of Farm Credit institutions to enter into agreements to share loan and other losses with other Farm Credit institutions. The prior regulation permitted loss-sharing agreements for the purpose of protecting against impairment of capital stock and participation certificates among the 12 FLBs, among the 12 FICBs, among the 12 BCs, or among all 37 Farm Credit banks. Other loss-sharing agreements were permitted only between like associations in the same district or between the association and its supervising bank. Under the revised regulation, agreements to share losses for any purpose may be entered into among the 12 FLBs, among the 12 FICBs, among the 12 BCs, among the 37 Farm Credit banks, between associations and their supervising banks and, with the approval of the supervising bank, among associations operating under the same title of the Act. No comments were received on the proposal.

12 CFR 614.4511 is revised to require FLBs to adopt, subject to FCA approval, policies governing compensation of FLBAs and to permit compensation plans consistent with such policies to be adopted by the bank board without FCA approval. The prior regulation required compensation plans to be approved by FCA. No comments were received on the proposal.

12 CFR 614.4520 is amended to extend special lending programs to producers or harvesters of aquatic products. No comments were received on the proposal.

12 CFR 615.5000 is amended to clarify the responsibilities of the various parties involved in the System's funding program and to delineate the overall approach to the procurement of funds. Two comments were received regarding 615.5000(c). One suggested the words "debt obligation" be changed to "bonds." The other commentor noted that consultation with the Treasury Department is not required by the Act and could result in an unduly cumbersome procedure for issuing discount notes. The Federal Board rejected the use of the word "bonds" as being too narrow for the purposes intended. The second comment was disregarded because consultation with the Treasury Department is required by the 1980 Amendment of section 5.10 of the Act and facilitates the orderly marketing of Farm Credit securities. Furthermore, the regulation reflects current practice, which has not proved to be unduly cumbersome. One other commentor felt the proposed regulation conflicted with the Act because the regulation limits the purpose to "loan" funds and would restrict the use of funds for other authorized purposes. The Federal Board responded to this comment by deleting "loan" as a modifier of funds.

12 CFR 615.5010 is revised to articulate more clearly the responsibilities of the Fiscal Agency and System institutions in the issuance and marketing of System securities. No comments were received on the proposal.

12 CFR 615.5020, which directs Farm Credit banks to borrow interbank or intersystem funds prior to borrowing from other institutions, is deleted because it is deemed to be unnecessary because of the added flexibility the banks have through the issuance of consolidated Systemwide bonds and notes. No comments were received on the proposal.

12 CFR 615.5050 is amended by adding the requirement that bank management certify the eligibility and adequacy of the collateral each month to the board, by redefining the method of evaluating the value of investments for collateral purposes, and by reflecting the new authority granted FLBs by the 1980 Amendments to make loans in amounts up to 97 percentum of the appraised value of the collateral when the loans are guaranteed by a governmental entity. Two commentors felt that a certified report at each regular board meeting is excessive and unnecessary. The Federal Board rejected this suggestion because it feels the banks should be encouraged to take appropriate steps to maintain collateral and that bank boards of directors should be apprised of collateral value on a regular basis. One commentor suggested changing the words "cost or market value" to "cost or par value" and another suggested changing the words to "carrying or market value." Both suggestions were rejected because "cost or market value" reflects more accurately the intent of the regulation.

12 CFR 615.5101 is amended by adding the collateral certification required by 12 CFR 615.5050(e)(3) to the topics which must be addressed in the resolution authorizing the issuance of debt obligations. No comments were received on the proposal.

12 CFR 615.5102 is amended to reflect the 1980 Amendments of the Act to allow bank presidents to delegate their authority to serve on the finance committees. One commentor recommended the deletion of the requirement that the Governor approve procedures and other organizational matters related to the finance committees and subcommittees. The Federal Board rejected the suggestion because of its belief that the Governor's approval is necessary to ensure that funding objectives are met and that the overall responsibilities for funding of the System are properly discharged.

12 CFR 615.5135 is revised to delineate the permissible purposes for which investments may be made and to emphasize that banks are not authorized to maintain large investment positions solely for the purpose of generating additional income. The amended regulation also requires the bank boards to adopt an investment policy which addresses the purpose of the investments, the portfolio objectives, the bank's liquidity needs, the portfolio size and quality, maturity guidelines, management of investment activities, and reporting and monitoring requirements. No comments were received on the proposal.

12 CFR 615.5140 is amended to expand the list of obligations eligible as investments for System institutions to include World Bank obligations denominated in dollars, prime commercial and finance paper, and repurchase agreements relating to eligible investments. One commentor suggested that limitations of commercial and finance paper investments to 15 percent of the portfolio be applied at the time of acquisition rather than during the life of the investment. The Federal Board intends that the limitation be applied at the time the investment is made. The same commentor recommended that subsection (b) be modified to allow for evaluation of face value of investments with maturities of 12 months or less. This suggestion was also rejected.

12 CFR 615.5141, which delineates permissible investments for PCAs, is amended to conform the language to the amended 12 CFR 615.5140. No comments were received on the proposal.

12 CFR 615.5142, which delineates permissible investments for FLBAs, is amended to conform the language to the amended 12 CFR 615.5140. No comments were received on the proposal.

12 CFR 615.5260 is amended to reflect the 1980 Amendments of the Act permitting the retirement or cancellation of borrowers' equity in a BC outside the normal revolving cycle at fair market value in the event of the borrower's liquidation, dissolution, or default on indebtedness to the bank. No comments were received on the proposal.

12 CFR 615.5270(b) is amended to reflect the 1980 Amendment of the Act deleting the word "fair" as a modifier of "book value" wherever it appears in the Act. The purpose of the amendment was to remove the ambiguity created by the use of the word "fair" as a modifier of "book value." No comments were received on the proposal.

12 CFR 615.5300 and 615.5310 are deleted because they merely describe procedures for retiring FICB stock and replacing lost or stolen FICB certificates, which are more appropriately a subject for bank manuals on practices and procedures. No comments were received on the proposal.

12 CFR 615.5320 is amended to delete the word "fair" as a modifier of "book value" and to permit the FICB flexibility, in circumstances approved by FCA, to retire stock acquired through patronage distributions before retiring stock acquired by purchase. No comments were received on the proposal.

12 CFR 615.5325 is added implementing the 1980 Amendments to the Act, authorizing FLBs to accept and FLBAs to make capital contributions to the FLB, subject to FCA approval. No comments were received on the proposal.

12 CFR 615.5335 is amended to require the FICBs to maintain a loan loss reserve adequate to reflect the "current value" rather than the "fair book value" of its assets. The proposed amendment of this regulation used the term "reasonable net value." "Current value" is substituted for "reasonable net value" in the final regulations because it is a more commonly understood accounting term. No comments were received on the proposal.

12 CFR 615.5360 is amended to implement the new authority granted to FLBs and FLBAs by the 1980 Amendments to pay patronage refunds to borrowers. No comments were received on the proposal.

12 CFR 615.5451 is amended to permit consolidated Systemwide notes to be issued in denominations of $500,000 and $5,000,000, as well as in denominations of $50,000, $100,000, and $1,000,000, which were permitted under the prior regulation. One commentor suggested eliminating any reference to denominations. The suggestion was rejected because the Federal Board believes the regulation an appropriate method of providing public notice of the denominations in which consolidated Systemwide notes are available.

12 CFR 616.6000 is amended by making minor editorial adjustments. No comments were received on the proposal.

12 CFR, Part 616, Subpart B, is amended by adding the words "and Technical Assistance" to the title. No comments were received on the proposal.

12 CFR 616.6020 is amended to recognize that in addition to credit, System institutions also provide financially related services and technical assistance and to clarify that district policies should address these services. Also, FLB and PCA lending to small, eligible cooperatives is added to the list of subjects which district policies are required to address. No comments were received on the proposal.

12 CFR 616.6030 is amended to clarify that the list of lending authorities and relationships which rural housing policies should address which are enumerated in the present regulation is not exclusive. No comments were received on the proposal.

12 CFR 616.6050 is amended to extend the authority of the banks for cooperatives to lend to eligible cooperatives to fund extensions of credit to their members to include extensions of credit to producers or harvesters of aquatic products. No comments were received on the proposal.

12 CFR 616.6060 is amended by adding "persons eligible for services" to borrowers, as persons eligible to utilize financially related services. The Act authorizes such services to be extended to borrowers, members, and applicants. One commentor felt the language "and other persons eligible for services" was too restrictive. The Federal Board disagrees that the term is too restrictive and understands the legislative intent of the Act to be that such services shall be extended only to borrowers and persons eligible to borrow from System institutions.

12 CFR, Part 617, is amended by changing the word "Irregularities" to "Investigations" in the title. No comments were received on the proposal.

12 CFR 617.7000 is amended to reflect that service organizations will be subject to FCA examination. No comments were received on the proposal.

12 CFR 617.7020 is amended by deleting the introductory paragraph, as unnecessary. No comments were received on the proposal.

12 CFR 617.7060 is amended to provide that any incorporated or unincorporated service organizations approved by FCA shall be examined and audited by FCA and to clarify that all bank and association activities are subject to FCA examination and audit. One commentor recommended that "other related activities" be changed to "other institutions." The Federal Board did not adopt the suggestion because all activities of Farm Credit institutions are subject to FCA examination and audit, whether or not they are institutionalized. An editorial change was made in response to the comment, however, for clarity.

12 CFR 617.7080 is amended to clarify that the regulation is applicable to examinations and audits of service organizations and to delete the requirement that the report of examination or audit of banks and service organizations be presented by the examiner at the first scheduled board meeting subsequent to receipt of the report. The amended regulation continues to require, however, that the report be reviewed with the bank's board of directors, and the requirement that association examination and audit reports be reviewed at the first scheduled association board meeting subsequent to receipt of the report is retained. The regulation is further amended to require the reports to be transmitted to the board of directors through its chairman, changing the existing practice of transmitting the report to the directors through bank management. No comments were received on the proposal.

12 CFR 617.7090 is amended to clarify that the regulation is applicable to all institutions of the Farm Credit System and their agents. No comments were received on the proposal.

12 CFR, Part 617, Subpart B, is amended by changing the word "Irregularities" to "Investigations" in the title. No comments were received on the proposal.

12 CFR 617.7100 is amended by enumerating the Federal criminal statutes most commonly involved in System investigations. A commentor's suggestion that 18 U.S.C. 658, be included was accepted.

12 CFR 617.7110 is amended to shift the responsibility for determining what further actions should be taken when a suspected violation is reported from the bank to the Chief Examiner of FCA. In addition, bank management is required to keep the bank boards informed of all irregularities. No comments were received on the proposal.

12 CFR 617.7120 is amended to require that the Chief Examiner of FCA, rather than the bank's attorney, refer cases concerning violations of Federal criminal statutes directly to the United States attorney. One commentor recommended the regulation not be changed because the bank is in a better position to know whether a criminal act has been committed. The Federal Board rejected the recommendation because it believes that past experience has demonstrated that the bank is not always in the best position to determine whether a crime has been committed and that centralizing this function will result in more effective prosecution of Federal criminal offenses.

12 CFR, Part 617, Subpart C, is amended by changing the word "Irregularities" to "Investigations" in the title. No comments were received on the proposal.

12 CFR 617.7160 is amended to require that suspected violations of Federal criminal statutes by borrowers which are reported to the United States attorney also be reported to the General Counsel of FCA. The prohibition of threats to borrowers of criminal prosecution by association or bank employees is extended to directors and is made to apply at any time. Under the former regulation, the prohibition applied only after a criminal violation appeared to have occurred. No comments were received on the proposal.

12 CFR 618.8000 is amended to include aquatic operations among the appropriate purposes for financially related services. No comments were received on the proposal.

12 CFR, Part 618, is amended by reserving Subpart B for a regulation regarding the sale of insurance to members and renumbering existing Subparts B through I accordingly. No comments were received on the proposal.

12 CFR 618.8050 is amended to include facilities needed in aquatic operations among facilities which FLBs and PCAs may own and lease. No comments were received on the proposal.

12 CFR 618.8240 is deleted because the 1980 Amendments remove the statutory restriction on the location of FCA's headquarters to the District of Columbia and permit FCA to locate its principal office in the Greater Metropolitan Washington Area. Since the regulation merely repeated the statute, it is deleted rather than modified. No comments were received on the proposal.

For the convenience of the reader, a redesignation table showing the old subparts of Part 618 and the new is shown below.

Part 618 -- General Provisions

Subpart Previous subpart

Subpart A -- Technical Assistance and Financially Related Services Same.
Subpart B -- Member Insurance New.
Subpart C -- Leasing Subpart B -- Leasing.
Subpart D -- Procedures and Guidelines Subpart C -- Procedures and Guidelines.
Subpart E -- Nomination and Election of Directors Subpart D -- Nomination and Election of Directors.
Subpart F -- Miscellaneous Provisions Subpart E -- Miscellaneous Provisions.
Subpart G -- Releasing Information Subpart F -- Releasing Information.
Subpart H -- Disposition of Obsolete Records Subpart G -- Disposition of Obsolete Records.
Subpart I -- Federal Records Subpart H -- Federal Records.
Subpart J -- Internal Controls Subpart I -- Internal Controls.

For the reasons set out in the preamble, Parts 611, 613, 614, 615, 616, 617, and 618 of Chapter VI, Title 12 of the Code of Federal Regulations are amended or revised as follows:

PART 611 -- ORGANIZATION

1. 12 CFR, Part 611, Subpart A, is revised to read as follows:

Subpart A -- Introduction

611.100 The Farm Credit Act.

The Farm Credit Act of 1971, Public Law 92-181, approved December 10, 1971, recodified and replaced the prior laws under which the Farm Credit Administration and the institutions of the Farm Credit System were organized and operated. The prior laws which were repealed and superseded by the 1971 Act are identified in section 5.26(a) of the Act. Section 5.26(b) retained the effectiveness of the existing regulations of the Farm Credit Administration and the Farm Credit System, the institutions' charters, bylaws, resolutions, stock classifications, policy, and elections until superseded, modified, or replaced under the authority of the Act. The Farm Credit Act Amendments of 1980, Public Law 96-592, amended the Farm Credit Act of 1971, effective December 24, 1981. All references to "the Act" in this subchapter shall be deemed to be references to the Farm Credit Act of 1971, as amended. All obligations and contracts under the prior laws remain enforceable unless and until modified by the Act. The purpose of these regulations is to implement the provisions of the Act. Contracts, including but not limited to notes, bonds, debentures, loans, security, and collateral, entered into by the Farm Credit Administration or any of the institutions of the Farm Credit System before the issuance of these regulations shall remain valid and enforceable upon their terms unless and until they are subsequently modified in accordance with the Act.

2. 12 CFR, Part 611, Subpart B, is revised to read as follows:

Subpart B -- Policy

611.200 Farm Credit policies.

Recognizing as national policy that a prosperous and productive agricultural economy requires a permanent financing system, Congress initially authorized prior law and continued under the 1971 Act, a System of limited-purpose, farmer-owned banks and associations designed to furnish sound, adequate, and constructive credit to farmers and ranchers and their cooperatives. The 1980 Amendments to the Farm Credit Act of 1971 expanded the classes of eligible borrowers to include producers or harvesters of aquatic products, and expanded the lending authority of System institutions to enable them to be more responsive to the credit needs of agriculture. This expanded authority accentuates the impact of the System on agricultural and aquatic economies, on the other elements of the Nation's total business community, and on the public generally. Consequently, the public interest will be protected under rules dealing with supervision, examination, audit, lending, and funding operations of the System. These regulations identify areas in which Systemwide and district policies for the guidance of management and operations of the banks and associations are necessary to assure the accomplishment of the Act's objectives.

3. 12 CFR, Part 611, Subpart D, is revised to read as follows:

Subpart D -- The Farm Credit System

611.400 System organization.

(a) The Farm Credit System includes the Federal land banks, the Federal land bank associations, the Federal intermediate credit banks, the production credit associations, the banks for cooperatives, service corporations authorized by section 4.25 of the Act and unincorporated service organizations formed pursuant to agreements authorized by section 5.6(a)(5) of the Act. Each institution is chartered by the Farm Credit Administration, an independent agency of the executive branch of the United States Government. Each of these banks, associations, and service corporations is an instrumentality of the United States, created to carry out the congressional policy and objectives of the Act. These institutions are subject to the regulation and supervision of the Farm Credit Administration. Each bank has immediate supervisory responsibility over its respective associations in its district. The banks which are stockholders of a service corporation have, through their boards of directors, immediate supervisory responsibility over the service corporation.

(b) The banks have immediate supervisory responsibility over unincorporated service organizations as owners or as participating users. Through their boards, the banks prescribe the powers, duties, authorities, and functions of such organizations. Unincorporated service organizations are under the direction of their governing bodies or similar managing bodies.

4. Section 611.1010 is revised to read as follows:

611.1010 Powers, duties, and responsibilities.

The district board, acting in that capacity or as the board of a bank, as appropriate, shall:

(a) Provide rules for its operation as a district board and as a separate board for each bank, and provide such other rules, guidelines, and policy guidance within the district as may be appropriate for the effective implementation of the Act and these regulations.

(b) Adopt bylaws for each bank and approve bylaws for associations from standard and optional bylaws approved by the Farm Credit Administration. Bylaws and amendments to bylaws proposed by a bank or association require Farm Credit Administration approval before implementation.

(c) Authorize agreements for joint services which can be most effectively performed by joint undertakings within or between districts for functions and services to borrowers and to institutions of the System. When such agreements have impact on or implications for other institutions of the System, the general protection of borrowers' equities, or the overall public interest, the proposals shall be undertaken after prior consultation with Farm Credit Administration.

(d) Employ a chief executive officer for each bank, and establish performance standards for the office. The board shall hold the officer accountable for the responsibilities delegated to him or her in administering the bank's business. The chief executive officer shall operate the bank according to policies prescribed and approved by the board, and according to the provisions of these regulations, the bylaws, and the Act.

(e) Adopt a policy to provide direction for the district and each Farm Credit entity in the district with regard to the management of human resources. Such policy shall include a statement of the board concerning recruitment and placement, employee development and training, and compensation and benefits.

(f) Provide for the supervision of the associations in the district to assure that authorized services are available to eligible persons in the most effective and efficient manner.

(g) Adopt and prescribe consistent lending and operating policies for each bank and for all associations in the district as authorized by the Act and by these regulations. Such policies shall establish that the credit and other services available to eligible persons are uniform, to the extent feasible, and are at the lowest reasonable cost consistent with sound business operations. The policies of the board shall recognize that the strength of the Farm Credit System lies substantially in its cooperative character, that each institution is an integral part of the statutory scheme for the whole System, and shall require that each institution shall consider the total credit needs of and services available to eligible borrowers.

(h) Formulate broad policy guidelines concerning the funding operations of banks in the district and in concert with other district boards, furnish long-range guidance to the System for future funding of the System.

(i) Consider recommendations made in examination and audit reports and take appropriate corrective actions, as determined by the board or as required by the Farm Credit Administration. If the district board does not concur with corrective actions required by the Farm Credit Administration, the Federal Farm Credit Board shall determine the appropriate corrective action.

(j) Provide a periodic review of the credit and related service needs of farmers, ranchers, producers or harvesters of aquatic products, and cooperatives in the district, and recommend programs or program modifications to the Federal Farm Credit Board.

5. Section 611.1055 is revised to read as follows:

611.1055 Minutes of the governing bodies of incorporated and unincorporated service organizations.

The governing bodies of incorporated and unincorporated service organizations shall keep full and accurate minutes of their meetings. Copies of the minutes shall be sent, as required, to the Farm Credit Administration.

6. Section 611.1060 is revised to read as follows:

611.1060 District organization.

The district board shall provide a means of facilitating and promoting maximum communications among the banks in the district. In addition, the district board shall provide an efficient and effective means of coordinating communications of the banks in the district with the Farm Credit Administration, with other parts of the System, with other organizations, with borrowers, and with the public. The district board shall provide for these means of communications through a committee of presidents of the three banks in the district or through some other organizational pattern. The organizational pattern should encourage and help effectuate closer relationships among the banks as a means of providing in the most efficient and effective manner the best possible service to members.

7. Section 611.1070 is revised to read as follows:

611.1070 Branches.

(a) A bank, an incorporated service corporation, or an unincorporated service organization may establish branches or other offices necessary for the effective operation of its business upon approval of its board or governing body. Such actions shall require the approval of the Farm Credit Administration.

(b) An association may establish such branches or other offices necessary for the effective service to borrowers when approved by its board and the supervisory bank.

8. Section 611.1090 is revised to read as follows:

611.1090 District changes.

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 tentative approval by the Federal Farm Credit Board before they are submitted for any required stockholder approval. Following approval by the stockholders, the proposed change shall be submitted to the Farm Credit Administration for approval by the Federal Farm Credit Board.

9. Section 611.1100 is revised to read as follows:

611.1100 Mergers or consolidations of banks.

As authorized by sections 4.10 and 5.18 of the Act, similar banks (operating under the same title of the Act) may merge or consolidate. Any of the banks proposing to merge or consolidate shall jointly submit to the Farm Credit Administration for review the proposal and justification for the proposed action and recommendations for the formulation of a board of directors for the continuing or consolidated bank. Approval of the merging or consolidating banks' stockholders shall be obtained after tentative approval by the Federal Farm Credit Board. Following approval by the stockholders, the proposed merger or consolidation shall be submitted to the Farm Credit Administration for final approval by the Federal Farm Credit Board.

10. Section 611.1110 is revised to read as follows:

611.1110 Creation of new associations.

Any application for the issuance of a charter to a new Federal land bank association shall meet the requirements of section 1.13 of the Act, and any application for the charter of a new production credit association shall meet the requirements of section 2.10 of the Act. Along with the application and recommendations required by said sections, the proposed association shall submit its proposed bylaws from the standard or optional bylaws approved by the Farm Credit Administration, or its proposed additions and modifications to approved standard bylaws provisions.

11. Section 611.1120 is revised to read as follows:

611.1120 Amendments of association charters.

(a) The Governor shall have the power to direct at any time changes in an association's charter that are necessary to accomplish the purposes of the Act.

(b) Subject to the approval of the bank board and the Farm Credit Administration, an association charter may be amended. Proposals for amendment may include, among others, mergers or consolidations, transfers of territories, and changes in association headquarters and title. Proposals for any charter amendments shall be submitted by the bank to the Farm Credit Administration. The proposal shall be accompanied by the following:

(1) A certified copy of the association's board of directors' resolution approving the proposed change.

(2) A certified statement from the bank's board of directors approving the proposed change.

(3) Any additional information that would be helpful to the Farm Credit Administration in acting upon the proposed change.

(c) Proposals for mergers or consolidations are subject to the following procedures. The boards of directors of two or more similar associations may propose to merge or consolidate associations. The resolutions proposing such agreement shall be submitted to the supervising bank board for approval, together with an agreement setting forth the terms and conditions of the merger or consolidation.

(1) The agreement for merger or consolidation shall include:

(i) The proposed effective date.

(ii) The proposed name and location of the continuing or consolidated association.

(iii) The proposed charter and bylaws of the continuing or consolidated association.

(iv) The names of persons nominated to serve as directors until the first annual meeting after the merger or consolidation. In a merger, present directors of the merging associations may serve as directors of the continuing association until the expiration of their terms. However, the directors must be serving current terms of office that will expire on a staggered basis to assure that an election of director(s) occurs at the first and subsequent annual stockholders' meetings following the merger. In such cases, the number of directors cannot exceed the maximum number of directors designated in the continuing association's bylaws.

(v) The authority for transferring assets to and for assuming liabilities by the continuing or consolidated association.

(vi) The provision relating to the stock of the constituent associations and the stock of the continuing or consolidated association. No fractional shares of stock shall be issued.
(vii) The granting of authority to persons designated to carry out the terms of the agreement, including the authority to execute any documents necessary to perfect title.

(2) Approval of a merger or a consolidation follows two steps:

(i) If the bank board approves the proposed merger or consolidation, the bank shall certify and shall transmit the tentative agreement to the Farm Credit Administration for review and for tentative approval. When the bank obtains the tentative approval of the Farm Credit Administration, the proposed merger or consolidation shall be submitted to the stockholders of the merging or consolidating associations for approval. Approval shall require a majority of the voting stockholders present and the written proxies (of voting stockholders) which are presented at a duly held stockholders' meeting of each constituent association. Voting may be by proxy, duly authorized in writing. The bank shall prescribe the form of proxy which shall be furnished or made available to each stockholder eligible to vote.

(ii) If the associations' stockholders approve the proposed merger or consolidation, the bank shall forward to the Farm Credit Administration a copy of the stockholders' resolution and a certified statement from each constituent association. The statement shall certify that the quorum, including proxies, was present at the stockholders' meeting and that a majority of the members voting, including proxies, approved the proposed merger or consolidation. If the Farm Credit Administration approves the proposed merger or consolidation, it shall amend the charter of the continuing association or issue a new charter to the consolidated association. Thereafter, the designated directors of the continuing or consolidated association may take actions necessary to transact the association's business, subject to ratification by the directors at the first meeting after the effective date of the merger or consolidation. The execution of the agreement and the merger or consolidation in its entirety shall be under the direction of the bank. Bylaws of the continuing or consolidated association shall be submitted to the Farm Credit Administration for approval when appropriate.

(d) Territorial adjustments are subject to the following requirements:

(1) All stockholders and all borrowers whose operations are located in adjusted territories shall be informed in writing of the territory adjustment. Also, they shall be notified of the transfer of their loans and the 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 which will not affect adversely the interests of the owner. Upon written request, each stockholder shall be informed of the availability of the association's latest financial and related information for review by the stockholder.

(2) The Agreement of Transfer of Territory and the notice of territory transfer shall provide 60 days from the date of the notice for stockholders to notify either association in writing of their decision to decline acceptance of the equities of the transferee association and to remain 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 for those applications permitted under 614.4070.

12. Part 611 is amended by adding 611.1160 to read as follows:

611.1160 Incorporated and unincorporated service organizations.

Incorporated and unincorporated service organizations shall be subject to regulations for the banks and associations of the Farm Credit System.

PART 613 -- ELIGIBILITY AND SCOPE OF FINANCING

1. Section 613.3000 is revised to read as follows:

613.3000 Authority.

Sections 1.8, 2.3, and 2.15 of the Act authorize the Federal land banks and production credit associations to make loans to bona fide farmers, ranchers, producers or harvesters of aquatic products, rural residents, and persons furnishing services directly related to the onfarm operating needs of farmers and ranchers. Similarly, sections 3.7 and 3.8 of the Act authorize banks for cooperatives to make loans to eligible cooperatives and loans to domestic or foreign parties that substantially benefit a cooperative which is a voting stockholder.

2. Section 613.3020 is revised to read as follows:

613.3020 Farmers and ranchers and producers or harvesters of aquatic products.

(a) Definitions:

(1) A bona fide farmer or rancher is a person owning agricultural land, or engaged in the production of agricultural products, including aquatic products under controlled conditions.

(2) A producer or harvester of aquatic products is a person engaged in producing or harvesting aquatic products for economic gain in open waters under uncontrolled conditions.

(b) Eligibility:

(1) To be eligible to borrow, an individual's qualification as a bona fide farmer, rancher, or producer or harvester of aquatic products shall be established as a part of the application for credit.

(2) A legal entity shall meet the same requirements in either paragraph (a) (1) or (2) above and at least one of the following qualifications to be eligible to borrow:

(i) More than 50 percent of the value or number of shares of its outstanding voting stock or equity is owned by the individuals conducting the farming, livestock, or aquatic operation.

(ii) More than 50 percent of the value of its assets consists of assets related to the production of agricultural products or production or harvest of aquatic products.

(iii) More than 50 percent of its income originates from its production of agricultural products or production or harvest of aquatic products.

(c) In addition, any loan to a legal entity in which at least 50 percent of the ownership or control is vested directly or indirectly in another legal entity that does not meet at least one of the preceding three requirements shall be subject to prior approval of the appropriate bank and submitted to the Farm Credit Administration for post-review. The applicant must also demonstrate that such owned or controlled legal entity can operate as a counterpart to the normal farm or aquatic business eligible to borrow, without jeopardy to such normal farm or aquatic business or the general agricultural or aquatic economy. Submissions shall fully document the ownership structure, the business affiliations of those owning or controlling the applicant, and the compatibility of the applicant's farming or aquatic business to normal farm or aquatic business operating in the area or to the general agricultural or aquatic economy.

(d) A legal entity engaged in agriculture or production or harvesting of aquatic products for the primary purpose of conducting its operation at a loss to absorb taxable income from nonagricultural or nonaquatic sources shall not be eligible. The legal entity shall demonstrate compliance with this subsection.

613.3030 [Removed]

3. Part 613, Subpart B, is amended by removing 613.3030.

613.3070, 613.3080, 613.3090 and 613.3100 [Removed]

4. Part 613, Subpart D, is amended by removing 613.3070, 613.3080, 613.3090, and 613.3100.

5. Section 613.3110 is revised to read as follows:

613.3110 Cooperative eligibility.

(a) Definitions. For the purpose of this part --

(1) "Cooperative" means any association of farmers, ranchers, producers or harvesters of aquatic products, or any federation of such associations, or a combination of such associations and farmers, ranchers, or producers or harvesters of aquatic products, which is operated on a cooperative basis; is engaged in processing, preparing for market, handling, or marketing farm or aquatic products; or purchasing, testing, grading, processing, distributing, or furnishing farm or aquatic supplies; or furnishes farm or aquatic business or other services to eligible farmers, ranchers, producers or harvesters of aquatic products, or eligible cooperatives.

(2) "Cooperative basis" means the conduct of business for the mutual benefit of the members as patrons.

(3) "Farm or aquatic supplies and farm or aquatic business services" are any goods, business, or services normally used by farmers, ranchers, or producers or harvesters of aquatic products which contribute to their business operations or are in furtherance of the welfare or security of the livelihood of such persons.

(4) "Service cooperative" is a cooperative predominantly involved in providing a specialized business service related to the agricultural or aquatic business operations of farmers, ranchers, or producers or harvesters of aquatic products, or cooperatives as approved by the Farm Credit Administration.

(b) Eligibility. To be eligible to borrow from a bank for cooperatives, a cooperative shall meet the following requirements:

(1) The percentage of voting control of the cooperative held by farmers, ranchers, producers or harvesters of aquatic products, or cooperatives eligible to borrow from a bank for cooperatives shall be at least 80 percent except:

(i) 60 percent in the case of rural electric, telephone, public utility, and service cooperatives;

(ii) 60 percent in the case of local farm supply cooperatives which have historically served needs of the community that would not adequately be served by other suppliers and have experienced a reduction in the percentage of farmer membership due to circumstances beyond their control such as, but not limited to, urbanization of the community;

(iii) 60 percent in the case of local farm supply cooperatives which provide or will provide needed services to a community and which are or will be in competition with a cooperative specified in Section 3110(b)(1)(ii).

(2) Requirements for a higher percentage of voting control by farmers, ranchers, producers or harvesters of aquatic products, or eligible cooperatives may be established by resolution of the bank board with respect to any type of cooperative. Such higher voting control percentage requirements shall be applied uniformly and consistently to any type of cooperative so designated in the bank board resolution. Such resolutions shall be subject to the prior approval of the Farm Credit Administration.

Bank board policies shall ensure that bank procedures require good faith representations on the part of borrowers in applications for loans and in loan covenants to affirm that the minimum farmer, rancher, and aquatic producer or harvester voting control percentage requirements established by the Act are met. The procedures shall require documentation in bank loan files of the basis on which such representations are made and accepted in the case of those cooperatives whose records do not establish the percentage of voting control held by agricultural or aquatic producers. Board policies concerning cooperative voting control shall be subject to Farm Credit Administration approval.

(3) The cooperative deals in farm or aquatic products or products therefrom, farm or aquatic supplies, or farm or aquatic business services with or for members in an amount at least equal in value to the total amount of such business transacted by it with or for nonmembers, excluding from the total of member and nonmember business transactions with the United States or any agencies or instrumentalities thereof or services or supplies furnished as a public utility.

(4) No member of the cooperative has more than one vote because of the amount of stock or membership capital owned therein; or, the cooperative must restrict dividends on stock or membership capital to 10 percent per year or the maximum percentage per year permitted by the applicable State statutes, whichever is less.

(5) A cooperative which is not eligible under the foregoing requirements but which was otherwise eligible and was a borrower on May 17, 1972, will continue to be eligible for further borrowing provided it does not materially change its entity structure or ownership and control and continues to meet the eligibility standards under which it was qualified to borrow on May 17, 1972.

(c) Scope of financing. A bank for cooperatives may make loans to meet any credit need which will enable a cooperative to perform those functions or powers prescribed in 613.3110(a) which will benefit its members. A bank may also make loans to a cooperative otherwise eligible to borrow for purposes not directly related to such primary functions or powers, so long as a finding is made that the amount to be lent is reasonably modest in relation to the total credit provided and such business purpose(s) will enhance the well-being of the members and patrons.

613.3120 [Removed]

6. Part 613, Subpart D, is amended by removing 613.3120.

PART 614 -- LOAN POLICIES AND OPERATIONS

1. Section 614.4051 is revised to read as follows:

614.4051 Federal land bank and Federal intermediate credit bank credit review.

(a) It shall be the duty of each supervising bank to review adequately and evaluate annually the credit quality of loans and related loan assets and the quality of credit administration in each Federal land bank association and each production credit association. Each bank board shall adopt policies prescribing credit review criteria and providing for the issuance of a report to the association board. The adequacy and reliability of bank reviews and the completeness of reporting shall be major considerations by Farm Credit Administration examiners in determining the scope of their audit and examination of associations and banks. Bank policies shall be subject to approval by the Farm Credit Administration. The policies shall include at least the following:

(1) Evaluating and reporting shall at all times be under the supervision of a bank officer, properly trained and with proven capability in analyzing loans, credit administration, and personnel performance.

(2) A credit review program shall be prepared annually which will designate the scope of review to be made in each association. The extent of review may range from a minimum sampling in strong associations to a full review in weaker associations. All associations shall be subject to a comprehensive review at intervals of no more than 3 years.

(i) Scope of review -- production credit associations. A comprehensive scope of review shall include a review of loans, acquired property, sales contracts, liquidating assets, the total area of credit administration, and the report from the association board at year-end of the number and amount of losses estimated in its loan portfolio. The basis for a decision to exclude any of these areas from a minimum review should be documented in the review report.

(ii) Scope of review -- Federal land bank associations. A comprehensive scope of review shall include new loans made, partial release and subordination functions, forbearance cases, overall loan servicing, the total area of credit administration, including appraisal accuracy, and the report from the association board at year-end of the number and amount of losses estimated in its loan portfolio. The basis for a decision to exclude any of these areas from a minimum review should be documented in the review report.

(3) An annual written report shall be prepared on each Federal land bank association and production credit association detailing:

(i) The quality of credit,

(ii) The quality of credit administration, and

(iii) An evaluation of management (unless prepared by other bank departments) and compliance with law, regulations, and association and bank policies.

(4) Loans shall be classified in accordance with the following Systemwide loan classification standards:

(i) Acceptable loans. Loans of highest quality, ranging down to and including those having significant credit weaknesses.

(ii) Problem loans. Loans having serious credit weaknesses requiring more than normal supervision but believed to be collectible in full.

(iii) Vulnerable loans. High risk loans still considered collectible but involving probability of loss in the event repayment from available sources does not materialize.

(iv) Loss loans. Loans on which all or any portion is deemed uncollectible.

(5) Statistical reporting shall comply with minimum uniformity requirements prescribed by the Farm Credit Administration.

(6) Association internal credit reviews may be used as a part of the bank's review program provided:

(i) Authority and direction is provided in the bank board policy and the program is approved by FCA.

(ii) The bank provides the necessary training, supervision, and testing of the association review process.

(7) Credit procedures will be issued to bank personnel to facilitate the making of credit reviews and the issuance of reports. Where the bank and/or association have adopted special lending programs (i.e., specialized enterprise financing, young farmer programs, etc.), bank procedures will provide that such loans be classified in accordance with standards prescribed in paragraph (a)(4) of this section but that the reports also contain a specific and separate analysis of each special lending program. Such analysis should cover the reasons for the program, the characteristics of borrowers including, the quality of service and control exercised over the loan, relative progress being made by individual borrowers as indicated by information obtained in connection with usual loanmaking and servicing actions, and the success or failure in meeting the objectives of the program.

(b) Each Federal intermediate credit bank policy shall provide for a credit review of other financing institutions borrowing, or discounting, or selling paper. The bank's credit review program shall prescribe a scope of review for such institutions commensurate with (1) the capability and responsibility of the institution, and (2) the ratio of peak debt to capital and collateral pledged. Frequency of review and loan classification and reporting standards will be generally the same as for production credit associations, recognizing that supervisory responsibility is not a factor.

2. Section 614.4070 is revised to read as follows:

614.4070 Loans outside the established territory -- Federal land banks, Federal land bank associations, and production credit associations.

(a) A loan to finance eligible borrower operations conducted wholly within the territory of a bank or an association may be made by the bank or association in whose territory the operations are conducted regardless of the residence of the applicant.

(b) A loan to finance eligible borrower operations which are conducted partially within and partially without the territory of an association or bank may be made if concurrence is obtained from all like supervisory banks responsible for territories in which the operations are conducted.

(c) A loan to finance eligible borrower operations conducted wholly outside the chartered territory of an association or bank may be made, provided such loans are authorized under policies established by the bank board and approved by the Farm Credit Administration. If a loan is made to an eligible borrower whose operation is conducted wholly outside the chartered territory of the lending association or bank, concurrence of like associations and the supervising bank(s) in whose territory(ies) the operation is conducted shall be obtained.

3. Section 614.4180 is amended by revising paragraph (b) to read as follows:

614.4180 Federal land banks.

* * * * *

(b) The outstanding loan balance on any loan shall not at any time during the life of the loan exceed 85 percent (97 percent if guaranteed by a Federal, State, or other governmental agency) of the appraised value established by the most recent appraisal report on the primary real estate security. This shall not however, prohibit advancing taxes, advancing insurance premiums with respect to the real estate, capitalizing past due interest, rescheduling loan payments, or granting partial releases of security interests in the real estate when, (1) if there is adequate collateral to support the total amount of the outstanding debt, such action will increase the ability of the debtor to repay the debt, or (2) if there is not adequate collateral to support the debt, the actions are considered necessary to protect the financial interest of the bank in the collateral.

* * * * *

4. Section 614.4230 is amended by revising paragraphs (a) and (c) 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 within 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 under 616.6020 of these regulations.

5. Section 614.4310 is revised to read as follows:

614.4310 Interest rate limitations for Federal intermediate credit banks.

(a) Federal intermediate credit banks may not purchase, discount, or accept as collateral for loans, notes or other obligations on which the original borrower has been charged an interest rate which exceeds by more than 4 percent per annum the lending rate of the Federal intermediate credit bank. Payment of interest on other than a simple interest rate basis (add-on, interest after maturity, etc.) may be accepted provided the effective simple interest rate to the borrowers does not exceed the 4-percent spread limitation.

(b) For fixed rate loans, the FICB interest rate in effect on the date the loan is closed shall be used to determine whether the limitation in paragraph (a) of this section is exceeded.

(c) For loans on which the interest rates vary, the current rate charged the borrower shall not at any time exceed by more than 4 percent per annum the current Federal intermediate credit bank rate.

(d) Interest rates charged borrowers by commercial banks on PCA-commercial bank participation loans shall not exceed by more than 6 percent per annum the lending rate of the Federal intermediate credit bank.

6. Section 614.4340 is revised to read as follows:

614.4340 General.

(a) With approval of the boards of directors of the respective Farm Credit System institutions, Farm Credit banks and associations may enter into agreements to share loan and other losses as provided in paragraph (b) of this section. The loss-sharing agreements shall cover, but not be limited to, definition of terms, terms and conditions for activation, determination of assessment formulas, limitation on assessments, reimbursements, administration, arbitration, and provisions for amendment and termination. All loss-sharing agreements shall be subject to Farm Credit Administration approval.

(b) Loss-sharing agreements to protect against the impairment of capital stock and participation certificates and for any other purpose may be entered into by:

(1) The 12 Federal land banks;

(2) The 12 Federal intermediate credit banks;

(3) The 12 district banks for cooperatives;

(4) The 37 Farm Credit banks;

(5) Federal land bank and district Federal land bank associations;

(6) District Federal land bank associations with the approval of the supervisory bank;

(7) Federal intermediate credit bank and district production credit associations; and

(8) District production credit associations with the approval of the supervisory bank.

7. Section 614.4511 is revised to read as follows:

614.4511 Federal land bank association compensation.

Bank financial policies on Federal land bank association compensation are subject to the approval of the bank board and the Farm Credit Administration. Compensation may be paid to associations in an amount which reflects the value of the services being rendered for the bank and other financial policies and objectives. Compensation plans and changes thereto shall be approved by the bank board.

8. Section 614.4520 is revised to read as follows:

614.4520 General.

(a) To provide the best possible credit service to farmers, ranchers, and producers or harvesters of aquatic products, a district board may adopt policies permitting banks and associations to enter into agreements (subject to approval by the bank) with agents, dealers, cooperatives, other lenders, and individuals to facilitate the making of loans to eligible farmers, ranchers, and producers or harvesters of aquatic products.

(b) Federal land banks. A bank, or an association with bank approval, may enter into an agreement (which will accrue to the benefit of the borrower and lender) with third parties to perform functions in loanmaking or servicing other than the evaluation and approval of loans. When such an agreement is developed, and the territory covered by the agreement extends outside the territorial limits of the originating association or bank, the written consent of all affected banks or associations is required. Reasonable compensation may be paid for services rendered.

(c) Production credit associations may enter into agreements with private dealers or cooperatives permitting them to take applications for loans from the association to purchase farm or aquatic equipment, supplies, and machinery. Such agreements shall normally be limited to persons or businesses selling to farmers, ranchers, or producers or harvesters of aquatic products and shall contain credit limits consistent with sound credit standards. When the sales territory of a dealer or cooperative extends outside the territory of the originating association or the Farm Credit district, written consent of each bank and association affected shall be obtained before making such loans. Reasonable compensation may be paid or charged to a dealer or cooperative for services rendered in connection with such programs.

(d) Subject to the approval of the respective bank's board of directors, Federal land banks, Federal intermediate credit banks, banks for cooperatives, and production credit associations may enter into memoranda of understanding among themselves or with other lenders for the simultaneous processing and closing of loans to a mutual borrower. The basic policies and principles of each System lender shall apply.

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

1. Section 615.5000 is revised to read as follows:

615.5000 General Responsibilities.

(a) System -- Primary responsibility for the procurement of funds rests with the System acting through its finance committees or subcommittees. These finance committees or subcommittees shall determine the amount, maturities, rates of interest, and participation by the banks in each issue of joint, consolidated, or Systemwide obligations.

(b) Farm Credit Administration -- The Farm Credit System has significant impact upon the investment community, the general public, and the national economy in both the volume and the manner by which funds are raised. The Farm Credit Administration holds a significant responsibility to supervise the collateral integrity of the debt obligations issued, to ensure ready accessibility to the money and capital markets, to preserve the stature and respect for the System's securities in the market-place, and to maintain appropriate liaison with the U.S. Treasury Department and the financial community in general. Whenever each bank of the Farm Credit System obtains funds from the sale of obligations, the amount, maturities, rates of interest, and participation of each bank in each issue shall be subject to the approval of and the obligations shall be executed by the Governor of the Farm Credit Administration. In the exercise of responsibility to supervise the funding of the Farm Credit System, the Governor, or a designated representative at the Governor's discretion, shall be present whenever the terms and conditions of publicly issued obligations are determined.

(c) The Treasury Department -- The Farm Credit Administration shall keep the U.S. Treasury Department informed of all public financing plans and actions by the institutions under its supervision and shall consult with the Secretary of the Treasury or his representative prior to taking any action relative to the amounts, maturities, rates of interest, and such terms and conditions of a sale of debt obligations.

2. Section 615.5010 is revised to read as follows:

615.5010 Fiscal Agency.

(a) The Fiscal Agency of the Farm Credit banks is authorized to market System obligations and to assist the banks in the handling and investment of bank flows of funds and investment portfolios at the request of the banks, and shall maintain accurate and timely records. The banks shall provide for the sale of obligations through the Fiscal Agency by negotiation, offer, bid, syndicate sale, and for the delivery of such obligations by book entry, wire transfer, or such other means as may be appropriate. The Fiscal Agency shall conduct the funding for the banks at the direction of the appropriate finance committees under broad policy direction of the district boards acting in concert. By resolutions of agreement adopted by the boards of each of the banks, appropriate committees may be established for the instruction and direction of the Fiscal Agency.

(b) The interaction of the Farm Credit System with the financial community shall be conducted principally through the Fiscal Agency. In order to aid in the process of ensuring continued and independent access to the national and international money and capital markets, to provide for an adequate and reliable supply of credit to meet the objectives of the Act, and to assure cooperation and coordination among the institutions of the System, the Fiscal Agency shall be subject to supervision and examination by the Farm Credit Administration.

615.5020 [Removed]

3. Part 615, Subpart A, is amended by removing 615.5020.

4. Section 615.5050 is amended by revising paragraphs (a), (b), (d), (e)(3), (e)(4) and by removing paragraph (e)(5).

615.5050 Policy.

(a) Each bank shall have on hand at the time of issuance of any long-term notes, bonds, debentures, or similar obligations, and at all times thereafter maintain, free from any lien or other pledge, assets consisting of notes and other obligations representing loans made under the authority of the Act, notes of Federal land banks, Federal intermediate credit banks, and banks for cooperatives representing secured interbank or intersystem loans, readily marketable securities approved by the Farm Credit Administration or cash, in an aggregate value equal to the amount of long-term notes, bonds, debentures, or similar obligations outstanding for which the bank is primarily liable.

(b) The collateral value of eligible investments shall be the lower of cost or market value.

* * * * *

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

(e) * * *

(3) A certified report by a bank officer at each regular meeting of the board of directors. The report should certify to the eligibility and the adequacy of collateral. Items to be reported will include but not be limited to the total amount of eligible collateral, amount of ineligible loans, amount of deductions, and the amount of excess collateral.

(4) Written procedures and practices to ensure that there will be a high degree of accuracy in protecting and accounting for the collateral.

6. Section 615.5101 is revised to read as follows:

615.5101 Resolution required.

Each bank's board of directors shall by resolution authorize the issuance of notes, bonds, debentures, and similar obligations in such amounts as may be required to meet the bank's needs. Such resolution shall specify the maximum amount of obligations which shall be outstanding at any one time, and shall authorize the president of the bank, the executive committee or appropriate officers to do all things necessary and proper to issue such obligations. Each such resolution shall cover all authorities to issue or borrow as stated in sections 4.2 and 4.3(b) of the Act and Regulations 615.5050 (e)(3).

7. Section 615.5102 is revised to read as follows:

615.5102 Finance Committee.

Each finance committee for the banks organized and operating under the respective titles of the Act composed of the president of each such bank or the president's designee may appoint appropriate subcommittees and shall establish its organization, responsibilities, and procedures relating to its operations and those of its subcommittees, subject to the approval of the Governor. The subcommittees or representatives of the finance committees shall establish, subject to the approval of the Governor, their organization, responsibilities, and procedures to cover their operations and those of their subcommittees for the issuance of Systemwide obligations.

8. Section 615.5135 is revised to read as follows:

615.5135 Investment policy.

(a) Banks are authorized to hold investment portfolios for the purposes of maintaining sufficient liquidity, investing short-term surplus funds, and managing short-term debt. The bank are not authorized to maintain investment portfolios primarily as a means of generating additional income.

(b) Each bank's board of directors shall adopt a policy, subject to the approval of the Farm Credit Administration, regarding the management of its investments. Within this policy, the following items shall be addressed:

(1) The purpose of the bank's investments.

(2) The portfolio objectives.

(3) The bank's liquidity needs.

(4) The portfolio size and quality.

(5) Maturity guidelines.

(6) Authorization to manage investment activities.

(7) Reporting and monitoring requirements.

Additional areas may be addressed in the policy as deemed appropriate by each bank.

9. Section 615.5140 is revised to read as follows:

615.5140 Eligible investments.

(a) The approved list of eligible investments for the Farm Credit banks shall include the following securities:

(1) Consolidated and Systemwide obligations of the Farm Credit banks.

(2) Direct and full faith obligations of the United States Government.

(3) Fully guaranteed obligations of the United States Government.

(4) Federal Home Loan Bank bonds and notes.

(5) Federal Home Loan Mortgage Corporation obligations.

(6) Federal National Mortgage Association notes, debentures, and participation certificates.

(7) Tennessee Valley Authority obligations.

(8) International Bank for Reconstruction and Development obligations denominated in dollars (World Bank).

(9) Bankers acceptances.

(10) Negotiable certificates of deposit.

(11) Prime Commercial Paper (Rates P[1] or A[1] limited to 15 percent of total portfolio).
(12) Prime Finance Paper (Rates P[1] or A[1] are limited to 15 percent of total portfolio).

(13) Repurchase agreements of eligible investments.

(14) Full faith and credit obligations of a State, municipality, political subdivision, or public agency or instrumentality thereof, when approved by the bank on a case-by-case basis provided:

(i) The obligations are rated A or better (or the equivalent) by a recognized rating service.

(ii) The obligations mature within approximately 10 years.

(iii) The obligations are readily marketable.

(15) Other types of investments authorized by the Farm Credit Administration.

(b) The collateral value of eligible investments supporting System obligations shall be the lower of cost or market value.

10. Section 615.5141 is revised to read as follows:

615.5141 Production credit associations.

Production credit associations shall invest in obligations eligible as investments under 615.5140, as authorized by the supervising bank.

11. Section 615.5142 is revised to read as follows:

615.5142 Federal land bank associations.

A Federal land bank association shall invest its excess cash in unsecured obligations of its supervising bank or in obligations eligible as investments under 615.5140 as authorized by the supervising bank.

12. Section 615.5260 is amended by substituting "fair market value" for "book value" in paragraphs (a) and (b) to read as follows:

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

(a) In case of liquidation or dissolution of a present or former borrower, the bank may, but shall not be required to, retire and cancel at the fair market value, not exceeding par, all or part of the capital stock or any allocated equity in the bank owned by or allocated to such borrower. Before any such retirement shall be made, the banks shall have reasonable assurance that the liquidation or dissolution is or soon will be completed and the business of the borrower is not being continued under circumstances in which it would be appropriate and feasible for any successor to acquire and hold the investment interest of the present or former borrowers in the bank. Retirements under this provision shall be authorized in accordance with bank board policy.

(b) Where the debt of a borrower to the bank is in default, the bank may, but shall not be required to, retire and cancel all or part of any stock or allocated equities of the bank on which the bank has a lien as collateral for the debt, at the fair market value thereof, not exceeding par value, in total or partial liquidation of the debt, under any of the following conditions:

* * * * *

13. Section 615.5270 is amended by deleting the word "fair" as a modifier of book value in paragraph (b).

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

* * * * *

(b) When making such allotments, the bank may transfer, retire, or reissue outstanding class B stock among the associations as may be necessary to establish the proportion indicated in the preceding paragraph. Stock that is retired or transferred for this purpose shall first be the stock purchased by the associations to the extent it is available, unless otherwise approved by the Farm Credit Administration. The bank shall pay the associations for all stock so retired or transferred and shall collect therefore from any association to which such stock is transferred or reissued, at the book value thereof not to exceed par.

615.5300 and 615.5310 [Removed].

14. Part 615, Subpart J, is amended by removing 615.5300 and 615.5310.

15. Section 615.5320 is amended by deleting the word "fair" as a modifier of book value in paragraphs (a), (b)(1), (b)(2), and (b)(3).

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

(a) When there is no stock held by the Governor, the bank may retire class B stock at par, participation certificates at face amount, and allocated legal reserve at book value without preference to all holders thereof and in such manner that the oldest outstanding stock, participation certificates, or allocated legal reserve will be retired first, provided that after such retirements, the net worth structure of the bank meets the minimum requirements approved by the Farm Credit Administration.

(b) * * *

(1) Class B stock, participation certificates, and allocated legal reserve may be retired at book value thereof, not exceeding par or face amount as the case may be, in the event of an equalization of the ownership by production credit associations of capital stock, participation certificates, and allocated legal reserve of the bank, whether in connection with an assessment for capital stock or otherwise, provided that when an association surrenders stock, participation certificates, or allocated legal reserve, it shall first, unless otherwise approved by the Farm Credit Administration, surrender that which was acquired by purchase to the extent available and thereafter, surrender that acquired by patronage distributions from the bank;

(2) When authorized by the bank board, class B stock, participation certificates, and allocated legal reserve may be retired at the book value thereof, not exceeding par value or face amount as the case may be:

* * * * *

(3) The bank board may authorize the retirement of unimpaired participation certificates at face amount and allocated legal reserve at book value owned by another institution as follows:

* * * * *

16. Part 615, Subpart J, is amended by adding 615.5325 to read as follows:

615.5325 Contributions of capital.

Subject to the approval of the Farm Credit Administration, Federal land banks may accept contributions of capital and Federal land bank associations may contribute capital to the Federal land bank under circumstances including, but not limited to provisions of district capital preservation, loss-sharing, or recapitalization programs.

17. Section 615.5335 is amended by revising paragraph (a) to read as follows:

615.5335 Federal intermediate credit bank system provision for losses on loans.

(a) Each bank shall evaluate its loans and discounts, accrued interest on loans, and other loan assets at the close of each fiscal year and establish and maintain a provision for losses adequate to reflect the current value of such assets.

18. Section 615.5360 is revised to read as follows:

615.5360 Federal land bank association earnings.

Any Federal land bank association, with approval of its supervising bank, may pay patronage refunds out of the whole or part of net earnings which remain after (a) the restoration of the amount of any impairment of capital stock, and (b) the maintenance of a reserve account as provided in section 1.18(a) of the Act. Patronage refunds shall be paid on the proportionate basis approved by its supervising bank and may be distributed in the form of stock, allocated equities or cash or any combination thereof with the approval of its supervising bank.

19. Section 615.5451 is revised to read as follows:

615.5451 Consolidated systemwide notes.

The 12 Federal land banks, the 12 Federal intermediate credit banks, and the 13 banks for cooperatives issue consolidated systemwide notes only in bearer definitive form in denominations of $50,000, $100,000, $500,000, $1,000,000, and $5,000,000.

PART 616 -- COORDINATION

1. Section 616.6000 is revised to read as follows:

616.6000 Responsibility.

Each district board shall be responsible for assuring that each bank, association, and service organization in its district carries on its functions in the most efficient manner to the end that eligible farmers, ranchers, producers or harvesters of aquatic products, rural residents, farm-related businesses and cooperatives have access to complete, convenient, and high quality credit and financially related services at reasonable cost. The broad lending and service activity authority of the banks and associations under the Act may involve overlapping of services among the units of the System in the absence of appropriate coordination. Thus, the interests of those using the System are best served when the activities are coordinated closely.

2. The title of Subpart B of Part 616 is revised to read as follows:

Subpart B -- Credit, Financially Related Services, and Technical Assistance

3. Section 616.6020 is revised to read as follows:

616.6020 Overall policy.

District policies should minimize the possibility of injurious competition among institutions of the System and maximize coordination among them in providing credit services and other financially related services and technical services programs. Such policies shall recognize that the Federal land banks are long-term real estate mortgage lenders, the production credit associations and the Federal intermediate credit banks make short- and intermediate-term loans, and the banks for cooperatives provide a specialized credit service to cooperatives. The absence of coordination among institutions will inevitably work to the detriment of those using the services of other institutions of the System. District policies shall address such subjects as collateral to be taken by each type lender, Federal land bank open-end advance and readvance mortgage plans, limitation on the use of balloon-payment provisions in loans by all banks and associations, simultaneous or joint lending to borrowers, Federal land bank and production credit association lending to small, eligible cooperatives, joint or adjacent housing for associations whenever possible, and shared technical assistance, record information, and counsel on specific loan cases.

4. Section 616.6030 is amended by revising the introductory paragraph to read as follows:

616.6030 Rural home lending

Coordination policies relative to rural home lending shall define the appropriate lending authorities and relationships including the following:

* * * * *

5. Section 616.6050 is revised to read as follows:

616.6050 Loans to cooperatives for the purpose of directly financing the operating needs of their members.

Policies of district boards should be designed to encourage farmers, ranchers, and producers or harvesters of aquatic products to obtain needed financing directly from their appropriate associations. These policies should recognize that the interests of farmers, ranchers and aquatic borrowers may at times best be served by obtaining financing from an eligible cooperative which may in turn borrow from a bank for cooperatives to fund such extensions of credit. District boards shall give due consideration to, among other things, the borrowing cooperative's ability to analyze and supervise credit extension; the credit policy to be established; the preference of the members; the quantity, quality, availability, and convenience of the credit service being offered by the appropriate associations; the need by cooperatives to offer the types of financing services offered by their competitors; and the natural relationships which exist between a cooperative's main functions of marketing, providing supplies or services, and financing services incident to such marketing, supplies or services. District policies should assure that such lending activities do not conflict with the objectives and responsibilities of the Federal land banks and the Federal land bank associations, the Federal intermediate credit banks, and the production credit associations, and that in all cases the best interests of the farmers, ranchers, and producers or harvesters of aquatic products are served.

6. Section 616.6060 is revised to read as follows:

616.6060 Financially related services.

Financially related services offered to borrowers and other persons eligible for the services by one institution in a Farm Credit district shall be made available, to the fullest extent possible, to the borrowers and other persons eligible for the services from the other banks and associations in that district. Duplication of financially related services by Farm Credit System institutions in the same district shall be avoided whenever possible.

PART 617 -- EXAMINATIONS, AUDITS, AND INVESTIGATIONS

1. The title of Part 617 is revised to read as set forth above.

2. Section 617.7000 is revised to read as follows:

617.7000 Farm credit system institutions.

The Farm Credit Administration is required by section 5.20 of the Act to examine and audit each institution of the System, and each of its agents, at such times as the Governor may determine, but each bank and each production credit association shall be examined and audited not less frequently than once each year. Such examinations and audits shall be under the direction of the Chief Examiner of the Farm Credit Administration. Sections 4.27 and 5.6(a)(5) of the Act specify that the service corporations authorized pursuant to section 4.25 and unincorporated service organizations formed pursuant to agreements authorized by section 5.6(a)(5), respectively, are institutions of the Farm Credit System and subject to supervision and examination by the Farm Credit Administration.

3. Section 617.7020 is revised as set forth below:

617.7020 Other financing institutions.

(a) As a condition precedent to securing discount privileges with a bank of the Farm Credit System, any organization other than State banks, trust companies, and savings associations shall file with such bank its written consent to examination by Farm Credit examiners as may be directed by the Farm Credit Administration. (Section 5.22 of the Act.) Such organizations shall also agree to furnish the bank, the Farm Credit Administration, or any Farm Credit examiner, at any time upon call, full and current information regarding its financial conditions and operations.

(b) State banks, trust companies, and savings associations shall be required in like manner to file a written consent that reports of their examination by constituted state authorities may be furnished by such authorities upon the request of the Farm Credit Administration. (Section 5.22 of the Act.)

4. Section 617.7060 is revised to read as follows:

617.7060 Frequency of examinations and audits.

Farm Credit System institutions and their activities shall be examined and audited in accordance with the following schedule and at such other times as the Governor may determine.

(a) Each bank and production credit association -- once each year.

(b) Each Federal land bank association -- one each 18 months.

(c) Each incorporated and unincorporated service organization -- once each year.

(d) Each data processing installation -- once each year.

(e) All other activities of the banks and associations -- as appropriate.

5. Section 617.7080 is revised to read as follows:

617.7080 Reports.

(a) The results of FCA examinations and audits of banks and service organizations shall be reported to the respective boards of directors and such meeting shall include an executive session with the board. Reports of examination and audit of associations by examiners shall be submitted to the supervising bank for transmittal to the respective chairmen of the boards of directors for review and appropriate action at the first scheduled board meeting subsequent to receipt of the report by the institution examined.

(b) Reports of examinations and audits are the property of the Farm Credit Administration and are furnished to the institution examined for its confidential use and may be disclosed only with the consent of the Governor or the Chief Examiner. Consent is given for disclosing reports of regular examinations and audits to the banks and associations involved or interested but such disclosure of reports of special examinations and investigations shall be only by action or consent of the Governor or Chief Examiner in each instance. Information needed for filing claims with surety companies, for establishing lines of credit, and for maintaining relations with other financial institutions may be extracted from such reports without further consent.

(c) Consent is also given for disclosing reports of regular examinations and audits to authorized representatives of the Farm Credit Administration and, when requested for confidential use in official investigations, to agents of the Federal Bureau of Investigation, Department of Justice; the Bureau of the Chief Postal Inspector, United States Postal Service; the Secret Service; the Internal Revenue Service; and the Office of Inspector General, United States Department of Agriculture.

6. Section 617.7090 is revised to read as follows:

617.7090 Liquidation.

In the event of voluntary or involuntary liquidation of a Farm Credit bank, association, or other institution of the Farm Credit System, or any of their agents, and upon completion of such liquidation, the books and records of the institutions shall be forwarded to the appropriate divisional examination office for final examination and audit. If circumstances warrant, such final examination and audit shall be made at the institution's offices.

7. The title of Subpart B of Part 617 is revised to read as follows:

Subpart B -- Investigations -- Personnel

8. Section 617.7100 is revised to read as follows:

617.7100 Investigation.

(a) The Farm Credit Administration shall make an investigation of any case involving possible violation of Federal criminal statutes by the following persons upon a determination by the Governor or Chief Examiner that an investigation is advisable:

(1) Bank or association personnel.

(2) Directors or borrowers of the System when preliminary information indicates that an applicable statute, such as those described in paragraph (b) of this section, was violated in collusion with bank or association personnel.

(b) Investigations most commonly involve actions prohibited by 18 U.S.C. 371, 18 U.S.C. 657, 18 U.S.C. 1006, and 18 U.S.C. 1014. Section 371 of the United States Criminal Code refers to a conspiracy between two or more persons to defraud an institution of the Farm Credit System. Section 657 of the United States Criminal Code makes it unlawful to embezzle or willfully misapply any funds or other things of value belonging to the institution or entrusted to its care. Section 1006 of the United States Criminal Code makes it unlawful to make any false entry in any book, report, or statement with the intent to defraud or to deceive; to participate or share in or receive directly or indirectly any money, profit, or benefits through any transaction of such institution; or, without being duly authorized, to draw obligations on the institutions with the intent to defraud. Section 1014 of the United States Criminal Code makes it unlawful to knowingly make a false statement or report for the purpose of influencing the action of the association or bank upon any application or related documents. Other Federal statutes that may be applicable are 18 U.S.C. 212, 213, 215, 216, 493, 658, 1011, 1013, 1907, and 1909.

9. Section 617.7110 is amended by revising the introductory paragraph and paragraphs (a) through (c) to read as follows:

617.7110 Reporting of violations.

Violations or possible violations of Federal criminal statues involving the banks and associations shall be immediately reported to the president of the bank and the attorney or other person designated by the bank for that purpose. The violation or possible violation shall then be promptly reported to the Farm Credit Administration.

(a) If any bank or association employee or director discovers irregularities in the funds and accounts of a bank or association, or has reasonable grounds for belief that Federal criminal statutes may have been violated, the employee or director shall report the matter to the appropriate officer of the bank and furnish such information as he has obtained or developed.

(b) The bank shall immediately notify the Chief Examiner of the Farm Credit Administration, and make available all information concerning the matter. The Chief Examiner will advise the bank what further steps, if any, should be taken by the representative in the case.

(c) The bank shall bring any irregularity found to exist to the attention of the board of directors of the association concerned and shall keep it informed of all significant developments in order that the board may take such action as may be required to protect the association's interest. The bank shall keep the bank board informed of all irregularities.

* * * * *

10. Section 617.7120 is revised to read as follows:

617.7120 Cases for referral.

It shall be the function of the Chief Examiner of the Farm Credit Administration to refer directly to the local United States Attorney all cases investigated which concern violation of Federal criminal statutes for consideration for criminal prosecution.

11. The title of Subpart C of Part 617 is revised to read as follows:

Subpart C -- Investigations -- Borrowers and Others

12. Section 617.7160 is revised to read as follows:

617.7160 Cases for referral.

It shall be the function of the general counsel of the Farm Credit district (or a designated bank attorney) to determine if there is substantial evidence that a violation of a Federal criminal statute has occurred, and to refer the matter to the United States Attorney for consideration of prosecution under established procedures. Violations reported to the United States Attorney shall also be reported to the General Counsel of the Farm Credit Administration. At no time shall any director or employee of an association or bank threaten a borrower with criminal prosecution, whether in an effort to collect an indebtedness, recover property, or otherwise.

PART 618 -- GENERAL PROVISIONS

1. Section 618.8000 is revised to read as follows:

618.8000 Authorization.

Banks and associations may provide technical assistance and may make available to borrowers, members, applicants, and other persons eligible to borrow such financially related services appropriate to their onfarm and aquatic operations as are authorized by the district board.

2. Subparts B through I are redesignated as Subparts C through J respectively. A new Subpart B is added and reserved as follows:

Subpart B -- Member Insurance [Reserved]

3. Section 618.8050 is amended by revising paragraphs (a) and (d) to read as follows:

618.8050 Leasing authority.

Farm Credit institutions are authorized to own and lease property as follows:

(a) Federal land banks may own and lease, or lease with option to purchase, to persons eligible to borrow from the bank, facilities needed in the farming or aquatic operations of such persons.

* * * * *

(d) Production credit associations may own and lease, or lease with option to purchase, to persons eligible to borrow from the production credit association, equipment needed in the farming or aquatic operations of such persons.

* * * * *

618.8240 [Removed]

4. Part 618, Subpart F, is amended by removing 618.8240.

(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, Farm Credit Administration.

[FR Doc. 82-7569 Filed 3-19-82; 8:45 am]

BILLING CODE 6705-01-M