Title: FINAL RULE--Loan Policies and Operations; Definitions; Lending Authorities and Purchase and Sale of Interests in Loans--12 CFR Parts 614 and 619
Issue Date: 08/24/1992
Agency: FCA
Federal Register Cite: 57 FR 38237
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FARM CREDIT ADMINISTRATION

12 CFR Parts 614 and 619

RIN 3052-AB13

Loan Policies and Operations; Definitions; Lending Authorities and Purchase and Sale of Interests in Loans


ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), adopts final regulations that amend parts 614 and 619 of FCA regulations governing the lending, loan sale and purchase, and loan participation authorities of Farm Credit System (FCS or System) institutions. The FCA originally proposed to amend these regulations on November 3, 1988, 53 FR 44438. In response to comments, the FCA reproposed amendments to certain regulations on January 23, 1991, 56 FR 2452. Pursuant to the Agricultural Credit Act of 1987 (1987 Act), n1 which amended the Farm Credit Act of 1971 (Act), the final regulations reconcile the loan-related authorities of FCS institutions that are created either by mergers or the transfer of long-term lending authorities from a bank to an association. These final regulations also implement provisions in the Act that authorize FCS institutions to sell and purchase non-participation interests in loans. The FCA has eliminated from the final regulations existing requirements that the agency give prior approval to loan purchase and sale transactions by FCS institutions. The final regulations also address the sale of loans to a pooler certified by the Federal Agricultural Mortgage Corporation (Farmer Mac) and lenders that are not FCS institutions.

n 1 Public Law No. 100-233, 101 Stat. 1568 (1988).

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

FOR FURTHER INFORMATION CONTACT:

Dennis K. Carpenter, Senior Policy Analyst, Regulation Development Division, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, or

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

TEXT:
SUPPLEMENTARY INFORMATION:

I. General

A. Historical Background

Proposed amendments pertaining to appraisal standards, lending limits, and loan participations were originally part of the eligibility/lending authorities regulations that the FCA proposed on November 3, 1988, 53 FR 44438. The appraisal standards, lending limits, and loan participation regulations were separated from the original proposal, and subsequently reproposed on January 23, 1991, 56 FR 2452. The comment period for the reproposed regulations expired on March 25, 1991. The FCA received approximately 430 comment letters about the reproposed appraisal standards, lending limits, and loan participations regulations. Most of these comments addressed FCA's proposed amendments to the lending limits and appraisal standards regulations.

As a result of these comments, the FCA published a Notice of Public Hearing on May 10, 1991, 56 FR 21637, so that System institutions, their borrowers, and other interested parties would be afforded another opportunity to express their concerns about these reproposed regulations, and to offer constructive suggestions about the content of the final regulations. The Notice of Public Hearings solicited public comments on specific topics. Testimony was presented by 121 individuals during the 4 days of the public hearings. Testimony on regulations relating to loan participations and loan sale and purchase authorities was confined to their interface with lending limits.

After carefully considering all comments, testimony, and documents received from the public, the FCA has adopted final regulations amending subparts A and H of part 614, which pertain to lending authorities, loan participations, and loan purchase and sale transactions. As explained in greater detail elsewhere in this preamble, the FCA incorporated many of the commentors' substantive and technical recommendations into the final regulations and declined to adopt others. The appraisal and lending limit regulations will be addressed separately at a future date.

B. Economic Impact

On January 30, 1992, the President of the United States unveiled an initiative for economic growth. n2 The President's initiative requires Federal agencies to review their regulations in order to: (1) Identify those regulations that impede economic growth; and (2) accelerate action on those regulations that promote growth. The President's initiative establishes five criteria for evaluating the impact of a regulation on economic growth. First, the expected benefits of the regulation to society should clearly outweigh its costs. Second, the regulation should be fashioned to maximize the net benefits to society. Third, the regulation should rely, to the maximum extent possible, on performance standards instead of prescriptive command-and-control requirements. Fourth, the regulation should, to the maximum extent possible, rely upon market mechanisms. Finally, the regulation should be expressed with clarity and certainty to guide regulated entities, and it should be designed to avoid needless litigation.

n 2 Presidential Memorandum dated January 28, 1992, addressed to certain Department and Agency Heads. The subject of the memorandum was "Reducing the Burden of Government Regulation."

The FCA has decided to promulgate these regulations at this time because they promote economic growth. For the first time, the regulations in subpart A of part 614 specifically address the loan sale and purchase authorities of Farm Credit Banks (FCBs), agricultural credit banks (ACBs), Federal land credit associations (FLCAs), production credit associations (PCAs), and agricultural credit associations (ACAs). As a result, FCS institutions will be able to exercise their authorities to the maximum extent allowed by law. For example, these regulations authorize FLCAs and ACAs to make, sell, or purchase, long-term loans that are statutorily permissible for the transferring FCB or ACB. Additionally, the FCA has liberally reconciled the residual powers of FCBs and ACBs so that they remain a source of credit for America's farmers, ranchers, and aquatic producers and harvesters, after their long-term lending authorities have been transferred to direct lender associations. The final regulations also facilitate the sale of loans to Farmer Mac and non-System lenders by clarifying regulatory treatment of such sales.

As a result, the FCA concludes that these regulations satisfy the criteria of the President's economic initiative because: (1) The benefits of these regulations clearly outweigh their costs; and (2) these regulations maximize net benefits to society. These regulations also rely, to the maximum extent permitted by the Act, on market mechanisms by enhancing the authorities of the FCS to participate in the secondary markets. With the enhancement of the System's authorities to purchase and sell loans, including participations and secondary market transactions, the FCS institutions will be provided additional avenues through which they can better manage their loan portfolios and the associated risk and income streams.

Finally, the FCA has eliminated from these regulations the requirement that the agency give prior approval to loan sale and purchase transactions. As a result, FCA will no longer exercise control over market transactions of System institutions. Prior approval of loan sales and purchase created delays and increased costs for FCS institutions.

II. Subpart A -- Lending Authorities

A. General Authorities

The FCA adopts final regulations that amend subpart A concerning lending authorities. Comments concerning lending authorities were received from the Farm Credit Council (FCC), two FCBs, and two ACAs.

All commentors opined that the reproposed regulations unduly restricted the lending authorities of FCS institutions. These commentors suggested that the reproposed regulation would prohibit FCS institutions from purchasing non-participation interests in loans from financial institutions outside the System for purposes other than Farmer Mac pooling. According to these commentors, this prohibition would place FCS institutions at a competitive disadvantage with commercial banks. These commentors also expressed concern that the reproposed regulation would also prevent a FCS institution from purchasing loans to sell to other secondary markets such as the Federal National Mortgage Corporation (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac).

In response, the FCA notes that no provision of the Act authorizes System institutions to purchase from non-FCS institutions interests in loans, other than participations, except for Farmer Mac pooling. The proposed regulations in subpart A, 614.4000(e)(3), 614.4010(f)(3), 614.4030(c)(3), 614.4040(d)(2), 614.4050(d)(3), 614.4325(b), and 614.4325(c)(1) reflect these statutory restrictions on the purchase of non-participation interests in loans from non-FCS institutions. Although all System commentors denied that the Act prohibits FCS institutions from purchasing such interests in loans from financial institutions outside the System for purposes other than Farmer Mac pooling, no commentor supplied any legal support for this position. After a careful review of the Act and its legislative history, the FCA reaffirms its legal conclusion that FCS institutions are not authorized to purchase non-participation interests in loans from non-FCS institutions for purposes other than for Farmer Mac pooling.

As noted earlier, these commentors expressed concern that the regulation does not allow FCS institutions to purchase loans for sale to other secondary markets, such as Fannie Mae and Freddie Mac. The FCS institutions do not have the statutory authority to purchase loans from non-FCS institutions for the purpose of pooling such loans for any secondary market, except Farmer Mac. Section II E of this preamble addresses the authorities of FCS institutions to sell loans to other secondary market entities such as Fannie Mae and Freddie Mac.

B. Affiliate Authorities

The FCC and a FCB suggested that the FCA amend the regulation in subpart A to clarify that FCBs, ACBs, PCAs, FLCAs, and ACAs are authorized to purchase or sell interests in loans through subsidiaries chartered under section 4.25 of the Act, or affiliates chartered under section 8.5(e)(1) of the Act.

The FCA recognizes that the Act authorizes FCS institutions to exercise certain of their functions through subsidiaries. The authorities of a subsidiary derives from the authorities of its parent(s). The derivative authority of the subsidiary is generally reflected in its charter, rather than in regulations.

A new 614.4060 has been added to the final regulation, however, which generally describes the authorities of FCS affiliates that pool and securitize loans under title VIII of the Act. Section 8.5(e)(1) of the Act impliedly amended section 4.25 of the Act so that associations, as well as banks, could organize affiliates that operate as poolers in the Farmer Mac program. Section 614.4060 clarifies that a FCS pooler affiliate is authorized to purchase loans from both FCS and non-System institutions that its parent is not authorized to make. Although the lending authorities of Farm Credit banks and associations are not expanded by provisions in the Act authorizing FCS institutions to operate as a certified agricultural mortgage marketing facility for the Farmer Mac program, title VIII of the Act permits certified agricultural mortgage marketing facilities to purchase, pool, and securitize any loan that complies with Farmer Mac's underwriting standards.

Two commentors asserted that System banks are statutorily authorized to sell or purchase interests in loans through existing subsidiaries that were organized under section 4.25 of the Act. The authority of a section 4.25 subsidiary to engage in such transactions would depend on its Articles of Incorporation. Accordingly, the authority of existing section 4.25 subsidiaries to sell or purchase interests in loans on behalf of their parent banks is determined on a case-by-case basis by reference to its Articles of Incorporation. Outside of the Farmer Mac context, the purchase of an interest in a loan may, in certain circumstances, be construed as an extension of credit to a borrower, and such activities cannot be legally conducted through a section 4.25 subsidiary. FCBs and ACBs should consult with the FCA before they conduct any loan sale or purchase activities through an existing section 4.25 subsidiary.

C. Loan Purchase and Sale Authorities

The FCC suggested that the FCA amend 614.4040(d)(2) to authorize PCAs to sell interests in loans to non-FCS institutions for pooling and securitizing such loans pursuant to title VIII of the Act. The reproposed regulations in subpart A of part 614 only authorized PCAs and other FCS institutions to purchase non-participation interests in loans from non-FCS institutions for Farmer Mac pooling and securitization. These reproposed regulations did not reflect the statutory authority of FCS institutions to sell interests in loan to non-FCS institutions that are certified agricultural mortgage marketing facilities under title VIII of the Act. Sections 1.5(24) and 2.2(21) of the Act authorize Farm Credit banks and associations to originate loans that are subsequently sold to a Farmer Mac pooler. Therefore, the FCA amends 614.4000(e)(1), 614.4010(f)(1), 614.4030(c)(1), 614.4040(d)(1), and 614.4050(d)(1) to reflect the statutory authority of FCS institutions to sell non-participation interests in loans to non-FCS institutions that operate as certified agricultural mortgage marketing facilities under title VIII of the Act.

Neither the Act or the final regulation authorizes FCS institutions to purchase or originate loans that they have no statutory authority to originate, for the purpose of selling them to a Farmer Mac pooler. For example, a PCA could not originate 30-year mortgage loans even though it intended to sell such loans to a Farmer Mac pooler. A PCA has no statutory authority to hold these loans on its books prior to a sale to a Farmer Mac pooler. Furthermore, the PCA would be illegally holding long-term loans if the pooler were to reject these loans because they do not qualify with Farmer Mac's underwriting standards. However, a FCS institution certified by Farmer Mac as a certified agricultural marketing mortgage facility may purchase such loans in its capacity as a pooler.

The FCA has also amended 614.4000(e)(3), 614.4010(f)(3), 614.4030(c)(3), 614.4040(d)(3), and 614.4050(d)(3) to clarify that FCS institutions are authorized to purchase non-participation interests in loans from non-System institutions only in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act. Sections 1.5(24) and 2.2(21) of the Act authorizes FCS institutions to become certified agricultural mortgage marketing facilities for Farmer Mac. In their capacity as Farmer Mac poolers, FCS institutions are authorized to engage in activities that may not be authorized under their other statutory power. For example, a PCA that is acting in its capacity as a certified agricultural mortgage marketing facility is authorized to purchase long-term real estate loans that it can neither make under 614.4040(a), nor purchase in other circumstances under 614.4040(d)(2).

The FCA expects FCS institutions certified as agricultural marketing facilities to maintain a separation between their Farmer Mac pooling activities and their other operations. The FCA intends to exercise its examination and enforcement powers to ensure that such a separation is maintained.

An ACA recommended that the FCA amend 614.4030 and 614.4050 to allow FLCAs and ACAs to sell or purchase non-participation interests in loans from other associations in the System. The reproposed regulation only authorized FLCAs and ACAs to engage in such transactions with FCBs, ACBs, or banks for cooperatives.

Section 1.5(16) of the Act authorizes FCBs to : (1) Sell interests in loans to non-FCS financial institutions; and (2) sell and purchase interests in loans to other FCS institutions. Section 7.6(a) of the Act enables a FCB to transfer its authority to "make and participate in long-term real estate mortgage loans" to an ACA or a FLCA, while section 7.6(c) of the Act requires the FCA to issue regulations governing the transfer of powers from the bank to an association. Sections 614.4030(c)(1) and 614.4050(d)(1) of the reproposed regulations reflect the FCA's determination that a FCB's powers to sell interests in long-term real estate loans to non-FCS institutions under section 1.5(16) of the Act can be transferred to FLCAs and ACAs.

The FCA concludes that ACAs and FLCAs also inherit the authority of the FCB under section 1.5(16) of the Act to buy from or sell to other FCS institutions interests in long-term loans. Accordingly, 614.4030(c) and 614.4050(d) of the final regulations authorize transferee FLCAs and ACAs to buy from or sell to other FCS institutions interests in long-term real estate loans.

The FCA emphasizes that the authority of ACAs to sell interests in loans to non-System institutions, and to sell to or purchase from FCS associations such loan interests applies only to lending authorities that are derived from the FCB, not from a PCA. Since section 2.2(11) of the Act restricts the authority of PCAs to sell or purchase interests in short- and intermediate-term loans to Farm Credit banks, 614.4050(d) does not authorize ACAs to purchase or sell non-participation interests in short- and intermediate-term loans with institutions that are not Farm Credit banks. The FCA has amended final 614.4050 to clearly distinguish the purchase and sale authorities of ACAs with respect to long-term and short-term loans.

D. Residual Authorities

The FCC requested that the FCA clarify in the regulation whether a FCB retains residual authority to participate loans with non-FCS lenders after the bank transfers it lending authority to an association. Section 7.6(c) of the Act requires the FCA to issue regulations that reconcile the authorities of FCS institutions after a bank transfers its lending authority to an association. In the preamble to the reproposed regulation, the FCA adopted the position that the transfer of lending authority to an association does not deplete the loan-related authorities of the FCB. The FCA also recognized the need to reconcile these authorities in a manner that best serves the credit needs of farmers, ranchers, and aquatic producers and harvesters. See 56 FR 2457 (January 23, 1991).

Pursuant to its powers under section 7.6 of the Act, the FCA determines that FCBs and ACBs that have transferred their lending authority to an ACA or a FLCA retain residual powers to: (1) Participate in loans with FCS and non-FCS lenders; (2) purchase or sell other interests in loans in accordance with these regulations; and (3) make loans in territories of the Farm Credit district where no active association operates. Accordingly, the FCA has added new 614.4000(f) and 614.4010(g) to the final regulation to clarify the residual powers of FCBs and ACBs after they transfer their lending authority to an association. The lending authorities of the FCBs in territories served by FLBAs are, of course, continue and are unaffected by these provisions.

E. Loan Sales to Other Lenders

The FCC requested that the phrase "other lending institution" in 614.4000(e)(1), 614.4010(f)(1), 614.4030(c)(1), and 614.4050(d)(1) be changed to "other financial institutions." This commentor asserted that although the statute allows FCS institutions to sell interests in loans to "other lenders," Congress intended to include "other financial institutions such as insurance companies and financial intermediaries that are in the business of purchasing loans."

The FCA agrees with the commentor that the statute authorizes FCBs, ACBs, FLCAs, and ACAs to sell their loans to a broad spectrum of purchasers. However, instead of following the FCC's recommendation, the FCA has decided to change the term "other lending institutions" in 614.4000(e)(1), 614.4010(f)(1), 614.4030(c)(1), and 614.4050(d)(1) to "other lenders." As a result of this change, the language of the final regulation and the Act is identical. After carefully reviewing the legislative history of section 1.5(16) of the Act, the FCA interprets the term "other lenders" to mean parties that extend credit in the ordinary course of their business. In this context, the term "lenders" includes commercial banks, savings associations, credit unions, insurance companies, trust companies, agricultural credit corporations, incorporated livestock loan companies, and other financial intermediaries that extend credit as a regular part of their business. In response to two comments, the FCA concludes that 614.4000(e)(1), 614.4010(f)(1), 614.4030(c)(1), and 614.4050(d)(1) authorize FCS institutions to sell their loans to other secondary markets such as Fannie Mae and Freddie Mac.

The FCA emphasizes that System institutions are required to comply with the borrower rights regulation, 614,4336, when loans are sold to purchasers that are not System institutions.

F. Purchases of Interests in Farmer Mac Pools

The FCC requested that the FCA amend 614.4000(e)(4) so that FCBs and ACBs that act in the capacity of a certified agricultural mortgage marketing facility under title VIII of the Act would be able to purchase an interest in a pool of subordinated participation interests where the pool had been assembled solely from loans purchased from other entities. The FCA rejects this suggestion because the risk is increased where the institution is exposed to the first risk of loss on loans in the pool, none of which it originated. The institution would be unable to determine whether any of the loans underlying the securities meet Farmer Mac underwriting standards and would have no control over the loan servicing. The FCA's position is consistent with the regulatory policy of the Office of the Comptroller of the Currency (OCC), which prohibits a national bank from acquiring a direct subordinated interest in loans sold by other lenders into the Farmer Mac program. See OCC BC-248 (October 24, 1990).

III. Subpart H -- Purchase and Sale of Interests in Loans

The FCA now adopts as final regulation amendments to subpart H pertaining to loan participation transactions, and the sale and purchase of other (non-participation) interests in loans. This regulation also addresses the treatment of loan participations and other interests in loans that are sold by FCS institutions to certified Farmer Mac poolers. As discussed in further detail, the FCA, in some instances, amended the reproposed regulation to incorporate suggestions of the commentors.

A. Definitions

The FCC and a FCB commented that the definition of "interests in loans" in reproposed 614.4325(a)(1) restricts the authority of FCS institutions to negotiate for the purchase of "any aspect" of a loan transaction from non-FCS institutions. These commentors suggested that the FCA revise 614.4325(a)(1) to clarify that the lender's rights in collateral are included in the definition of "interest in loans."

The FCA declines to make the changes suggested by the commentors. The FCA's approach provides FCS institutions with a sufficient degree of flexibility in structuring agreements to reach interests in collateral in appropriate circumstances. In certain situations, rights in a loan may not extend to collateral because the FCS institution acquires an unsecured interest in a loan. Additionally, rights in collateral and other aspects of the transaction derive from the agreement between the parties.

The FCC, a FCB, several associations, and an individual suggested that the FCA amend 614.4325(a)(4) to indicate that loan participations are a subcategory of interests in loans. These commentors argue that the Act authorizes FCS institutions to purchase non-participation interests in loans from non-System institutions because loan participations are a subcategory of interests in loans. The FCA disagrees with this rationale because it does not follow the plain language of the Act. Under the Act, the authority of FCS institutions to participate in loans is separate and distinct from their authority to purchase or sell other interests in loans. While the Act authorizes FCS institutions to participate in loans with non-System institutions, the statute does not allow FCS institutions to purchase other interests in loans from non-System institutions.

The FCC also recommended that the FCA revise the definition of a participation interest in 614.4325(a)(4) to encompass interest payments and collateral security.

From the perspective of the FCA, reproposed 614.4325(a)(4) provides System institutions with sufficient flexibility to structure participation agreements to encompass interest payments and collateral security. Under the FCA's approach, an institution's fractional undivided interest in the principal is not required to be equal to its share of the collateral or interest payments. For this reason, the FCA declines to adopt the commentor's recommendation.

Several commentors suggested that the FCA revise 614.4325(a)(4) and (a)(5) by changing "fractional undivided interest" to "undivided fractional interest" in order to clarify that the fractional interest is undivided. The FCA declines to accept this suggestion because "fractional undivided interest" more clearly communicates the FCA's intention that all rights of ownership in the entire loan be shared on a pro rata basis. An "undivided fractional interest" can be interpreted to mean that the institution assumes all risks inherent in the fraction of the loan it purchases, instead of assuming all of the risks in the entire loan interest in an amount proportional to its fractional interest in the loan. The revision suggested by the commentors would significantly expand the types of transactions in which FCS institutions can engage. The FCA believes that the regulation allows FCS institutions reasonable flexibility in structuring loan participations, while retaining adequate standards for excluding loan participations sold from lending limit calculations.

A FCB and its related associations commented that "lead lender" is a very broad definition that does not take into account subparticipations that may be sold by a "first tier" participant. The commentor suggested that "lead lender" be changed to "financial institution." The reproposed regulation allows FCS institutions to purchase or sell participations when they are not lead lenders; however, prudent business practices require the agreement to extend to a lead lender who is responsible for servicing the loan or collecting payments. Therefore, the references to "lead lender" contained in 614.4330(a)(1) and 614.4325(a)(4) remain unchanged.

B. Prior Approvals, Lending Limits Exclusions, Purchase and Sale Agreements

1. Prior Approvals and Lending Authorities

The reproposed regulation would eliminate the existing requirement that the FCA prior approve loan purchase and sale agreements by FCS institutions. The FCA received no comments about this proposed revision and the proposed position is adopted unchanged.

The FCC objected to reproposed 614.4325(b), which would only enable FCS institutions to purchase or sell interests in loans pursuant to their lending authorities in subpart A of these regulations and the requirements of reproposed 614.4330. The commentor asserts that the reproposed regulation is too narrowly drafted with regard to the authority of FCS institutions to purchase interests in loans from non-FCS institutions. Accordingly, the FCC requests that the FCA delete such restrictions from subpart A and 614.4325(b). As an alternative, the FCC suggests that the FCA "grandfather" purchases of loans from non-FCS institutions that do not conform with the final regulations.

As explained in this preamble to subpart A, these regulations reflect the FCA's view that FCS institutions are not authorized to purchase non-participation interests in loans from non-FCS institutions except pursuant to their authority to act as certified agricultural mortgage marketing facilities under title VIII of the Act. For this reason, the final regulation retains this prohibition. Because the purchase of such loan interests is without statutory authority, the FCA has no authority to "grandfather" the purchase of such loan interests.

2. Exclusion From Lending Limits and Capital Requirements

The FCC, a FCB, several associations, and an individual commentor suggested that the FCA revise 614.4325(a)(6) to exclude situations where a seller retains some risk of loss from a "sale with recourse." The FCB recommended that the definition of "sale with recourse" loans should not cover circumstances where servicing rights and other aspects of the loan are retained.

In response, the reproposed regulation did not treat the retention of servicing rights alone as a sale with recourse. Nonetheless, the FCA amends 614.4325(a)(6) so that the final regulation explicitly states that the retention of servicing rights alone does not constitute recourse.

Two System commentors suggested that the FCA modify proposed 614.4325(g)(1) in order to clarify that an undivided interest in the loan must extend to the same percentage of collateral securing the loan if the seller is to be allowed to exclude the portion of the loan sold from its lending limit. The FCA has modified 614.4325(g)(1) in order to address the commentors' concerns.

The American Bankers Association (ABA) commented that national banks are subject to additional limitations that the FCA does not impose on FCS institutions. The commentor complained that the OCC limits the amount of subordinated loan participations and subordinated securities that national banks can hold in Farmer Mac to 25 percent of capital. The ABA urges the FCA to impose this same restriction on FCS institutions. The FCA rejects this suggestion because this OCC policy is not suitable for the System, which was established to serve as a primary source of credit for American agriculture. Since Farmer Mac is a FCS institution, the FCA chooses not to impose a limit at this time on the subordinated loan participations or subordinated securities that other FCS institutions may purchase. However, the FCA interprets 614.4325 as requiring each FCS institution to establish internal policies that limit the amount of subordinated securities that it shall purchase in total or from one pooler.

3. Purchase and Sale Agreements

The FCA received three comments proposing minor modifications of reproposed 614.4330, which pertains to sale or purchase of participation interests in loans. Several FCS commentors sought clarification as to whether or not 614.4330(b) requires a non-FCS institution to hold the lesser of a 10-percent interest in the principal amount of the loan, or its lending limit, whenever it sells loan participation to a System institution but retains servicing rights. The ABA supported the easing of the retention requirements on loan participations sold by commercial banks. Accordingly, the agency has modified the language of 614.4330(b) in order to clarify the retention requirements imposed on non-FCS institutions.

Several System commentors also suggested that the FCA modify the terminology in 614.4330(a)(9) to eliminate any confusion about the certificates required to evidence an undivided interest in a loan. The reproposed regulation referred to "participation certificates," which is also the term for nonvoting stock in FCS institutions. The FCA has adjusted the language in final 614.4330(a)(9) to avoid potential confusion.

C. Independent Credit Judgment

The FCA adopts 614.4325(e), which requires each FCS institution to exercise independent credit judgment on every interest in a loan that it purchases. From the perspective of the FCA, FCS institutions may be engaging in unsafe and unsound lending practices whenever they purchase a participation or other interest in a loan without performing an independent credit analysis and exercising independent judgment concerning the creditworthiness of the borrower or the quality of the asset. Additionally, a FCS institution that purchases an interest in a loan without the servicing rights incurs considerable risk in relying upon the lead lender to discharge its servicing responsibilities under the agreement. The purchasing institution must have sufficient capital to absorb any risk associated with the purchased interest, especially risks resulting from the failure of the lead lender to perform certain duties. Fraudulent activity, ineffective servicing, or the insolvency of the lead lender can result in loss to the participant, which in turn adversely affects its capital position. In order to reduce this exposure, the final regulation requires each FCS institution to conduct an independent credit analysis sufficient for it to exercise independent judgment when it purchases a loan or any interest therein. Independent credit judgment requires the purchaser to consider the creditworthiness of the borrower as well as the financial stability and servicing capacity of the lead lender.

The FCA received comments from the FCC, the FCB of Baltimore, associations in the Second Farm Credit District, and an individual concerning reproposed 614.4325(e), which requires each FCS institution to exercise independent credit judgment prior to purchasing any interest in or agreeing to taking any servicing action on a loan that alters the terms of the original agreement. The FCC and the FCB suggested that the FCA insert the word "material" into the final regulation in order to describe the types of servicing actions where the participant is expected to exercise independent judgment. These commentors stated that it is customary for a participating lender to contractually delegate certain discretionary authority to the servicing lender where such decisions will not materially alter the credit risk on the loan. Most commentors expressed concern that reproposed 614.4325(e) would cause unwarranted delays and "decision gridlock" in servicing actions on loans since all participants would need to concur in any servicing action. These commentors also suggested that the independent credit judgment requirement would increase the costs of participation arrangements. One commentor opined that the reproposed regulation would offer no protection to a lead lender where participants unnecessarily delay any decision. All commentors from the Second Farm Credit District inquired whether the reproposed regulation would authorize an agent to make certain decisions and take certain actions on behalf of participants or purchasers of interests in a loan. These commentors cited certain precedents within the FCS where similar arrangements were used. The FCA also received comments noting that commercial lenders are more frequently allowing servicing decisions to be vested in a few participants, who in effect assume a controlling interest in the loan. Questions were also raised about whether the reproposed regulation required two FCS institutions to exercise absolute independence in their credit judgment, in situations where both institutions share a common director or voting interest, or when one institution exercises supervisory authority over another institution.

The final regulation grants the participants some discretion to delegate, by contract, certain judgments or servicing actions to either the lead lender or an agent. The final regulation does not require all participants in a loan to review decisions on non-substantive matters. The FCA considers certain servicing actions, such as granting time extensions for certain reporting requirements, releasing non-material portions of collateral, or granting a reasonable forbearance for meeting defined financial covenants, as non-substantive in nature. Although final 614.4325(e) requires that the participating institution perform an independent credit analysis and exercise independent judgment with respect to each interest purchased, the participants may rely on an agent to assist in such functions as analyzing the creditworthiness of the borrower, determining the appropriateness of any proposed servicing action, and monitoring the performance of both the borrower and the lead lender under the terms of the contracts. Nevertheless, the FCA continues to believe that each participant must independently review and agree to any action which substantively alters either the terms of the loan or the participant's interest therein.

Although 614.4325(e) may cause some delays in originating and servicing loans, the FCA does not believe that these inconveniences offset the need for each participant to independently analyze the creditworthiness of the borrower or the appropriateness of any substantive servicing action. Failure to assess the risks involved in these actions independently could result in material loss to the FCS participant.

Other alternatives exist to avert problems posed by decision gridlock. For example, participation agreements may contain provisions that require each participant to acquiesce in the decision of the other participants if it fails to make its decision within a prescribed period of time. Additionally, arrangements can be made to substitute participants.

The final regulation reaffirms the FCA's position that an institution's directors cannot delegate basic decisions inherent to its operation to an agent. An institution's directors are responsible for ensuring that assets are purchased and recorded at their proper value, and that the institution is not exposed to unnecessary risks. The final regulation requires that a FCS institution exercise credit judgment and analysis independently of the originating or lead lender and any intermediary seller or broker.

Furthermore, 614.4325(e) requires that the independent credit analysis be performed by employees of the participating institution who are directly accountable to the board of directors. Additionally, the final regulation prohibits an employee who performed an appraisal of real estate supporting the loan decision from participating in the decision to purchase a loan. Some commentors noted that, in the past, one or more FCS institutions have delegated the decision to participate in certain loans to another body. In response, the FCA notes that those arrangements resulted from the seller's need for financial assistance from the participants. Moreover, such decisions were duly adopted by a body representative of all participants.

Section 614.4325(e) does not prohibit a FCS institution that participates in a loan from considering the analysis of the originating or lead lender. The final regulation does not require the FCS participant to gather information independently. However, the FCS institution purchasing a loan interest would be required to obtain such information if the originating lender does not provide the necessary information to support the purchasing institution's decision. It is the responsibility of the purchasing FCS institution to ensure that information furnished by the originating or selling institution meets the standards necessary to support the loan participation decision.

Final 614.4325(e) now explicitly states that information such as appraisals of collateral and inspection reports can be accepted and utilized by the purchasing institutions. Section 614.4325(e) does not require the participating institution to prepare a lengthy analysis or to compile separate documentation from the originating or lead lender. However, 614.4325(e) requires the purchasing institution to perform an objective, independent, and thorough analysis when it makes a loan decision. The regulation prohibits a participating institution from relying upon the analysis and judgment of the originating or selling institution when reaching its own credit judgment. The final regulation contemplates that the participation agreement will require the originating or selling institution to provide the participating FCS institution with all necessary information for assessing and monitoring risk in the loan on a timely and continuing basis. When the lead lender is a FCS institution, that information would include the credit and performance classification of the asset.

Although the final regulation permits the board of directors to delegate to institution employees functional or ministerial responsibilities, the board cannot delegate its fiduciary duties. Furthermore, the board must exercise appropriate oversight over employees who perform delegated responsibilities. While an agent may perform certain administrative and operational functions pertaining to credit analysis under the final regulation, the agency relationship must be structured to preserve the institution's responsibility to conduct an independent analysis and reach an independent, objective credit decision. Where a funding bank acts as agent, 614.4325(e) requires that the association have sufficient independence under the agreement to disagree with the bank's analysis, refuse to participate in a loan, and cancel the contract, in its entirety or on an individual loan, without fear of reprisal. The FCA considers these requirements necessary for the board to effectively discharge its fiduciary responsibility to the institution's stockholders. The regulation will require that adequate internal controls be in place to safeguard the institution's assets.

The FCC also inquired whether a FCS institution that purchases an interest in a pool of subordinated participation interests pursuant to title VIII of the Act is required to exercise its independent credit judgment. An interest in a pool of subordinated participation interests enables a FCS institution to exchange the risk of a subordinated participation interest in a particular loan for the risk that is dispersed throughout a pool of subordinated participation interests. In these situations, subordinated participation interests in loans originated by the FCS institution must be included in the pool of subordinated participation interests. In such a transaction, the purchaser of subordinated participation interests relies on: (1) Pooler compliance with the underwriting standards of Farmer Mac; and (2) Farmer Mac enforcement of its certification requirements. The purchaser should exercise the same credit judgment that is expected of a prudent investor in such investments.

The FCC questioned whether proposed 614.4325(e) applied to: (1) Transfers of direct lending authority from FCBs to associations; or (2) territorial adjustments pursuant to 611.1124 of this chapter. The FCA emphasizes that the agency still retains prior approval authority for loan sales or purchases resulting from: (1) Merger of two or more FCS institutions; (2) adjustments to the chartered territory of a FCS institution; (3) the transfer of direct lending authority from a bank to an association; or (4) financial assistance. In these four situations, the prior approval authority of the FCA emanates from other provisions of the Act and separate regulations.

Independent credit judgment is required in situations where the acquirer may refuse to purchase any loan or interest therein. The FCA envisions that FCS institutions that acquire loans or interests therein as a means of rendering financial assistance to another FCS institution shall exercise independent credit judgment. Additionally, the FCA interprets 614.4325(e) as applying to the transfer of direct lending authority if the transfer agreement allows the transferee institution to refuse loans originated by the bank prior to the time of transfer. Where the institution is required to accept all assets, the regulation does not impose an independent credit judgment requirement on specific loans. However, in these situations, the institution would not be relieved of its responsibility to exercise due diligence over the entire transaction, and shareholder approval is required.

D. Borrower Rights

The reproposed regulations would address the impact of the sale of a loan or an interest therein on the borrower's rights under title IV of the Act. Section 614.4336(a) of the reproposed regulation would require a FCS institution that sells an interest in a loan to either: (1) Obtain the borrower's consent to the sale, including the relinquishment of the statutory borrower rights; or (2) incorporate the statutory borrower rights into the loan contract so that the purchaser of the loan would continue to afford these statutory rights to the borrower. Under the reproposed regulation, the relinquishment of borrower rights would take effect at the time the loan is sold, and would remain in effect only so long as the loan is not reflected on the books of a FCS institution. In the event that the originating institution or another FCS direct lender repurchases the loan, statutory borrower rights would reattach under the reproposed regulation.

The FCA received comments about reproposed 614.4336 from the FCC, a FCB, and an ACA. All commentors interpreted the reproposed regulation as applying to all loan sales by FCS institutions. All three commentors suggested that reproposed 614.4336(a) would conflict with section 8.9(b) of the Act if the reproposed regulation applied to loans that were sold to Farmer Mac. The ACA expressed concern that reproposed 614.4336(a) would extend to loan sales with other FCS institutions, including situations where a FCB sold its loan portfolio to a transferee ACA or FLCA. The FCB commented upon the impact of the reproposed regulation on loan sales to non-FCS institutions which are not Farmer Mac poolers.

These comments indicate that reproposed 614.4336 created significant confusion in the System about the treatment of borrower rights when loans are sold to different types of purchasers. The commentors indicated that the reproposed regulation did not clearly distinguish the treatment of borrower rights when loans are sold to: (1) A Farmer Mac pooler under title VIII of the Act; (2) non-FCS institutions that are not Farmer Mac poolers; or (3) FCS institutions. The FCA is now amending 614.4336 so that the final regulation will clearly distinguish the application of borrower rights in these three situations. The final regulation clarifies that FCS lenders will be required to incorporate the statutory borrower rights into the contract, or obtain the borrower's consent to the sale subject to the relinquishment of borrower rights, whenever loans are sold to non-FCS institutions which are not Farmer Mac poolers.

Final 614.4336 requires a FCS institution to comply with the borrower rights notification requirements of 614.4367(b) whenever it sells a loan to a Farmer Mac pooler pursuant to title VIII of the Act. This approach is consistent with section 8.9(b) of the Act which requires a FCS institution that sells a loan to a Farmer Mac pooler to: (1) Notify the borrower that the statutory borrower rights will no longer apply once the loan is sold into the agricultural mortgage secondary market under title VIII of the Act; and (2) inform the borrower that he or she has the right to not have the loan pooled. Section 8.9(b) of the Act and 614.4367(b) also enable borrowers to retain their statutory borrower rights by refusing to allow the System lender to pool the loan.

The FCA never intended for reproposed 614.4336 to apply to the sale of loans within the System. As noted elsewhere in the preamble, borrower rights continue to apply when a loan is sold within the System because all System lenders are "qualified lenders" as described in section 4.14A(a)(6) of the Act. The final regulation clearly establishes that the borrower rights provisions of 614.4336 do not apply to such sales.

The FCA's decision to impose the requirements in reproposed 614.4336(a) on loan sales to non-FCS institutions (that are not Farmer Mac poolers) proved controversial. A FCB argued that the borrower rights requirements in reproposed 614.4336(a) violate the Act when applied to loans that are sold to such non-FCS institutions. The commentor asserts that section 4.14A(a)(6) of the Act only requires FCS institutions and OFIs within the meaning of section 1.7(b)(1) of the Act to comply with the borrower rights provisions in title IV of the statute. This commentor also opines that the statutory authority to sell interests in loans to non-FCS institutions predates, and thus supersedes, the borrower rights provisions in title IV of the Act. In the alternative, the commentor argues that Congress would have written the statute differently if it had intended for non-System purchasers of FCS loans to adhere to these statutory borrower rights requirements. This commentor further argues that the borrower rights are automatically extinguished when a loan is sold to a non-FCS institution (that is not a Farmer Mac pooler) because these rights are created by statute, not contract.

All commentors advanced several non-legal arguments against the borrower rights requirements in reproposed 614.4336. The FCC claimed that most prospective purchasers would decline to buy loans that incorporated these borrower rights provisions. Another commentor opined that a non-System purchaser would face numerous impracticalities in administering borrower rights that were incorporated into the loan contract because it would be unfamiliar with FCA regulations, policies, procedures, and interpretations. These commentors also complained that the alternative of requiring a borrower both to consent to the sale and to relinquish the statutory borrower rights effectively enables borrowers to veto loan sales, thus defeating the statutory rights of the FCS institutions to sell loans.

After careful consideration of these comments, the FCA has decided to retain the requirements that a FCS lender either incorporate the statutory borrower rights into a contract to which the borrower is a signatory or obtain the borrower's signed, written consent to the sale, including the relinquishment of borrower rights, whenever the loan is sold to a non-FCS lender that is not a Farmer Mac pooler. The FCA rejects the arguments that the regulation violates the statute. The FCA concludes that the regulation implements the Act by balancing the authority of FCS institutions to sell loans in the secondary market with the borrower rights provisions in title IV of the Act. The FCA finds no support in either the Act or its legislative history for the claim that the authority of the FCS to sell loans to non-FCS lenders is superior to borrower rights provisions in title IV of the Act.

The claim that borrower rights are automatically extinguished whenever a FCS institution sells a loan to a non-FCS institution denies borrowers those rights and benefits that Congress enacted into law. In fact, a FCS institution could face significant litigation liability that could potentially undermine its solvency if the issue of borrower rights is left unresolved at the time the loan is sold to a non-FCS institution. Section 614.4336 reduces this litigation risk by compelling the seller to obtain either the purchaser's assumption of borrower rights, or the borrower's consent to the sale with the relinquishment of borrower rights.

The FCA acknowledges that borrower rights are established by statute and that section 4.14A(a)(6) of the Act only imposes these borrower rights requirements on the System and OFIs. However, title IV of the Act neither prohibits a FCS lender from incorporating the statutory borrower rights into the loan contract nor prevents a non-FCS institution from voluntarily assuming borrower rights obligations. The claim that many potential purchasers would decline to buy a loan containing borrower rights provisions does not provide a sufficient reason for deleting this provision from the final regulation. From the perspective of the FCA, the regulation provides FCS institutions with two options for resolving borrower rights issues when loans are sold outside the System to parties who are not Farmer Mac poolers. Although non-FCS institutions may experience difficulties with borrower rights requirements, these non-FCS institutions have voluntarily and knowingly assumed these obligations with any attendant problems.

In order to provide greater flexibility to FCS institutions that choose this option, the FCA modifies 614.4336(a)(2)(i) to allow the borrower rights to be incorporated into either the original loan contract or a subsequent modification agreement that is signed by the borrower. This approach does not require a FCS institution to incorporate borrower rights into the contract until such time as it sells the loan to a non-FCS lender that is not a Farmer Mac pooler.

The FCA also declines to delete the alternative requirement that the borrower consent to the loan sale and relinquish the statutory borrower rights. As stated earlier, the FCA rejects the argument that the statutory lending authorities of FCS institutions supersede the borrower rights provisions in title IV of the Act. Borrower rights are an unique feature of FCS loans which may enhance the competitiveness of the System in agricultural credit markets .

The approach advocated by the commentors would allow FCS institutions to unilaterally deprive borrowers of their rights without their consent. As a result, the FCS institution and the non-System purchaser would profit from the sale of the loan at the expense of the borrower, who is denied any voice in the matter. The borrower receives no consideration for involuntarily forfeiting borrower rights. From the perspective of the FCA, such an approach is inherently unfair to System borrowers. The regulation maintains the balance of power that title IV of the Act establishes between FCS lenders and borrowers. The FCA believes that borrowers should be afforded an ability to consent to relinquishment of their borrower rights. Furthermore, the FCA is modifying the language of the regulation to reflect more accurately the fact that the borrower is consenting to the loan sale and relinquishing borrower rights.

At this juncture, the FCA emphasizes that section 4.14A(a)(5) of the Act only extends borrower rights to loans made to farmers, ranchers, and aquatic producers and harvesters for any agricultural or aquatic purpose and other credit needs of such borrowers. Therefore, 614.4336 applies only if the borrower is a farmer, rancher, or aquatic producer or harvester, and the loan is sold to either a certified Farmer Mac pooler or a non-System institution. Section 614.4336(a), however, would not apply when a FCS lender sold to a non-System institution a rural housing loan made under either section 1.11(b) or 2.4(b) of the Act to a borrower who is not a farmer, rancher, or aquatic producer or harvester for residential property that could not produce agricultural products for sale on a sustained basis.

E. Borrower Stock

Section 614.4335 of the reproposed regulations reflects the statutory requirement that a borrower, as a condition of obtaining a loan from or through a Farm Credit bank or association, purchase an amount of stock that is not less than the lower of $1,000 or 2 percent of the loan amount. Additionally, the Act contemplates that individual institutions may need to require a higher minimum stock purchase in order to adequately capitalize the institution. The reproposed regulation would require a FCS institution to impose the institution's minimum stock purchase requirement upon all borrowers, whether or not the loan is made for the purpose of sale. Accordingly, reproposed 614.4335 would not allow an institution to retire stock below its minimum stock purchase requirement for the entire loan whenever: (1) A subordinated participation interest is retained; (2) an interest in a pool of subordinated participation interests is purchased; or (3) a contribution to a cash reserve is made to satisfy the requirements of title VIII of the Act.

The regulation that was reproposed on January 23, 1991, would allow an institution to retire a portion of the borrower's stock investment when it sells a fractional interest in the principal amount of a loan that qualifies for exclusion from capital computations. In such situations, reproposed 614.4335 allows an institution, in its discretion, to retire a proportionate share of the borrower stock, provided that after the stock is retired the institution would: (1) Continue to comply with its minimum permanent capital standards; and (2) retain adequate capital to cover the risk in its portfolio. Since the reproposed regulation would grant FCS institutions discretion concerning stock retirements in such circumstances, the FCA encourages all institutions to carefully evaluate both their present and future capital needs before deciding whether to retire the borrower's stock. In addition, the FCS institutions must maintain a minimum borrower stock requirement to support the statutory requirements of institution membership where a loan to a borrower is held outstanding.

The FCA received comments on reproposed 614.4335(a) from the FCC, two FCBs, a PCA, and a Federal land bank association (FLBA) regarding the requirement that FCS institutions require their borrowers to purchase stock on loans originated for future sale into the secondary market. One commentor suggested that the FCA require the borrower to purchase stock in the FCS institution if the loan is not sold into the secondary market within a reasonable period of time. The FCC asserted that the stock purchase requirement places FCS institutions at a competitive disadvantage with other lenders who originate loans for sale to the secondary market. More specifically, the commentor argued that the borrower stock requirement increases the cost of the loan for the borrower and poses marketing difficulties for a FCS institution. The FCC also argued that the reproposed regulation focuses on capitalization of an individual loan rather than the institution.

The FCC transmitted to the FCA an opinion of counsel to bolster its position on borrower stock. The opinion concludes that the FCA has discretion to waive the borrower stock requirement for loans that FCS institutions contemplate selling into the secondary market. The opinion states that the primary purposes of the stock purchase requirement are: (1) To furnish at least a portion of the capital that the bank or association must hold to support the loan as an asset; and (2) to implement the cooperative principle that each FCS institution is owned by its borrowers. Accordingly, the FCC's legal counsel concludes that the reasons behind the borrower stock requirements no longer apply when a loan is sold into the secondary market because the loan is no longer an asset of the bank or association.

In response, the FCA believes that the stock purchase requirement should be imposed on all borrowers, even if the institution contemplates selling their loans on the secondary market. First, the possibility that a loan or an interest therein may be subsequently sold does not negate the requirement of the Act that borrowers, who are farmers, ranchers, or aquatic producers and harvesters, purchase voting stock in the institution. The potential sale of a loan on the secondary market does not relieve the FCS institution of its legal obligation to sell stock to the borrower, especially where the FCS institution is likely to retain servicing rights or a subordinated participation interest in the loan. Second, the possible future sale of a loan or an interest therein is not a certainty at the time a loan is made. Loans contemplated for sale on the secondary market must meet the underwriting criteria of the secondary market and exhibit characteristics desired by potential purchasers. Although the lender, at the time the loan is originated, may contemplate selling it on the secondary market, such a sale may never occur. Third, the FCA believes that as long as the institution retains a portion of the loan as an asset, the statute requires the borrower to hold stock in the institution. The regulation provides FCS institutions with latitude to set a minimum stock purchase requirement. In exercising its authority to set a minimum stock requirement, each institution should balance its need to attract potential borrowers with its responsibility to be viable and adequately capitalized. For the same reasons, 614.4335 also requires the borrower to repurchase stock or participation certificates equal to the institution's minimum stock purchase requirement whenever the institution repurchases the loan.

The FCA is persuaded that the regulation should provide as much flexibility as the law allows to facilitate the sale of loans into the Farmer Mac program, and that the statutory stock requirement only applies when a portion of the borrower's loan is retained as a loan asset. Consequently, the final regulation allows a FCS institution to retire borrower stock when the entire loan is sold to a Farmer Mac pooler. The stock requirement emanates from a membership requirement rather than as a means of capitalizing an individual loan. In addition, if a loan is sold to another lender outside of the Farmer Mac secondary market and a portion of the loan, or recourse to the selling institution is retained, then the institution would be required to retain the borrower stock as if the entire loan had not been sold.

Therefore, the FCA revises 614.4335 so that the final regulation provides a FCS institution with latitude to retire the full amount of the borrower's stock where the entire loan has been transferred from the institution's books through the sale of the loan even if an interest in a pool of subordinated interests is purchased to satisfy statutory requirements. However, for other regulatory purposes, the purchased interest is treated like any loan sale where a portion of the loan and/or associated risk is retained. The institution will still be required to comply with the capital requirements and disclosure requirements as described in parts 615 and 620, respectively, of this chapter.

These commentors also expressed concerns about reproposed 614.4335(b), which requires a borrower to repurchase stock in the event that the institution subsequently repurchases the loan. All commentors asserted that such a requirement was impractical, and that there may be no legal or business basis for requiring the borrower to repurchase stock in a FCS institution. The FCC asserted that Congress did not intend to cripple FCS institutions through the use of such restrictions as stock repurchase requirements.

In response to comments on proposed 614.4335(b), the FCA continues to believe that borrowers whose loans are repurchased should be required to repurchase stock in the institution. FCS institutions have discretion to set minimum stock purchase requirements at a level where no additional stock purchase will be needed in the event a loan is repurchased. FCS institutions that contemplate selling loans on the secondary market should insert provisions into membership contracts that require the borrower to repurchase stock in the event that the institution reacquires the loan. Any disclosures about potential retirement of stock on the sale of a loan should also notify the borrower that the stock cannot be retired if the institution is not in compliance with minimum permanent capital standards, or its capital is not adequate to support the risk in its loan operations.

As noted in the preamble to subpart A of part 614 of these regulations, 614.4030(c) and 614.4050(d) of the final regulation allows FLCAs and ACAs to sell loans to FCS institutions other than banks. The FCA believes that the final regulations should address the borrower stock requirement in such situations. The FCA anticipates that, in most situations, the selling FCS institution will retain servicing rights but will sell the loan without recourse to another System institution. In some instances, the purchasing institution may be located far from the borrower.

The Act requires farmers, ranchers, and aquatic producers or harvesters who borrow from the FCS to hold stock in a System institution. A loan sale within the FCS does not negate statutory requirements concerning borrower rights and borrower stock. The FCA believes that the borrower should be afforded the opportunity to elect whether to hold stock in the selling or purchasing FCS institution. Since the borrower has an established relationship with the local FCS institution that originated his or her loan, the FCA expects that many borrowers will elect to remain a member of that institution. For these reasons, the FCA has added a new 614.4335(d), which allows the borrower to choose membership in either the selling or purchasing FCS institution. The FCA concludes that the cooperative principles of the FCS would be violated if such borrowers did not retain stock in either the originating or purchasing FCS institution.

F. Disclosure to Borrowers

The FCA received four comments about reproposed 614.4337, concerning disclosures to borrowers. All of the commentors indicated that the reproposed regulation would apply to loans that were sold "without" servicing rights. The FCA corrects this inadvertent error, and the final 614.4337 applies to loans that are sold with servicing rights.

Some commentors expressed the opinion that reproposed 614.4337 (a)(3) and (a)(4) should be deleted because they duplicate the requirements of 614.4336(b). These provisions are not redundant because they address different issues. Accordingly, the FCA declines to delete 614.4336 (a)(3) and (a)(4).

Conversely, some commentors argued that 614.4337(b) should be deleted because it duplicates the requirements of 614.4337(a). As noted in the preamble to the reproposed regulation, 614.4337(b) was added in order to address concerns in a recent General Accounting Office (GAO) study about damage to borrowers caused by the transfer of servicing rights. Accordingly, the FCA declines to delete 614.4337(b). The FCA, however, clarifies that 614.4337(b) only applies to situations where a FCS institution purchases the loan or an interest therein.

Finally, one commentor suggested the reproposed 614.4337(a)(3) would require FCS institutions to give legal advice to their borrowers. The FCA modified the language of this provision to address the commentor's concern.

IV. Part 619 -- Definitions

The final regulation reflects a definition of "loan participation" consistent with its meaning in part 614, subpart H. The comments received on the proposed change have been addressed elsewhere in this preamble.

List of Subjects

12 CFR Part 614

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

12 CFR Part 619

Agriculture, Banks, Banking, Rural areas.

For reasons stated in the preamble, parts 614 and 619 of chapter VI, title 12 of the Code of Federal Regulation are amended as follows:

PART 614 -- LOAN POLICIES AND OPERATIONS

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

Authority: Secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.19, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.7, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act; 12 U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2071, 2073, 2074, 2075, 2091, 2093, 2094, 2096, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184, 2199, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2207, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b, 2279b-1, 2279b-2, 2279f, 2279f-1, 2279aa, 2279aa-5; sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639

Subpart A -- Lending Authorities

2. Section 614.4000 is amended by adding new paragraphs (e) and (f) to read as follows:

614.4000 Farm Credit Banks.

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(e) Other interests in loans. (1) Subjects to the requirements of subpart H of this part, Farm Credit Banks may sell interests in loans only to:

(i) Farm Credit System institutions authorized to purchase such interests;

(ii) Other lenders that are not Farm Credit System institutions; and

(iii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(2) Subject to the requirements of subpart H of this part, Farm Credit Banks may purchase interests other than participation interests in loans and nonvoting stock from other Farm Credit System institutions.

(3) Farm Credit Banks, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests authorized in paragraph (d) of this section) from institutions other than Farm Credit System institutions only for the purpose of pooling and securitizing such loans under title VIII of the Act.

(4) A Farm Credit Bank may purchase an interest in a pool of subordinated participation interests that contains a subordinated participation interest in a loan it has originated to satisfy the requirements of title VIII of the Act with respect to such loans.

(f) Residual powers after the transfer of lending authority to an association. After transferring its authority to make and participate in long-term real estate loans to an agricultural credit association of a Federal land credit association pursuant to section 7.6(a) of the Act and subpart E of part 611 of these regulations, a Farm Credit Bank retains residual authority to:

(1) Enter into loan participation agreements pursuant to paragraph (d) of this section;

(2) Purchase or sell other interests in loans in accordance with paragraph (e) of this section; and

(3) Make long-term real estate loans in accordance with paragraph (a) of this section in areas of its chartered territory where no active association operates.

3. Section 614.4010 is amended by adding new paragraphs (f) and (g) to read as follows:

614.4010 Agricultural credit banks.

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(f) Other interest in loans. (1) Subject to the requirements of subpart H of this part, agricultural credit banks may sell interests in loans, except those originated under paragraph (d) of this section, only to:

(i) Farm Credit System institutions authorized to purchase such interests;

(ii) Other lenders that are not Farm Credit System institutions; and

(iii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(2) Subject to the requirements of subpart H of this part, agricultural credit banks may purchase interests other than participation interests in loans and nonvoting stock from other Farm Credit System institutions.

(3) Agricultural credit banks, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests authorized in paragraph (e) of this section) from institutions other than Farm Credit System institutions only for the purpose of pooling and securitizing such loans under title VIII of the Act.

(4) An agricultural credit bank may purchase an interest in a pool of subordinated participation interests that contains a subordinated participation interest in a loan it has originated, to satisfy the requirements of title VIII of the Act with respect to such loans.

(g) Residual powers after the transfer of lending authority to an association. After transferring its authority to make and participate in long-term real estate loans to an agricultural credit association or a Federal land credit association pursuant to section 7.6(a) of the Act and subpart E of part 611 of these regulations, an agricultural credit bank retains residual authority to:

(1) Enter into loan participation agreements pursuant to paragraph (e) of this section;

(2) Purchase or sell other interests in loans in accordance with paragraph (f) of this section; and

(3) Make long-term real estate loans in accordance with paragraph (a) of this section in areas of its chartered territory where not active association operates.

4. Section 614.4030 is amended by adding a new paragraph (c) to read as follows:

614.4030 Federal land credit associations.

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(c) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, Federal land credit associations may sell interests in loans made under paragraph (a) of this section only to:

(i) Farm Credit System institutions, as authorized by their respective funding banks;

(ii) Other lenders that are not Farm Credit System institutions, as authorized by their respective funding banks; and

(iii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(2) Subject to the requirements of subpart H of this part, Federal land credit associations may purchase interests in loans that comply with the requirements of paragraph (a) of this section and nonvoting stock from Farm Credit System institutions.
(3) Federal land credit associations, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans (other than participation interests under paragraph (b) of this section) from institutions other than Farm Credit System institutions for the purpose of pooling and securitizing such loans under title VIII of the Act.

(4) A Federal land credit association may purchase an interest in a pool of subordinated participation interests that contains a subordinated participation interest in a loan it has originated, to satisfy the requirements in title VIII of the Act.

5. Section 614.4040 is amended by adding a new paragraph (d) to read as follows:

614.4040 Production credit associations.

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(d) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, production credit associations may sell interests in loans that are made under paragraph (a) of this section to:

(i) Banks of the Farm Credit System, as authorized by their respective funding banks; and

(ii) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(2) Subject to the requirements of subpart H of this part, production credit associations, as authorized by their respective funding banks, may purchase interests in loans that comply with the requirements of paragraph (a) of this section and nonvoting stock from banks of the Farm Credit System.

(3) Production credit associations, in their capacity as certified mortgage marketing facilities under title VIII of the Act, may purchase from Farm Credit System institutions and institutions that are not Farm Credit System institutions interests in loans (other than participation interests authorized by paragraph (c) of this section) for the purpose of pooling and securitizing such loans under title VIII of the Act.

(4) A production credit association may purchase an interest in a pool of subordinated participation interests that contains a subordinated participation interest in a loan it has originated, to satisfy the requirements of title VIII of the Act.

6. Section 614.4050 is amended by adding a new paragraph (d) to read as follows:

614.4050 Agricultural credit associations.

* * * * *

(d) Other interests in loans. (1) Subject to the requirements of subpart H of this part and the supervision of their respective funding banks, agricultural credit associations may sell:

(i) Interests in loans made under paragraph (a) of this section only to:

(A) Farm Credit System institutions, as authorized by their respective funding banks;

(B) Lenders that are not Farm Credit System institutions, as authorized by their respective funding banks; and

(C) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(ii) Interests in loans made under paragraph (b) of this part only to:

(A) Banks of the Farm Credit System, as authorized by their respective funding banks; and

(B) Any certified agricultural mortgage marketing facility, as defined by section 8.0(3) of the Act, for the purpose of pooling and securitizing such loans under title VIII of the Act.

(2) Subject to the requirements of subpart H of this part, agricultural credit associations may purchase:

(i) Interests in loans that comply with the requirements in paragraph (a) of this section from institutions of the Farm Credit System;

(ii) Interests in loans that comply with the requirements of paragraph (b) of this section from banks of the Farm Credit System; and

(iii) Nonvoting stock from institutions of the Farm Credit System.

(3) Agricultural credit associations, in their capacity as certified agricultural mortgage marketing facilities under title VIII of the Act, may purchase interests in loans, other than participation interests authorized by paragraph (c) of this section, from institutions other than Farm Credit System institutions for the purpose of pooling and securitizing such loans under title VIII of the Act.

(4) An agricultural credit association may purchase an interest in a pool of subordinated participation interests that contains a subordinated participation interest in a loan it has originated, to satisfy the requirements in title VIII of the Act.

7. A new 614.4060 is added to read as follows:

614.4060 Affiliates established pursuant to section 8.5(e)(1) of the Farm Credit Act of 1971.

An affiliate established by one or more Farm Credit System institutions pursuant to section 8.5(e)(1) of the Act and 611.1137 of this chapter, as a certified agricultural mortgage marketing facility, may purchase loans from Farm Credit System institutions and institutions other than Farm Credit System institutions in accordance with title VIII of the Act and any applicable regulation promulgated thereunder.

8. Subpart H is revised to read as follows:

Subpart H -- Loan Purchases and Sales

Sec.

614.4325 Purchase and sale of interests in loans.

614.4330 Loan participations.

614.4335 Borrower stock requirements.

614.4336 Borrower rights.

614.4337 Disclosure to borrowers.

Subpart H -- Loan Purchases and Sales

614.4325 Purchase and sale of interests in loans.

(a) Definitions. For the purposes of this subpart, the following definitions shall apply:

(1) Interests in loans means ownership interests in the principal amount, interest payments, or any aspect of a loan transaction, including servicing rights.

(2) Lead lender means a lending institution having a direct contractual relationship with a borrower to advance funds, which institution sells or assigns an interest or interests in such loan to one or more other lenders.

(3) Loan means any extension of credit or similar financial assistance of the type authorized under the Act, such as leases, guarantees, letters of credit, and other similar transactions.

(4) Loan participation means a fractional undivided interest in the principal amount of a loan that is sold by a lead lender to a participating institution in accordance with the requirements of 614.4330 of this subpart. The term "loan participation" does not include a subordinated participation interest.

(5) Participating institution means an institution that purchases a fractional undivided interest in the principal amount of a loan originated by another lender.

(6) Sale with recourse means a sale of a loan or an interest in a loan in which the seller:

(i) Retains some risk of loss from the transferred asset for any cause except the seller's breach of usual and customary warranties or representations designed to protect the purchaser against fraud or misrepresentation; or

(ii) Has an obligation to make payments of principal or interest to any party resulting from:

(A) Default on the payment of principal or interest on the loan by the borrower or guarantor or any other deficiencies in the obligor's performance;

(B) Changes in the market value of the assets after transfer;

(C) Any contractual relationship between the seller and purchaser incident to the transfer that, by its terms, could continue even after final payment, default, or other termination of the assets transferred; or

(D) Any other cause, except the retention at servicing rights alone shall not constitute recourse.

(7) Subordinated participation interest means an interest in a loan that bears the first risk of loss, including the retention of such an interest when a loan is sold to a pooler certified by the Federal Agricultural Mortgage Corporation pursuant to title VIII of the Act, or an interest in a pool of subordinated participation interests purchased to satisfy the requirements of title VIII of the Act with respect to a loan sold to such a certified pooler.

(b) Authority to purchase and sell interests in loans.

Loans and interests in loans may only be sold in accordance with each institution's lending authorities, as set forth in subpart A of this part. No Farm Credit System institution may purchase from an institution that is not a Farm Credit System institution any interest in a loan, except for the purpose of pooling and securitizing such loans under title VIII of the Act, unless such an interest is a participation interest that qualifies under the institution's lending authority, as set forth in subpart A of this part, and meets the requirements of 614.4330 of this subpart.

(c) Policies. Each Farm Credit System institution that is authorized to sell or purchase interests in loans under subpart A of this part shall exercise that authority in accordance with a policy adopted by its board of directors that addresses the following matters:

(1) The types of purchasers to which the institution is authorized to sell interests in loans;

(2) The types of loans in which the institution may purchase or sell an interest and the types of interests which may be purchased or sold;

(3) The underwriting standards to be applied in the purchase of interests in loans:

(4) Such limitations on the aggregate principal amount of interests in loans that the institution may purchase from a single institution as are necessary to diversify risk, and such limitations on the aggregate amount the institution may purchase from all institutions as are necessary to assure that service to the territory is not impeded;

(5) Provision for the identification and reporting of loans in which interests are sold or purchased;

(6) Requirements for providing and securing in a timely manner adequate credit and other information needed to make an independent credit judgment; and

(7) Any limitations or conditions to which sales or purchases are subject that the board deems appropriate, including arbitration.

(d) Purchase and sale agreements. Agreements to purchase or sell an interest in a loan shall, at a minimum:

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

(2) Provide for the transfer of credit and other borrower information on a timely and continuing basis;

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

(4) Identify the nature of the interest(s) sold or purchased;

(5) Set forth the rights and obligations of the parties and the terms and conditions of the sale; and

(6) Contain any terms necessary for the appropriate administration of the loan and the protection of the interests of the Farm Credit System institution.

(e) Independent credit judgment. Each institution that purchases an interest in a loan shall make a judgment on the creditworthiness of the borrower that is independent of the originating or lead lender and any intermediary seller or broker prior to the purchase of the interest and prior to any servicing action that alters the terms of the original agreement, which judgment shall not be delegated to any person(s) not employed by the institution. A Farm Credit System institution that purchases a loan or any interest therein may use information, such as appraisals or collateral inspections, furnished by the originating or lead lender, or any intermediary seller or broker; however, the purchasing Farm Credit System institution shall independently evaluate such information when exercising its independent credit judgment. No employee who performed a real estate appraisal on any collateral supporting a loan shall participate in the decision to purchase that loan. The independent credit judgment shall be documented by a credit analysis that considers factors set forth in 614.4160 of this part and is independent of the originating institution and any intermediary seller or broker. The credit analysis shall consider such credit and other borrower information as would be required by a prudent lender and shall include an evaluation of the capacity and reliability of the servicer. Boards of directors of jointly managed institutions shall adopt procedures to ensure that the interests of their respective shareholders are protected in participation between such institutions.

(f) Limitations. The aggregate principal amount of interests in loans purchased from a single lead lender and the aggregate principal amount of interests in loans purchased from other institutions shall not exceed the limits set in the institution's policy.

(g) Lending limits. In order to exclude the principal amount of interests sold from the principal amount of the loan for the purpose of determining compliance with the lending limits set forth in subpart J of this part, sale agreements must meet the following requirements:

(1) The interest sold must be an undivided interest in the principal amount of the loan and in all collateral securing the loan; and

(2) The interest must be sold without recourse; and

(3) The agreement under which the interest is sold must provide for the sharing of all payments of principal, collection expenses, collateral proceeds, and risk of loss on a pro rata basis according to the percentage interest in the principal amount of the loan. Agreements that provide for the pro rata sharing to commence at the time of default or similar event, as defined in the agreement under which the interest is sold, shall be considered to be pro rata agreements, notwithstanding the fact that advances are made and payments are distributed on a basis other than pro rata prior to that time.

(h) Sales with recourse. When a loan or interest in a loan is sold with recourse, it shall be accorded the following treatment:

(1) The loan shall be considered, to the extent of the recourse, an extension of credit by the purchaser to the seller, as well as an extension of credit from the seller to the borrower(s), for the purpose of determining whether credit extensions to a borrower are within the lending limits established in subpart J of this part.

(2) The amount of the loan subject to the recourse agreement shall be considered a loan sold with recourse for the purpose of computing permanent capital ratios.

614.4330 Loan participations.

Agreements to purchase or sell a participation interest shall be subject to the provisions of 614.4325 of this subpart, and, in addition, shall satisfy the requirements of this section.

(a) Participation agreements. Agreements to purchase or sell a participation interest in a loan shall, in addition to meeting the requirements of 614.4325(d) of this subpart, at a minimum:

(1) Define the duties and responsibilities of the participating institution and the lead lender, and/or the servicing institution, if different from the lead lender.

(2) Provide for loan servicing and monitoring of the servicer;

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

(4) Provide for sharing of risk;

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

(6) Provide for sharing of fees, interest charges, and costs between participating institutions;

(7) Provide for a method of resolution of disagreements arising under the agreement between two or more institutions;

(8) Specify whether the contract is assignable by either party; and

(9) Provide for the issuance of certificates evidencing an undivided interest in a loan.

(b) Retention requirement. No participation interest may be purchased from an institution that is not a Farm Credit System institution unless the servicing institution has an ownership interest in the principal amount equal to the lesser of 10 percent of the principal amount or such lesser amount as represents the servicing institution's lending limit, which ownership interest cannot be assigned separately from the servicing rights.

(c) Intrasystem participations. Loans participated between or among Farm Credit System institutions shall meet the borrower eligibility, membership, loan term, loan amount, loan security, and stock purchase requirements of the originating lender.

614.4335 Borrower stock requirements.

(a) As a condition of obtaining a loan from or through a Farm Credit System institution, including loans originated for sale to other lenders, a borrower shall meet the institution's minimum stock purchase requirements.

(b) Borrower stock may be retired only if the institution meets its minimum permanent capital standards and only in accordance with paragraphs (b)(1) or (b)(2) of this section.

(1) When a loan is sold to a party that is not a certified agricultural mortgage marketing facility under title VIII of the Act:

(i) Subject to the requirements of paragraph (d) of this section, borrower stock may be retired if the entire loan is sold without recourse.

(ii) Borrower stock may not be retired when the entire loan is sold with recourse.

(iii) When an interest in a loan is sold without recourse, or an interest is retained that is not a subordinated interest, a proportionate amount of borrower stock may be retired, but in no event may stock be retired below the institution's minimum stock purchase requirement for the interest retained.

(2) When a loan or an interest therein is sold to a certified agricultural mortgage marketing facility under title VIII of the Act, the stock may be retired; but, in no event may stock be retired below the institution's minimum stock purchase requirement for the portion retained.

(c) If an institution repurchases a loan on which the stock has been retired, the borrower shall be required to repurchase stock in the amount of the minimum stock purchase requirement.

(d) When the loan is sold without recourse to another Farm Credit System institution pursuant to paragraph (b)(1)(i) of this section, the borrower may elect to hold stock in either the selling or purchasing institution.

614.4336 Borrower rights.

(a) Each institution that contemplates selling a loan or an interest therein that is subject to the borrower rights provisions of title IV of the Act shall either:

(1) For loans intended for sale to a certified agricultural mortgage marketing facility pursuant to title VIII of the Act, comply with the requirements of 614.4367(b) of this part; or

(2) For loans intended for sale to institutions that are neither Farm Credit System institutions nor certified agricultural mortgage marketing facilities under title VIII of the Act, comply with one of the following two requirements:

(i) Include provisions in the contract with the borrower, or a written modification thereto, that ensure that the purchaser of the loan will be obligated to accord the borrower the same rights "qualified lenders" must provide under the Act; or

(ii) Obtain from the borrower a signed written consent to the sale which explicitly states that the borrower relinquishes the statutory borrower rights. The consent to the loan sale and the relinquishment of the borrower rights shall have no effect until the loan is actually sold and shall be in effect in the event that lender or any other Farm Credit System institution repurchases the loan or any interest therein.

(b) Before obtaining the borrower's consent to the sale of the loan and the relinquishment of borrower rights pursuant to paragraph (a)(2)(ii) of this section, the lending institution shall disclose in writing to the borrower:

(1) A full and complete description of the statutory rights that the borrower is asked to relinquish;

(2) Any changes in the loan terms or conditions that will occur if the loan is not sold;

(3) The fact that the relinquishment of the statutory borrower rights will not become effective unless the loan is actually sold and shall become ineffective in the event that the lender or any other Farm Credit System institution repurchases the loan or any interest therein.

(c) The making of a loan may not be conditioned on the borrower's consent to its sale and relinquishment of statutory borrower rights.

614.4337 Disclosure to borrowers.

When a loan or an interest in a loan other than a participation interest is sold with servicing rights, the disclosure shall be made to the borrower in accordance with this section:

(a) The selling institution shall disclose to the borrower at least 10 days prior to the borrower's next payment date;

(1) The name, address, and telephone number of the purchasing institution;

(2) The name and address of the party to whom payment is to be made;

(3) A description of the impact of the sale on statutory borrower rights after the sale;

(4) Any terms in the agreement that would permit a purchaser to change the terms or conditions of the loan.

(b) A Farm Credit System institution that purchases a loan or a non-participation interest therein shall not take any servicing action that adversely affects the borrower until it ensures that disclosure has been made to the borrower of:

(1) The name, address, and telephone number of the purchasing institution; and

(2) The address where the payment should be sent.

Subpart N -- Loan Servicing Requirements; State Agricultural Loan Mediation Programs; Right of First Refusal

614.4510 [Amended]

9. Section 614.4510 is amended by removing the reference " 614.4330" and adding in its place, " 614.4325" in paragraph (c).

Subpart O -- Banks for Cooperatives Financing International Trade

614.4710 [Amended]

10. Section 614.4710 is amended by removing the reference " 614.4334" and adding in its place, " 614.4020(b)" in paragraphs (a)(4) and (b)(2).

PART 619 -- DEFINITIONS

11. The authority citation for part 619 is revised to read as follows:

Authority: Secs. 1.7, 2.4, 4.9, 5.9, 5.12, 5.17, 5.18, 7.0, 7.6, 7.7, 7.8 of the Farm Credit Act; 12 U.S.C. 2015, 2075, 2160, 2243, 2246, 2252, 2253, 2279a, 2279b, 2279b-1, 2279b-2.

12. Section 619.9195 is revised to read as follows:

619.9195 Loan participation.

A fractional undivided interest in the principal amount of a loan that is sold by a lead lender to a participating institution in accordance with the requirements of 614.4330 of this chapter. The term "loan participation" does not include a subordinated participation interest.

619.9320 [Removed]

13. Section 619.9320 is removed.

Dated: August 14, 1992.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 92-20153 Filed 8-21-92; 8:45 am]

BILLING CODE 6705-01-M