Farm credit system: Funding and fiscal affairs loan policies and operations, and funding operations— Financial assistance to associations,

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Federal Register: February 18, 1999 (Volume 64, Number 32)Proposed RulesPage 8018-8020From the Federal Register Online via GPO Access [wais.access.gpo.gov]

DOCID:fr18fe99-17

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB80

Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; FCB Assistance to Associations

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

SUMMARY: The Farm Credit Administration (FCA or Agency), is proposing to repeal a regulatory requirement that a Farm Credit Bank or an agricultural credit bank (collectively referred to as a bank) obtain FCA prior approval before giving financial assistance to an affiliated association. Instead, the proposed rule would require a bank to consider various standards before providing financial assistance and notify both the FCA and bank shareholders. We expect this rule change to reduce regulatory burden on banks.

DATES: Please send your comments to us on or before March 22, 1999.

ADDRESSES: You may mail or deliver written comments to Patricia W. DiMuzio, Director, Regulation and Policy Division, Office of Policy and Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090 or send them by facsimile transmission to (703) 734-5784. You may also submit comments via electronic mail to ``reg- comm@fca.gov'' or through the Pending Regulations section of our website at ``www.fca.gov.'' You may review copies of all comments we receive in the Office of Policy and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT: Dale L. Aultman, Policy Analyst, Office of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444, or Jennifer A. Cohn, Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: This action furthers our strategic plan commitment to consider eliminating regulatory prior approvals that are not required by the Farm Credit Act of 1971, as amended (Act), or are not based on safety and soundness concerns. The proposed regulation would eliminate the existing requirement in Sec. 615.5171 that the FCA approve, in advance, any financial assistance from a bank to its affiliated associations. This change is appropriate for two reasons:

<bullet> The existing regulation's prior approval requirement runs counter to our current approach to supervising risk in Farm Credit System (System) institutions. Consistent with our role as arm's-length regulator, we have found that we can replace many prior approval requirements with simple notification requirements.

<bullet> Our new, much stronger, capital regulations will help to ensure that a bank will not imperil its own capital position in providing assistance to an association. See 62 FR 4449, January 30, 1997, for a more detailed discussion of our capital regulations.

I. Scope and Application of Sec. 615.5171

Section 1.5(11) of the Act provides that each Farm Credit Bank shall have the power, subject to our regulation, to ``purchase nonvoting stock in, or pay in surplus to * * * associations in its district.'' Section 615.5171 implements this provision of the Act as follows: ``Farm Credit Banks may purchase nonvoting stock and participation certificates of and pay in surplus to associations in their respective districts when authorized by the bank board of directors on a case basis and approved by the Farm Credit Administration.''

The regulation applies to any bank purchase of association nonvoting stock and participation certificates. The regulation does not discuss voting stock because banks are not eligible association borrowers/members and thus are not permitted to hold association voting stock. The regulation also refers to the bank's statutory authority to ``pay in surplus'' to associations. FCA's interpretations of the ``pay in surplus'' language have resulted in a broad application of the prior approval requirement for financial assistance transactions.

In general, it has been our practice to consider a bank to have triggered the prior approval requirement of this regulation when it purchases nonvoting stock or participation certificates or takes other action to pay in surplus to improve the capital position of an association. Thus, the FCA has required prior approval for the following types of transactions:

  (1) Cash gifts;

  (2) Debt forgiveness or compromise of indebtedness;

  (3) Interest rate concessions;

  (4) Interest free loans;

  (5) Transfer of loans at less than fair market value;

  (6) Reduction or elimination of standard loan service fees;

  (7) Assumption of operating or other expenses (e.g., legal fees, insurance premiums, etc.); and

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  (8) Special compensation.

As currently interpreted, Sec. 615.5171 also applies to transactions pursuant to loss-sharing agreements between banks and their affiliated associations. Under Sec. 614.4340 of this chapter, any System institution may enter into an agreement to share loan and other losses with any other System institution. The agreements can involve the sharing of losses to protect against stock and participation certificate impairment, or for any other purpose. The agreements may address losses that arise in the future or that were recognized before the date of the agreement.

System institutions may execute loss-sharing agreements without FCA prior approval. In contrast, the FCA must approve in advance transactions pursuant to a loss-sharing agreement that result in a bank transferring capital or surplus to an association. Our proposed rule would eliminate Agency prior approval of such loss-sharing transactions, but would still require a bank to notify us before carrying out the transaction.

We have not interpreted the current regulation to cover routine business transactions and agreements between the banks and associations, such as a General Financing Agreement. Thus, Sec. 615.5171 does not cover payment of dividends or patronage, normal adjustments to interest rates, bank equalization of purchased equity investments, and similar matters ordinarily addressed in an institution's bylaws. Our proposed rule would not change this approach.

II. Approval of Financial Assistance Under Sec. 615.5171

Generally, we have approved bank financial assistance to an association under the following circumstances:

  (1) The bank would continue to be financially sound after providing assistance. The financial assistance would not place the bank's capital at risk prior to association capital.

  (2) The financial assistance has a reasonable chance of returning the association to financial stability and self-sufficiency. Similarly, financial assistance provided to facilitate a merger of a troubled association would result in a reasonable chance for financial stability and continued service to borrowers.

  (3) The proposed financial assistance is the ``least cost'' option available.

We have also ensured that other bank shareholders were informed of the financial assistance and that their interests were adequately considered by the bank board. In addition, in reviewing the purpose of proposed financial assistance requests, we have focused on ensuring that one association was not unduly advantaged compared to other affiliated associations. We have incorporated these general criteria for approval of financial assistance into the standards and notice sections of the proposed regulation.

III. The Proposed Regulation

We propose that the prior approval requirement contained in Sec. 615.5171 be removed and replaced with the following provisions:

  (1) To clarify when the regulation is applicable, we have added a definition of financial assistance. This definition lists bank transactions with affiliated associations that we consider to be financial assistance. In general, financial assistance transactions are those in which a bank conveys a direct or indirect financial benefit to, or enters into contractual arrangements with, an affiliated association on a preferential basis not available on similar terms to all affiliated associations. On the other hand, we clarify that financial assistance does not include routine business transactions or transactions available on similar and nonpreferential terms to all affiliated associations.

  (2) We have added a list of standards that a bank board must consider before authorizing financial assistance to an affiliated association. These standards are designed to ensure that financial assistance is in the best interests of the shareholders of the banks as well as the receiving association. Bank boards that give financial assistance must document their consideration of these standards.

  (3) We have replaced the current prior approval requirement with a requirement for prior notification to FCA. This should provide greater flexibility to the banks and associations, while allowing us to identify and address safety and soundness concerns before a bank takes assistance action. During the 30-day notification period, we may need to request additional information. We also may exercise our enforcement authorities under title IV, part A, and title V, part C, of the Act.

  (4) We have added a requirement for post notification to shareholders. This will ensure that all shareholders of the bank (associations and other financing institutions) are appropriately informed of the bank's assistance action. Banks may inform shareholders before assistance is given, and, in general, should inform shareholders as soon as practicable of any assistance actions.

The FCA will continue to coordinate with the Farm Credit System Insurance Corporation in financial assistance matters to ensure that all pertinent Insurance Fund issues are appropriately identified and addressed.

List of Subjects in 12 CFR Part 615

Accounting, Agriculture, Banks, Banking, Government securities, Investments, Rural areas.

For the reasons stated in the preamble, part 615 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be amended to read as follows:

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

1. The authority citation for part 615 continues to read as follows:

Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.7, 8.8, 8.10, 8.12 of the Farm Credit Act 12 U.S.C. 2013 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-7, 2279aa-8, 2279aa-10, 2279aa-12); sec. 301(a) of Pub. L. 100-233, 101 Stat. 1568, 1608.

2. The heading of subpart F is revised to read as follows:

Subpart F--Property, Assistance, and Other Investments

3. Section 615.5171 is revised to read as follows:

Sec. 615.5171 Financial assistance by Farm Credit Banks and agricultural credit banks to affiliated associations.

  (a) Financial assistance. (1) Farm Credit Bank and agricultural credit bank (collectively, bank) financial assistance to affiliated associations includes, but is not limited to:

  (i) Purchasing an affiliated association's nonvoting stock or participation certificates; and

  (ii) Paying in surplus to an affiliated association in the form of:

  (A) Cash;

  (B) Debt forgiveness or compromise of indebtedness;

  (C) Interest rate concessions;

  (D) Interest free loans;

  (E) Transfer of loans between the bank and the association at a value advantageous to the association relative to fair market value;

  (F) Reduction or elimination of standard loan service fees;

  (G) Assumption of operating or other expenses (e.g., legal fees, insurance premiums, etc.); and

  (H) Any other preferential payment or compensation not available on similar terms to all affiliated associations.

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  (2) Financial assistance does not include routine business transactions providing financial benefits that are available on similar and nonpreferential terms to all affiliated associations.

  (b) Standards for financial assistance. Before authorizing financial assistance to an affiliated association, a bank board of directors must consider and document whether:

  (1) The financial assistance is necessary, feasible, and the ``least cost'' alternative available;

  (2) The financial assistance is in the best interests of all of the shareholders;

  (3) The bank will continue to be financially sound and maintain adequate capital after providing the financial assistance; and

  (4) The financial assistance will enable the association to maintain service to borrowers.

  (c) Notification requirements. (1) Banks must notify the Chief Examiner of the Farm Credit Administration at least 30 days prior to providing financial assistance to an affiliated association.

  (2) Banks must notify their shareholders within a reasonable time of providing financial assistance to an affiliated association.

Date: February 12, 1995. Vivian L. Portis, Secretary, Farm Credit Administration Board.

FR Doc. 99-3980Filed2-17-99; 8:45 amBILLING CODE 6705-01-P

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