Amortization Limits
| Published date | 23 January 2020 |
| Citation | 85 FR 3867 |
| Record Number | 2020-00785 |
| Section | Proposed rules |
| Court | Farm Credit Administration |
Federal Register, Volume 85 Issue 15 (Thursday, January 23, 2020)
[Federal Register Volume 85, Number 15 (Thursday, January 23, 2020)]
[Proposed Rules]
[Pages 3867-3870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-00785]
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FARM CREDIT ADMINISTRATION
12 CFR Parts 614
RIN 3052-AC92
Amortization Limits
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
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SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes to
repeal the regulatory requirement that production credit associations
(PCAs) amortize their loans in 15 years or less, while requiring all
Farm Credit System (FCS or System) associations to address amortization
through their credit underwriting standards and internal controls.
DATES: You may send us comments on or before March 23, 2020.
ADDRESSES: We offer a variety of methods for you to submit comments.
For accuracy and efficiency reasons,
[[Page 3868]]
commenters are encouraged to submit comments by email or through FCA's
website. As facsimiles (fax) are difficult for us to process and
achieve compliance with section 508 of the Rehabilitation Act, as
amended, we are no longer accepting comments submitted by fax.
Regardless of the method you use, please do not submit your comment
multiple times via different methods. You may submit comments by any of
the following methods:
Email: Send us an email at [email protected].
FCA Website: http://www.fca.gov. Click inside the ``I want
to . . .'' field near the top of the page; select ``comment on a
pending regulation'' from the dropdown menu; and click ``Go.'' This
takes you to an electronic public comment form.
Mail: David P. Grahn, Director, Office of Regulatory
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA
22102-5090.
You may review copies of comments we receive at our office in
McLean, Virginia, or on our website at http://www.fca.gov. Once you are
on the website, click inside the ``I want to . . .'' field near the top
of the page; select ``find comments on a pending regulation'' from the
dropdown menu; and click ``Go.'' This will take you to the Comment
Letters page where you can select the regulation for which you would
like to read the public comments. We will show your comments as
submitted, including any supporting data provided, but for technical
reasons we may omit items such as logos and special characters.
Identifying information that you provide, such as phone numbers and
addresses, will be publicly available. However, we will attempt to
remove email addresses to help reduce internet spam.
FOR FURTHER INFORMATION CONTACT:
Lori Markowitz, Senior Policy Analyst, Office of Regulatory Policy,
(703) 883-4487, TTY (703) 883-4056, [email protected] or
Richard A. Katz, Senior Counsel, Office of General Counsel, (703) 883-
4020, TTY (703) 884-4056, [email protected].
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the proposed rule are to:
Repeal regulatory provisions that impose amortization
limits on PCA loans; and
Require associations to address loan amortization in their
credit underwriting standards and internal controls.
II. Background
Historically, the Farm Credit System (FCS or System) was comprised
of different types of institutions that made loans for different
purposes. The former Federal land banks, through their agent Federal
land bank associations (FLBAs) made real estate loans for terms of 5 to
40 years that were secured by first liens on realty while PCAs made
short- and intermediate-term operating loans for terms not exceeding 10
years, although aquatic loans could mature within 15 years.\1\ Congress
did not intend for FLBAs and PCAs to compete with each other because
they were both members of the cooperative FCS.
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\1\ Over the decades, Congress has repeatedly extended the
maturity on PCA loans, so farmer-borrowers would have easier payment
terms as capital equipment became increasingly expensive. Originally
the maximum term to maturity for operating loans was three years.
See Agricultural Credits Act of 1923, Public Law 503 section 202(c),
42 Stat. 1454, 1456, (March 4, 1923). The Farm Credit Act of 1956
authorized PCAs to make loans that matured in 5 years. See Public
Law 809, section 104(b), 70 Stat. 659, 664, (July 26, 1956). In
1961, Congress expanded the maturity for PCAs loans to 7 years. See
Public Law 87-343, section 1(b), 75 Stat. 758 (Oct. 3, 1961). An
amendment in 1978 allowed PCA loans to aquatic producers and
harvesters to mature in 15 years. See Public Law 95-443, 92 Stat.
1066 (Oct. 10, 1978). The Farm Credit Act Amendments of 1980 allowed
PCAs to make 10-year loans to farmers and ranchers under policies
approved by their funding banks See Public Law 96-592, section 204,
94 Stat. 3437, 3441, (Dec. 24, 1980).
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The Agricultural Credit Act of 1987 (1987 Act) \2\ significantly
restructured the FCS through mandatory and voluntary mergers, and the
transfer of direct lending authority from banks to associations. For
example, the 1987 Act authorized Farm Credit Banks \3\ to transfer
their real estate lending authority in specific territories to their
agent FLBAs, which then became Federal land credit associations
(FLCAs). The 1987 Act also allowed PCAs to voluntarily merge with FLCAs
or FLBAs to form agricultural credit associations (ACAs). As a result
of mergers and corporate restructurings that have taken place over the
past 32 years, there are currently 68 ACAs, each with a separate PCA
and FLCA subsidiary, and 1 freestanding FLCA.
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\2\ See Public Law 100-233, 101 Stat. 1568 (January 6, 1988).
\3\ Section 410 of the 1987 Act created a Farm Credit Bank in
each district by requiring the Federal land bank to merge with the
Federal Intermediate Credit Bank, which funded or discounted short-
and intermediate-term loans for PCAs and other financing
institutions. Section 7.12 of the Act allows Farm Credit Banks to
merge.
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Since the 1987 Act became law, we have periodically issued
regulations that implement the statutory authorities of System banks
and associations to make, participate in, and buy and sell other
interests in, loans to eligible borrowers. Pursuant to statute, these
regulations also establish how the powers and obligations of the
constituent banks or associations are consolidated, and to the extent
necessary, reconciled in the successor institutions created by the 1987
Act.\4\ As FCS institutions restructured and merged, and the
agricultural economy evolved in subsequent years, FCA revised these
regulations from time to time so the System could adjust to changing
market conditions.
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\4\ The applicable provisions of the Act are: Section 7.2(b)
ACBs; 7.6(c) for FLCAs; and 7.8(b) for ACAs.
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Our original regulations in 1990 authorized FLCAs to make long-term
real estate loans for terms of not less than 5 years, nor more than 40
years, while ACA long-term real estate loans could have terms to
maturity of between 10 and 40 years.\5\ These regulations also
authorized ACAs to make and guarantee short- and intermediate-term
loans, and provide similar financial assistance for most eligible
borrowers for not more than 10 years, although loans to aquatic
producers and harvesters could mature within 15 years.\6\ PCAs could
make or guarantee loans, and provide similar financial assistance to
most borrowers for terms of not more than 7 years unless policies
approved by their funding bank allowed such loans to mature within 10
years.\7\ However, PCAs could also make and guarantee loans to
producers and harvesters of aquatic products for up to 15 years for
major capital expenditures, such as vessels and shore facilities.\8\
These differences in the authorities of ACAs and PCAs to lend to
aquatic producers and harvesters, and to make operating loans for terms
between 7 and 10 years still remain in effect in our regulations.
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\5\ See 12 CFR 614.4030(a) (1991) for FLCA long-term real estate
mortgage loans and 12 CFR 614.4050(a) (1991) for ACA long-term real
estate mortgage loans.
\6\ See 12 CFR 614.4050(b) (1991).
\7\ See 12 CFR 614.4040(a) (1991).
\8\ See 12 CFR 614.4040(b) (1991).
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In 1997, FCA amended its regulations governing lending authorities,
credit underwriting, and loan terms and conditions so associations
could better meet their borrowers' credit needs. At the time,
freestanding PCAs needed greater flexibility so they could offer
farmers and ranchers easier credit terms to buy expensive equipment and
other chattels. As amended, Sec. 614.4040(a)(2), which remains in
effect today, allows PCAs to make loans with maturities of 10 years or
less, but amortize them over a period of up to 15 years. Under this
regulation, PCA loans that amortize within 15 years must comply with
[[Page 3869]]
specific conditions, which are detailed below.
In 1997, FCA also made a substantive revision to the ACA lending
authority regulation, Sec. 614.4050, to recognize the statutory
authority of ACAs to make long-term real estate loans that mature in
not less than 5 years nor more than 40 years, rather than between 10
and 40 years, as the regulation previously specified. The preamble to
the proposed rule issued in 1996 stated that the original version of
Sec. 614.4050 emphasized that ACAs had ``the option to make loans
under their short- and intermediate-term lending authority without
requiring a first lien on real estate if the term is 10 years or
less.\9\ By amending this regulation, FCA recognized that ACAs also had
the option of making loans with maturities between 5 and 10 years under
either their long-term, or short-and intermediate-term authorities, as
appropriate.\10\
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\9\ See 61 FR 16403, 16408 (Apr. 15, 1996).
\10\ Id.
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III. A New Lending Environment and Input From the System
Although the regulations governing loan maturity and amortization
for title I and II loans have not been revised since 1997, the
environment in which the System operates has changed significantly over
the past 22 years. During this time, the System has restructured and
consolidated into larger, but fewer banks and associations.
Because of these changes, the System has periodically asked FCA to
review and revise these regulations. A widespread perception exists in
the System that the current regulations have created a discrepancy
between PCA and ACA lending authorities. A common criticism is that the
regulations permit ACA parents to make 10-year operating loans to
borrowers, without any restriction on amortization, while PCA
subsidiaries cannot amortize the same loans for a period longer than 15
years.
The Farm Credit Council (FCC), on behalf of its members, submitted
a letter in response to FCA's request for public comment on our most
recent Statement on Regulatory Burden, which we issued in 2017.\11\ The
FCC stated that PCA and ACA loan authorities should be updated to
reflect current System structure. According to the commenter, ``There
is no statutory basis to maintain restrictions on PCA real estate
lending, or that loans amortize within a period of 15 years . . ., or
whether the customer already owns the land or is purchasing it.'' The
FCC also commented that ``amortization and repayment should be a matter
of appropriate credit administration, not regulation.''
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\11\ See 82 FR 22762, May 18, 2017. Since 1993, FCA has issued
Statements on Regulatory Burden approximately every five years, and
asks the public to identify regulations that may duplicate other
requirements, are ineffective, are not based on law, or impose
burdens that are greater than the benefits received.
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IV. Proposed Rule
A. Overview
In response to the restructuring of the System, changes in the
agricultural economy, and input we received from the FCS, we are
proposing to revise Sec. Sec. 614.4040, 614.4050, and 614.4200.
Briefly, the proposed rule would repeal the provision in the PCA
regulation, Sec. 614.4040 that imposes restrictions on the
amortization of PCA loans. FCA is also proposing conforming, non-
substantive changes to the ACA regulation, Sec. 614.4050. As discussed
in greater details below, the proposed rule would amend Sec. 614.4200,
to address factors that FCA expects direct lenders to consider as they
develop credit underwriting standards and amortization schedules for
loans that amortize over a period that is longer than their term to
maturity.
B. Proposed Changes to the Lending Authority Regulations
The proposed rule would repeal Sec. 614.4040(a)(2) which restricts
PCAs from amortizing any loan over a period that is longer than 15
years. More specifically, the proposed rule would rescind regulatory
provisions that allow PCAs to amortize loans over periods longer than
the terms to maturity under policies approved by their funding banks,
subject to the following conditions: (1) Such loans are amortized over
a period that does not exceed 15 years, (2) each such loan can be
refinanced only if the PCA determines at the time of refinancing that
the loan meets its loan policies and underwriting criteria, (3) No
refinancing may extend repayment beyond 15 years from the date of the
original loan, and (4) acquiring unimproved real estate is not the sole
purpose of the loan. FCA also proposes to repeal Sec. 614.4040(a)(3),
which states that short- and intermediate-term PCA loans must have
maturities that are appropriate for the purpose and underlying
collateral of the loan, and that comply with the requirements of
Sec. Sec. 614.4150 and 614.4200. As discussed below, the proposed rule
would amend Sec. 614.4200 to require all FCS direct lenders to address
loans that amortize over a period that is longer than their terms to
maturity in their credit underwriting standards and internal controls.
Existing Sec. 614.4040(a)(1) implements section 1.10(b) of the
Act, which sets forth the terms to maturity for short- and
intermediate-term PCA loans. For this reason, FCA is not proposing any
substantive changes to these regulatory provisions. However, we are
making conforming amendments to Sec. 614.4040(a), such as renumbering
its paragraphs, now that we are planning to repeal Sec. Sec.
614.4040(a)(2) and (3).
FCA is not proposing any substantive changes to the ACA lending
authority regulation, Sec. 614.4050. Pursuant to section 7.8(b) of the
Act, this regulation consolidates and, to the extent necessary,
reconciles the lending powers that ACAs inherited from their
constituent PCAs and FLBAs or FLCAs. Accordingly, this regulation
grants ACAs maximum flexibility to exercise their short-, intermediate,
-and long-term lending authorities to meet the credit needs of their
borrowers. Thus, as noted above, ACAs have the option of making loans
between 5 and 10 years either under their PCA or their FLBA/FLCA
authority. Also, ACAs are subject to less stringent regulatory
requirements than PCAs regarding aquatic loans, and loans that mature
between 7 and 10 years.
However, FCA is proposing to restructure Sec. 615.4050 so it
follows the same format as the regulations governing the lending
authorities of FLCAs and PCAs. The proposed rule would combine existing
Sec. Sec. 614.4050(a) and (b) into a single provision. As a result,
proposed Sec. 614.4050(a) would cover the ACAs' authority to make both
long-term real estate loans, and short-, and intermediate-term loans.
Existing Sec. 614.4050(c) and (d), which address loan participations
and other interests in loans, would be redesignated as Sec.
614.4050(b) and (c), respectively. Thus, the regulations for FLCAs,
PCAs, and ACAs would all have the same structure and format.
C. FCA's Position on Loan Amortization
The Act establishes the terms to maturity on loans made by direct
lenders operating under titles I or II. However, the statute does not
prohibit an association from amortizing a loan over a longer time.\12\
Indeed, an amortization schedule that exceeds the term of the loan is
often used to provide borrowers with easier credit repayment terms for
the acquisition of various
[[Page 3870]]
assets, especially equipment and other capital expenditures.
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\12\ Neither the overall structure and text of the Act, nor its
legislative history, indicates that Congress intended to require
System loans to amortize in the same period of time as their terms
to maturity.
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Amortizing a loan over a term that is longer than the term to
maturity would result in a balloon payment. That balloon payment can
either be repaid at the end of the loan term or refinanced into a new
loan. This decision to refinance a balloon loan at the due date of the
loan is based on many factors, including the borrower's current
financial position. However, the lender will not know at the time of
origination whether the loan will be refinanced at maturity. FCA views
loan amortization as a credit underwriting issue, not a legal authority
issue. While FCA recognizes that some loans need to be amortized for a
period that is longer than the terms to maturity, the amortization
period should not extend beyond the useful life of the asset being
financed.
Our proposed rule would require System direct lenders \13\ that
amortize loans over timeframes that are longer than their terms to
maturity to specifically address loan amortization in their credit
underwriting standards.\14\ More specifically, this proposal would add
a new paragraph at the end of Sec. 614.4200 to require such FCS
institutions to establish loan amortization schedules for balloon loans
that are: (1) Consistent with their loan underwriting standards that
they adopt pursuant to Sec. 614.4150, and (2) appropriate to the type
and purpose of the borrower's loan, the expected useful life of the
asset being financed, and the repayment capacity of the borrower.
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\13\ Currently, all direct lenders operating under title I and
II are associations. All Farm Credit banks operating under title I
of the Act have transferred authority to their associations to make
real estate mortgage loans directly to eligible borrowers under
title I of the Act. Section 1.13 of the Act grants these banks
residual authority to make real estate mortgage loans directly to
borrowers in a geographic area where there are no active
associations. For this reason, proposed Sec. 614.4150(c)
specifically refers to the direct lending authorities of Farm Credit
Banks and the agricultural credit bank.
\14\ FCA emphasizes that System banks and associations that do
not offer their customers balloon loans that amortize over a longer
timeframe than the term to maturity would not be required to comply
with proposed Sec. 614.4200(c).
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This regulation identifies the issues that FCA expects FCS direct
lenders to address in their credit underwriting standards if the
amortization period is longer than the term of such loans. We emphasize
that the proposed rule would not prescribe credit underwriting
standards. Instead, it provides System institutions wide latitude to
develop credit underwriting parameters that meet their borrowers' needs
for different types of loan products. This regulatory framework also
enables each System direct lender association to tailor its loan
underwriting standards to its own structure and operations.
In developing credit underwriting standards for balloon loans, we
expect every association to base its decisions on safety and soundness
factors, and it must be able to defend its decisions if examiners
question its choices. One of the purposes of this provision is to
preclude short- or intermediate-term loans from being continually
refinanced at maturity.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), FCA hereby certifies that the proposed rule would
not have a significant economic impact on a substantial number of small
entities. Each of the banks in the System, considered together with its
affiliated associations, has assets and annual income in excess of the
amounts that would qualify them as small entities. Therefore, System
institutions are not ``small entities'' as defined in the Regulatory
Flexibility Act.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, Banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, part 614 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
1. The authority citation for part 614 is revised to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 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,
4.13B, 4.14, 4.14A, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26,
4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 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, 2019, 2071, 2073, 2074, 2075, 2091, 2093, 2094,
2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183, 2184,
2201, 2202, 2202a, 2202d, 2202e, 2206, 2206a, 2207, 2211, 2212,
2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a, 2279a-2, 2279b,
2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413 of Pub. L. 100-
233, 101 Stat. 1568, 1639.
0
2. Section 614.4040 is amended by revising paragraph (a) to read as
follows:
Sec. 614.4040 Production credit associations.
(a) Short- and intermediate-term loans. Production credit
associations are authorized to make or guarantee short- and
intermediate-term loans and provide other financial assistance for a
term of:
(1) Not more than 7 years;
(2) More than 7 years, but not more than 10 years, as set forth in
policies approved by the funding bank; or
(3) Not more than 15 years to producers and harvesters of aquatic
products for major capital expenditures, including but not limited to
the purchase of vessels, construction or purchase of shore facilities,
and similar purposes directly related to the operations of producers or
harvesters of aquatic products.
* * * * *
0
3. Section 614.4050 is amended by:
0
a. Removing the introductory text;
0
b. Revising paragraph (a);
0
c. Removing paragraph (b); and
0
d. Redesignating paragraphs (c) and (d) as paragraphs (b) and (c)
respectively.
The revision reads as follows:
Sec. 614.4050 Agricultural credit associations.
(a) Terms to maturity on loans. Agricultural credit associations
are authorized to make or guarantee, subject to requirements of Sec.
614.4200:
(1) Long-term real estate mortgage loans with maturities of not
less than 5 nor more than 40 years, and continuing commitments to make
such loans;
(2) Short- and intermediate-term loans and provide other similar
financial assistance for a term of not more than:
(i) 10 years; or
(ii) 15 years to aquatic producers and harvesters for their aquatic
operations.
* * * * *
0
4. Section 614.4200 is amended by adding paragraph (c) to read as
follows:
Sec. 614.4200 General requirements.
* * * * *
(c) Loan amortization. If a direct lender amortizes a loan over a
period of time that is longer than the term to maturity under
Sec. Sec. 614.4000(a), 614.4010(a), 614.4030(a), 614.4040(a), or
614.4050(a)(1) or (2), it must establish a loan amortization schedule
that is:
(1) Consistent with its loan underwriting standards adopted
pursuant to Sec. 614.4150; and
(2) Appropriate to the type and purpose of the loan, expected
useful life of the asset being financed, and the repayment capacity of
the borrower.
Dated: January 14, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-00785 Filed 1-22-20; 8:45 am]
BILLING CODE P
