Statement on Regulatory Burden, 15413-15416 [E6-4493]

Agencies

• Farm Credit Administration

[Federal Register Volume 71, Number 59 (Tuesday, March 28, 2006)]
[Notices]
[Pages 15413-15416]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-4493]


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FARM CREDIT ADMINISTRATION

RIN 3052-AC15


Statement on Regulatory Burden

AGENCY: Farm Credit Administration (FCA).

ACTION: Notice.

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SUMMARY: This notice is part of our most recent initiative to reduce 
regulatory burden for the Farm Credit System (FCS or System). Many 
System institutions responded to our May 2003 request for comments by 
identifying regulations that they considered burdensome, ineffective, 
or duplicative. Since May 2003, FCA has adopted a number of final rules 
addressing many of the comments. We are publishing contemporaneously a 
separate proposed rule in the Federal Register to change or remove 
several regulations. This notice responds to the comments that address 
regulations we are not changing at this time.

FOR FURTHER INFORMATION CONTACT: Jacqueline R. Melvin, Associate Policy 
Analyst, Office of Regulatory Policy, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4414, TTY (703) 883-4434; or Howard 
Rubin, Senior Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION:

I. Background

    On May 16, 2003, we published a notice in the Federal Register 
inviting the public to comment on our regulations and policies that may 
duplicate other requirements, are not effective in achieving stated 
objectives or impose burdens that are greater than the benefits 
received. See 68 FR 26551. We took this action in our continuing effort 
to improve the regulatory environment so System institutions can more 
effectively serve farmers, ranchers, aquatic producers, their 
cooperatives, and other rural residents. We received 19 comment 
letters, 16 of which were from System institutions, one from the Farm 
Credit Council, and one from CoBank, ACB's Northeast Regional Council. 
One comment letter was from an individual.
    Since May 2003, we have published a number of final rules that 
addressed many of the comments, including those related to: (1) 
Required effective interest rate disclosures, (2) distressed loan 
restructuring, (3) lending authorities under title III of the 1971 Farm 
Credit Act, as amended (Act), (4) liquidity reserve requirements, and 
(5) risk weighting. Additionally, the FCA has provided additional 
guidance to System institutions on a number of the issues raised in the 
comments including a Board adopted policy statement in June 2005, that 
provides the framework for examination policies and a November 2004, 
Informational Memorandum that clarified our 2002 E-Commerce rule.
    To further our effort to reduce regulatory burden we are publishing 
a proposed rule contemporaneously with this notice that proposes 
changes or deletions to five regulations that were identified by 
commenters as unnecessary and burdensome.
    The purpose of this notice is to address comments raised about FCA 
regulations that will not be changed in connection with this project. A 
number of the issues raised by commenters are the subject of other 
regulatory projects scheduled for consideration by the FCA as set forth 
in FCA's Semiannual Regulatory Agenda published in the Federal Register 
on October 31, 2005. See 70 FR 65530.
    However, in some cases, commenters identified regulations that 
implement statutory requirements or safety and soundness measures that 
cannot be changed or need significant further evaluation before we can 
consider whether changes are appropriate. Moreover, some of the 
comments are the same or similar to those we received and considered 
(but did not implement) over the past 10 years. Although we are not 
recommending changes to these regulations at this time, we may propose 
changes in the future. Additionally, some commenters appear to have 
misinterpreted our regulations and therefore no revision of our rules 
is needed in order to address the commenters' concerns. We have 
attempted to clarify those regulations in this notice. The following 
section summarizes the comments we received on regulations that we are 
not proposing to change at this time.

II. Regulations That We Are Not Proposing To Change at This Time

A. Employee Standards of Conduct

    One commenter recommended that we revise Sec.  612.2150(j) and (k), 
which limit when a System employee can act as an agent or broker in the 
sale of real estate or insurance. The commenter suggested that System 
employees acting as agents or brokers in the sale of real estate or 
insurance should be able to do so as long as such transactions do not 
involve the directors, employees, borrowers, or loan applicants of the 
employing institution. The Agency prohibits System employees who are 
licensed real estate agents or brokers from acting as agents or brokers 
for their respective institutions in order to avoid real and perceived 
conflicts of interest. We continue to believe that this is an important 
conflict-of-interest provision and are not proposing a change at this 
time.

B. Maximum 15-Year Amortization for Production Credit Association (PCA) 
Loans

    One commenter suggested that we eliminate the 15-year amortization 
requirement for PCA loan terms and remove the restriction that a PCA 
loan may not be made for the purpose of acquiring unimproved real 
estate. Similar comments were raised during the 1997 rulemaking that 
implemented these provisions. Section 1.10(b) of the Act states, 
``[l]oans, other than real estate loans, and discounts made under the 
provisions of this title shall be repayable in not more than 7 years 
(15 years if made to producers or harvesters of aquatic products).'' 
This section provides that FCA may, by regulation, provide for up to a 
10-year repayment period. FCA has implemented this provision in Sec.  
614.4040(a), which allows PCAs to amortize loans for 15 years, although 
the repayment period cannot exceed 10 years. As we indicated in the 
1997 final rule, these provisions are consistent with the differing 
lending authorities of PCAs and Federal Land Credit Associations 
(FLCAs) and recognize the importance of the Act's distinction between 
long-term real estate lenders and short- and intermediate-term lenders. 
In addition,

[[Page 15414]]

under the agriculture credit association (ACA) subsidiary structure, 
PCA customers have access to FLCA services to fill their long-term 
credit needs. Therefore, we are not proposing any change to our 
regulations in response to these comments at this time.

C. Loan Policies and Operations

    We received many comments on a broad range of regulations contained 
in part 614 on loan policies and operations. One commenter stated the 
collateral evaluation requirements contained in Sec.  614.4265 are 
burdensome and exceed comparable standards imposed on the System's 
competitors. Specifically, the commenter said that Sec.  614.4265(d) on 
documenting the evaluation of the income and debt-servicing capacity 
for the property and operation where the transaction amount exceeds 
$250,000 is excessive.
    One commenter stated that Sec.  614.4325(e) requiring an 
independent judgment on the credit worthiness of borrowers in 
transactions involving the purchase of a group or pool of loans is 
burdensome. The commenter suggested the requirement be eliminated or 
revised to allow for System institutions to underwrite group or pooled 
participations on a composite analysis basis. Another commenter 
reiterated this position and stated the underwriter should have 
jurisdiction over whether or not the purchaser of the group or pool of 
loans would identify the extent of analysis needed.
    Two commenters recommended that we eliminate the requirement in 
Sec.  614.4325(h)(4)(ii) allowing an association, in transactions where 
its funding bank serves as its agent in the purchase of loans, to 
require its funding bank to purchase any interest in a loan that the 
association determines does not comply with the terms of the agency 
agreement or the association's loan underwriting standards.
    The intent of these regulations is to implement various sections of 
the Act and/or important safety and soundness measures and we are not 
proposing to change them at this time. However, FCA is committed to 
ensuring that the System is able to meet the credit needs of farmers, 
ranchers, aquatic producers and harvesters, cooperatives, and rural 
residents. The FCA also recognizes that the operating environment of 
the FCS is changing rapidly. Therefore, we will continue to consider 
the commenters' suggestions to identify ways to relieve the System of 
unnecessary regulatory burdens.

D. Loans to Designated Parties

    Several commenters recommended changes to the prior approval 
requirements of district banks for loans to designated parties made by 
their affiliate associations. One commenter stated direct lender 
associations should be responsible for administering their own loan 
approval processes, implementing appropriate internal controls, and 
reporting to their boards of directors. Two commenters suggested that 
approving loans to association directors and/or employees should be the 
responsibility of the direct lending association not their funding 
bank.
    FCA initiated a rulemaking to implement the commenters suggestions 
in 1999-2001; however, FCA received many negative comments from System 
institutions on our proposed changes and did not adopt a final rule. We 
are therefore not proposing any changes at this time.

E. Flood Insurance

    Two commenters asked us to exempt certain farm and ranch 
outbuildings and commercial agribusiness firms from flood insurance 
requirements by establishing a de minimis level of building 
contributory value, below which a flood insurance determination would 
not be required. The Flood Disaster Protection Act of 1973 and the 
National Flood Insurance Reform Act of 1994 require that federally 
regulated lenders, including System institutions, document the 
determination of flood hazard status for all loans where a building or 
mobile home is offered as collateral to secure a loan. This 
determination is done by completing a standard flood hazard 
determination form (SFHDF). However, if the collateral is only bare 
land, there is no requirement to complete a SFHDF. The flood insurance 
statutes do not provide FCA discretion to establish a de minimis level 
of building contributory value, below which a flood insurance 
determination would not be required.

F. Related Services--Authorization Process

    Several commenters addressed provisions of FCA regulations 
governing related services. These commenters stated that the approval 
process for related services is burdensome and discourages innovation. 
In 1995, when the Agency adopted its final rule on related services, we 
explained in the preamble that the review and approval process is the 
least burdensome way to adequately control program risks. While we are 
open to suggestions for reform in this area, we are not proposing any 
change at this point.

G. Related Services--Farm-Related Businesses

    The commenters also suggested that FCA remove prohibitions on 
providing financially related services to farm-related businesses. 
Current Sec.  618.8005 repeats the language of section 2.5 of the Act. 
We will continue to review this issue to determine whether we may 
appropriately broaden eligibility requirements. However, we are not 
proposing any change in our regulations at this time.

H. Related Services--Feasibility Reviews

    Two commenters suggested the requirement that a funding bank's 
board of directors verify that its affiliate associations have 
performed feasibility analyses before offering a related service for 
the first time is not required by the Act and is burdensome. The 
commenters recommended the determination that the feasibility analysis 
is complete be done by FCA examination personnel.
    Three sections of the Act (sections 1.12, 2.5, and 2.12) require 
that the board of directors of the Farm Credit Banks must determine the 
feasibility of an association providing a related service. Section 
618.8025 states that to comply with this statutory requirement the bank 
board of directors need only determine that the association's 
feasibility analysis is complete and that the analysis determines that 
it is feasible to make this related service available.

I. Authorized Insurance Service

    Five commenters addressed FCA regulations authorizing System 
institutions to offer insurance services to their members and 
borrowers. Some commenters suggested that the requirement that a 
borrower sign a written notice acknowledging that any insurance offered 
is optional is burdensome and unnecessary. Two commenters recommended 
the FCA eliminate the requirement that System institutions offer more 
than one insurer.
    The Agency has previously stated that the signed consent does not 
necessarily impose additional paperwork requirements on the banks and 
associations because required notices can be incorporated into existing 
loan documents. The Act requires that ``the board of directors of the 
association or bank selects and offers at least two approved insurers 
for each type of insurance made available to the members and borrowers, 
if at least two insurers have been approved.'' To effectuate the 
statutory requirement,

[[Page 15415]]

Sec.  618.8040(b)(4)(v) states that if the bank or association has 
selected less than two insurers, it has to document the reasons why it 
is unable to offer borrowers additional insurers.
    Another commenter stated that the current 5-percent restriction on 
incentive compensation for loan officers tied to sales of crop 
insurance is too restrictive. The preamble to Sec.  618.8040(b)(6)(60 
FR 34090, June 30, 1995) states that ``the FCA continues to believe 
that unrestricted incentive compensation based on volume of insurance 
sales may lead to conflicts of interest or coercion in the case of loan 
officer * * *.'' At the time, the regulation was modified to allow 
unlimited incentive compensation for full-time insurance personnel or 
full-time managers and supervisors of insurance departments. While we 
believe that the 1995 regulation remains appropriate and are not 
proposing any changes, we may review this regulation in the future.

J. Releasing Borrower Information

    One commenter suggested that Sec. Sec.  618.8320 and 618.8330 be 
amended to include an exception that would allow System employees to 
disclose borrower information in response to a lawful subpoena, 
summons, warrant, or court order. Under the current regulations, if an 
employee is summoned as a witness, the employee must appear, advise the 
court of these regulations, and disclose information after being 
ordered by the court.
    These regulations were amended in the direct final rule published 
August 9, 1999 (64 FR 43046). The final regulation allows a bank or 
association to disclose confidential information under the lawful order 
of a court if the Government or institution is not a party to the 
litigation. As a result, institutions do not automatically have to 
contest every order to produce documents or testimony. Confidential 
borrower information as defined by Sec.  618.8320(a) may be released 
only if a judge issues the order. We believe that this requirement is 
necessary to protect borrower confidentiality because the judge can 
impartially decide whether the litigant needs the confidential 
information in the institution's possession.
    One commenter also suggested that we expand Sec.  618.8320 (b)(4) 
to include any kind of transaction authorized under the Act, including 
lease transactions, sales of participations, and other interests in 
loans. This regulation states that, ``[i]nformation concerning 
borrowers may be given for the confidential use of any Farm Credit 
institution in contemplation of the extension of credit or the 
collection of loans.'' Lease transactions, sales of participations, and 
other interests in loans are all considered extensions of credit for 
purposes of this section. Therefore, no regulatory changes are 
necessary to implement the commenter's suggestion.

K. Young, Beginning and Small (YBS) Farmers and Ranchers Reporting

    Four commenters addressed the requirements for tracking, 
monitoring, and reporting loans to YBS farmers and ranchers. One 
commenter stated that the methodology used to report these loans is 
cumbersome and not very informative. Another commenter suggested that 
the reporting requirements should apply only to the primary customer. 
Two commenters recommended that we change the reporting requirements so 
that they are consistent with small borrower reporting used by the 
commercial lending industry, which bases reporting on loan size, not 
borrower assets and income.
    FCA's current YBS definitions and data collection requirements are 
based on other Government agencies' definitions, as well as the 
objective of the congressionally mandated mission for System 
institutions to serve YBS farmers and ranchers. Section 614.4165 does 
not require this reporting. These requirements are contained in annual 
Call Report instructions for preparing the Young, Beginning, and Small 
Farmers and Ranchers Report. The Call Report instructions state that 
reporting is required if ``* * * any individual that is obligated on 
the promissory note meets the definitional criteria as a young or 
beginning borrower.'' Therefore, a System institution is required to 
report a loan as young or beginning if any person obligated on the note 
meets any of these definitions. The Agency solicits this supplemental 
information to help us provide a more in-depth report to Congress on 
the performance of the System in fulfilling its statutory mission set 
forth in section 4.19 of the Act. The Agency recently completed its YBS 
Call for 2005. Therefore, we do not intend to change this policy at 
this time. However, the YBS Call Report is reviewed annually and could 
be subject to change in the future.

L. Interest Rate Shock and Ramp Requirements

    One commenter recommended that the Agency eliminate interest rate 
shock and ramp requirements for System associations that are match 
funded. Section 615.5135 requires that bank boards develop and 
implement interest rate risk (IRR) management programs. One requirement 
of this regulation is that IRR management programs measure the 
potential impact of certain risks on projected earnings and market 
values by conducting interest rate shock tests and simulations of 
multiple economic scenarios at least on a quarterly basis. This is a 
safety and soundness requirement that FCA believes is appropriate and 
therefore we are not proposing any regulatory change at this time.

M. Confidentiality in Voting

    Four commenters asked us to clarify or amend Sec.  611.330. Some 
commenters were unsure when a third-party tabulator is required to 
tally stockholder votes and asked for clarification. Other commenters 
stated that the requirement for a third-party tabulator is unnecessary 
and burdensome. One commenter suggested that we remove the requirement 
that weighted votes be tabulated by an independent third party because 
this is not required by the Act.
    Section 4.20 of the Act requires that FCS institutions implement 
safeguards to protect shareholders' rights to a secret ballot. Section 
611.330 implements this section of the Act. Section 611.330(b) requires 
the use of an independent third party to tabulate vote results if the 
ballot contains an identifying code. If no code is used, then there is 
no regulatory requirement for an independent third party. For weighted 
votes, such as association ballots that are weighted by the number of 
shareholders determined by the bank, the votes must be tabulated by an 
independent third party. Otherwise, when an association submits a 
weighted vote, the factor that determines the weight (e.g., number of 
shareholders) would breach the confidentiality requirement of section 
4.20 of the Act because the bank could determine who submitted the 
ballot by the weight factor. At this time, we believe that our 
regulations help ensure that the appropriate safeguards are in place to 
protect shareholders' right to a secret ballot and we do not find these 
regulations to be unnecessary or burdensome. Therefore, we are not 
proposing any changes to Sec.  611.330.

N. Employee Standards of Conduct--Disclosure Requirements

    One commenter suggested that we limit the standards of conduct 
disclosure obligation to officers. Section 612.2155(b) requires that 
System employees complete standards of conduct disclosures at intervals 
determined by the board.

[[Page 15416]]

    As explained in the preamble to FCA's final rule on Personnel 
Administration (59 FR 24889, May 13, 1994), Sec.  612.2155 allows 
System institutions to determine employee reporting frequency for 
matters not required by part 620 disclosures, but the institution must 
establish reporting requirements sufficient to permit the effective 
enforcement of the regulations and the standards of conduct policy. 
This allows System institutions to exclude certain individuals or 
classes of individuals from the reporting requirement based on the 
functions the employee performs. For instance, positions where there is 
a substantial degree of supervision and a low level of responsibility 
may make the reporting requirement unnecessary. Therefore, System 
institutions already have the ability to limit who must complete the 
standards of conduct disclosure as requested by the commenter.

O. Federal Land Credit Associations (FLCAs)

    One commenter suggested that we revise Sec.  614.4030 to permit 
FLCAs to participate with non-System institutions on loans authorized 
under title I and title II of the Act. This regulatory requirement 
implements section 1.5(12)(C) of the Act, which provides that an FLCA 
may participate with non-System lenders on title I type loans only. 
However, an FLCA could become an agricultural credit association with a 
PCA and an FLCA subsidiary so that the ACA had short- and intermediate-
term lending authority enabling the ACA to participate in loans 
authorized under title I and title II of the Act.

P. Territorial Concurrence

    One commenter asked that we clarify and simplify the territorial 
concurrence rules contained in Sec.  614.4070. The commenter suggested 
that FCA adopt a rule that would not require territorial concurrence 
when an association makes a loan to an eligible borrower that either 
resides or has operations in the direct lender association's territory. 
Currently, a bank or association operating under title I or II of the 
Act must get territorial concurrence when it lends to an eligible 
borrower that: (1) Is headquartered and operating in its territory even 
though the operation financed is conducted partially outside its 
territory, (2) is headquartered outside its territory to finance 
eligible borrower operations that are conducted partially within its 
territory and partially outside its territory, (3) finances eligible 
borrower operations conducted wholly outside its chartered territory, 
provided such loans are authorized by the policies of the bank and/or 
association involved and do not constitute a significant shift in loan 
volume away from the bank or association's assigned territory, or (4) 
has operations wholly outside its chartered territory. We are not 
proposing a regulatory change at this time because of the potentially 
significant impact of changing this rule. However, we will continue to 
apply and clarify our existing rule on a case-by-case basis to help 
ensure consistent application of Sec.  614.4070.

Q. Loan Terms and Conditions--General Requirements

    One commenter suggested that the Agency allow System institutions 
with long-term lending authority to make loans in participation with 
Government agency lenders when the loan-to-value ratio of the entire 
debt is greater than 85 percent, but the Government agency lender takes 
the first risk of loss on the portion of the indebtedness that exceeds 
the 85-percent limit. The commenter asserts that this would make 
financing more available for YBS farmers and ranchers.
    Section 1.10(a) of the Act requires a long-term mortgage loan that: 
(1) Is secured by a first-lien interest in real estate, and (2) does 
not exceed 85 percent of the appraised value of the mortgaged property, 
except that FCS banks and associations may finance up to 97 percent of 
the appraised value of the property if the loan is guaranteed by a 
governmental agency. In addition, section 12 of the Farm Credit System 
Reform Act of 1996 amended section 1.10(a) of the Act so that System 
mortgage lenders can rely on private mortgage insurance (PMI) when the 
loan-to-value ratio exceeds 85 percent. Under the Act, if the 
Government agency in the commenter's example is acting as a guarantor 
of the entire loan, the System lender can finance up to 97 percent; 
however, if the Government agency is acting as another lender 
``participating'' in the loan, then the 85-percent rule (with the PMI 
exception) applies.

R. Disclosure to Shareholders

    We received several comments on FCA's regulatory requirements on 
disclosures to shareholders. Many of the issues raised by commenters 
are being addressed in other regulatory projects scheduled to be 
considered by FCA. However, one commenter suggested that the costs and 
efforts in preparing and mailing the Association Annual Meeting 
Information Statement (AAMIS) are not justified by the marginal benefit 
derived by stockholders, and sought more flexibility in providing the 
AAMIS to stockholders. The FCA believes the requirements for items to 
be disclosed in the AAMIS are reasonable and do provide benefits. 
However, the FCA does allow the AAMIS to be mailed to stockholders with 
the annual report so long as the annual meeting is held within the time 
requirements prescribed in the regulations.

S. Grounds for Appointment of Conservators and Receivers

    One commenter stated that Sec.  627.2710(b) requires FCA 
determination of a ``material'' default by an association on a general 
financing agreement (GFA) before action can be taken by the affiliated 
bank. The commenter stated that this is an infringement on the bank-
association contractual relationship that places the bank in the 
position of entering into a lending relationship with an association 
without being able to collect the debt due without FCA's approval. 
However, while a bank has authority to declare an association in 
default of a GFA, it cannot place an association in receivership. The 
preamble to this final regulation dated July 22, 1998 (63 FR 39219) 
stated that ``[t]he FCA Board further believes that the Agency, not the 
bank nor the association, should be responsible for determining, as a 
ground for appointing a conservator or receiver, what constitutes a 
material default of the GFA.'' We are therefore not proposing any 
change at this time.

III. Future Efforts To Reduce Regulatory Burdens on FCS Institutions

    As noted above, we will consider remaining regulatory burden issues 
raised during the comment period in separate regulatory projects. We 
will continue our efforts to remove regulatory burden. However, we will 
maintain those regulations that are necessary to implement the Act and 
are critical for the safety and soundness of the System. Our approach 
will enable the FCS to continue to provide credit to America's farmers, 
ranchers, aquatic producers, their cooperatives and other rural 
residents.

    Dated: March 23, 2006.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E6-4493 Filed 3-27-06; 8:45 am]
BILLING CODE 6705-01-P