Eligibility and Scope of Financing; Processing and Marketing, 30460-30476 [E8-11742]

Agencies

• Farm Credit Administration

[Federal Register Volume 73, Number 103 (Wednesday, May 28, 2008)]
[Rules and Regulations]
[Pages 30460-30476]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-11742]


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FARM CREDIT ADMINISTRATION

12 CFR Part 613

RIN 3052-AC33


Eligibility and Scope of Financing; Processing and Marketing

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or Agency) issues this 
final rule to amend its regulation governing financing of processing 
and marketing operations by Farm Credit System (Farm Credit, FCS, or 
System) institutions under titles I and II of the Farm Credit Act of 
1971, as amended (Act). The final rule revises the criteria used to 
determine the eligibility of legal entities for financing as processing 
and marketing operations. This revision will enable FCS institutions to 
better meet the changing needs of their eligible borrowers. The rule 
further requires System institutions to develop policies and procedures 
for ensuring that the revised eligibility criteria are met and to 
include information on all processing and marketing loans in their 
Reports of Condition and Performance filed with the FCA. The final rule 
also makes a non-substantive technical correction to the regulation 
defining the term ``person''.

DATES: Effective Date: This regulation will be effective 30 days after 
publication in the Federal Register during which either or both Houses 
of Congress are in session. We will publish a notice of the effective 
date in the Federal Register.

FOR FURTHER INFORMATION CONTACT: Barry Mardock, Associate Director, 
Office of Regulatory Policy, Farm Credit Administration, 1501 Farm 
Credit Drive, McLean, VA 22102-5090, (703) 883-4456, TTY (703) 883-
4434; or Michael J. Duffy, Senior Policy Analyst, Office of Regulatory 
Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 
22102-5090, (952) 854-7151, TTY (952) 854-2239; or Howard I. Rubin, 
Senior Counsel, Office of General Counsel, Farm Credit Administration, 
McLean, VA 22102-5090, (703) 883-4029, TTY (703) 883-4020.

SUPPLEMENTARY INFORMATION:

I. Background

    Sections 1.11(a)(1) and 2.4(a)(1) of the Act authorize Farm Credit 
banks and associations to finance the processing and marketing 
operations of bona fide farmers, ranchers, and aquatic producers or 
harvesters that are ``directly related'' to the operations of the 
borrower, provided that the operations of the borrower supply some 
portion of the raw materials used in the processing or marketing 
operation (throughput).\1\ Current Sec.  613.3010(a)(1)

[[Page 30461]]

provides that a borrower is eligible for financing for a processing or 
marketing operation only if the borrower is eligible to borrow from the 
System or is a legal entity in which eligible borrowers own more than 
50 percent of the voting stock or equity.
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    \1\ 12 U.S.C. 2019(a)(1), 2075(a)(1). Each Farm Credit bank has 
transferred its title I authority to make long-term real estate 
mortgage loans to Federal land bank associations pursuant to section 
7.6 of the Act (12 U.S.C. 2279b).
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    We believe that the existing rule, focusing solely on the 
percentage of eligible borrower ownership in a legal entity, is 
unnecessarily narrow. Therefore, FCA adds additional specific criteria 
for determining what legal entities are eligible for financing for 
processing and marketing operations in accordance with the provisions 
in sections 1.11(a) and 2.4(a) of the Act. While potentially expanding 
the pool of eligible legal entities, we believe that the additional 
criteria properly ensure that there is a sufficiently strong economic 
link--or identity of interests--between eligible borrowers and the 
processing or marketing entity so that the financing can be considered 
made to eligible borrowers and ``directly related'' to their 
operations.
    On October 16, 2006, we published a proposed rule (71 FR 60678) to 
amend the regulation governing financing of processing and marketing 
operations by FCS institutions with the comment period closing on 
December 15, 2006. On January 11, 2007, we reopened the comment period 
for the proposed rule (72 FR 1300) after receiving requests from 
several commercial bank trade organizations. The comment period was 
reopened for 45 days and ended on February 26, 2007.

II. Purpose of the Rule

    FCA believes its amendment to Sec.  613.3010 will permit System 
associations to more effectively meet the credit needs of eligible 
borrowers in the face of changing agricultural and economic conditions 
while remaining consistent with the Act. We recognize the increasing 
importance of value-added agriculture and aquaculture and the changing 
ownership structures in processing and marketing operations. As part of 
these changing agricultural and economic conditions, FCA seeks to 
ensure that affordable and dependable credit for businesses that add 
value to farm and aquatic products and commodities remains available 
for the benefit of agricultural and aquacultural producers (and the 
rural communities in which they operate).
    As farmers, ranchers, and producers or harvesters of aquatic 
products look for opportunities to increase their income and diversify 
income sources, the importance of value-added agriculture and 
aquaculture has emerged. Producers are pursuing value-added activities 
to gain more direct access to markets and a greater share of the 
consumers' food dollar. As such, farmers are increasingly reliant upon 
vertical integration and coordination of production, processing, and 
marketing to deliver products that meet consumer needs. These 
opportunities have stemmed from increased consumer demands regarding 
health, nutrition, and convenience; efforts by food processors to 
improve their productivity; and technological advances that enable 
producers to provide what consumers and processors desire. With 
continued movement to a global economy, the international market for 
value-added products is also growing.
    Ownership structures within processing and marketing operations are 
changing as substantial capital investments cannot be fully raised 
through traditional methods. The farmer-owned sole proprietorships or 
closely held entities prevalent in the past are often no longer 
economically viable. Therefore, new forms of cooperatives, limited 
liability companies, limited liability partnerships, and other 
ownership structures--requiring outside investment--are being used to 
address capital needs. For example, many new ethanol plants are only 
partially owned by farmers; however, these plants are usually directly 
related to the farmer-owners' operations and provide significant 
benefits to both producers and the rural communities in which they are 
located.
    Moreover, even where sole proprietorships or closely held entities 
are economically viable, they are often not advisable from a legal 
liability, tax, or estate planning perspective. Structuring a 
processing or marketing operation with prudent legal liability 
considerations protects borrowers' financial interests and is an 
appropriate safety and soundness practice. We do not believe that our 
rules should create a circumstance that forces eligible borrowers to 
reject prudent legal, business and tax advice if they wish to continue 
borrowing from their FCS lender.
    Processing and marketing agricultural businesses are projected to 
continue to evolve and grow within rural America. The entrepreneurial 
spirit of farmers, ranchers, and producers of aquatic products will 
require a reliable and flexible source of credit and financial 
services. As value-added agriculture continues to grow, agricultural 
producers are challenged by the need to attract substantial capital in 
order to provide products to an increasing number of consumers and 
improve the output and efficiency of their operations. The success of 
value-added agriculture not only directly benefits rural America, but 
American and international consumers as well.\2\
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    \2\ For background on the issues discussed in this section, see, 
e.g., Klinefelter, D. A., and Penson, J. B., ``Growing Complexity of 
Agricultural Lending Decisions.'' Choices, 20(1) (1st Quarter 2005); 
Bowers, D. and Gale, F., ``Value-Added Manufacturing--An Important 
Link to the Larger U.S. Economy,'' Rural Conditions and Trends, Vol. 
8, No. 3 (March 1998); Govindasamy, R., and Thornsbury, S., ``Theme 
Overview: Fresh Produce Marketing: Critical Trends and Issues,'' 
Choices, 21(4) (4th Quarter 2006); Gehlhar, M. and Coyle, W., 
``Global Food Consumption and Impacts on Trade Patterns,'' 
Agriculture and Trade Report, Market and Trade Economics Division, 
Economic Research Service, U.S. Department of Agriculture, WRS-01-1 
(May 2001); Holz-Clause, M., ``Using Value-added Agriculture to 
Create a New Rural America,'' Economic Development Administration, 
U.S. Department of Commerce (Summer 2004); Kohl, D. M., and Morris, 
A. M., ``Agri-lending Vision 2020: When Vision and Reality Meet.'' 
Choices, (20)1 (1st Quarter 2005); and Innovation & Information 
Consultants, Inc., ``Empirical Approach to Characterize Rural Small 
Business Growth and Profitability,'' Office of Advocacy, Small 
Business Administration, Small Business Research Summary (February 
2006).
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    FCA recognizes the importance of these value-added enterprises to 
producers, rural areas and American agriculture and consumers. We 
believe this regulation will help ensure dependable credit for 
businesses that add value to farm, ranch and aquatic products and 
commodities, as well as the communities in which they operate. We also 
believe that the regulation will provide the FCS with the additional 
flexibility to meet the existing and future credit needs of processing 
and marketing entities upon which farmers, ranchers, and producers or 
harvesters of aquatic products are increasingly dependent for economic 
survival.

III. Structure of Final Rule

    The two criteria contained in existing Sec.  613.3010(a)(1) and 
(a)(2) for determining the eligibility of processing or marketing 
operations are retained in paragraphs (a)(1) and (a)(2) of revised 
Sec.  613.3010. In addition, paragraph (a)(2) clarifies that it only 
applies to a legal entity that does not qualify for financing under 
paragraph (a)(1) as a bona fide farmer, rancher, or producer or 
harvester of aquatic products. However, as discussed above, we believe 
that a limitation based solely on the percentage of voting stock held 
by eligible borrowers--representing pure numerical voting ``control'' 
of the entity--is an unnecessarily narrow way

[[Page 30462]]

of looking through a legal entity to determine whether a loan can be 
viewed as made to an eligible borrower or ``directly related to'' an 
eligible borrower's operation.
    The final rule adds new paragraph Sec.  613.3010(a)(3) to provide 
alternative methods for determining actual eligible borrower 
``control'' over a legal entity where the eligible borrower owns 50 
percent or less of the voting stock or equity. New Sec.  613.3010(a)(4) 
provides eligibility criteria for legal entities where eligible 
borrowers have a significant equity stake and provide a substantial 
amount of the throughput for the processing and marketing operation. 
New Sec.  613.3010(a)(5) provides criteria for financing legal entities 
that are a direct extension or outgrowth of an eligible borrower's 
production operation, regardless of the amount of eligible borrower 
ownership of the legal entity. A legal entity must meet one of the 
criteria under Sec.  613.3010 to borrow from an FCS association for its 
processing and marketing activities.
    The final rule also adds new paragraph (c), adding new reporting 
requirements for each System institution making processing or marketing 
loans and new paragraph (d), requiring the board of directors of each 
System institution making processing or marketing loans to adopt a 
policy that, at a minimum, directs institution management to establish 
procedures for ensuring compliance with the eligibility provisions of 
Sec.  613.3010.

IV. Comments Received

    We received a total of 5,016 comment letters on our proposed rule. 
We received letters from commenters residing in Puerto Rico, the 
District of Columbia, and from 48 states. Of the comment letters 
received, 1,976 letters expressed support for the proposed amendments. 
The majority of these letters were submitted by System institutions and 
their member/borrowers, officers, and employees, as well as four 
comment letters from the Farm Credit Council (FCC) on the behalf of all 
System institutions and two letters from the 10th District of the FCC. 
We also received a letter of support from the Empire State Council of 
Agricultural Organizations, an umbrella organization comprised of 25 
farm, commodity and agribusiness organizations in New York.
    We received 3,040 comment letters expressing opposition to the 
proposed rule. Of the opposition comment letters received, 2,945 were 
submitted by commercial banks, 67 by trade organizations representing 
commercial banks, and 28 by individuals. The national trade 
associations that provided opposition comments included the American 
Bankers Association of America (ABA), the Independent Bankers 
Association of America (ICBA), the Financial Services Roundtable, the 
Conference of State Bank Supervisors, the American Bankers Insurance 
Association, and America's Community Bankers. The states from which 
banking chapters and affiliates of their national associations 
submitted comments included Arizona, Arkansas, Colorado, Georgia, 
Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maryland, Michigan, 
Minnesota, Missouri, Montana, Nebraska, New Jersey, Oklahoma, Oregon, 
Pennsylvania, South Dakota, Tennessee, Texas, Vermont, Virginia, West 
Virginia, Wisconsin, and Wyoming.
    Although we received opposition letters from commenters throughout 
the country, almost 75 percent of all opposition comment letters came 
from the following states located in the central portion of the 
country: Kansas (429 letters), Oklahoma (325 letters), Minnesota (288 
letters), Nebraska (180 letters), Missouri (157 letters), South Dakota 
(146 letters), Michigan (128 letters), Iowa (125 letters), North Dakota 
(108 letters), Wisconsin (89 letters), Illinois (80 letters), Colorado 
(57 letters), Arkansas (55 letters), Wyoming (54 letters), and 
Tennessee (46 letters). Moreover, commenters in Kansas and Oklahoma 
submitted approximately 25 percent of all the opposition letters we 
received.
    We received a significant number of letters criticizing the 
proposal from the three noncontiguous states of Oregon (129 letters), 
Pennsylvania (109 letters), and Virginia (98 letters). By adding the 
opposition letters from these three states to those from the 15 states 
identified above, we note that almost 86 percent of all opposition 
letters we received in response to the proposed rule came from 18 
states.
    We also received support letters from commenters located throughout 
the country. The largest geographic concentration (approximately 27 
percent) of letters supporting the proposal came from commenters 
residing in states located in the South Atlantic section of the 
country. For example, we received numerous support letters from South 
Carolina (215 letters), North Carolina (147 letters), Georgia (96 
letters), and Virginia (81 letters). In contrast to the opposition 
letters we received, which were primarily from commenters residing in 
the middle of the country, we received letters supporting the proposed 
rule from commenters throughout the United States. Approximately 40 
percent of the letters supporting the proposed rule were submitted by 
the member/borrowers, officers, and employees of the System from 
Colorado (120 letters), Minnesota (89 letters), California (88 
letters), Pennsylvania (87 letters), Kansas (70 letters), Washington 
(64 letters), North Dakota (61 letters), Texas (60 letters), Ohio (58 
letters), Illinois (49 letters), and Wisconsin (49 letters). 
Consequently, approximately 67 percent of all supporting comments came 
from the 15 noncontiguous states identified above.
    The vast majority of the 5,016 letters we received in response to 
our proposed rule--4,683 letters or 93.4 percent of all letters 
received--were form letters or letters with the same language as 
numerous other letters with only the names and addresses changed. For 
example, of the 3,040 responses we received opposing the proposed rule, 
3,007 were form letters. Consequently, 98.9 percent of all opposition 
comments were submitted through form letters by the officers and 
employees of commercial banks and their trade associations (Bankers). 
In addition, of the 1,976 responses we received in support of the 
proposed rule, 1,676 were form letters. Therefore, 84.8 percent of the 
supporting comments were submitted through form letters by the member/
borrowers, officers, and employees of the System. The form letters 
submitted by System and non-System commenters expressed strong 
opinions--albeit from very different positions--on the rule.

V. Summary of Supporting Comments

    We received 1,976 comments in favor of the proposed rule. Most 
letters highlighted the changes occurring in the industry and the 
importance of value-added agriculture, stating:
     The existing regulations no longer fully meet the needs of 
today's producers and the proposed revisions are necessary to address 
the changing agricultural conditions farmers currently face;
     Congress recognized the importance of economic diversity 
for farmers and rural communities and established the FCS to improve 
the income and well being of agricultural producers who often have 
limited options for marketing their products;
     The proposed regulatory changes will allow producers to 
coordinate the production, processing and marketing of their 
commodities through a financial structure that is conducive to a 
natural business model;
     Processing and marketing operations are becoming 
increasingly

[[Page 30463]]

important to the success and viability of farmers and rural areas as 
traditional operations diversify into facilities that support producers 
with value-added activities;
     FCA should develop a rule that allows System institutions 
to finance the complex business entities that agricultural producers 
employ to efficiently and effectively manage their operations; and
     The proposed rule will help rural areas by increasing the 
level of outside investment in processing and marketing businesses.
    The commenters also suggested a number of additional changes to 
provide further flexibility for financing processing and marketing 
entities, including:
     Revising proposed Sec.  613.3010(a)(2) to require ``at 
least 50-percent ownership'' rather than ``more than 50-percent 
ownership'' to allow the financing of hybrid operations that include 
half eligible producers and half investor owners; and
     Emphasizing ``throughput'' rather than ``ownership'' for 
determining eligibility to better accommodate future changes in the 
operating structures of agricultural entities.

VI. Summary of Opposing Comments

    We received a total of 3,040 comment letters opposing the proposed 
changes to the rule. The vast majority of the opposition letters--
received from commercial bankers and commercial bank lobbyists--
requested that the FCA withdraw the proposed rule. We refer to these 
throughout this preamble as ``Bankers' comments.'' Bankers' comments 
included:
     FCA lacks the authority to establish new or revised 
criteria for processing and marketing borrowers;
     The proposal is an attempt to change the mission of the 
FCS so it can expand into ``every sphere of commercial lending'';
     The proposed rule will allow the System to move away from 
financing farmer-owned businesses and will lead to the direct financing 
of commercial businesses that may have only marginal farmer 
involvement, in conflict with Congress' original intent for the System;
     The proposed expansion of authority could be harmful to 
rural America due to the unregulated growth of the System and lead to 
another Federal bailout;
     There is no need for the proposed regulatory changes 
because there is abundant capital in the marketplace and numerous banks 
and other lending institutions seeking to make processing and marketing 
loans;
     FCA should retain its existing rule because it is 
quantifiable and easy to use when determining eligibility;
     Revisions to the eligibility requirements are not 
necessary because System institutions can make processing and marketing 
loans under their similar entity authorities;
     The proposed criteria for determining eligibility is 
``very subjective and arbitrary'';
     FCA does not provide a transparent process or criteria for 
determining a borrower's eligibility;
     The proposed rule will expand the lending authority of the 
System and is part of the System's ``Horizons'' project;
     The proposed rule does not include an explanation of how 
the FCA would monitor compliance with the new criteria;
     The proposal does not allow for public input, oversight or 
the ability to challenge a System funding decision; and
     The proposed rule will negatively impact several thousand 
small banks that compete with the FCS.

VII. Consideration of Comments and Summary of Changes

    In response to the concerns raised by the commenters, we made 
several changes to the proposed rule to: (1) Ensure the language of the 
regulation conforms to our stated purposes and objectives, (2) increase 
the objectivity of the eligibility criteria, (3) ensure adequate 
controls over System processing and marketing lending activities, and 
(4) add new reporting requirements for processing and marketing loans. 
We believe the final rule is consistent with the intent of the proposed 
rule while minimizing or eliminating the potential for unintended 
consequences or overly broad interpretation of the eligibility 
criteria. Changes from the proposed to final rule include:
     Revising proposed Sec.  613.3010 (eligibility based on 
actual management control) by eliminating (a)(3)(iii) and requiring 
eligible borrowers to constitute a majority of the directors of a 
corporation, general partners of a limited partnership, or managing 
members of a limited liability company and exercise actual control;
     Revising proposed Sec.  613.3010(a)(5) (eligibility based 
on a direct extension or outgrowth of a borrower's operation) to--
    [cir] Require that the processing or marketing entity was created 
for the primary purpose of processing or marketing the eligible 
borrower's throughput and would not exist but for the eligible 
borrower's involvement, and
    [cir] Add specific throughput requirements;
     Adding new Sec.  613.3010(c) (reporting requirements) to 
require periodic reporting on processing and marketing loans as part of 
the quarterly Reports of Condition and Performance required under Sec.  
621.12 of this chapter; and
     Adding new Sec.  613.3010(d) (institution policies) to 
require the board of directors of each System institution making 
processing or marketing loans to legal entities under authority of this 
section to adopt a policy, that, at a minimum, directs institution 
management to establish procedures for ensuring that the eligibility 
provisions of Sec.  613.3010 are properly adhered to.

VIII. Response to General Comments

A. Legal Authority for Rule

    Many Bankers commented that FCA's proposal violates sections 
1.11(a)(1) and 2.4(a)(1) of the Act (authorizing System banks and 
associations to finance the processing and marketing credit needs of 
bona fide farmers, ranchers, and aquatic producers and harvesters that 
are ``directly related'' to the operations of the borrower) because it 
allows financing for entities not majority owned by farmers. We 
disagree.
    While the Bankers' comment letters supported FCA's existing rule 
(requiring eligible borrowers to own more than 50 percent of a 
processing or marketing entity) as a necessary and objective bright 
line test under the Act, in 1997 the ICBA and ABA filed suit against 
FCA seeking to invalidate that rule (and other regulatory changes 
adopted at the same time). The ICBA and ABA argued to the court that 
the plain language of the statute requires that the applicant be an 
agricultural producer and therefore only 100-percent farmer-owned 
operations should be eligible for financing. At the time, FCA argued 
that the new 50-percent rule was valid because it ensured that the 
processing or marketing operation was ``directly related'' to the 
eligible borrower's production operation by requiring farmers to 
``control'' the processing or marketing entity.
    Even under FCA's pre-1997 rule, System lenders could make 
processing or marketing loans to ``persons'' other than eligible 
farmers or ranchers. At that time, FCA rules required that eligible 
borrowers own 100 percent of the processing or marketing entity. 
Whether a corporation (or most other ``legal entities'') is owned 1 
percent or 100 percent by farmers, it is considered to be a separate 
``person'' under the law, able

[[Page 30464]]

to sue and be sued in its own name. It is a hallmark of the corporate 
form that shareholders are not liable for the debts of their 
corporation, and the corporation is not liable for the debts of the 
shareholders. A loan to a corporation is not the same thing as a loan 
to its shareholders.
    In January 1999, the United States Court of Appeals for the 
District of Columbia rejected the Bankers' challenge (affirming the 
district court's decision), holding that under either the old (100-
percent ownership) or new (more than 50-percent ownership) rule:

legal entities could obtain financing for their processing and 
marketing operations, provided they were controlled by actual 
farmers. Appellants' [ICBA and ABA] objection is thus one of degree: 
how much ownership of the legal entity is enough before the business 
is no longer farmer-controlled. The statute does not directly 
address this issue, and appellants fail to demonstrate that the 
agency's requirement that farmers have a majority ownership of the 
operation is not a reasonable interpretation.\3\
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    \3\ Independent Bankers Ass'n v. Farm Credit Admin., 164 F.3d 
661, 670 (DC Cir. 1999).

    Notably, the Court did not say that the 50-percent rule was the 
only reasonable interpretation or formulation allowed under the Act.
    Today, the Banker commenters are making conceptually the same legal 
argument--and in some cases almost word-for-word the same legal 
argument--that the Court of Appeals rejected in 1999. There is nothing 
in the Act that requires 50-percent ownership or any other numerical 
threshold for farmer ownership for an entity to be eligible for 
processing or marketing credit. The 50-percent rule is simply a test 
FCA devised for determining whether a processing or marketing entity 
has a sufficient identity of interests with an eligible borrower so 
that it is considered ``directly related'' to the eligible borrower's 
operations and therefore eligible for financing under the Act. There 
are, however, other meaningful ways to make that determination.
    While the 50-percent rule does provide a ``bright line'' test, it 
excludes many borrowers we believe should be eligible under the Act and 
is therefore an imperfect test. An example: a processing facility is 
operated on a day-to-day basis by an eligible farmer and his son, who 
works full-time in the processing facility. The farmer's equipment and 
employees are used to operate the facility and the farmer supplies 100 
percent of the throughput. However, the processing operation is not 
eligible for System financing because the farmer only owns 49.9 percent 
of the stock in the corporation that owns the facility, with the other 
50.1 percent owned by the farmer's son, who is not an eligible farmer 
because he does not own agricultural land or produce agricultural 
products.\4\
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    \4\ See 12 CFR 613.3000(a)(1).
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    The Bankers argue that the 50-percent rule is necessary to ensure 
that legal entities financed by the System are ``controlled'' by 
eligible borrowers. Many Banker commenters noted that the proposed rule 
is ``arbitrary'' and would ``eliminate the quantifiable, easily 
determined requirement that eligible processing and marketing 
operations have at least 50-percent farmer or rancher ownership and 
would replace it with a graduated series of mostly subjective 
determinations regarding the control, authority, and dependent 
financial condition of the producers and borrowers.''
    However, there are many ways to measure ``control'' over a legal 
entity. For example, statutes and regulations applicable to a wide 
spectrum of activities define ``control'' several different ways, 
including use of various numerical thresholds. In some contexts, as 
little as 5-percent ownership of an entity can be deemed a 
``controlling'' interest.\5\ We believe that each of the new Sec.  
613.3010 provisions require substantial control over an entity by an 
eligible borrower. More importantly, since the concept of ``control'' 
is not contained in the Act, control through majority stock ownership 
is clearly not the only way to determine whether financing a processing 
or marketing entity is necessary to meet the credit needs of an 
eligible borrower or whether the operation is ``directly related'' to 
the farmer's production operation.
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    \5\ See, e.g., 12 CFR 612.2130(c) (definition of ``controlled 
entity'' under FCA Standards of Conduct rule); 12 U.S.C. 1841(a) 
(statutory presumptions related to determining bank holding company 
``control''); 7 CFR 59.200 (definition of an affiliate of a packer 
under United States Department of Agriculture rule); 5 CFR 890.1003 
(definition of ``control interest'' by a health care provider under 
Office of Personnel Management rule).
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    The 50-percent rule was adopted by FCA more than 10 years ago even 
though nothing in the Act required a 50-percent test for eligibility. 
As we noted in the preamble to the proposed rule, we believe that our 
current rule is unnecessarily narrow in focusing solely on percentage 
of ownership to determine eligibility. However, the Financial Services 
Roundtable commented that ``[h]owever arbitrary these percentage 
minimums and maximums [in the current rule] may seem, these percentages 
of eligible borrower ownership permit an objective application of FCA 
regulations.'' We disagree that a Federal agency should settle for a 
potentially arbitrary rule just because it permits an ``objective'' 
application. Ease of application is not the only criterion to consider 
when promulgating a rule. There may not be a perfect method available 
to determine which processing or marketing entities should be eligible 
and which should not; however, we do believe our current rules are 
deficient because they exclude entities we believe Congress intended to 
be eligible under the Act.
    As discussed herein, we have made changes to address commenters' 
concerns over ``subjectivity'' and the potential for overly broad 
lending under the rule. Far from being ``arbitrary'' or unduly 
``subjective,'' we have attempted to carefully target the new 
provisions of Sec.  613.3010 to ensure that farmers, ranchers, and 
aquatic producers and harvesters are able to obtain System credit for 
their value-added activities as they vertically integrate their 
operations.

B. Prior FCA Interpretations

    The Bankers further assert that the new rule contradicts FCA's 
previous interpretation of legislative history, contradicts the 
System's mission to serve farmers and ranchers, and contains proposals 
FCA rejected in prior rulemakings. As discussed below, these assertions 
are based, in large part, on a misunderstanding of the intended scope 
of the rule. As Banker commenters noted, ``FCA has long held the 
position that the Act only authorizes titles I and II lenders to lend 
to processing and marketing operations that are directly related to the 
borrowers' agricultural or aquatic activities.'' We continue to believe 
this; we also believe that, in today's agricultural economy, processing 
and marketing operations not 50 percent owned by farmers may also be 
``directly related'' to an eligible borrower's production activities. 
While the Bankers criticize FCA for ``expanding the class'' of eligible 
borrowers under the rule, the new rule, like the prior rule, is 
intended to ensure that farmers and ranchers can get System financing 
for their processing and marketing needs, even when legal structures 
are arranged so that they do not own more than 50 percent of the 
entity. In adopting the processing and marketing provisions of the Act, 
we believe Congress intended System lenders to continue to finance 
their borrowers as they grow their agricultural businesses into value-
added activities; our intent with the new rule is to remove artificial 
constraints

[[Page 30465]]

impeding System lenders' efforts to fully serve the credit needs of 
their customers.
    With regard to our interpretation of legislative history, FCA is 
required to implement the Act as adopted by Congress. Legislative 
history is a tool of statutory interpretation that can help provide 
insight into Congress's intent. However, it is not the law, and it 
cannot override the plain words of a statute enacted by Congress. 
Moreover, as the Court of Appeals stated in the 1999 Independent 
Bankers v. FCA case, ``the remarks of a single legislator, even the 
sponsor, are not controlling in analyzing legislative history.'' \6\ 
The ICBA's comment includes lengthy quotes from 1980 Committee Reports 
that accompanied the legislation establishing a 20-percent minimum 
throughput requirement. However, Congress changed the law in 1990 to 
allow financing where there was only ``some'' farmer-owner throughput, 
clearly evidencing a Congressional intent to broaden eligibility 
requirements and clearly limiting the usefulness of the 1980 quotes in 
determining Congressional intent.
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    \6\ Id. at 668.
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    More fundamentally, as the Court of Appeals said in its 1999 
decision, an ``initial agency interpretation is not instantly carved in 
stone. On the contrary, the agency, to engage in informed rulemaking, 
must consider varying interpretations and the wisdom of its policy on a 
continuing basis.'' \7\ The Supreme Court has stated that agencies 
``must be given ample latitude to `adapt their rules and policies to 
the demands of changing circumstances.' '' \8\ As discussed above, we 
believe our new rule is necessary to ensure that the regulatory 
authorities of System lenders keep up with the evolving nature of their 
customers' businesses.
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    \7\ Id. (quoting Chevron, U.S.A., Inc. v. Natural Resources 
Defense Council, Inc., 467 U.S. 837, 863-64 (1984)).
    \8\ Motor Vehicle Mfrs. Assn. of United States, Inc. v. State 
Farm Mut. Automobile Ins. Co., 463 U.S. 29, 42 (1983) (quoting 
Permian Basin Area Rate Cases, 390 U.S. 747, 784 (1968)).
---------------------------------------------------------------------------

C. Unmet Credit Needs

    Virtually all of the Banker commenters assert that our rule is not 
necessary because there is not an ``unmet need'' for processing and 
marketing credit. The Bankers assert that commercial banks are filling 
this credit need and therefore this type of financing is generally 
available in the relevant marketplace. The Bankers support this 
argument by pointing to the large number of commercial banks operating 
in rural communities. The Bankers assert that the System would provide 
unfair competition for these loans, ultimately driving commercial banks 
out of the market to the detriment of rural communities.\9\ The Bankers 
further assert that FCA must be able to demonstrate an unmet credit 
need for processing and marketing businesses prior to adopting a final 
rule.
---------------------------------------------------------------------------

    \9\ We note that many of the Banker commenters appear to 
contradict this assertion by stating that it is ``comical'' or 
``nonsense'' to believe that the 100 or so direct lenders of the 
System can have any significant impact on competition in credit 
markets.
---------------------------------------------------------------------------

    We believe that the Bankers' comments misconstrue both the System's 
statutory mission and authorities and FCA's role as a Federal 
regulatory agency. Moreover, many of the Bankers' comments appear to be 
based on factual misconceptions as well.
    Congress established the System to be a nationwide lender to make 
loans to all creditworthy agricultural borrowers covered by the Act. 
The preamble to the Act states that the System is intended, among other 
things, to ``provide for an adequate and flexible flow of money into 
rural areas.'' Congress further provided in section 1.1(a) of the Act 
(12 U.S.C. 2001) that:

    It is declared to be the policy of the Congress, recognizing 
that a prosperous, productive agriculture is essential to a free 
nation and recognizing the growing need for credit in rural areas, 
that the farmer-owned cooperative Farm Credit System be designed to 
accomplish the objective of improving the income and well-being of 
American farmers and ranchers by furnishing sound, adequate, and 
constructive credit and closely related services to them, their 
cooperatives, and to selected farm-related businesses necessary for 
efficient farm operations.

    Congress did not intend for the System to only serve those 
agricultural producers ``who could not otherwise obtain credit.'' 
Congress could have, but did not, limit the System to only those areas 
and to only those times when credit was otherwise ``unavailable.'' 
Congress also did not authorize FCA to limit the System's lending 
authority to only those times and places where there was a lack of 
available credit. Congress specifically rejected this approach, 
providing in section 1.1(c) of the Act that the System offer 
``competitive'' credit to borrowers. Further, in response to banker 
opposition to new System rural housing authority in the 1971 Act, the 
House Agriculture Committee stated that:

    The committee does not agree that those lenders have a vested 
right to be free from competition and free to make the choice of the 
areas in which adequate credit is actually available for fully 
repayable housing loans. There will be no `credit elsewhere' 
requirement.\10\
---------------------------------------------------------------------------

    \10\ H. Rep. No. 92-593, 92nd Cong., 1st Sess., (Oct. 27, 1971) 
at 12. See also Independent Bankers Ass'n v. National Credit Union 
Admin., 936 F. Supp. 605, 612 (W.D. Wis. 1996) (stating ``Congress 
enacted the Farm Credit Act solely for the benefit of farmers and 
other agricultural entities, not for the benefit of the banks. In 
fact, Congress seems to have intended that the Act would promote 
competition for banks by providing farmers with an alternative 
access to credit'').

    The Act requires the System to provide financing for the processing 
and marketing credit needs of farmers, ranchers and aquatic producers 
and harvesters and directs FCA to implement the Act through 
regulations. Therefore, Congress has already addressed the question of 
System competition and FCA has an obligation to ensure that its rules 
enable System lenders to fully meet their statutory obligations. The 
Bankers generally assert that FCA has exceeded its statutory authority 
in proposing this rule; however, in the same comment letters they are 
asking FCA to regulate the System in a manner that would essentially 
suppress competition for agricultural credit, a result inconsistent 
with clear statutory intent. Such action by FCA would exceed its 
Constitutional and statutory authority as an administrative agency.

D. Adequacy of Processing and Marketing Credit

    The Act specifically authorizes System lenders to serve the 
processing and marketing credit needs of farmers, ranchers and aquatic 
producers and harvesters. Therefore Congress, as expressed through the 
Act, has decided the `unmet credit need' policy question for FCA. While 
we carefully considered and evaluated the Bankers' assertions, we 
remain convinced that the rule is appropriate to ensure a continuing 
and ``adequate and flexible flow of money into rural areas.''
    The ICBA supports its contentions, in part, with the results of a 
poll of its own commercial bank members, in which the poll respondents 
nearly universally concluded that they are meeting the credit needs of 
processing and marketing borrowers. We are unaware of any national poll 
of processing and marketing borrowers gauging their satisfaction with 
credit providers. However, we note that of the 3,040 people who signed 
comments in opposition to the rule, only one identified him or herself 
as a farmer, rancher, or agricultural credit customer. In contrast, we 
received hundreds of letters from persons who identified themselves as 
farmers, ranchers and/or

[[Page 30466]]

System borrowers offering strong support regarding the need for the 
rule. Moreover, we received a number of letters (19) from farmers in 
the Northeastern United States stating that commercial banks are not 
interested in lending to agricultural borrowers in their area. This 
regional variation in agricultural credit availability also seems to be 
borne out by the geographic distribution of opposition letters; as 
discussed above, a large percentage of the opposition letters came from 
a small number of states. In contrast, we received relatively very few 
opposition letters from major agricultural states such as California, 
Texas and Florida (in addition to the Northeast).
    Various independent studies on the availability of credit in rural 
areas have indicated there is the need for additional competition. For 
example, a recent article in Choices magazine, a publication of the 
American Agricultural Economics Association, explored the need for 
additional competition in rural credit markets. The authors focused 
their attention on the competitive forces in rural credit markets in 12 
Midwestern states. The authors found that price discrimination and 
barriers to entry may result in the extension of less credit in rural 
areas than is optimal. They also concluded that when barriers to 
entering a market exist, banks that provide agricultural credit engage 
in credit rationing towards farmers and away from nonfarm 
borrowers.\11\ Similarly, an article entitled ``Financing the New Rural 
Economy,'' presented at a conference on rural policy issues sponsored 
by the Federal Reserve Bank of Kansas City, noted that borrowers with 
large debt capital needs, borrowers needing debt capital for start-up 
businesses, and borrowers needing debt capital for businesses 
unfamiliar to their lenders can expect difficulties obtaining 
credit.\12\
---------------------------------------------------------------------------

    \11\ Kilkenny, M., & Jolly, R., ``Are Rural Credit Markets 
Competitive? Is There Room for Competition in Rural Credit 
Markets?'' Choices, 20(1) (1st Quarter 2005).
    \12\ Markley, D. M., ``Financing the New Rural Economy.'' 
Federal Reserve Bank of Kansas City Rural Conference: Exploring 
Policy Options for a New Rural America, 69-80 (2001).
---------------------------------------------------------------------------

    A study recently commissioned by the ABA and the Pennsylvania 
Bankers Association on rural credit markets in Pennsylvania confirmed 
that the capital needs of rural America require many participants to be 
involved.\13\ The study's authors (professors at Pennsylvania State 
University) stated that ``multiple sources of credit will be required'' 
to meet rural Pennsylvania's future needs in order to avoid the 
possibility of ``credit rationing.'' Most importantly, the professors 
surveyed farm-related businesses and found those businesses want to 
work with a lender that has expertise in agriculture, but commercial 
banks are not replacing their agricultural loan officers who move or 
retire and some banks are exiting the agricultural market entirely. The 
study also concluded that the System is ``clearly involved in 
agricultural lending to an extremely high degree while the average 
commercial bank does comparatively little agricultural lending in 
Pennsylvania.'' We also note that we received comments from System 
customers stating their preference for working with System lenders 
because of their specialized knowledge and expertise in agricultural 
lending.
---------------------------------------------------------------------------

    \13\ Stokes, J. R. and Moore, H. L., Rural Credit Conditions in 
Pennsylvania. American Bankers Association and Pennsylvania Bankers 
Association (April 2007). Available on the World Wide Web at: http:/
/www.aba.com/Press+Room/041007FarmDisputes.htm.
---------------------------------------------------------------------------

    Other independent academic and government sources also indicate 
that while there may be access to some credit at some price in all 
parts of rural America today, there is a lack of adequate competition 
for credit throughout the rural areas of the United States. For 
example, the 1997 Conference on Rural Development sponsored by the 
Kansas City Federal Reserve Bank documented shortfalls in financing for 
rural and agricultural businesses.\14\ More recently, a 2005 study of 
farm level data from the United States Department of Agriculture's 
(USDA) Agricultural Resource Management Survey (ARMS) looked at 
competition in farm credit markets and studied farm loans made during 
the periods of 1991-93 and 2001-02. The study noted the number of 
counties called ``highly competitive'' (three or more banks with at 
least one branch in the county and at least 10-percent agricultural 
loans or $50 million of agricultural loans) declined between the two 
periods and the number that were ``uncompetitive'' (with no banks 
meeting the conditions outlined above) increased. The study found FCS 
lenders were more likely to serve full-time commercial farmers and 
farmers located in regions with less competitive credit markets.\15\ 
Factors such as distance from metropolitan areas, economies of scale, 
and the small number of potential customers in remote areas are market-
entry barriers that limit competition. Thus, banks in these markets are 
in a position to charge higher interest rates, pay lower rates on 
deposits, offer a narrower range of products, and take on fewer risks 
than they otherwise would in a more competitive situation. Clearly, the 
presence of a System institution in these rural credit markets has a 
moderating influence on what commercial banks offer, and rural 
customers benefit from the additional competition provided by the 
System's presence.\16\ This benefit may become more significant as 
commercial banks continue to consolidate, particularly if the acquiring 
bank chooses to focus more heavily on nonagricultural pursuits. Notably 
the number of commercial banks classified as agricultural banks by the 
Federal Deposit Insurance Corporation (i.e., at least 25 percent of a 
bank's loan portfolio consists of agricultural loans) has declined by 
about a third (34 percent) over the last 10 years to 1,634 banks at 
year-end 2006.\17\
---------------------------------------------------------------------------

    \14\ Federal Reserve Bank of Kansas City, Financing Rural 
America (1997). Available on the World Wide Web: https://
www.kansascityfed.org/publicat/fra/framain.htm.
    \15\ Dodson, C. B. and Koenig, S. R., ``Competition in Farm 
Credit Markets: Identifying Market Segments Served by the Farm 
Credit System and Commercial Banks,'' Agricultural Finance Review, 
64, no. 2, 167-186 (2004).
    \16\ Markley, D. M., ``Financing the New Rural Economy.'' 
Exploring Policy Options for a New Rural America. Federal Reserve 
Bank of Kansas City (April 30--May 1, 2001). Available on the World 
Wide Web at: https://www.kansascityfed.org/PUBLICAT/Exploring/
RC01Mark.pdf.
    \17\ Economic Research Service, Ag Income and Finance Outlook 
(AIS 80). U.S. Department of Agriculture (March 11, 2003). Available 
on the World Wide Web at: https://usda.mannlib.cornell.edu/usda/ers/
AIS//2000s/2003/AIS-03-11-2003.pdf; and Federal Deposit Insurance 
Corporation (FDIC), Bank Data & Statistics. Available on the World 
Wide Web at: https://www.fdic.gov/bank/statistical/.
---------------------------------------------------------------------------

    Additionally, there is significant anecdotal evidence that 
commercial banks are not interested in providing financing for start-up 
and other small or potentially risky processing and marketing ventures, 
which are the primary intended beneficiaries of our rule. Some of the 
Banker commenters tacitly acknowledge this, asserting that System 
institutions employ ``relaxed underwriting standards that do not meet 
our safety and soundness requirements.'' This means that the System is 
making processing and marketing loans that commercial banks typically 
do not make. System institutions have a public mission to serve 
agriculture in good times and bad and therefore we expect them to 
accept a reasonable degree of risk that commercial banks may not be 
willing to accept; because System institutions are dedicated 
agricultural lenders, their expertise and experience in lending to 
agricultural ventures should enable

[[Page 30467]]

them to more accurately measure, understand, and adequately address the 
risks involved.
    A good example of this is the ethanol industry. The System appears 
to have provided financing for the majority of independently owned 
ethanol plants (excluding ethanol plants owned by large corporate 
entities) in the start-up phase of the industry. Contrary to Banker 
assertions about System loan pricing, interest spreads on System 
ethanol loans would ordinarily be very attractive and, in other 
industries, draw a great deal of competition for the loans.

E. ``Unfair'' System Competition

    Many bankers commented that the System--because of its Government-
sponsored enterprise (GSE) status--provides ``unfair'' competition for 
commercial banks, asserting that it is unfair for ``private sector'' 
banks to compete against ``government,'' ``Federal instrumentality,'' 
``taxpayer subsidized'' System institutions. This comparison needs 
careful consideration.
    First, each System association--the entity that makes direct loans 
to farmers, ranchers, and aquatic producers and harvesters--is a 
cooperative owned and controlled by its member borrowers. The Farm 
Credit banks--which provide funding to the associations--are in turn 
owned by their affiliated associations. CoBank, ACB has the authorities 
of both a Farm Credit bank and a bank for cooperatives and is therefore 
jointly owned by its affiliated associations and by its cooperative 
borrowers. FCS institutions are privately owned and in 1985 
legislation, Congress expressly referred to ``commercial bankers and 
Farm Credit System'' as ``private lenders'' in contrast to ``public 
lenders.'' \18\ Therefore, similar to their commercial bank 
competitors, no government capital is invested in System institutions.
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 2001 note.
---------------------------------------------------------------------------

    Second, Congress established the System to fulfill a public purpose 
and specifically designated System institutions to be ``Federal 
instrumentalities.'' Congress also created the national banks to 
fulfill a public purpose and courts have long recognized that national 
banks are also ``Federal instrumentalities.'' \19\ Congress continues 
to expect the System and banks to meet public needs; for example, 
Congress made banks (and not the System) subject to the Community 
Reinvestment Act, while obligating the System (and not banks) to focus 
on lending to ``young, beginning, and small farmers and ranchers.''
---------------------------------------------------------------------------

    \19\ See Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896).
---------------------------------------------------------------------------

    Third, System institutions do not receive any government 
``subsidy,'' which directs payments by the government to a private 
party, such as in various USDA programs providing payments to farmers. 
Instead, Congress provided that Farm Credit banks and Federal land bank 
associations, and their long-term mortgage lending business are exempt 
from Federal and state income taxation. The production credit 
activities of System associations are taxable. Congress provided 
similar tax exemptions for a wide variety of privately owned entities 
that also fulfill public purposes; 26 U.S.C. 501 alone lists some 31 
categories of tax-exempt organizations. Moreover, Congress has provided 
a variety of ways for privately owned businesses to minimize their 
Federal income taxes. For example, System institutions are organized as 
cooperatives; to the extent that they return profits to their members 
in the form of patronage, they are able to minimize their taxes under 
Subchapter T of the Internal Revenue Code. Similarly, as of December 
31, 2006, some 2,356 commercial banks have organized as Subchapter S 
corporations and are therefore also able to pass their Federal tax 
burden on to shareholders.\20\ This number has risen steadily since 
1997 when financial institutions were first allowed to elect Subchapter 
S status.\21\ This trend is particularly pronounced for commercial 
banks that are classified as agricultural banks by the Federal Deposit 
Insurance Corporation, with 49 percent electing to be organized as 
Subchapter S corporations at December 31, 2006, compared to 11 percent 
in 1997.\22\
---------------------------------------------------------------------------

    \20\ See U.S. Government Accountability Office letter to Senator 
Bernard Sanders, April 30, 2007 (GAO-07-593R).
    \21\ Id.
    \22\ Federal Deposit Insurance Corporation (FDIC), Required 
Financial Reports, Call and Thrift Financial Reports (December 
2006). Available on the World Wide Web at: https://www.fdic.gov/
regulations/required/.
---------------------------------------------------------------------------

    Fourth, commercial banks also receive government benefits not 
available to System institutions and are free from statutory 
restrictions that System lenders must live by. For example, unlike 
System lenders, commercial banks may accept Federally insured 
(government-guaranteed) deposits (and earn service fees associated with 
those deposits). By statute, commercial banks also may lend to a much 
broader range of customers and provide a much broader range of services 
to those customers than can System institutions. Moreover, unlike 
commercial banks, System lenders must comply with rigid statutory 
borrower rights provisions, offering their borrowers extensive 
disclosures and distressed loan restructuring. Additionally, each 
System borrower must purchase stock in the lending association (with a 
statutory minimum of the lesser of 2 percent of the loan or $1,000) 
before obtaining a loan.
    Fifth, Banker commenters assert that ``unlike FCS lenders,'' 
commercial banks are subject to many safety and soundness regulatory 
limitations. We invite commenters to review our rules at 12 CFR part 
600 et seq., in particular parts 613 (eligibility and scope of 
financing), 614 (loan policies and operations), 615 (funding and fiscal 
affairs), 616 (leasing), 618, subpart A (related services), and 621 
(accounting and reporting requirements) which demonstrate that FCA's 
safety and soundness rules are comparable to those of other financial 
institution regulators.
    Lastly, the Bankers assert the System has an ``unfair funding 
advantage'' because the financial markets treat the System as having an 
implicit government guarantee, thereby allowing the System to obtain 
funds at favorable ``agency'' interest rates (and thereby allowing 
System lenders to undercut them on interest rate pricing). However, 
commercial banks also have access to ``agency'' or GSE funding through 
the Federal Home Loan Bank System and have increased those borrowings 
significantly in recent years.\23\ Additionally, we have found that 
arguments about an unfair funding advantage are not clear cut and are 
extremely difficult to evaluate and ensure meaningful comparison given 
the multiple variables impacting various lenders' cost structures and 
funding strategies. We note that none of the comment letters the Agency 
received presented any empirical data on this issue.
---------------------------------------------------------------------------

    \23\ Federal Deposit Insurance Corporation (FDIC), ``FLHB 
Borrowings Rose Sharply,'' Quarterly Banking Profile, (November 27, 
2007). Available on the World Wide Web at: https://www2.fdic.gov/gbp/
2007sep/chart8.html.
---------------------------------------------------------------------------

F. Similar Entity Authorities

    Many Bankers suggested that the financing proposed under the 
revised rule could be accomplished using existing similar entity 
authorities and that FCA should be encouraging the System to work with 
commercial banks through the Act's similar entity authority rather than 
discouraging that cooperation by expanding eligibility for processing 
and marketing operations. Under section 4.18A of the Act (12 U.S.C. 
2206a), System title I and II

[[Page 30468]]

lenders may participate with non-System lenders in loans made to 
entities that are not otherwise eligible to receive a loan from a 
System bank or association, provided the entities are ``functionally 
similar'' to System-eligible borrowers. Among other statutory 
restrictions, System lenders must hold less than 50 percent of any 
similar entity loan. System institutions may also participate with non-
System lenders in loans to eligible borrowers.
    Similar entity authorities are designed to meet the credit needs of 
(functionally similar) ineligible borrowers while the processing and 
marketing statutory and regulatory provisions are intended to meet the 
needs of eligible borrowers. As Congress directed the System in the Act 
to serve eligible borrower needs directly, a reliance on the more 
limited similar entity authorities would not be appropriate.
    Moreover, the System has been very active in working with 
commercial banks through participation and similar entity authorities. 
According to Call Report data (available at https://www.FCA.gov), System 
institutions held $10 billion (net, i.e., purchases less sales) in 
participations obtained from non-System lenders, including nearly $5.8 
billion (net of similar entity loans) at December 31, 2006. FCA 
continues to encourage System lenders to work with their commercial 
bank counterparts in providing credit to borrowers. However, the Act 
caps similar entity volume (lending capacity) at 15 percent of total 
loan volume. Because the capital intensive nature of processing and 
marketing facilities often results in large loans, some associations 
that serve these operations are already approaching this cap. Using 
this capacity for loans to borrowers that should be eligible 
unnecessarily restricts the System's ability to work with commercial 
bankers in the similar entity marketplace for functionally similar 
ineligible borrowers.
    More fundamentally, we believe that this rule will not have a 
significant effect on similar entity or eligible borrower 
participations by System lenders with commercial banks. This is because 
multi-lender transactions are driven by economic considerations, not 
regulatory fiat. Most System-commercial bank participations involve 
large credits. Multiple lenders make sense for those transactions 
because: (1) The lead lender may not have the capacity to make the 
entire loan, (2) the risk exposure can be spread among multiple 
lenders, and (3) the costs associated with using multiple lenders makes 
sense in the context of the loan size. These types of large loans will 
continue to be made with multiple lenders. However, this means that the 
needs of young, beginning and small farmers for start-up processing and 
marketing credit--intended beneficiaries of this rule--may not be met 
through participations and are unlikely to be met in the future because 
of the economics and risks inherent in such loans. Moreover, where 
commercial banks have made a business decision to avoid lending (or 
participating in loans) in a particular industry or to a particular 
class of borrowers, similar entity authority does not provide any means 
for the System to provide financing.

G. Scope of Rule--Processing or Marketing Operations

    Many of the opposition commenters, without specific reference to 
any proposed rule language, asserted that the rule will allow System 
institutions ``unlimited opportunities'' to finance ``investor-owned'' 
businesses that have little or no connection to farmers. Several 
commenters also expressed concern that the revised regulation would 
allow System lenders to finance large, publicly traded firms and 
investor-owned firms. Numerous commenters used Wal-Mart as an example 
of a large, publicly traded entity that would qualify for System 
financing as a result of its relationship with farmer-owned suppliers.
    It was not an objective of the regulation to expand the System's 
authority so that it could lend to businesses that only have a 
tangential relationship to agricultural or producers' operations. As we 
stated in the Federal Register notice reopening the comment period, 
``[s]uch a wide scale expansion of lending authority is not the intent 
of the proposed rule.'' \24\ As discussed in detail below, we have made 
significant changes to Sec.  613.3010(a)(5) to allay these concerns and 
avoid unintended consequences. However, many of the comments appear to 
be based on a misunderstanding of the scope of the System's processing 
and marketing lending authority under the Act and FCA's prior rule. 
This is evidenced by this passage appearing in many of the letters:
---------------------------------------------------------------------------

    \24\ See 72 FR 1300 (Jan. 5, 2007).

    Another example possible under the proposed rule: A rural town 
has two farm supply stores. One of the stores is a farmer-owned 
store (greater than 50 percent of the enterprise is owned by 
eligible borrowers), and the second one is owned by some investors 
that do not live in the community. Under the existing regulations, 
only the farmer-owned supply store would be eligible for total FCS 
financing because it is majority owned by eligible farmers. Under 
the proposed rule the FCS lender would be a