Maximum Interest Rates on Guaranteed Farm Loans, 56754-56756 [E8-22871]

Agencies

• DEPARTMENT OF AGRICULTURE
• Farm Service Agency

[Federal Register Volume 73, Number 190 (Tuesday, September 30, 2008)]
[Proposed Rules]
[Pages 56754-56756]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-22871]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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Federal Register / Vol. 73, No. 190 / Tuesday, September 30, 2008 / 
Proposed Rules

[[Page 56754]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761 and 762

RIN 0560-AH66


Maximum Interest Rates on Guaranteed Farm Loans

AGENCY: Farm Service Agency, USDA.

ACTION: Proposed rule.

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SUMMARY: The Farm Service Agency (FSA) is proposing to amend its 
guaranteed farm loan program regulations governing interest rates to 
increase clarity and to be more consistent with other government loan 
guarantee programs. FSA is proposing to tie the maximum interest rate 
that may be charged on FSA guaranteed farm loans to nationally 
published indices such as the Wall Street Journal Prime (also known as 
New York Prime), or the 10-year Treasury note rate unless the lender 
uses a formal written risk-based pricing model for loans, in which case 
the rate will be the rate charged to moderate risk borrowers. This 
proposed rule specifically asks for comments on the index to be used 
and the maximum allowable spread between the base rate and the rate to 
be charged to FSA guaranteed borrowers.

DATES: We will consider comments that we receive by December 1, 2008.

ADDRESSES: We invite you to submit comments on this proposed rule. In 
your comment, include the volume, date, and page number of this issue 
of the Federal Register. You may submit comments by any of the 
following methods:
     E-Mail: Trent.Rogers@wdc.usda.gov.
     Fax: (202) 720-6797.
     Mail: Director, Loan Making Division, Farm Service Agency, 
U.S. Department of Agriculture, 1400 Independence Avenue, SW., Stop 
0522, Washington, DC 20250-0522.
     Hand Delivery or Courier: Deliver comments to Farm Service 
Agency, Loan Making Division, 1280 Maryland Ave., SW., Suite 240, 
Washington, DC 20024.
     Federal eRulemaking Portal: Go to https://
www.regulations.gov. Follow the online instructions for submitting 
comments.
    Comments may be inspected in the Office of the Director, Loan 
Making Division, Farm Services Agency, USDA, Suite 240, 1280 Maryland 
Ave., SW., Washington, DC 20024, between 8 a.m. and 4:30 p.m., except 
holidays.

FOR FURTHER INFORMATION CONTACT: Trent Rogers, Senior Loan Officer, 
Loan Making Division, Farm Service Agency; telephone: (202) 720-3889; 
facsimile: (202) 720-6797; e-mail: Trent.Rogers@wdc.usda.gov. Persons 
with disabilities or who require alternative means for communications 
should contact the USDA Target Center at (202) 720-2600 (voice and 
TDD).

SUPPLEMENTARY INFORMATION:

Background

    FSA guaranteed loans are a means of providing credit to farmers 
whose financial risk exceeds a level acceptable to commercial lenders. 
The guarantee reduces the lender's risk of default and loss, and thus 
the lender's credit cost. FSA believes that part of the intent of the 
program is for the borrower to receive the benefit of the reduction in 
the lender's credit cost in the form of a lower interest rate.
    The existing regulation, 7 CFR 762.124(a)(3), limits the interest 
rate that a lender may charge guaranteed loan customers to a rate that 
does not exceed the rate charged to its ``average agricultural loan 
customers'' as defined in Sec.  761.2. Currently, 7 CFR 762.124(a)(2) 
states that variable rates, if used, may change according to the normal 
practices of the lender for its average agricultural loan customer, but 
the frequency of change must be specific in the loan instrument. Some 
lenders have indicated that the term ``average agricultural loan 
customer'' is overly vague and have encouraged the agency to review its 
current interest rate policy. FSA proposes to clarify this section of 
the regulations to simplify compliance for stakeholders by setting a 
maximum rate based on certain widely published indices, while 
permitting the continued use of risk-based pricing models for lenders 
that prefer that approach.
    The agriculture credit industry continues to undergo rapid 
transformation in response to the impact of technology and 
globalization of financial markets. FSA's current interest rate 
policies that are tied to the rate of an average customer are no longer 
consistent with industry pricing practices that generally consider the 
anticipated risks, costs, market competition, and terms of the loan or 
with the practices of other government agencies that administer similar 
programs. For example, the Small Business Administration has imposed 
rate ceilings which are linked to the ``prime'' rate or other index, 
depending on loan size, terms, and rate structure.
    FSA believes that the FSA guarantee compensates the lender for much 
of the lender's risk of loss and that the interest rate charged by the 
lender to the producer should reflect that reduced risk. The changes 
proposed are consistent with that policy. In this rule FSA is proposing 
to eliminate the term ``average agricultural loan customer'' from 7 CFR 
762.124(a)(2) and (3). FSA proposes new interest rate limits based on 
widely recognized indices, which will provide simple, clear limits 
rather than an ``average'' customer. For lenders who use a formal 
written risk-based pricing model for loans, the option to use the rate 
charged to moderate risk borrowers will still be included in the 
regulation.
    FSA has selected the indices that it believes most accurately 
represent current rates. FSA has conducted an analysis of its guarantee 
portfolio and the rates lenders have charged their agricultural loan 
customers since 1999 in order to identify a correlation between these 
rates and a published index. That analysis indicated that the 10-year 
Treasury note rate was the index that most closely tracked farm real 
estate loans and Wall Street Journal prime was the index that most 
closely tracked short and intermediate term loans. The rate for 10 year 
Treasury notes is the yield on 10 year Treasury notes issued by the 
U.S. Department of the Treasury through the Bureau of Public Debt. The 
Wall Street Journal prime is the rate that at least 23 of the 30 
largest U.S. banks charge for corporate loans, as published in the 
print edition of the Wall Street Journal. It is sometimes called the 
New York Prime rate.
    The average rate charged on guaranteed Farm Ownership (FO) loans

[[Page 56755]]

since 1999 was 291 basis points (2.91 percent) over the 10-year 
Treasury rate. FSA proposes to limit the interest rate charged on 
guaranteed FO loans to no more than 350 basis points (3.5 percent) over 
the 10-year Treasury rate. Of the FO loans made since 1999, most would 
have met this interest rate limit, had it been in effect.
    The average rate charged on guaranteed Operating Loans (OL) during 
the same time period was New York Prime plus 195 basis points (1.95 
percent). FSA proposes to limit the guaranteed OL interest rate to no 
more than 250 basis points (2.5 percent) over the New York Prime rate. 
Had the proposed interest rate limit been in effect, most of the 
guaranteed OLs made since 1999 would have met this limit. These limits 
will apply to both fixed and variable rate guaranteed loans and lines 
of credit.
    FSA realizes that financial markets can be very volatile and that 
lenders use various methodologies to manage their funding sources. This 
proposal does not require that the lender tie its guaranteed loan 
interest rates to these indices, nor does it require that the rate 
remain below these maximums throughout the term of the loan. It only 
sets the maximum rate that may be charged to the customer at the time 
of loan origination. In addition, to ensure that the benefit of the 
guarantee is passed on to borrowers in financial distress, these 
interest rate limits will apply to guaranteed loans at such time that 
they are restructured, too. FSA is specifically requesting comments on 
the suitability of using these indices or recommendations for another 
index, such as a London Inter Bank Offered Rate (known as LIBOR), or 
the Farmer Mac II cost of funds index or alternative methodologies for 
setting maximum interest rates.
    FSA also realizes that some lenders have well developed risk based 
pricing models and are able to document how the interest rate on a 
guaranteed loan reflects the reduced risk of loss due to the guarantee. 
FSA is proposing to continue to permit such lenders to price guaranteed 
loans at a rate not exceeding the rate charged to their typical, 
moderate risk agricultural loan customer. The rate charged this 
customer would be limited to no more than the highest interest rate for 
the tier of the lender's risk rating matrix that reflects moderate 
risk. This would typically be the lender's middle tier, or for those 
lenders with an even number of tiers, a rate no higher than an average 
of the lender's two middle tiers. If such tier had a range of interest 
rates, the maximum rate permitted would be the highest rate for that 
tier. Specific comments are requested to further define this moderate 
risk agricultural loan rate. The lender will be required to provide the 
Agency with their pricing model.
    Again, FSA is inviting comments that will address the indices to be 
used, as well as the maximum yield spreads. FSA is attempting to adhere 
to current lending standards, propose changes that will provide clear 
and straightforward guidance for lenders to improve lender compliance, 
allow guaranteed loan borrowers to receive the benefit resulting from 
the reduced risk of loss with a guarantee, and to promote active 
competition among lenders. FSA proposes to reserve the right to change 
the maximum rates on a temporary basis by Federal Register notice to 
ensure liquidity in the farm loan market, as determined in consultation 
with the Department of the Treasury, in response to conditions that 
result in large interest rate changes or term structure changes. 
Examples of these conditions include increased loan losses in the 
sector or significant changes in the yield curve.

Executive Order 12866

    This rule has been designated as not significant under Executive 
Order 12866 and has not been reviewed by the Office of Management and 
Budget.

Regulatory Flexibility Act

    In accordance with the Regulatory Flexibility Act, 5 U.S.C. 601, 
FSA certifies that there would not be a significant economic impact on 
a substantial number of small entities. This rule is not expected to 
change the ability of applicants, borrowers, or lenders to receive FSA 
guaranteed loans, and would not increase the costs of compliance with 
the program. Further, all applicants or borrowers affected by this 
change are small, but no lenders are considered small entities. Changes 
will be applied to all affected entities equally, however, without 
regard to their size.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) 
establishes requirements for Federal agencies to assess the effects of 
their regulatory actions on State, local, and tribal governments and 
the private sector. This rule contains no Federal mandates (under the 
regulatory provisions of title II of the UMRA) for State, local, and 
tribal governments or the private sector. Therefore, this rule is not 
subject to the requirements of sections 202 and 205 of the UMRA.

Executive Order 12612

    It has been determined under section 6(a) of Executive Order 12612, 
Federalism, that this rule does not have sufficient federalism 
implications to warrant the preparation of a Federalism Assessment. The 
provisions contained in this rule will not have a substantial direct 
effect on States or their political subdivisions or on the distribution 
of power and responsibilities among the various levels of government.

Executive Order 12372

    These regulations are not subject to the provisions of Executive 
Order 12372, which require intergovernmental consultation with State 
and local officials. See the notice related to 7 CFR part 3015, subpart 
V, published at 48 FR 29115, June 24, 1983.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, on Civil 
Justice Reform. The provisions of this rule are not retroactive. The 
provisions of this rule preempt State and local laws to the extent such 
State and local laws are inconsistent. Generally, all administrative 
appeal provisions, including those published at 7 CFR part 11, must be 
exhausted before any action for judicial review may be brought in 
connection with the matters that are the subject of this rule.

Environmental Evaluation

    The environmental impacts of this rule have been considered in a 
manner consistent with the provisions of the National Environmental 
Policy Act (NEPA), 42 U.S.C. 4321-4347, the regulations of the Council 
on Environmental Quality, 40 CFR parts 1500-1508, and the FSA 
regulations for compliance with NEPA (7 CFR 799 and 7 CFR part 1940, 
subpart G). FSA concluded that this rule will not have a significant 
impact on the quality of the human environment either individually or 
cumulatively and therefore is categorically excluded and not subject to 
environmental assessments or environmental impact statements in 
accordance with 7 CFR 1940.310(e)(3).

Paperwork Reduction Act of 1995

    The information collections to which this rule applies have been 
reviewed by OMB under the Paperwork Reduction Act of 1995 (44 U.S.C. 
chapter 35), approved, and assigned OMB control number 0560-0155. This 
rule involves no change to the currently approved collection of 
information.

[[Page 56756]]

E-Government Act Compliance

    FSA is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.

List of Subjects

7 CFR Part 761

    Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 762

    Agriculture, Credit, Loan programs--agriculture, Grant programs--
agriculture, Reporting and recordkeeping requirements.

    For the reasons set out in the preamble, 7 CFR parts 761 and 762 
are proposed to be amended as follows:

PART 761--GENERAL PROGRAM ADMINISTRATION

    1. The authority citation for part 761 continues to read as 
follows:

    Authority: 5 U.S.C. 301 and 7 U.S.C. 1989.

Sec.  761.2  [Amended]

    2. In Sec.  761.2(b), remove the definition of ``average 
agricultural loan customer.''

PART 762--GUARANTEED FARM LOANS

    3. The authority citation for part 762 continues to read as 
follows:

    Authority: 5 U.S.C. 301, 7 U.S.C. 1989.

    4. Amend Sec.  762.124 by revising paragraphs (a)(2) and (a)(3) to 
read as follows:


Sec.  762.124  Interest rate, terms, charges, and fees.

    (a) * * *
    (2) If a variable rate is used, it must be tied to an index or rate 
specifically agreed to between the lender and borrower in the loan 
instruments and the rate adjustments must be in accordance with normal 
practices of the lender for unguaranteed loans. Upon request, the 
lender must provide the Agency with copies of written rate adjustment 
practices.
    (3) At loan closing and at the time of loan restructuring, the 
interest rate on the guaranteed portion and the unguaranteed portion of 
a fixed or variable rate loan may not exceed the following, as 
applicable:
    (i) For lenders utilizing a pricing model based on loan risk, the 
highest interest rate for tier of the lender's risk rating matrix that 
reflects moderate risk. The lender must provide the Agency with this 
pricing model.
    (ii) For lenders without a risk based pricing model, the 10-year 
Treasury rate plus 350 basis points for FO and the New York Prime (as 
published in the Wall Street Journal) plus 250 basis points for OL. In 
the event of extraordinary conditions resulting in large interest rate 
changes or term structure changes, the Agency may temporarily set a 
different maximum rate under this paragraph as determined in 
consultation with the Department of the Treasury; and
* * * * *
    5. Amend Sec.  762.150 by revising paragraph (g) to read as 
follows:


Sec.  762.150  Interest Assistance Program.

* * * * *
    (g) Rate of Interest. The lender interest rate will be set 
according to Sec.  762.124(a).
* * * * *

    Signed at Washington, DC, on September 24, 2008.
Glen L. Keppy,
Acting Administrator, Farm Service Agency.
[FR Doc. E8-22871 Filed 9-29-08; 8:45 am]
BILLING CODE 3410-05-P