Borrower Rights; Effective Interest Rates, 29143-29144 [E9-14484]

Agencies

• Farm Credit Administration

[Federal Register Volume 74, Number 117 (Friday, June 19, 2009)]
[Proposed Rules]
[Pages 29143-29144]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-14484]


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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. 74, No. 117 / Friday, June 19, 2009 / 
Proposed Rules

[[Page 29143]]



FARM CREDIT ADMINISTRATION

12 CFR Part 617

RIN 3052-AC45


Borrower Rights; Effective Interest Rates

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA) proposes to amend two 
sections of its borrower rights regulations governing what initial and 
subsequent disclosures a qualified lender must make to a borrower when 
the borrower's interest rate is directly tied to a widely publicized 
external index. The proposed revisions would require qualified lenders 
to provide additional disclosure to borrowers at loan closing on how 
and where to track the external index, and allow qualified lenders, who 
are required to provide the additional disclosure, to send written 
notices of subsequent rate changes to borrowers no later than the 
borrower's first regularly scheduled billing statement after the 
effective date of the change.

DATES: You may send comments on or before August 18, 2009.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by e-mail or through the FCA's Web site. 
As facsimiles (fax) are difficult for us to process and achieve 
compliance with section 508 of the Rehabilitation Act, we are no longer 
accepting comments submitted by fax. Regardless of the method you use, 
please do not submit your comment multiple times via different methods. 
You may submit comments by any of the following methods:
     E-mail: Send us an e-mail at reg-comm@fca.gov.
     FCA Web site: https://www.fca.gov. Select ``Public 
Commenters,'' then ``Public Comments,'' and follow the directions for 
``Submitting a Comment.''
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     Mail: Gary K. Van Meter, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or from our Web site at https://www.fca.gov. Once you 
are in the Web site, select ``Public Commenters,'' then ``Public 
Comments,'' and follow the directions for ``Reading Submitted Public 
Comments.'' We will show your comments as submitted but, for technical 
reasons, we may omit items such as logos and special characters. 
Identifying information that you provide, such as phone numbers and 
addresses, will be publicly available. However, we will attempt to 
remove e-mail addresses to help reduce Internet spam.

FOR FURTHER INFORMATION CONTACT: 

Jacqueline R. Melvin, Policy Analyst, Office of Regulatory Policy, Farm 
Credit Administration, McLean, VA, (703) 883-4414, TTY (703) 883-4434;

 or

Robert Taylor, Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-
4020.

SUPPLEMENTARY INFORMATION: 

I. Objective

    The objective of this proposed rule is to ensure that borrowers 
with loans directly tied to a widely publicized external index receive 
appropriate disclosure of interest rate changes in accordance with 
statutory requirements while minimizing regulatory burden on Farm 
Credit System (FCS or System) institutions.

II. What Does the Statute Require?

    Section 4.13(a)(4) of the Farm Credit Act of 1971, as amended 
(Act), requires qualified lenders to provide borrowers, for all loans 
not subject to the Truth in Lending Act (15 U.S.C. 1601 et seq.), 
``meaningful and timely disclosure'' of any change in the interest rate 
applicable to the borrower's loan within a ``reasonable time after the 
effective date'' of a change.\1\
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    \1\ 12 U.S.C. 2199(a)(4). ``Qualified lenders'' include Farm 
Credit System lenders (except for a bank for cooperatives), and non-
System lenders (other financing institutions (OFIs)) for loans that 
OFIs make with funding from a Farm Credit bank. See 12 U.S.C. 
2202a(a)(6).
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III. Why did Congress Establish this Requirement?

    At the time of the 1985 adoption of the interest rate notice 
requirements, almost all FCS loans were administered \2\ rate loans and 
there were few, if any, FCS loans directly tied to an external 
index.\3\ Administered rates require definitive action at the 
discretion of the lending bank or association to change the interest 
rate charged. Administered rates are usually based on an institution's 
internal index or other standard and take into account the lending 
institution's costs. Administered rates may also reflect management's 
assessments of whether rate changes are warranted or feasible in view 
of competitive market conditions; therefore, the actual interest rates 
charged on administered rate loans may not mirror the movement of 
market interest rates.\4\
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    \2\ ``Administered'' and ``adjustable'' rates are synonymous 
terms that describe the types of variable rates offered by System 
institutions.
    \3\ FCA considers the nationally published commercial bank Prime 
Rate and the London Interbank Offered Rate (LIBOR) to be the primary 
examples of widely publicized external indexes. Other rates may also 
meet the criteria, but the qualified lender must ensure that the 
rate is published in a source readily available to its borrowers. 
See 68 FR 5587 (Feb. 4, 2003).
    \4\ See the Federal Farm Credit Bank Funding Corporation's 
annual report to investors at https://www.farmcredit-ffcb.com.
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    Prior to adopting the interest rate notice requirements (during the 
farm crisis of the 1980s), Congress and FCA received a number of 
complaints and inquiries from borrowers about interest rate changes 
made on administered rate loans without adequate explanation to 
borrowers. Therefore, it appears that the new notice provisions were 
necessary to protect borrower rights because of the lack of 
transparency associated with the System's administered rate loans. 
While Congress may not have anticipated that the interest rate notice 
provisions cover widely publicized external index loans, these loans 
are not excluded from the reach of the Act.

IV. Section-by-Section Analysis

What initial disclosures must a qualified lender make to a borrower? 
[Sec.  617.7130]

    The proposed revision to Sec.  617.7130(b) would add a paragraph

[[Page 29144]]

(6), requiring, when the borrower's interest rate is directly tied to a 
widely publicized external index, that a qualified lender must provide 
information on how and where the borrower may track changes to the 
index and when the borrower will receive written notice of changes to 
the borrower's interest rate.
    This additional information would be included in the initial 
disclosure to ensure that borrowers have adequate knowledge, at loan 
closing, of how and where they may access information to monitor 
changes in the interest rate. Further, the borrower would be fully 
informed as to how billing or other statements would reflect changes in 
the loan's interest rate.

What subsequent disclosures must a qualified lender make to a borrower? 
[Sec.  617.7135]

    Section 4.13(a)(4) of the Act requires qualified lenders to 
provide, no later than loan closing, notice to borrowers that change in 
the interest rate applicable to the borrower's loan may be made within 
a reasonable time after the effective date of increase or decrease. 
Current Sec.  617.7135(a)(2) requires that the qualified lender provide 
the borrower whose loan is directly tied to a widely publicized 
external index a notice within 45 days after the effective date of the 
rate change.
    We propose amending the regulation to require the qualified lender 
to provide written notice to the borrower of a rate change applicable 
to the borrower's loan no later than the borrower's first regularly 
scheduled billing statement after the effective date of the change, so 
long as the qualified lender provided the disclosures required by 
proposed Sec.  617.7130(b)(6) no later than the time of loan closing.
    There have been several trends in the use of external indexes and 
enhanced information availability that have caused us to now believe 
that the billing statement option is reasonable and justifiable. For 
example, between 1999 and 2008, the volume of administered rate loans 
has declined by 16 percent as more borrowers opt to use their knowledge 
and understanding of index loans to meet their operating needs.\5\ 
Further, advances in technology, such as broad band Internet access in 
rural communities, increased usage of mobile phones and personal 
computers for accessing the Internet and receiving information via e-
mails and text messages, provide borrowers instantaneous information 
regarding any changes in external index rates. Moreover, most System 
associations now offer borrowers online access to their loan balances, 
rate changes, and other information. Therefore, when a qualified lender 
provides the initial disclosure proposed for Sec.  617.7130(b), we 
believe that written notice of subsequent rate changes to the borrower, 
no later than the first regularly scheduled billing statement after the 
effective date of the change, protects borrower rights in accordance 
with the statute regarding ``meaningful and timely disclosure.'' Also, 
institutions do not incur the burden of additional mailing costs, which 
may be passed on to their borrowers.
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    \5\ Historical data compiled from 1999 to 2008 in the Federal 
Farm Credit Banks Funding Corporation annual report to investors 
available at https://www.farmcredit-ffcb.com.
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    The new notice requirements would not apply to rate changes 
applicable to a borrower's loan closed prior to the effective date of 
the final rule (the borrowers would not have received the enhanced 
initial disclosures). Therefore, the current 45-day notice requirement 
would still apply to interest rate changes on those loans.

V. Regulatory Flexibility Act

    Pursuant to section 605(b) of the Regulatory Flexibility Act (5 
U.S.C. 601 et seq.), the FCA hereby certifies that the proposed rule 
will not have a significant economic impact on a substantial number of 
small entities. Each of the banks in the System, considered together 
with its affiliated associations, has assets and annual income in 
excess of the amounts that would qualify them as small entities. 
Therefore, System institutions are not ``small entities'' as defined in 
the Regulatory Flexibility Act.

List of Subjects in 12 CFR Part 617

    Agriculture, Banks, banking, Rural areas.
    For the reasons stated in the preamble, part 617 of chapter VI, 
title 12 of the Code of Federal Regulations is proposed to be amended 
as follows:

PART 617--BORROWER RIGHTS

    1. The authority citation for part 617 continues to read as 
follows:

    Authority: Secs. 4.13, 4.13A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 
4.14E, 4.36, 5.9, 5.17 of the Farm Credit Act (12 U.S.C. 2199, 2200, 
2201, 2202, 2202a, 2202c, 2202d, 2202e, 2219a, 2243, 2252).

Subpart B--Disclosure of Effective Interest Rates

    2. Amend Sec.  617.7130 by revising introductory text of paragraph 
(b) and adding a new paragraph (b)(6) to read as follows:


Sec.  617.7130  What initial disclosures must a qualified lender make 
to a borrower?

* * * * *
    (b) Adjustable rate loans. A qualified lender must provide the 
following information for adjustable rate loans in addition to the 
requirements of paragraph (a) of this section:
* * * * *
    (6) If the borrower's interest rate is directly tied to a widely 
publicized external index, a qualified lender must provide:
    (i) How and where the borrower may track changes to the index; and
    (ii) When the borrower will receive written notice of changes to 
the borrower's interest rate.
    3. Amend Sec.  617.7135 by revising paragraph (a)(2) to read as 
follows:


Sec.  617.7135  What subsequent disclosures must a qualified lender 
make to a borrower?

* * * * *
    (a) * * *
    (2) If the borrower's interest rate is directly tied to a widely 
publicized external index, a qualified lender must provide written 
notice to the borrower of the rate change no later than the borrower's 
first regularly scheduled billing statement after the effective date of 
the change, except that a qualified lender must provide written notice 
to the borrower of the rate change within 45 days after the effective 
date of the change if the loan closed before the disclosures required 
under Sec.  617.7130(b)(6).
* * * * *

    Dated: June 16, 2009.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E9-14484 Filed 6-18-09; 8:45 am]
BILLING CODE 6705-01-P