Borrower Rights; Effective Interest Rates, 67970-67972 [E9-30438]

Agencies

• Farm Credit Administration

[Federal Register Volume 74, Number 244 (Tuesday, December 22, 2009)]
[Rules and Regulations]
[Pages 67970-67972]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-30438]


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FARM CREDIT ADMINISTRATION

12 CFR Part 617

RIN 3052-AC45


Borrower Rights; Effective Interest Rates

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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SUMMARY: The Farm Credit Administration (FCA or we) issues a final rule 
amending the disclosure requirements governing what initial and 
subsequent disclosures a Farm Credit System (FCS or System) qualified 
lender must make to a borrower when the borrower's adjustable rate 
loan's interest rate is directly tied to a widely publicized external 
index. The final rule requires qualified lenders to include, in the 
initial disclosure to borrowers (at loan closing), how and where to 
obtain information on changes to the external index. The final rule 
also requires qualified lenders to make the disclosures to ``existing'' 
borrowers with adjustable rate loans directly tied to a widely 
publicized external index who had not previously been given the ``new'' 
initial disclosures. In addition, the final rule allows qualified 
lenders to send written notices of subsequent rate changes to borrowers 
within 45 days after the effective date of the change or as part of the 
borrower's first regularly scheduled billing statement affected by the 
rate change.

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: Jacqueline R. Melvin, Policy Analyst, 
Office of Regulatory Policy, Farm Credit Administration, McLean, VA 
22102-5090, (703) 883-4498, TTY (703) 883-4434, or Howard Rubin, Senior 
Counsel, 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 final 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 allowing System institutions to provide 
the notices in a more efficient manner.

II. Background

    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\ Under our current rules, where the 
borrower's interest rate is directly tied to a widely publicized 
external index, qualified lenders must provide a written notice to the 
borrower within 45 days after the effective date of the change; where 
the borrower's rate is not directly tied to a widely publicized 
external index, qualified lenders must send written notice within 10 
days.\2\
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    \1\ 12 U.S.C. 2199(a)(4). ``Qualified lenders'' include 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).
    \2\ 12 CFR 617.7135(a). 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).
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    On June 19, 2009 (74 FR 29143), the FCA published a proposed rule 
in the Federal Register that would amend two sections of the disclosure 
requirements in part 617 of FCA's regulations. First, we proposed 
enhancing the initial information a qualified lender gives to borrowers 
with loans directly tied to a widely publicized external index. Second, 
we proposed that the subsequent disclosure notifying the borrower of 
changes in the external index be included in the first regularly 
scheduled billing statement after the effective date of the change. 
However, if the borrower's loan closed before the proposed new initial 
disclosures became effective, the qualified lender would be required to 
provide written notice of the rate change within 45 days after the 
effective date of change.

III. Summary of Comments on the Proposed Rule

    The FCA received comments from two Farm Credit banks and one 
agricultural credit association on the proposed rule. Commenters 
expressed concern that the new rule would add burden by requiring a 
``dual'' disclosure regime (one disclosure system for new borrowers and 
one for existing borrowers). Commenters also requested clarification on 
what information a qualified lender must provide to a borrower with the 
initial disclosure.

IV. Summary of Changes to the Final Rule

    After careful review of comments received, the final rule 
eliminates the need for a ``dual'' notice regime by revising Sec.  
617.7135 to require that the new Sec.  617.7130(b)(6) disclosures be 
provided to all borrowers with a loan interest rate directly tied to a 
widely publicized external index. The final rule gives qualified 
lenders the option of continuing to give borrowers the 45-day rate 
change notice required under the current rule or to give notice of the 
rate change as part of the borrower's first regularly scheduled billing 
statement affected by the rate change. In addition, we also added a 
provision to Sec.  617.7135 that requires qualified lenders to provide 
a one-time notice to applicable borrowers with adjustable rate loans 
directly tied to a widely publicized external index who did not 
previously receive the initial disclosures required by new Sec.  
617.7130(b)(6). We also made changes to the language of final Sec.  
617.7130(b)(6)(i) and (ii); these clarifications are consistent with 
the intent of the proposed rule and do not represent substantive 
changes. The comments and corresponding changes to the final rule are 
more fully discussed in the section-by-section analysis below.

V. FCA's Section-by-Section Analysis of Comments With FCA's Response

A. Initial Disclosure Requirement

    Comment: One commenter requested more guidance as to the FCA's 
expectations on the level of detail that qualified lenders will be 
required to provide to borrowers to satisfy the initial disclosures. 
For example, the commenter wanted to know whether a reference to the 
Wall Street Journal or a single Web site would satisfy the requirements 
of the proposed rule.
    Response: Section 617.7130(b)(1) through (b)(5) of our regulations 
provides qualified lenders the level of information that must be given 
to borrowers at loan closing regarding adjustable rate loans. We 
proposed

[[Page 67971]]

revising Sec.  617.7130 by adding paragraph (b)(6) to ensure that 
borrowers have adequate knowledge, at loan closing, of how and where 
they may access information on adjustable rate loans that are directly 
tied to a widely publicized external index. The FCA expects the 
qualified lender to make an independent assessment of information 
availability in the community that it serves in determining whether a 
single financial news source or a single Web site reference is 
sufficient for borrowers to obtain information on the external index. 
For example, if the institution publicizes index change information on 
its Web site and the institution's borrowers have reasonable access to 
that Web site, a qualified lender may direct their borrowers to the 
institution's Web site.
    Comment: A commenter requested clarification of how and where the 
borrower may ``track'' changes to the index. For example, the commenter 
wanted to know whether qualified lenders will only be required to tell 
the borrowers where they will be able to find changes in the index as 
the changes occur or will qualified lenders also be expected to tell 
borrowers where they can find a history of the changes to the index.
    Response: To avoid confusion, the FCA is eliminating the term 
``track'' changes. To ensure that the regulation is clear, the final 
rule will require qualified lenders to provide information on how and 
where the borrower may ``obtain'' information on changes to the index. 
Qualified lenders will be required to tell borrowers where they can get 
current information on index rates so that borrowers can stay informed 
about interest rate changes that affect them. Qualified lenders will 
not be expected to tell borrowers where they can find historical data 
on index rates.

B. Subsequent Disclosure Requirement

    Comment: A commenter stated that, while proposed Sec.  
617.7135(a)(2) would create a new disclosure system for loans going 
forward, qualified lenders would be required to maintain the old 
disclosure system for existing loans. The commenter also stated that 
besides the additional expense in maintaining two systems 
simultaneously, ``we are unclear as to whether or not this would be 
feasible with our current infrastructure.'' Furthermore, the commenter 
stated that a ``dual'' disclosure system will also be confusing to 
borrowers with existing loans that thereafter close a second loan under 
the proposed rule because the borrowers would presumably receive 
different notices depending on when the loan was booked.
    A second commenter similarly stated that the proposed regulations 
set up two separate classes of loans with different compliance 
requirements with respect to notices of interest rate changes. The 
commenter also stated that the additional compliance requirements would 
be burdensome for qualified lenders to manage. Instead of two separate 
disclosure systems, the commenter suggested that FCA allow institutions 
to establish one process for all loans with interest rates directly 
tied to a widely publicized external index. Another commenter requested 
the flexibility to have the new notice requirement for subsequent 
disclosures apply to the existing loans if the qualified lender 
provided the enhanced disclosures to the existing borrowers, telling 
them how and where they may track changes to the index.
    Response: Upon consideration, we believe the commenters' concerns 
are well-founded and we have changed the final rule as suggested to 
allow for comparable treatment for all borrowers. The FCA's intention 
was to make the subsequent disclosure requirements for notifying 
borrowers of changes in the external index more flexible. This 
flexibility was intended to satisfy the statutory requirements for 
disclosure within a ``reasonable time after the effective date'' of a 
change. However, after consideration of the comments, we see the 
challenge that qualified lenders would face in managing two systems 
instead of one. We therefore agree with the commenters that subsequent 
notice of the enhanced disclosure information to existing borrowers is 
appropriate to allow qualified lenders to begin providing the same 
subsequent interest rate change notice to all borrowers.
    The final rule allows an institution to select one of two options 
for notifying borrowers of changes in the external index. Since either 
method complies with regulatory requirements, a qualified lender may 
choose to use either or both methods. However, unlike the proposed 
rule, the final rule does not require a ``dual'' notice system and 
therefore whichever system is selected, the process can be the same for 
all borrowers regardless of when the loan closed.
    The final rule also requires that the initial disclosures be made 
to applicable borrowers with adjustable rate loans directly tied to a 
widely publicized external index who were not previously provided with 
the disclosures in Sec.  617.7130(b)(6). This subsequent disclosure 
must be made no later than the qualified lender's next regularly 
scheduled correspondence to those borrowers after April 1, 2010. The 
April 1, 2010 date will provide a transition period after the effective 
date of the final rule. Providing the new disclosure, which could be 
sent with planned mail (or e-mail in accordance with FCA's e-commerce 
rules) communication, such as a 45-day notice, a billing statement, or 
some other form of communication directly to the borrower--but not 
advertisements or other generic communications sent to all customers--
would eliminate the need for a ``dual'' notice requirement.
    Comment: A commenter noted that the existing Sec.  617.7130(b) 
requires the qualified lender to ``provide'' information for adjustable 
rate loans to borrowers. However, proposed Sec.  617.7130(b)(6)(ii) 
would require disclosure of when the borrower would ``receive'' notice 
of changes in the borrower's interest rate. The commenter stated that 
since the qualified lender has little control over when the notice of 
the rate change is actually received by the borrower the qualified 
lender should not be required to include a statement to this effect.
    Response: We agree with the commenter that, as proposed, the term 
``receive'' places responsibility on the qualified lender when there is 
little control over the outcome. Therefore, the final rule requires 
that the qualified lender disclose to the borrower when the qualified 
lender will ``provide'' written notice of the rate change.

C. Billing Statements

    Comment: A commenter stated that the proposed regulation provides 
for the submission of a rate change notice no later than the borrower's 
first billing statement which, in the case of monthly pay loans where 
monthly statements are sent 20 days prior to the due date, would reduce 
the time for notice from 45 days to 10 days. The commenter also stated 
that the proposed process would be further complicated by the 
possibility of multiple changes in a given month. In addition, the 
commenter stated that for annual payment loans, the proposed regulation 
is unclear as to whether qualified lenders should provide the latest 
change immediately prior to the annual payment or all of the changes 
throughout the year in the billing statement. As such, the commenter 
urged FCA to consider amending the rule to provide System institutions 
the ability to ``opt out'' and continue using the existing disclosure 
methodology for all loans. Another commenter had similarly requested 
clarification about the billing statement schedule.

[[Page 67972]]

    Response: Generally, we expect that a borrower's billing statement 
would disclose the interest rate being charged in connection with the 
payment due. Proposed Sec.  617.7135(a)(2) required disclosure as part 
of the borrower's first regularly scheduled billing statement ``after 
the effective date of the change.'' To clarify our intent and the 
qualified lender's responsibility, the language of final Sec.  617.7135 
is revised to require disclosure as part of the borrower's first 
regularly scheduled billing statement ``affected by the rate change.'' 
Therefore, if the qualified lender elects to provide the subsequent 
disclosure notifications to the borrower as part of the regularly 
scheduled billing statement, the qualified lender will include all 
intermittent rate changes as part of the borrower's billing statement. 
For example, if the borrower's loan was tied to an external index that 
adjusts monthly and the borrower's regularly scheduled billing 
statements are provided annually, then the qualified lender must 
include in the billing statement all of the changes to the external 
index that occurred throughout the year that affected the borrower's 
interest rate and the resulting annual payment due from the borrower.
    Additionally, as previously discussed, the final rule gives the 
qualified lender an option of continuing with the current process of 
the subsequent disclosure notifications to borrowers within 45 days 
after the effective date of the change.

VI. 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 final 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.

0
For the reasons stated in the preamble, part 617 of chapter VI, title 
12 of the Code of Federal Regulations is amended as follows:

PART 617--BORROWER RIGHTS

0
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

0
2. Amend Sec.  617.7130 by revising introductory text of paragraph (b), 
paragraphs (b)(4) and (b)(5), 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:
* * * * *
    (4) Any limitations on the amount or frequency of adjustments;
    (5) The specific factors that the qualified lender may take into 
account in making adjustments to the interest rate on the loan; and
    (6) If the borrower's interest rate is directly tied to a widely 
publicized external index:
    (i) How and where the borrower may obtain information on changes to 
the index; and
    (ii) When the qualified lender will provide written notice of 
changes to the borrower's interest rate.

0
3. Amend Sec.  617.7135 by revising paragraph (a)(2), redesignating 
existing paragraph (b) as new paragraph (c), and adding a new paragraph 
(b) 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 either:
    (i) Within forty-five (45) days after the effective date of the 
change; or
    (ii) As part of the borrower's first regularly scheduled billing 
statement affected by the rate change.
* * * * *
    (b) Notice to adjustable rate loan borrowers with interest rates 
directly tied to a widely publicized external index. A qualified lender 
must provide the written disclosure required by Sec.  617.7130(b)(6) to 
applicable borrowers who were not previously given the disclosure no 
later than the qualified lender's next regularly scheduled 
correspondence to those borrowers occurring after April 1, 2010.
* * * * *

    Dated: December 16, 2009.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. E9-30438 Filed 12-21-09; 8:45 am]
BILLING CODE 6705-01-P