Loan Policies and Operations; Lending and Leasing Limits and Risk Management, 50936-50941 [2010-20367]
Download as PDF
<![CDATA[
50936
Proposed Rules
Federal Register
Vol. 75, No. 159
Wednesday, August 18, 2010
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.
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052–AC60
Loan Policies and Operations; Lending
and Leasing Limits and Risk
Management
Farm Credit Administration.
Proposed rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, Agency, we, our),
by the Farm Credit Administration
Board, is publishing for comment
proposed amendments to our
regulations relating to lending and
leasing limits. We propose lowering the
current limit on extensions of credit to
a single borrower for each Farm Credit
System (System) institution operating
under title I or II of the Farm Credit Act
of 1971, as amended (Act). The
proposed rule would not affect the
lending and leasing limits of title III
lenders under § 614.4355. However, we
are proposing that all titles I, II and III
System institutions adopt written
policies to effectively identify, limit,
measure and monitor their exposures to
loan and lease concentration risks. This
proposed rule, if adopted, would
increase the safe and sound operation of
System institutions by strengthening
their risk management practices and
abilities to withstand volatile and
negative changes in increasingly
complex and integrated agricultural
markets.
DATES: You may send comments on or
before October 18, 2010.
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
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
erowe on DSK5CLS3C1PROD with PROPOSALS
SUMMARY:
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
multiple times via different methods.
You may submit comments by any of
the following methods:
• E-mail: Send us an e-mail at regcomm@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 all
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 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: Paul
K. Gibbs, Senior Accountant, Office of
Regulatory Policy, Farm Credit
Administration, 1501 Farm Credit Drive,
McLean, VA 22102–5090, (703) 883–
4498, TTY (703) 883–4434; or Wendy R.
Laguarda, Assistant General Counsel,
Office of General Counsel, Farm Credit
Administration, 1501 Farm Credit Drive,
McLean, VA 22102–5090, (703) 883–
4020, TTY (703) 883–4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule
are to:
• Strengthen the safety and
soundness of System institutions;
• Ensure the establishment of
consistent, uniform and prudent
concentration risk management policies
by System institutions;
• Ensure that all System lenders have
robust methods to identify, measure,
limit and monitor exposures to loan and
lease concentration risks, including
counterparty risks; and
• Strengthen the ability of System
lenders to withstand volatile and
negative changes in increasingly
PO 00000
Frm 00001
Fmt 4702
Sfmt 4702
complex and integrated agricultural
markets.
The proposed regulation would not
change the following provisions of the
current lending limits rule: Definitions
under § 614.4350; computation of
lending and leasing limit base under
§ 614.4351; lending and leasing limits
for Banks for Cooperatives (BCs) under
§ 614.4355; BCs look-through notes
under § 614.4357; the base calculation
for computing the lending and leasing
limit under § 614.4358; the attribution
rules under § 614.4359; lending and
leasing limit violations under
§ 614.4360; or the transition period
prescribed in § 614.4361.1
We have elected not to address the
lending limits for title III lenders at this
time because of the complexity of the
issues involved in lending to
cooperatives under title III of the Act.
Should the Agency decide to address
the BCs lending limits at some future
time, we will do so in a separate
rulemaking.
All System institutions, including
title III institutions, would be given
6 months from the effective date of new
§ 614.4362 to establish and implement
written policies on limiting exposures to
on- and off-balance sheet loan and lease
concentration risks as prescribed
therein.
II. Background
The Act 2 does not contain general
lending and leasing limits for titles I and
II System institutions outside of specific
limits for processing and marketing and
rural housing loans. However, both the
Agency and the System recognize that
lending limits are a sound banking
practice and an effective risk
management tool that enhance the
safety and soundness of individual
System institutions and the System as a
whole. The Agency’s current lending
limit regulations,3 promulgated in 1993
with an effective date in 1994, were
issued due to the System’s structural
changes resulting from the Agricultural
Credit Act of 1987 (1987 Act).4 This
regulation created a uniform lending
limit for all System banks and
associations, with the exception of BCs,
1 The proposed changes will not change existing
regulations covering underwriting standards or
lending procedures under § 614.4150.
2 Public Law 92–181, 85 Stat. 583 (Dec. 10, 1971).
3 See 58 FR 40311, July 28, 1993.
4 Public Law 100–233, 101 Stat. 1568 (Jan. 6,
1988).
E:\FR\FM\18AUP1.SGM
18AUP1
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 / Proposed Rules
and for all types of loans and leases. The
25-percent lending limit represented a
balance between the Agency’s safety
and soundness concerns and the
System’s concerns of being able to
service the credit needs of creditworthy,
eligible borrowers.5
The current regulations do not impose
lending limits based on specified risks,
such as undue industry concentrations,
counterparty risk, ineffective credit
administration, participation and
syndication activity, inadequate
management and accounting practices,
or other shortcomings that might have
been present in a System institution’s
financial position or business practices.
When the Agency issued the final
regulations in 1993, we stated ‘‘limiting
the amount that can be lent to any one
borrower or a group of related borrowers
is an effective way to control
concentrations of risk in a lending
institution and limit the amount of risk
to an institution’s capital arising from
losses incurred by large ‘single
credits.’ ’’ 6 Other than concentration of
risk to a single borrower, the Agency left
it up to each individual System lender
to address industry, counterparty and
other concentrations of risk.
erowe on DSK5CLS3C1PROD with PROPOSALS
III. Proposed Limit on Loans and
Leases to One Borrower/Lessee
A. In General
The Agency is proposing to lower the
lending and leasing limit on loans and
leases (loans) to one borrower or lessee
(borrower) for all System institutions
operating under title I or II of the Act
from the current limit of 25 percent to
no more than 15 percent of an
institution’s lending and leasing limit
base. Specifically, FCA proposes to
lower the lending and leasing limit in
§§ 614.4352, 614.4353 and 614.4356 to
15 percent. We are interested in
receiving comments on the implications
of this proposed limit for the smallestsized associations in the System. As
noted above, the calculation for the
lending and leasing limit base in
§ 614.4351 would remain unchanged, as
would the lending and leasing limit
base in § 614.4355 for title III lenders.
The proposed 15-percent limit would
apply on the date a loan or lease is made
and at all times thereafter, with certain
exemptions for loans that violate the
lending limit as set forth in § 614.4360.7
The Agency believes the proposed
15-percent limit is appropriate and
necessary for the safe and sound
5 See
58 FR 40311, 40318, July 28, 1993.
at 40311.
7 Section 614.4360 and its stated exemptions from
the requirements of § 615.5090 remain unchanged,
as noted earlier.
6 Id.
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
operation of the System, given the
changes in the System’s structure,
growth, authorities and practices since
the current regulations became final in
1994. While the proposed 15-percent
limit is more in line with the practices
of a majority of System lenders, which
have established, by policy, internal
lending limits well below the current
regulatory limit, some System lenders
rely on the current 25-percent regulatory
limit. Given the extensive System
practice of establishing internal hold
limits well below the regulatory
maximum and the significant
concentration risk a 25-percent limit
represents, FCA concludes that all
System lenders should be required to
implement internal lending limits at or
below the proposed 15-percent limit
based on their institutions’ specific
circumstances, resources, financial
condition, business activities and
capability.
B. Substantial Changes in System
Structure Since the 25-Percent Limit
Was Adopted
Since 1994, System banks have
shifted their focus from supervising
their district associations to operating as
funding banks that predominately
extend direct loans to, and manage
funding for, their district associations.
In turn, all associations have become
direct lenders, no longer acting as agents
for the district banks or relying on
district bank policies for their day-today operations. During this same time
period, the associations have gone
through significant restructurings and
consolidations. Today, there are fewer
than 90 associations in the System and
all but a few of them are structured as
agricultural credit associations with
Federal land credit and production
credit association subsidiaries. The
proposed 15-percent lower lending limit
is more appropriate to these larger
consolidated direct lender associations,
operating primarily as stand-alone
lending institutions with greater lending
capacity than ever before.
C. Substantial Growth in System
Lending Capacity Since the 25-Percent
Limit Was Adopted
Coupled with these operational and
structural changes, there has been
substantial growth in the capital bases
of System institutions since 1994, giving
them much greater capacity to meet the
needs of large borrowers. For example,
the median System institutions based on
permanent capital totaled $13.7 million
at year-end 1994, compared to $98.5
million at year-end 2009. This change
represents a 621-percent increase in
capital and has increased the 25-percent
PO 00000
Frm 00002
Fmt 4702
Sfmt 4702
50937
lending limit amount in the median
System institution from $3.4 million to
$24.6 million. Additionally, when you
compare the 25-percent lending limit
amount for the median System
institution in 1994 to a 15-percent
lending limit amount for a median
System institution in 2009, there is
effectively a 333-percent increase in the
amount of the lending limit due to the
increase in the median size of System
institutions. Furthermore, when you
compare the 25-percent lending limit
amount for the smallest and largest
System institutions in 1994 to a 15percent lending limit amount for the
smallest and largest System institutions
in 2009, there is effectively an increase
in the maximum amount of a loan that
could be made to a single borrower from
$105,000 to $822,000 (a 685-percent
increase) for the smallest System
institution and from $188 million to
$566 million (a 202-percent increase) for
the largest System institution.
Accordingly, because of the
substantial growth in the System’s
lending capacity, the current 25-percent
lending limit is no longer prudent or
necessary to meet the needs of the
System’s borrowers. While the
borrowing needs of the System’s largest
borrowers have also increased, the tools
available to the System today (such as
participations, syndications and
guarantees) have made it possible to
meet those needs with lower, more
prudent lending and leasing limits.
Such tools can also work to mitigate
lending risks by enabling System
lenders to share credit risk with each
other as well as with other non-System
lenders and governmental entities.
D. Majority of System Institution
Lending Limit Practices
The Agency has found that a majority
of System lenders have implemented
internal lending limits at levels not only
lower than the current 25-percent
regulatory limit but, in many cases,
lower than the proposed 15-percent
limit. Therefore, the proposed 15percent limit would be in line with a
majority of the current lending practices
in the System and, we believe, would
not significantly disrupt System
institution operations.
The Agency also believes that even
with the proposed lower limit of 15
percent, the growth in System capital
since 1994 leaves sufficient lending and
leasing capacity in the System to
adequately serve the credit needs of
creditworthy, eligible borrowers.
E:\FR\FM\18AUP1.SGM
18AUP1
50938
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 / Proposed Rules
erowe on DSK5CLS3C1PROD with PROPOSALS
E. Enhanced System Authorities Since
the 25-Percent Limit Was First Adopted
Since 1994, System institutions have
used the authorities granted under the
Act and implemented through FCA
regulations to increase their loan
portfolios and meet the mission of
providing sound, adequate and
constructive credit to American
agriculture. During this time period,
loans to processing and marketing
operations have increased to meet the
changing nature and needs of farming
over the last decade and a half.
Likewise, the System’s ability to
participate and syndicate loans both
within and outside of the System has
also grown since 1994. System
institutions now routinely serve large
borrowers by buying and selling
participation and syndication interests
to other System institutions and other
lenders.
The System’s lending authorities
ensure adequate credit for the next
generation of farmers and are necessary
for the future of a strong and stable
agricultural industry. The System’s
lending authorities also allow farmers
and ranchers to diversify their incomes
and financial portfolios. However, the
varied loans made for multiple
agricultural purposes are not without a
degree of risk, particularly when
concentrations are not identified,
measured, and managed. Similarly,
while the System’s increased
participation and syndication channels
reduce the risk of credit to large
borrowers and enable System
institutions to continue serving such
large customers notwithstanding the
proposed 15-percent lower lending
limit, they also are not without some
risk. Such lending channels increase
counterparty risks, or those risks created
by the potential default of the multiple
parties doing business with the System.
Therefore, System institutions must
carefully manage and control the
counterparty risk posed by purchasing
or selling loan exposures through
participations or syndications to other
System and non-System lenders. With
appropriate use and risk controls over
syndications and participations, the
Agency believes that the proposed 15percent lower lending limit would
reduce the potential risks of all large
loans without jeopardizing the System’s
ability to provide the varied and
multiple forms of credit that are
necessary in today’s agricultural
environment.
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
F. Lending Limits of Other Federally
Chartered Lending Institutions
We recognize that a single industry
lender like the System is not
comparable in many respects to other
Federally chartered lending institutions
with more diverse lending authorities.
Consequently, different factors are
considered when arriving at a lending
limit for the System. Notwithstanding
these differences, we note that the 15percent proposed lower lending limit
for the System is comparable to the
lending limits of other Federally
chartered lending institutions.8 We do
not believe, therefore, that the proposed
lower limit would put System
institutions at a competitive
disadvantage in the agricultural lending
marketplace.
G. Repeal of § 614.4354
The proposed rule would repeal
§ 614.4354 pertaining to Federal land
bank associations (FLBAs) since such
associations have all been converted to
direct lending institutions. We note,
however, that the repeal of § 614.4354
does not affect, modify, or change in any
manner FCA’s authority to charter an
FLBA without direct lending authority
in the future. If we were to issue such
a charter at some future point, this
provision of the regulation would be
repromulgated to establish a lending
limit for such an association.
H. Transition Period for Lower Lending
Limit
As previously noted, the proposed
regulations would not change the
existing transition rules in § 614.4361.
However, we want to make clear that
this section should be read as providing
that certain nonconforming loans
(including commitments) made or
attributed to a borrower prior to the
effective date of existing subpart J, or
the amendments proposed herein, will
not be considered a violation of the
lending and leasing limits during the
existing contract terms of such loans,
provided such loans complied with the
regulatory lending limit when made.
IV. Policy on Limiting Exposures to
Loan and Lease Concentration Risks
A. In General
In addition to proposing a lower limit
on loans to one borrower, FCA is
proposing that each System lender’s
board of directors adopt and ensure
implementation of a written policy that
would effectively identify, measure,
8 See, e.g., 12 CFR 32.3 (Office of the Comptroller
of the Currency); 12 CFR 560.93 (Office of Thrift
Supervision); and 12 CFR 701.21 and 12 CFR 723.8
(National Credit Union Administration).
PO 00000
Frm 00003
Fmt 4702
Sfmt 4702
limit and monitor exposures to loan and
lease concentration risks. This policy
should include both on- and off-balance
sheet loan and lease exposures
(participation and syndication activity).
The country’s recent economic crisis
revealed the increasing complexity and
volatility of the financial world over the
past few decades. The increase in types
and complexity of financial
instruments—including mortgagebacked securities, collateralized debt
obligations and credit default swaps—
along with the rise in imprudent home
mortgage lending practices helped to
create the current instability and
uncertainty in the financial lending
markets that System institutions, along
with all other lenders, are experiencing
today.
Like the growing complexity in the
financial markets, agricultural markets
and industries have also become more
complex, integrated, inter-related and
potentially turbulent over the years. The
System has not been immune to these
financial or agricultural instabilities. For
instance, the recent financial woes in
the biofuels industry (namely ethanol)
that the System funded left many
System institutions with large troubled
loans with related potential loss
exposures. Similarly, the recent
financial troubles of the largest poultry
industry producer in the United States
had a domino and damaging effect on
contract poultry growers throughout the
industry, which demonstrated the
impact of concentration risk and
ultimately created credit stress in
several System institutions. For these
reasons, we believe enhanced focus on
all loan and lease concentration risks is
essential.
B. Safety and Soundness
While many System lenders have
adopted policies to manage their
exposures to loan concentration risks, a
number of institutions do not have any
formal or written policies in place.
Furthermore, some of those System
institutions with established internal
concentration limits operate without
board policies that adequately address
all aspects of identifying, measuring,
limiting and monitoring those
concentration risks that could adversely
impact the institution’s financial
performance. FCA believes that the
proposed policy requirements would
ensure a comprehensive approach to
mitigating loan and lease concentration
risks and would represent a best
practice in loan portfolio management.
Such policies would help ensure the
continuance of a safe and sound System
by potentially reducing exposures to
concentration risks.
E:\FR\FM\18AUP1.SGM
18AUP1
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 / Proposed Rules
erowe on DSK5CLS3C1PROD with PROPOSALS
The proposed policy requirement is
intended to address vulnerabilities in
System loan portfolios resulting from
both on- and off-balance sheet loan
concentration risks, in particular those
concentration risks that are not
addressed by the attribution provisions
of § 614.4359.
The Agency recognizes that there is
not one ideal uniform approach to a
loan concentration risk mitigation
policy. Accordingly, this proposal
outlines only the minimally required
elements of such a policy. We have
placed substantial responsibility on the
board of directors to establish more
detailed policies and procedures
appropriate to the nature and scope of
their institutions’ credit activities,
territory and risk-bearing capacity. For
example, under the category of ‘‘other
concentration risks,’’ System banks may
find it necessary to develop policies that
focus on district-wide loan
concentrations and on the participation
and syndication loans in their
portfolios.
C. Policy Elements
In addition to the specific loan and
lease concentration risk exposures
discussed below under ‘‘Quantitative
Methods’’ in Part D, we are proposing to
require that the policy include the
following elements to ensure that it is
properly developed, implemented and
monitored:
1. A clearly defined purpose and
objective statement that sets forth the
objectives of the policy and specific
means of achieving such objectives. The
Agency believes that such a statement
would engage System boards of
directors in forming a philosophy and
direction for the management of their
institutions’ loan portfolio in the area of
concentration risk mitigation.
2. Clearly defined terms that are used
consistently throughout the policy.
3. Internal control requirements that:
a. Define those authorities delegated
to management. Such requirements
should set forth organizational structure
and reporting lines that clearly delineate
responsibility and accountability for all
management functions pertaining to
mitigating exposures to both on- and offbalance sheet loan and lease
concentration risks, including risk
identification, measurement, limitation
and oversight. In addition, the policy
should establish, when feasible, a
separation of duties between personnel
executing transactions and those
responsible for approval, evaluation and
oversight of credit activities. This
separation of duties promotes integrity
and accuracy in lending practices that
reduces the risk of loss. Finally, the
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
policy should cross-reference the
conflict of interest regulations in part
612 of this chapter to ensure that
employees directly involved in lending
and leasing are aware of their
responsibilities to disclose actual or
apparent conflicts with their official
duties.
b. Define those authorities retained
for board action. Each institution’s
board of directors has a fiduciary duty
to ensure that its institution’s lending
and leasing activities are prudently
managed and in compliance with all
applicable laws and regulations.
Additionally, the board must ensure
that the institution has adequate and
qualified personnel to manage the risks
associated with its lending and leasing
activities. To this end, the Agency
encourages each System board of
directors to review its loan and lease
portfolio concentration risk mitigation
policy every year and make any
adjustments that are necessary and
proper in light of the institution’s
financial position and the lending
environment.
c. Address exceptions to the policy.
Such procedures should set forth the
basis for detecting deviations from, and
making exceptions to, the policy
requirements. In addition, the policy
should describe the duties and
responsibilities of management with
regard to recommending and reporting
on policy deviations or exceptions to
the institution’s board of directors,
including what corrective actions must
be taken to restore compliance with the
policy. In no event may the lending and
leasing limit exceed the applicable
regulatory limits for title I, II, or III
institutions.
d. Describe reporting requirements.
Such requirements should describe the
content and frequency of the reports and
the office or individual(s) responsible
for preparing them for an institution’s
board of directors. The reports should
focus on providing information that
interprets the data and focuses the board
on what is crucial to understand and
consider.
D. Quantitative Methods
The Agency is proposing that each
policy contain a quantitative method(s)
to measure and limit identified
exposures to on- and off-balance sheet
loan and lease concentrations emanating
from:
(i) A single borrower;
(ii) Borrowers in a single sector in the
agricultural industry;
(iii) A single counterparty; or
(iv) Unique factors because of the
institution’s territory, nature and scope
of its activities and risk-bearing
PO 00000
Frm 00004
Fmt 4702
Sfmt 4702
50939
capacity. Unique concentration
exposures might include, but not
limited to, borrowers that are reliant on
the same processor, marketer, manager,
integrator or supplier (or any
combination thereof).
Quantitative methods could include
hold limits (for example, as a percentage
of risk funds, capital, earnings/net
income or other appropriate
measurements or methods) that
reasonably measure and limit
concentration risk exposures. We
emphasize that the proposed 15-percent
regulatory limit on loans to one
borrower establishes a ceiling limit. We
encourage System institutions to choose
more conservative limits on loans to one
borrower as a majority of them have
done under the current regulatory limit.
When arriving at quantitative methods,
System institutions should strongly take
into account the stability and strength of
their capital positions and set their hold
limits or other risk management
measures accordingly.
The following are examples of
concentration risk exposures that might
be unique to a lender’s territory:
• An institution has a preponderance
of borrowers in its territory that are
dependent on off-farm income from the
same area manufacturing plant where
the potential downsizing or closing of
the plant could have a negative effect on
loan repayment abilities.
• An institution has a preponderance
of independent borrowers selling
production to a very limited market
(such as farmers selling eggs, sugar
beets, cranberries) where a squeeze in
the market could have a negative effect
on loan repayment abilities.
• An institution has a preponderance
of borrowers structured as limited
liability companies or partnerships in
which the same individuals or group of
individuals own interests—not enough
to trigger the attribution provisions
under this subpart—but enough to
create instability among the group of
borrowers should the common investors
experience financial difficulties.
• An institution has a preponderance
of borrowers in a newly emerging
market, such as biofuels, which also is
an industry outside of the institution’s
area of expertise and in which volatile
and unforeseen trends in the industry
can have a negative effect on loan
repayment abilities.
In all the foregoing examples, System
institutions should prudently identify,
measure, limit and monitor loan
concentrations to these groups of
borrowers.
In determining concentration risk
limits, the policy should take into
E:\FR\FM\18AUP1.SGM
18AUP1
50940
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 / Proposed Rules
consideration other risk factors that
could reasonably identify foreseeable
loan and lease losses. Such risk factors
could include borrower risk ratings, the
institution’s relationship with the
borrower, the borrower’s knowledge and
experience, loan structure, type and
location of collateral (including loss
given default ratings), loans to emerging
industries or industries outside of an
institution’s area of expertise, out-ofterritory loans, counterparties, or
weaknesses in due diligence practices.
This list is exemplary only and not
meant to be exhaustive. The risk factors
to be considered by an institution would
depend on the unique circumstances of
the institution’s credit operations.
System institutions should give
special consideration to counterparty
risks. For example, when entering into
a participation, the institution should
consider how well it knows and trusts
the originator to make full and fair
disclosures and to competently service
the loan. Conversely, when a System
institution originates a participation, it
must ensure that there are no material
misrepresentations in its disclosures
and that it has the ability to properly
service the loan. System institution
originators should also consider the risk
of holding the entire loan should the
loan become distressed and the
counterparties prevail against the
System institution in a lawsuit requiring
the System institution to take back the
participation. System institutions
should consider the risks of
concentrating too much of their
participation and syndication loans
with the same third party. Finally,
System institutions should ensure that
their policies prudently identify,
measure, limit and monitor
counterparty exposures with respect to
their participation and syndication
activity.
We emphasize that robust due
diligence practices are especially
important when institutions are making
loans outside of their territories or core
areas of expertise, or with
counterparties.
erowe on DSK5CLS3C1PROD with PROPOSALS
E. Six-Month Timeframe To Issue a
Policy
The proposed regulations would
require all System lenders (including a
title III lender) to establish written loan
and lease concentration risk mitigation
policies within 6 months from the
effective date of these revised
regulations. FCA believes that 6 months
is a sufficient amount of time for System
boards to design and adopt the policy
requirements prescribed in new
§ 614.4362.
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the
Regulatory Flexibility Act (5 U.S.C. 601
et seq.), 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 Farm Credit 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, Farm Credit System
institutions are not ‘‘small entities’’ as
defined in the Regulatory Flexibility
Act.
a. Adding the words ‘‘direct lender’’
after the word ‘‘No’’;
b. Removing the comma after the
word ‘‘borrower’’; and
c. Removing ‘‘exceeds 25’’ and adding
in its place ‘‘exceed 15’’.
§ 614.4354
[Removed]
4. Section 614.4354 is removed.
§ 614.4356
[Amended]
5. Section 614.4356 is amended by
removing the number ‘‘25’’ and adding
in its place, the number ‘‘15’’.
6. Section 614.4361 is amended by
adding a new paragraph (c) to read as
follows:
List of Subjects in 12 CFR Part 614
§ 614.4361
Agriculture, Banks, Banking, Foreign
trade, Reporting and recordkeeping
requirements, Rural areas.
For the reasons stated in the
preamble, part 614 of chapter VI, title 12
of the Code of Federal Regulations is
proposed to be amended as follows:
*
PART 614—LOAN POLICIES AND
OPERATIONS
§ 614.4362 Loan and lease concentration
risk mitigation policy.
1. The authority citation for part 614
continues to read as follows:
The board of directors of each System
direct lender institution must adopt and
ensure implementation of a written
policy to effectively measure, limit and
monitor exposures to concentration
risks resulting from the institution’s
lending and leasing activities.
(a) Policy elements.
(1) The policy must include:
(i) A purpose and objective;
(ii) Clearly defined and consistently
used terms;
(iii) Quantitative methods to measure
and limit identified exposures to loan
and lease concentration risks (as set
forth in paragraph (b) of this section);
and
(iv) Internal controls that delineate
authorities delegated to management,
authorities retained by the board, and a
process for addressing exceptions and
reporting requirements.
(b) Quantitative methods.
(1) At a minimum, the quantitative
methods included in the policy must
quantifiably measure and limit
identified concentration risk exposures
emanating from:
(i) A single borrower;
(ii) A single industry sector;
(iii) A single counterparty; or
(iv) Other lending activities unique to
the institution because of its territory,
the nature and scope of its activities and
its risk-bearing capacity.
(2) In determining concentration
limits, the policy must consider other
risk factors that could reasonably
identify foreseeable loan and lease
losses. Such risk factors could include
Authority: 42 U.S.C. 4012a, 4104a, 4104b,
4106, and 4128; secs. 1.3, 1.5, 1.6, 1.7, 1.9,
1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13,
2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28,
4.12, 4.12A, 4.13B, 4.14, 4.14A, 4.14C, 4.14D,
4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26, 4.27,
4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6,
7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act
(12 U.S.C. 2011, 2013, 2014, 2015, 2017,
2018, 2019, 2071, 2073, 2074, 2075, 2091,
2093, 2094, 2097, 2121, 2122, 2124, 2128,
2129, 2131, 2141, 2149, 2183, 2184, 2201,
2202, 2202a, 2202c, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a–2,
2279b, 2279c–1, 2279f, 2279f–1, 2279aa,
2279aa–5); sec. 413 of Pub. L. 100–233, 101
Stat. 1568, 1639.
Subpart J—Lending and Leasing
Limits
§ 614.4352
[Amended]
2. Section 614.4352 is amended by:
a. Removing the comma after the
word ‘‘borrower’’ and removing the
number ‘‘25’’ and adding in its place, the
number ‘‘15’’ in paragraph (a);
b. Removing the comma after the
word ‘‘Act’’ and removing ‘‘exceeds 25’’
and adding in its place ‘‘exceed 15’’ in
paragraph (b)(1); and
c. Removing the comma after the
word ‘‘Act’’ and removing ‘‘exceeds’’ and
adding in its place ‘‘exceed’’ in
paragraph (b)(2).
§ 614.4353
[Amended]
3. Section 614.4353 is amended by:
PO 00000
Frm 00005
Fmt 4702
Sfmt 4702
Transition.
*
*
*
*
(c) The loan and lease concentration
risk mitigation policy required by
§ 614.4362 must be adopted and
implemented within 6 months from the
effective date of such section.
7. A new § 614.4362 is added to
subpart J to read as follows:
E:\FR\FM\18AUP1.SGM
18AUP1
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 / Proposed Rules
borrower risk ratings, the institution’s
relationship with the borrower, the
borrower’s knowledge and experience,
loan structure and purpose, type or
location of collateral (including loss
given default ratings), loans to emerging
industries or industries outside of an
institution’s area of expertise, out-ofterritory loans, counterparties, or
weaknesses in due diligence practices.
Dated: August 12, 2010.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 2010–20367 Filed 8–17–10; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2010–0797; Directorate
Identifier 2010–NM–141–AD]
RIN 2120–AA64
Airworthiness Directives; B/E
Aerospace Protective Breathing
Equipment Part Number 119003–11
Installed on Various Transport
Airplanes
Federal Aviation
Administration (FAA), DOT.
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to adopt a new
airworthiness directive (AD) for various
transport airplanes equipped with
certain B/E Aerospace protective
breathing equipment (PBE) units. This
proposed AD would require removing
affected PBE units. This proposed AD
results from reports of potentially
defective potassium superoxide
canisters used in PBE units, which
could result in an exothermic reaction
and ignition. We are proposing this AD
to prevent PBE units from igniting,
which could result in a fire and possible
injury to the flightcrew or other persons.
DATES: We must receive comments on
this proposed AD by October 4, 2010.
ADDRESSES: You may send comments by
any of the following methods:
• Federal eRulemaking Portal: Go to
https://www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: 202–493–2251.
• Mail: U.S. Department of
Transportation, Docket Operations,
M–30, West Building Ground Floor,
Room W12–140, 1200 New Jersey
Avenue, SE., Washington, DC 20590.
• Hand Delivery: U.S. Department of
Transportation, Docket Operations,
erowe on DSK5CLS3C1PROD with PROPOSALS
SUMMARY:
VerDate Mar<15>2010
15:11 Aug 17, 2010
Jkt 220001
M–30, West Building Ground Floor,
Room W12–140, 1200 New Jersey
Avenue, SE., Washington, DC 20590,
between 9 a.m. and 5 p.m., Monday
through Friday, except Federal holidays.
For service information identified in
this proposed AD, contact B/E
Aerospace, Inc., Commercial Aircraft
Products Group, RGA Department,
10800 Pflumm Road, Lenexa, KS 66215,
phone: (913) 338–7378, fax: (913) 469–
8419. You may review copies of the
referenced service information at the
FAA, Transport Airplane Directorate,
1601 Lind Avenue, SW., Renton,
Washington. For information on the
availability of this material at the FAA,
call 425–227–1221.
Examining the AD Docket
You may examine the AD docket on
the Internet at https://
www.regulations.gov; or in person at the
Docket Management Facility between 9
a.m. and 5 p.m., Monday through
Friday, except Federal holidays. The AD
docket contains this proposed AD, the
regulatory evaluation, any comments
received, and other information. The
street address for the Docket Office
(telephone 800–647–5527) is in the
ADDRESSES section. Comments will be
available in the AD docket shortly after
receipt.
FOR FURTHER INFORMATION CONTACT:
David Fairback, Aerospace Engineer,
Systems and Propulsion Branch, ACE–
116W, FAA, Wichita Aircraft
Certification Office (ACO), 1801 Airport
Road, Room 100, Mid-Continent
Airport, Wichita, Kansas 67209;
telephone (316) 946–4154; fax (316)
946–4107.
SUPPLEMENTARY INFORMATION:
Comments Invited
We invite you to send any written
relevant data, views, or arguments about
this proposed AD. Send your comments
to an address listed under the
ADDRESSES section. Include ‘‘Docket No.
FAA–2010–0797; Directorate Identifier
2010–NM–141–AD’’ at the beginning of
your comments. We specifically invite
comments on the overall regulatory,
economic, environmental, and energy
aspects of this proposed AD. We will
consider all comments received by the
closing date and may amend this
proposed AD because of those
comments.
We will post all comments we
receive, without change, to https://
www.regulations.gov, including any
personal information you provide. We
will also post a report summarizing each
substantive verbal contact we receive
about this proposed AD.
PO 00000
Frm 00006
Fmt 4702
Sfmt 4702
50941
Discussion
We have been notified that potassium
superoxide canisters used in 119003–11
protective breathing equipment ignited
on a vendor’s test stand during quality
assurance testing. Subsequent
investigation revealed that potassium
superoxide contained a high percentage
of small particles that ignited. B/E
Aerospace manufactured units with this
chemical lot between February 15, 2010
and March 6, 2010. B/E Aerospace
shipped 600 canisters with this lot of
chemicals to part distributers, airplane
manufacturers (including Airbus, ATR,
Boeing, Bombardier, Embraer, Fokker,
and Hawker Beechcraft), and airlines
(including Emirates, Korean Airlines,
and Shenzhen Airlines). This condition,
if not corrected, could result in
potentially defective canisters being
used in on-board PBE units.
Relevant Service Information
We have reviewed B/E Aerospace
Service Bulletin 119003–35–5, dated
April 19, 2010. This service bulletin
describes procedures for doing an
inspection to determine the serial
number of the protective breathing
equipment having part number 119003–
11, and returning affected parts to B/E
Aerospace.
FAA’s Determination and Requirements
of This Proposed AD
We are proposing this AD because we
evaluated all relevant information and
determined the unsafe condition
described previously is likely to exist or
develop in other products of the same
type design. This proposed AD would
require accomplishing the actions
specified in the service information
described previously, except as
discussed under ‘‘Differences Between
the Proposed AD and Service
Information.’’
Differences Between the Proposed AD
and Service Information
B/E Aerospace Service Bulletin
119003–35–5, dated April 19, 2010,
specifies a compliance time of within 30
days for PBE units in stock or stored as
spares, and within the next maintenance
check for in-service PBE units. This
proposed AD would require compliance
within 120 days after the effective date
of this AD. B/E Aerospace Service
Bulletin 119003–35–5, dated April 19,
2010, specifies to return any faulty PBE
units to B/E Aerospace; this proposed
AD would not include that requirement.
Costs of Compliance
We estimate that this proposed AD
would affect up to 600 aircraft of U.S.
registry. We also estimate that it would
E:\FR\FM\18AUP1.SGM
18AUP1
]]>Agencies
[Federal Register Volume 75, Number 159 (Wednesday, August 18, 2010)]
[Proposed Rules]
[Pages 50936-50941]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-20367]
========================================================================
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.
========================================================================
Federal Register / Vol. 75, No. 159 / Wednesday, August 18, 2010 /
Proposed Rules
[[Page 50936]]
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AC60
Loan Policies and Operations; Lending and Leasing Limits and Risk
Management
AGENCY: Farm Credit Administration.
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, Agency, we, our), by the
Farm Credit Administration Board, is publishing for comment proposed
amendments to our regulations relating to lending and leasing limits.
We propose lowering the current limit on extensions of credit to a
single borrower for each Farm Credit System (System) institution
operating under title I or II of the Farm Credit Act of 1971, as
amended (Act). The proposed rule would not affect the lending and
leasing limits of title III lenders under Sec. 614.4355. However, we
are proposing that all titles I, II and III System institutions adopt
written policies to effectively identify, limit, measure and monitor
their exposures to loan and lease concentration risks. This proposed
rule, if adopted, would increase the safe and sound operation of System
institutions by strengthening their risk management practices and
abilities to withstand volatile and negative changes in increasingly
complex and integrated agricultural markets.
DATES: You may send comments on or before October 18, 2010.
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 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 all 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 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: Paul K. Gibbs, Senior Accountant,
Office of Regulatory Policy, Farm Credit Administration, 1501 Farm
Credit Drive, McLean, VA 22102-5090, (703) 883-4498, TTY (703) 883-
4434; or Wendy R. Laguarda, Assistant General Counsel, Office of
General Counsel, Farm Credit Administration, 1501 Farm Credit Drive,
McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-4020.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of this proposed rule are to:
Strengthen the safety and soundness of System
institutions;
Ensure the establishment of consistent, uniform and
prudent concentration risk management policies by System institutions;
Ensure that all System lenders have robust methods to
identify, measure, limit and monitor exposures to loan and lease
concentration risks, including counterparty risks; and
Strengthen the ability of System lenders to withstand
volatile and negative changes in increasingly complex and integrated
agricultural markets.
The proposed regulation would not change the following provisions
of the current lending limits rule: Definitions under Sec. 614.4350;
computation of lending and leasing limit base under Sec. 614.4351;
lending and leasing limits for Banks for Cooperatives (BCs) under Sec.
614.4355; BCs look-through notes under Sec. 614.4357; the base
calculation for computing the lending and leasing limit under Sec.
614.4358; the attribution rules under Sec. 614.4359; lending and
leasing limit violations under Sec. 614.4360; or the transition period
prescribed in Sec. 614.4361.\1\
---------------------------------------------------------------------------
\1\ The proposed changes will not change existing regulations
covering underwriting standards or lending procedures under Sec.
614.4150.
---------------------------------------------------------------------------
We have elected not to address the lending limits for title III
lenders at this time because of the complexity of the issues involved
in lending to cooperatives under title III of the Act. Should the
Agency decide to address the BCs lending limits at some future time, we
will do so in a separate rulemaking.
All System institutions, including title III institutions, would be
given 6 months from the effective date of new Sec. 614.4362 to
establish and implement written policies on limiting exposures to on-
and off-balance sheet loan and lease concentration risks as prescribed
therein.
II. Background
The Act \2\ does not contain general lending and leasing limits for
titles I and II System institutions outside of specific limits for
processing and marketing and rural housing loans. However, both the
Agency and the System recognize that lending limits are a sound banking
practice and an effective risk management tool that enhance the safety
and soundness of individual System institutions and the System as a
whole. The Agency's current lending limit regulations,\3\ promulgated
in 1993 with an effective date in 1994, were issued due to the System's
structural changes resulting from the Agricultural Credit Act of 1987
(1987 Act).\4\ This regulation created a uniform lending limit for all
System banks and associations, with the exception of BCs,
[[Page 50937]]
and for all types of loans and leases. The 25-percent lending limit
represented a balance between the Agency's safety and soundness
concerns and the System's concerns of being able to service the credit
needs of creditworthy, eligible borrowers.\5\
---------------------------------------------------------------------------
\2\ Public Law 92-181, 85 Stat. 583 (Dec. 10, 1971).
\3\ See 58 FR 40311, July 28, 1993.
\4\ Public Law 100-233, 101 Stat. 1568 (Jan. 6, 1988).
\5\ See 58 FR 40311, 40318, July 28, 1993.
---------------------------------------------------------------------------
The current regulations do not impose lending limits based on
specified risks, such as undue industry concentrations, counterparty
risk, ineffective credit administration, participation and syndication
activity, inadequate management and accounting practices, or other
shortcomings that might have been present in a System institution's
financial position or business practices. When the Agency issued the
final regulations in 1993, we stated ``limiting the amount that can be
lent to any one borrower or a group of related borrowers is an
effective way to control concentrations of risk in a lending
institution and limit the amount of risk to an institution's capital
arising from losses incurred by large `single credits.' '' \6\ Other
than concentration of risk to a single borrower, the Agency left it up
to each individual System lender to address industry, counterparty and
other concentrations of risk.
---------------------------------------------------------------------------
\6\ Id. at 40311.
---------------------------------------------------------------------------
III. Proposed Limit on Loans and Leases to One Borrower/Lessee
A. In General
The Agency is proposing to lower the lending and leasing limit on
loans and leases (loans) to one borrower or lessee (borrower) for all
System institutions operating under title I or II of the Act from the
current limit of 25 percent to no more than 15 percent of an
institution's lending and leasing limit base. Specifically, FCA
proposes to lower the lending and leasing limit in Sec. Sec. 614.4352,
614.4353 and 614.4356 to 15 percent. We are interested in receiving
comments on the implications of this proposed limit for the smallest-
sized associations in the System. As noted above, the calculation for
the lending and leasing limit base in Sec. 614.4351 would remain
unchanged, as would the lending and leasing limit base in Sec.
614.4355 for title III lenders. The proposed 15-percent limit would
apply on the date a loan or lease is made and at all times thereafter,
with certain exemptions for loans that violate the lending limit as set
forth in Sec. 614.4360.\7\
---------------------------------------------------------------------------
\7\ Section 614.4360 and its stated exemptions from the
requirements of Sec. 615.5090 remain unchanged, as noted earlier.
---------------------------------------------------------------------------
The Agency believes the proposed 15-percent limit is appropriate
and necessary for the safe and sound operation of the System, given the
changes in the System's structure, growth, authorities and practices
since the current regulations became final in 1994. While the proposed
15-percent limit is more in line with the practices of a majority of
System lenders, which have established, by policy, internal lending
limits well below the current regulatory limit, some System lenders
rely on the current 25-percent regulatory limit. Given the extensive
System practice of establishing internal hold limits well below the
regulatory maximum and the significant concentration risk a 25-percent
limit represents, FCA concludes that all System lenders should be
required to implement internal lending limits at or below the proposed
15-percent limit based on their institutions' specific circumstances,
resources, financial condition, business activities and capability.
B. Substantial Changes in System Structure Since the 25-Percent Limit
Was Adopted
Since 1994, System banks have shifted their focus from supervising
their district associations to operating as funding banks that
predominately extend direct loans to, and manage funding for, their
district associations. In turn, all associations have become direct
lenders, no longer acting as agents for the district banks or relying
on district bank policies for their day-to-day operations. During this
same time period, the associations have gone through significant
restructurings and consolidations. Today, there are fewer than 90
associations in the System and all but a few of them are structured as
agricultural credit associations with Federal land credit and
production credit association subsidiaries. The proposed 15-percent
lower lending limit is more appropriate to these larger consolidated
direct lender associations, operating primarily as stand-alone lending
institutions with greater lending capacity than ever before.
C. Substantial Growth in System Lending Capacity Since the 25-Percent
Limit Was Adopted
Coupled with these operational and structural changes, there has
been substantial growth in the capital bases of System institutions
since 1994, giving them much greater capacity to meet the needs of
large borrowers. For example, the median System institutions based on
permanent capital totaled $13.7 million at year-end 1994, compared to
$98.5 million at year-end 2009. This change represents a 621-percent
increase in capital and has increased the 25-percent lending limit
amount in the median System institution from $3.4 million to $24.6
million. Additionally, when you compare the 25-percent lending limit
amount for the median System institution in 1994 to a 15-percent
lending limit amount for a median System institution in 2009, there is
effectively a 333-percent increase in the amount of the lending limit
due to the increase in the median size of System institutions.
Furthermore, when you compare the 25-percent lending limit amount for
the smallest and largest System institutions in 1994 to a 15-percent
lending limit amount for the smallest and largest System institutions
in 2009, there is effectively an increase in the maximum amount of a
loan that could be made to a single borrower from $105,000 to $822,000
(a 685-percent increase) for the smallest System institution and from
$188 million to $566 million (a 202-percent increase) for the largest
System institution.
Accordingly, because of the substantial growth in the System's
lending capacity, the current 25-percent lending limit is no longer
prudent or necessary to meet the needs of the System's borrowers. While
the borrowing needs of the System's largest borrowers have also
increased, the tools available to the System today (such as
participations, syndications and guarantees) have made it possible to
meet those needs with lower, more prudent lending and leasing limits.
Such tools can also work to mitigate lending risks by enabling System
lenders to share credit risk with each other as well as with other non-
System lenders and governmental entities.
D. Majority of System Institution Lending Limit Practices
The Agency has found that a majority of System lenders have
implemented internal lending limits at levels not only lower than the
current 25-percent regulatory limit but, in many cases, lower than the
proposed 15-percent limit. Therefore, the proposed 15-percent limit
would be in line with a majority of the current lending practices in
the System and, we believe, would not significantly disrupt System
institution operations.
The Agency also believes that even with the proposed lower limit of
15 percent, the growth in System capital since 1994 leaves sufficient
lending and leasing capacity in the System to adequately serve the
credit needs of creditworthy, eligible borrowers.
[[Page 50938]]
E. Enhanced System Authorities Since the 25-Percent Limit Was First
Adopted
Since 1994, System institutions have used the authorities granted
under the Act and implemented through FCA regulations to increase their
loan portfolios and meet the mission of providing sound, adequate and
constructive credit to American agriculture. During this time period,
loans to processing and marketing operations have increased to meet the
changing nature and needs of farming over the last decade and a half.
Likewise, the System's ability to participate and syndicate loans both
within and outside of the System has also grown since 1994. System
institutions now routinely serve large borrowers by buying and selling
participation and syndication interests to other System institutions
and other lenders.
The System's lending authorities ensure adequate credit for the
next generation of farmers and are necessary for the future of a strong
and stable agricultural industry. The System's lending authorities also
allow farmers and ranchers to diversify their incomes and financial
portfolios. However, the varied loans made for multiple agricultural
purposes are not without a degree of risk, particularly when
concentrations are not identified, measured, and managed. Similarly,
while the System's increased participation and syndication channels
reduce the risk of credit to large borrowers and enable System
institutions to continue serving such large customers notwithstanding
the proposed 15-percent lower lending limit, they also are not without
some risk. Such lending channels increase counterparty risks, or those
risks created by the potential default of the multiple parties doing
business with the System.
Therefore, System institutions must carefully manage and control
the counterparty risk posed by purchasing or selling loan exposures
through participations or syndications to other System and non-System
lenders. With appropriate use and risk controls over syndications and
participations, the Agency believes that the proposed 15-percent lower
lending limit would reduce the potential risks of all large loans
without jeopardizing the System's ability to provide the varied and
multiple forms of credit that are necessary in today's agricultural
environment.
F. Lending Limits of Other Federally Chartered Lending Institutions
We recognize that a single industry lender like the System is not
comparable in many respects to other Federally chartered lending
institutions with more diverse lending authorities. Consequently,
different factors are considered when arriving at a lending limit for
the System. Notwithstanding these differences, we note that the 15-
percent proposed lower lending limit for the System is comparable to
the lending limits of other Federally chartered lending
institutions.\8\ We do not believe, therefore, that the proposed lower
limit would put System institutions at a competitive disadvantage in
the agricultural lending marketplace.
---------------------------------------------------------------------------
\8\ See, e.g., 12 CFR 32.3 (Office of the Comptroller of the
Currency); 12 CFR 560.93 (Office of Thrift Supervision); and 12 CFR
701.21 and 12 CFR 723.8 (National Credit Union Administration).
---------------------------------------------------------------------------
G. Repeal of Sec. 614.4354
The proposed rule would repeal Sec. 614.4354 pertaining to Federal
land bank associations (FLBAs) since such associations have all been
converted to direct lending institutions. We note, however, that the
repeal of Sec. 614.4354 does not affect, modify, or change in any
manner FCA's authority to charter an FLBA without direct lending
authority in the future. If we were to issue such a charter at some
future point, this provision of the regulation would be repromulgated
to establish a lending limit for such an association.
H. Transition Period for Lower Lending Limit
As previously noted, the proposed regulations would not change the
existing transition rules in Sec. 614.4361. However, we want to make
clear that this section should be read as providing that certain
nonconforming loans (including commitments) made or attributed to a
borrower prior to the effective date of existing subpart J, or the
amendments proposed herein, will not be considered a violation of the
lending and leasing limits during the existing contract terms of such
loans, provided such loans complied with the regulatory lending limit
when made.
IV. Policy on Limiting Exposures to Loan and Lease Concentration Risks
A. In General
In addition to proposing a lower limit on loans to one borrower,
FCA is proposing that each System lender's board of directors adopt and
ensure implementation of a written policy that would effectively
identify, measure, limit and monitor exposures to loan and lease
concentration risks. This policy should include both on- and off-
balance sheet loan and lease exposures (participation and syndication
activity).
The country's recent economic crisis revealed the increasing
complexity and volatility of the financial world over the past few
decades. The increase in types and complexity of financial
instruments--including mortgage-backed securities, collateralized debt
obligations and credit default swaps--along with the rise in imprudent
home mortgage lending practices helped to create the current
instability and uncertainty in the financial lending markets that
System institutions, along with all other lenders, are experiencing
today.
Like the growing complexity in the financial markets, agricultural
markets and industries have also become more complex, integrated,
inter-related and potentially turbulent over the years. The System has
not been immune to these financial or agricultural instabilities. For
instance, the recent financial woes in the biofuels industry (namely
ethanol) that the System funded left many System institutions with
large troubled loans with related potential loss exposures. Similarly,
the recent financial troubles of the largest poultry industry producer
in the United States had a domino and damaging effect on contract
poultry growers throughout the industry, which demonstrated the impact
of concentration risk and ultimately created credit stress in several
System institutions. For these reasons, we believe enhanced focus on
all loan and lease concentration risks is essential.
B. Safety and Soundness
While many System lenders have adopted policies to manage their
exposures to loan concentration risks, a number of institutions do not
have any formal or written policies in place. Furthermore, some of
those System institutions with established internal concentration
limits operate without board policies that adequately address all
aspects of identifying, measuring, limiting and monitoring those
concentration risks that could adversely impact the institution's
financial performance. FCA believes that the proposed policy
requirements would ensure a comprehensive approach to mitigating loan
and lease concentration risks and would represent a best practice in
loan portfolio management. Such policies would help ensure the
continuance of a safe and sound System by potentially reducing
exposures to concentration risks.
[[Page 50939]]
The proposed policy requirement is intended to address
vulnerabilities in System loan portfolios resulting from both on- and
off-balance sheet loan concentration risks, in particular those
concentration risks that are not addressed by the attribution
provisions of Sec. 614.4359.
The Agency recognizes that there is not one ideal uniform approach
to a loan concentration risk mitigation policy. Accordingly, this
proposal outlines only the minimally required elements of such a
policy. We have placed substantial responsibility on the board of
directors to establish more detailed policies and procedures
appropriate to the nature and scope of their institutions' credit
activities, territory and risk-bearing capacity. For example, under the
category of ``other concentration risks,'' System banks may find it
necessary to develop policies that focus on district-wide loan
concentrations and on the participation and syndication loans in their
portfolios.
C. Policy Elements
In addition to the specific loan and lease concentration risk
exposures discussed below under ``Quantitative Methods'' in Part D, we
are proposing to require that the policy include the following elements
to ensure that it is properly developed, implemented and monitored:
1. A clearly defined purpose and objective statement that sets
forth the objectives of the policy and specific means of achieving such
objectives. The Agency believes that such a statement would engage
System boards of directors in forming a philosophy and direction for
the management of their institutions' loan portfolio in the area of
concentration risk mitigation.
2. Clearly defined terms that are used consistently throughout the
policy.
3. Internal control requirements that:
a. Define those authorities delegated to management. Such
requirements should set forth organizational structure and reporting
lines that clearly delineate responsibility and accountability for all
management functions pertaining to mitigating exposures to both on- and
off-balance sheet loan and lease concentration risks, including risk
identification, measurement, limitation and oversight. In addition, the
policy should establish, when feasible, a separation of duties between
personnel executing transactions and those responsible for approval,
evaluation and oversight of credit activities. This separation of
duties promotes integrity and accuracy in lending practices that
reduces the risk of loss. Finally, the policy should cross-reference
the conflict of interest regulations in part 612 of this chapter to
ensure that employees directly involved in lending and leasing are
aware of their responsibilities to disclose actual or apparent
conflicts with their official duties.
b. Define those authorities retained for board action. Each
institution's board of directors has a fiduciary duty to ensure that
its institution's lending and leasing activities are prudently managed
and in compliance with all applicable laws and regulations.
Additionally, the board must ensure that the institution has adequate
and qualified personnel to manage the risks associated with its lending
and leasing activities. To this end, the Agency encourages each System
board of directors to review its loan and lease portfolio concentration
risk mitigation policy every year and make any adjustments that are
necessary and proper in light of the institution's financial position
and the lending environment.
c. Address exceptions to the policy. Such procedures should set
forth the basis for detecting deviations from, and making exceptions
to, the policy requirements. In addition, the policy should describe
the duties and responsibilities of management with regard to
recommending and reporting on policy deviations or exceptions to the
institution's board of directors, including what corrective actions
must be taken to restore compliance with the policy. In no event may
the lending and leasing limit exceed the applicable regulatory limits
for title I, II, or III institutions.
d. Describe reporting requirements. Such requirements should
describe the content and frequency of the reports and the office or
individual(s) responsible for preparing them for an institution's board
of directors. The reports should focus on providing information that
interprets the data and focuses the board on what is crucial to
understand and consider.
D. Quantitative Methods
The Agency is proposing that each policy contain a quantitative
method(s) to measure and limit identified exposures to on- and off-
balance sheet loan and lease concentrations emanating from:
(i) A single borrower;
(ii) Borrowers in a single sector in the agricultural industry;
(iii) A single counterparty; or
(iv) Unique factors because of the institution's territory, nature
and scope of its activities and risk-bearing capacity. Unique
concentration exposures might include, but not limited to, borrowers
that are reliant on the same processor, marketer, manager, integrator
or supplier (or any combination thereof).
Quantitative methods could include hold limits (for example, as a
percentage of risk funds, capital, earnings/net income or other
appropriate measurements or methods) that reasonably measure and limit
concentration risk exposures. We emphasize that the proposed 15-percent
regulatory limit on loans to one borrower establishes a ceiling limit.
We encourage System institutions to choose more conservative limits on
loans to one borrower as a majority of them have done under the current
regulatory limit. When arriving at quantitative methods, System
institutions should strongly take into account the stability and
strength of their capital positions and set their hold limits or other
risk management measures accordingly.
The following are examples of concentration risk exposures that
might be unique to a lender's territory:
An institution has a preponderance of borrowers in its
territory that are dependent on off-farm income from the same area
manufacturing plant where the potential downsizing or closing of the
plant could have a negative effect on loan repayment abilities.
An institution has a preponderance of independent
borrowers selling production to a very limited market (such as farmers
selling eggs, sugar beets, cranberries) where a squeeze in the market
could have a negative effect on loan repayment abilities.
An institution has a preponderance of borrowers structured
as limited liability companies or partnerships in which the same
individuals or group of individuals own interests--not enough to
trigger the attribution provisions under this subpart--but enough to
create instability among the group of borrowers should the common
investors experience financial difficulties.
An institution has a preponderance of borrowers in a newly
emerging market, such as biofuels, which also is an industry outside of
the institution's area of expertise and in which volatile and
unforeseen trends in the industry can have a negative effect on loan
repayment abilities.
In all the foregoing examples, System institutions should prudently
identify, measure, limit and monitor loan concentrations to these
groups of borrowers.
In determining concentration risk limits, the policy should take
into
[[Page 50940]]
consideration other risk factors that could reasonably identify
foreseeable loan and lease losses. Such risk factors could include
borrower risk ratings, the institution's relationship with the
borrower, the borrower's knowledge and experience, loan structure, type
and location of collateral (including loss given default ratings),
loans to emerging industries or industries outside of an institution's
area of expertise, out-of-territory loans, counterparties, or
weaknesses in due diligence practices. This list is exemplary only and
not meant to be exhaustive. The risk factors to be considered by an
institution would depend on the unique circumstances of the
institution's credit operations.
System institutions should give special consideration to
counterparty risks. For example, when entering into a participation,
the institution should consider how well it knows and trusts the
originator to make full and fair disclosures and to competently service
the loan. Conversely, when a System institution originates a
participation, it must ensure that there are no material
misrepresentations in its disclosures and that it has the ability to
properly service the loan. System institution originators should also
consider the risk of holding the entire loan should the loan become
distressed and the counterparties prevail against the System
institution in a lawsuit requiring the System institution to take back
the participation. System institutions should consider the risks of
concentrating too much of their participation and syndication loans
with the same third party. Finally, System institutions should ensure
that their policies prudently identify, measure, limit and monitor
counterparty exposures with respect to their participation and
syndication activity.
We emphasize that robust due diligence practices are especially
important when institutions are making loans outside of their
territories or core areas of expertise, or with counterparties.
E. Six-Month Timeframe To Issue a Policy
The proposed regulations would require all System lenders
(including a title III lender) to establish written loan and lease
concentration risk mitigation policies within 6 months from the
effective date of these revised regulations. FCA believes that 6 months
is a sufficient amount of time for System boards to design and adopt
the policy requirements prescribed in new Sec. 614.4362.
V. Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act (5
U.S.C. 601 et seq.), 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 Farm Credit 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, Farm Credit System institutions are not ``small entities''
as defined in the Regulatory Flexibility Act.
List of Subjects in 12 CFR Part 614
Agriculture, Banks, Banking, Foreign trade, Reporting and
recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, part 614 of chapter VI,
title 12 of the Code of Federal Regulations is proposed to be amended
as follows:
PART 614--LOAN POLICIES AND OPERATIONS
1. The authority citation for part 614 continues to read as
follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs.
1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12,
2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A,
4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25,
4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8,
7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (12 U.S.C. 2011, 2013,
2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074, 2075, 2091, 2093,
2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202c, 2202d, 2202e, 2206, 2206a, 2207,
2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252, 2279a,
2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5); sec. 413
of Pub. L. 100-233, 101 Stat. 1568, 1639.
Subpart J--Lending and Leasing Limits
Sec. 614.4352 [Amended]
2. Section 614.4352 is amended by:
a. Removing the comma after the word ``borrower'' and removing the
number ``25'' and adding in its place, the number ``15'' in paragraph
(a);
b. Removing the comma after the word ``Act'' and removing ``exceeds
25'' and adding in its place ``exceed 15'' in paragraph (b)(1); and
c. Removing the comma after the word ``Act'' and removing
``exceeds'' and adding in its place ``exceed'' in paragraph (b)(2).
Sec. 614.4353 [Amended]
3. Section 614.4353 is amended by:
a. Adding the words ``direct lender'' after the word ``No'';
b. Removing the comma after the word ``borrower''; and
c. Removing ``exceeds 25'' and adding in its place ``exceed 15''.
Sec. 614.4354 [Removed]
4. Section 614.4354 is removed.
Sec. 614.4356 [Amended]
5. Section 614.4356 is amended by removing the number ``25'' and
adding in its place, the number ``15''.
6. Section 614.4361 is amended by adding a new paragraph (c) to
read as follows:
Sec. 614.4361 Transition.
* * * * *
(c) The loan and lease concentration risk mitigation policy
required by Sec. 614.4362 must be adopted and implemented within 6
months from the effective date of such section.
7. A new Sec. 614.4362 is added to subpart J to read as follows:
Sec. 614.4362 Loan and lease concentration risk mitigation policy.
The board of directors of each System direct lender institution
must adopt and ensure implementation of a written policy to effectively
measure, limit and monitor exposures to concentration risks resulting
from the institution's lending and leasing activities.
(a) Policy elements.
(1) The policy must include:
(i) A purpose and objective;
(ii) Clearly defined and consistently used terms;
(iii) Quantitative methods to measure and limit identified
exposures to loan and lease concentration risks (as set forth in
paragraph (b) of this section); and
(iv) Internal controls that delineate authorities delegated to
management, authorities retained by the board, and a process for
addressing exceptions and reporting requirements.
(b) Quantitative methods.
(1) At a minimum, the quantitative methods included in the policy
must quantifiably measure and limit identified concentration risk
exposures emanating from:
(i) A single borrower;
(ii) A single industry sector;
(iii) A single counterparty; or
(iv) Other lending activities unique to the institution because of
its territory, the nature and scope of its activities and its risk-
bearing capacity.
(2) In determining concentration limits, the policy must consider
other risk factors that could reasonably identify foreseeable loan and
lease losses. Such risk factors could include
[[Page 50941]]
borrower risk ratings, the institution's relationship with the
borrower, the borrower's knowledge and experience, loan structure and
purpose, type or location of collateral (including loss given default
ratings), loans to emerging industries or industries outside of an
institution's area of expertise, out-of-territory loans,
counterparties, or weaknesses in due diligence practices.
Dated: August 12, 2010.
Roland E. Smith,
Secretary, Farm Credit Administration Board.
[FR Doc. 2010-20367 Filed 8-17-10; 8:45 am]
BILLING CODE 6705-01-P
