Loan Policies and Operations; Lending and Leasing Limits and Risk Management, 29992-29997 [2011-12771]

Agencies

• Farm Credit Administration

[Federal Register Volume 76, Number 100 (Tuesday, May 24, 2011)]
[Rules and Regulations]
[Pages 29992-29997]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12771]


=======================================================================
-----------------------------------------------------------------------

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: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Farm Credit Administration (FCA, Agency, we, our) issues 
this final rule amending our regulations relating to lending and 
leasing limits (lending limits) and loan and lease concentration risk 
mitigation (risk mitigation) with a delayed effective date. The final 
rule lowers the limit on extensions of credit to a single borrower or 
lessee (collectively borrower) for each Farm Credit System (System) 
institution operating under title I or II of the Farm Credit Act of 
1971, as amended (Act). This final rule also adds new regulations 
requiring all titles I, II, and III System institutions to adopt 
written policies to effectively identify, limit, measure and monitor 
their exposures to loan and lease (collectively loan) concentration 
risks. We expect this final rule will increase the safe and sound 
operation of System institutions by strengthening their risk mitigation 
practices and abilities to withstand volatile and negative changes in 
increasingly complex and integrated agricultural markets.

DATES: Effective Date: This regulation will be effective on July 1, 
2012, provided either or both Houses of Congress are in session for at 
least 30 calendar days after publication of this regulation in the 
Federal Register. We will publish a notice of the effective date in the 
Federal Register.

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 final rule are to:
     Strengthen the safety and soundness of System 
institutions;
     Ensure the establishment of consistent, uniform and 
prudent loan

[[Page 29993]]

and lease concentration risk mitigation policies by System 
institutions;
     Ensure that all System lenders have robust methods to 
measure, limit and monitor reasonably foreseeable 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.

II. Background

    On August 18, 2010, the FCA published a proposed rule (75 FR 50936) 
in the Federal Register to lower the lending limit on loans and leases 
to one borrower for all System institutions operating under title I or 
II of the Act from the current limit of 25 percent to a limit of no 
more than 15 percent of an institution's lending limit base. We further 
proposed that each title I, II and III System institution's board of 
directors adopt and ensure implementation of a written policy that 
would effectively measure, limit and monitor exposures to loan 
concentration risks.

III. Comments on the Proposed Rule and Our Responses

A. In General

    The FCA received a total of six comment letters, including five 
from System associations and one from the System's trade association. 
No comment letters were received from outside of the System. In 
addition, FCA personnel had substantive oral communications during the 
comment period with the signatories of two of the comment letters 
regarding clarification of their written comments. These substantive 
discussions have been reduced to writing and placed in the public 
rulemaking file.

B. Specific Comments and Responses on the Proposal To Reduce the 
Lending Limit From 25 Percent to 15 Percent

1. Agreement With the Proposal
    A few commenters agreed with the proposal to reduce the lending 
limit from 25 percent to 15 percent. One commenter also indicated that 
it does not anticipate that the lower limit will negatively affect its 
current lending and leasing practices.
    In addition, one commenter recommended that there be consistent 
limits for titles I and II lenders as well as for title III lenders. 
This commenter explained that titles I and II lenders also provide 
financing for cooperatives and would be at a competitive disadvantage 
with CoBank, ACB (CoBank), the only title III lender in the System. 
While it is true that associations provide some financing directly to 
cooperatives, the overwhelming majority of lending to cooperatives by 
titles I and II lenders is made through CoBank. We fully support 
continuation of these risk-sharing arrangements, and believe that risk 
sharing among associations and their funding banks and/or CoBank will 
enable associations to continue to meet the credit needs of 
cooperatives, which choose to do business through their local 
association. We do not believe the 15-percent lending limit will change 
this business landscape, nor create a competitive disadvantage for 
titles I and II lenders. Further, as stated in the preamble to the 
proposed rule, we chose not to address the title III lending limits in 
this rulemaking due to the complexity of the issues and indicated that, 
should we decide to address title III lending limits in the future 
through a regulation amendment, we would do so in a separate 
rulemaking.
2. No Need To Lower the Limit
    A few commenters questioned the need to lower the lending limit, 
stating that a lower limit was not the best solution to address unsafe 
lending practices. Rather than lower the limit for those institutions 
with a positive track record, these commenters advised the Agency to 
address the few problem institutions individually.
    We believe that lowering the lending limit is an effective way to 
ensure that System institutions' lending practices do not result in 
unsafe concentrations of risk. Moreover, as stated in the proposed 
rule, the significant growth in System capital since the lending limit 
was last set in the early 1990s provides the System with significant 
lending capacity. Accordingly, the current 25-percent limit is no 
longer considered necessary or prudent.
    Further, as stated in the proposed rule, a majority of titles I and 
II lenders already have internal lending limits that are more aligned 
with the 15-percent limit the Agency is now imposing. Therefore, those 
System institutions with a positive track record should not find 
compliance with the 15-percent limit onerous. The Agency also believes 
that imposing such limits by regulation rather than on individual 
institutions best meets due process principles of fairness, 
consistency, and transparency, as well as providing an opportunity to 
be heard through the public comment process.
    One commenter also stated that there was no need to lower the 
lending limits because its funding bank already enforces a 20-percent 
hold limit. The fact that System banks are enforcing limits below the 
current 25-percent limit evidences their recognition that the current 
limit is too high and provides additional support for the new limit of 
15 percent.
    One commenter questioned the need to lower the lending limit since 
risk may be mitigated using Farm Service Agency guarantees, farm 
program subsidies and crop insurance. We note that loans or portions of 
loans that have a Government guarantee, as well as loans fully secured 
by obligations fully guaranteed by the United States Government, are 
exempt from the computation of loans to one borrower under Sec.  
614.4358 of the lending limit regulation. Hence, the fact that a System 
institution may mitigate risk using such guarantees has no bearing on 
loans subject to the lending limit.
3. Impact on Competitiveness
    One commenter indicated that lowering the lending limit to 15 
percent would put System institutions at a competitive disadvantage 
with National banks, which may loan up to 15 percent plus an additional 
10 percent if the loan is fully secured by readily marketable 
collateral such as livestock, dairy cattle and warehouse receipts. 
Similarly, this commenter indicated that System institutions would be 
at a competitive disadvantage with State-chartered banks because such 
banks also have higher lending limits.
    The FCA has carefully considered whether the 15-percent limit would 
put System lenders at a competitive disadvantage with National and 
State-chartered banks and have concluded it will not for all of the 
following reasons. First, an overwhelming majority of titles I and II 
lenders currently have in-house lending limits of 20, 15 and even 10 
percent. The 15-percent limit, therefore, should not have a significant 
impact on the competitive position of the majority of System 
institutions with regard to National and State banks. We also note that 
these self-imposed limits have not resulted in a reduction in the 
System's market share of agricultural lending--a market share that has, 
in fact, grown over the last decade or so.
    Second, our review of lending limit regulations for State-chartered 
banks indicates that such limits vary widely. However, like National 
banks, in most case loans with higher lending limits made by State-
chartered banks must be fully secured by readily marketable collateral.
    The FCA also considered, but did not adopt exceptions to the rule 
based on the type and quantity of collateral supporting the loan. The 
concern over

[[Page 29994]]

the time and difficulty of administering such exceptions outweighed any 
potential benefits that might result for System borrowers. Furthermore, 
the FCA does not wish to encourage System institutions to place undue 
reliance upon collateral as a basis for extending credit above the 15-
percent limit.
    The Agency also believes that comparisons with National and State-
chartered banks are of limited value given that the System as a single-
industry agricultural lender, a cooperative and a Government-Sponsored 
Enterprise with public mission responsibilities, operates very 
differently in many respects from other Federal or State-chartered 
lending institutions. Given the unique and public purpose role of the 
System, the Agency has an obligation to ensure its safety and soundness 
so that the System remains a dependable and adequate source of credit 
to American farmers and ranchers. We also believe the 15-percent 
lending limit appropriately addresses the Agency's concerns over the 
volatility of agricultural lending as well as single-credit and 
industry concentrations. For all the foregoing reasons, we believe the 
15-percent limit will enhance the overall strength of each System 
institution, thus leveraging the System's ability to compete even more 
successfully with National and State-chartered banks for a share of the 
agricultural credit market.
    Another commenter stated that the lower limits would delay the loan 
approval process since more than one lending institution would be 
involved in a loan, further reducing an institution's competitiveness 
in the marketplace. FCA acknowledges that a longer loan approval 
process may result from risk-sharing agreements (i.e., participations, 
capital/asset pools, guarantees, etc.). However, we also believe that 
the additional due diligence performed by the other lenders in these 
risk-sharing agreements will lead to better credit decisions and a 
stronger loan portfolio in each System institution--benefits that will 
far outweigh any inconveniences resulting from such agreements. 
Further, the delayed effective date of this rule will give System 
institutions time to forge new relationships with other institutions so 
that procedures can be in place for approving such loans without 
significant delay.
4. Impact on Future Earnings
    One commenter asserted that the lower lending limit would cause a 
substantial reduction in future earnings because larger loans represent 
its association's best quality, least risky and most profitable segment 
of its loan portfolio.
    While large loans may be of sound quality and profitable, such 
loans have a greater impact on the viability of an institution should 
they deteriorate. It is the Agency's belief that a diversified loan 
portfolio that serves all eligible borrowers, both large and small, is 
one of the best ways to ensure an institution's stability.
    Further, earning streams need not suffer, nor should any potential 
loans be forced out of the System solely on the basis of this final 
regulation. Each System institution should use the time provided by the 
delayed effective date of this rule to develop risk-sharing agreements 
so it can continue to meet the needs of the borrowers in its territory.
    Another commenter indicated that the lower lending limit would 
reduce earnings because an association would be forced to sell off high 
quality loans, resulting in a lower return on assets and equity along 
with a restricted ability to build capital. This commenter also 
believed that the lower limit would reduce net income, negatively 
affecting an association's efficiency performance as reflected in its 
gross and net operating rates and efficiency ratio.
    Although a System institution may temporarily forego some earnings 
as a result of reducing the size of a loan it holds, any opportunity 
cost should be offset by its reduced exposure to concentration risk. 
Such concentration risk is a greater threat to the safety and soundness 
of a System institution than a temporary loss of earnings. In addition, 
lower concentration risk levels require less capital to buffer risk 
that may exist in a loan portfolio, thereby lowering the capital 
requirements of a System lender.
    Finally, we note that all existing loans are grandfathered under 
the transition provisions of this regulation. Therefore, unless the 
terms of a loan are changed, rendering it a ``new loan'' under the rule 
that would need to comply with the 15-percent lending limit, System 
institutions will not be forced to sell off high quality loans. 
Further, the delayed effective date should give System institutions 
enough time to forge the necessary lending relationships to offset any 
anticipated negative income and performance results.
5. Effect on Patronage Distributions and Customer Service
    Two commenters stated that the lower limits would result in a loss 
of patronage paid to borrowers because System institutions would be 
forced to sell more participations to lenders not paying patronage. One 
of these commenters asserted that a loss of patronage payments by an 
association would cause its borrowers to spread rumors about the 
financial troubles of the association, resulting in a negative image 
for the System throughout the community. One of these commenters also 
stated that the lower limit would unnecessarily hurt farmers and 
ranchers.
    While one of the effects of the final regulation is expected to be 
the greater use of risk-sharing agreements, the FCA expects that those 
System institutions paying patronage will find like partners or, 
alternatively, partners that will agree to patronage. System lenders 
can use these risk-sharing agreements to manage risk while still 
receiving financial consideration in the form of patronage or loan fees 
from a loan sale. These agreements should mitigate any temporary impact 
from reducing the size of loan held by a lender, as the lender can 
still receive income without bearing the risk of loss from holding a 
larger portion of the loan principal or commitment.
    We also believe that such risk-sharing activities will encourage 
additional market discipline in System institutions by requiring them 
to price loans appropriately in order to find willing lending partners. 
We believe that the added due diligence, diversity and market 
discipline that lending partners bring to a System institution's loan 
and patronage practices will strengthen System institutions, ensure 
their long-term safety and soundness and benefit, rather than hurt, the 
System's farmer and rancher borrowers.
6. Effect of Lower Limits on Smaller System Institutions
    A few commenters stated that, while lower limits may be appropriate 
for larger System associations, they would cause hardships on smaller 
associations. These commenters were concerned that the lower lending 
limit would make it even more challenging for small associations to 
meet the capital demands of those borrowers with large farming and 
ranching operations. One commenter suggested that the Agency should 
consider making exceptions to the 15-percent limit for small 
associations or allowing the System funding banks to make such 
exceptions in their general financing agreements with their district 
associations. Alternatively, this commenter suggested allowing the 
funding banks to authorize an association's use of a higher lending 
limit, not to exceed 25 percent, subject to other credit factors such 
as the association's size and capital base.

[[Page 29995]]

    The Agency is sensitive to the fact that the lower limit may 
initially be more of a burden on smaller System associations. In 
response to this concern, we are issuing this regulation with a delayed 
effective date of approximately 1 year to give all titles I and II 
lenders more time to establish participation, syndication, capital 
pooling or other risk-sharing agreements so that they may continue to 
serve the needs of the borrowers in their territories.
    However, we also note, as stated in the preamble to the proposed 
regulation, that the substantial growth in the capital bases of titles 
I and II System institutions since the current lending limit was first 
promulgated, has given all System lenders, including the smaller ones, 
much greater capacity to meet the needs of large borrowers. It is also 
true that smaller System institutions are often more at risk from large 
loans that cease to perform since their capacity to absorb such losses 
is often not as great as in larger-sized institutions.
    The FCA considered the commenters' suggestions for exceptions to 
the lending limit for smaller associations and also considered the 
following alternatives to address the issue:
     Establishing the lending limit at the greater of 15 
percent or a specific dollar amount for smaller System institutions, or
     Permanently grandfathering existing loans (even when the 
terms of the loan change) held by smaller institutions with a higher 
lending limit percentage or based on a specified dollar amount.
    We ultimately rejected all of these alternatives for several 
reasons, not the least of which is our continued belief that the 15-
percent lending limit is necessary for the long-term safety and 
soundness of all System institutions, including and especially the 
smaller institutions. We also believe that making exceptions for 
smaller associations, either through the funding banks or by 
regulation, would be difficult to effectively administer and monitor, 
and could end up weakening rather than strengthening the smaller 
institutions. Finally, with the delayed effective date providing time 
for System institutions to establish additional risk-sharing 
agreements, we believe that all System institutions, including the 
smaller ones, will be able to continue to meet the mission of servicing 
the credit needs of the creditworthy, eligible borrowers in their 
respective territories.
    Finally, one commenter stated that lowering the lending limit for 
the smallest System associations is not necessary because such 
institutions pose no risk to the System as a whole.
    As the safety and soundness regulator, it is the FCA's duty to 
ensure the safe and sound operation of every System institution. It 
would be irresponsible for the Agency to ignore or permit an unsafe 
lending limit based on the notion that the System as a whole could 
absorb the insolvency of a small institution. Further, it is important 
to consider the disruption caused by the failure of an institution to 
its farmer and rancher borrowers, to the consequences on the 
institution's employees or members of the community, or to the fact 
that the continued viability of even the smallest System association is 
vital to achieving the mission of the System.
    This same commenter indicated that the lower limit would reduce the 
System's diversity in business models, presumably by forcing the 
smaller associations to merge with larger associations. A reduction in 
the diversity of System business models does not necessarily accompany 
the further consolidation of the System. We believe that the most 
successful business models adapt to changes in the operating 
environment, which serves to strengthen the System.
    Given the concern over the impact of the 15-percent lending limit 
on smaller associations, the Agency especially encourages each funding 
bank to carefully evaluate the lending limits imposed by its general 
financing agreements (GFA). It may be appropriate to maintain the GFA 
limit at the 15-percent level for smaller associations if the bank and 
associations determine that the 15-percent level is needed to 
adequately serve the needs of the borrowers in their respective 
territories. This analysis should be completed with regard to each 
particular association's lending capacity, history, expertise, etc., 
and the resulting risk to the funding bank.
7. Transition Period
    One commenter indicated that the transition rule contained in Sec.  
614.4361 should be lengthened to allow System institutions sufficient 
time to develop risk-sharing agreements to conform new loans to the 15-
percent lending limits without a loss of business or customers. The FCA 
agrees with the need to provide more time to System institutions to 
develop such agreements which is why, as mentioned earlier, this final 
rule is being issued with a delayed effective date, giving institutions 
approximately 1 year to comply with the rule's requirements.
    Therefore, we are deleting proposed Sec.  614.4361(c), which in the 
proposed rule would have given titles I and II System institutions 6 
months from the effective date to comply with the new limits and would 
have given titles I, II and III System institutions 6 months from the 
effective date to comply with the new policy requirements.

C. Specific Comments and Responses on the Proposed Loan and Lease 
Concentration Risk Mitigation Policies

1. Agreement With the Proposal
    Two commenters agreed with the requirement to adopt risk mitigation 
policies and recognized the need for all financial institutions to 
adhere to such policies. However, one of these commenters added that 
such policies will not, in and of themselves, protect the System 
without corresponding efforts from associations to responsibly manage 
portfolio risk. The FCA agrees with these comments and encourages each 
title I, II and III System institution's board of directors to adopt 
robust internal controls, such as reporting requirements and other 
accountability safeguards, so that the board remains engaged in 
ensuring that those policy authorities delegated to management are 
effectively carried out.
2. Need for the Regulation
    One commenter indicated that it did not believe that the FCA has to 
change its regulations to require associations to set prudent lending 
limits.
    The FCA believes that a regulation requiring a written risk 
mitigation policy is necessary since our current regulations do not 
impose lending limits based on specified risks in an institution's loan 
portfolio and practices. The policy required by this final rule focuses 
on the mitigation of risks caused by undue industry concentrations, 
counterparty risks, ineffective credit administration, inadequate due 
diligence practices, or other shortcomings that could be present in a 
System institution's lending practices. The recent stresses experienced 
by System institutions caused by downturns in the poultry, ethanol, hog 
and dairy industries underscore the need for such policies in System 
institutions.
    This commenter also indicated that the FCA has sufficient 
enforcement powers to ensure safe and sound loan portfolio risk 
mitigation by System institutions and also reminded the FCA of 
Congress' previous instruction to eliminate all regulations that ``are 
unnecessary, unduly burdensome or costly.''
    The risk mitigation policy required by this rule is intended to 
strengthen a

[[Page 29996]]

System institution's loan portfolio so that it can better withstand 
stresses experienced by a single borrower, industry sector or 
counterparty. The policy must set forth sound loan and lease 
concentration risk mitigation practices in order to prevent weak and 
unsound practices. In contrast, our enforcement authorities apply when 
a System institution (or other persons) engages, has engaged, or is 
about to engage in an unsafe or unsound practice in conducting the 
business of the institution. In addition, this commenter stated that 
the lower lending limits do not justify the need to regulate the 
specific content of an institution's lending policies, asserting that 
FCA's existing loan policy regulation at Sec.  614.4150 already 
establishes the necessary regulatory framework for lending standards. 
In lieu of the regulations proposed by the FCA, this commenter suggests 
simply adding the phrase ``effectively measure, limit and monitor 
exposures to concentration risk'' to existing Sec.  614.4150.
    Section 614.4150 addresses requirements for prudent credit 
extension practices and underwriting standards for individual loans, 
but falls short of addressing concentration risks inherent in an 
institution's loan portfolio. Although some institutions have already 
established policies to address loan concentration risks, many have 
not. This final regulation is necessary to ensure that all System 
institutions adopt adequate risk mitigation policies. System 
institutions are free, however, to incorporate the requirements of this 
policy into their already existing lending policies.
    For all the foregoing reasons, we believe that the establishment of 
a policy to mitigate loan concentration risks is necessary and will not 
be unduly burdensome or costly to System institutions.
3. Lack of Specificity in the Requirements for a Loan and Lease 
Concentration Risk Mitigation Policy
    A few commenters thought that the risk mitigation policy was too 
vague, the risks mentioned would be too difficult to quantify, and the 
policy would not make the System safer, noting specifically that:
     The quantitative method(s) are not sufficiently defined 
and may unnecessarily limit the flexibility of System institutions 
seeking to facilitate credit opportunities for eligible and qualified 
System borrowers;
     Certain System institutions serve areas where particular 
agricultural industries dominate in their territories, resulting in 
unavoidable loan concentrations in their loan portfolios;
     Risks emanating from unique factors, such as dependence on 
off-farm income from a local manufacturing plant are difficult to 
effectively identify, measure, limit and monitor and are not 
susceptible to meaningful quantitative measures. Attempts to measure 
such risks could lead to arbitrary decisions that contradict the 
System's mission of making credit available to qualified farmers;
     The requirements of the policy could prevent System 
institutions from making loans to producers with a limited market for 
their farm products;
     The imposition of specific policy elements and 
quantitative methods is not appropriate for a regulation since each 
institution's territory, nature and scope of its activities and risk-
bearing capacity is unique;
     The regulation provides no definition of the meaning of a 
``single-industry sector'' so it is unclear how broadly or narrowly 
this phrase should be defined;
     It is neither practical, necessary, or realistic to create 
a meaningful quantitative method around what may be a limitless set of 
risk factors; and finally,
     The policy would not enhance the underlying safety and 
soundness of the System.
    The FCA recognizes that there is no ideal uniform approach to a 
loan and lease concentration risk mitigation policy. For this reason, 
the regulation intentionally outlines only minimally required elements. 
It is up to each institution, based on the unique risks in its 
territory and risk-bearing capacity, to identify and define 
concentration risks so that they can be effectively mitigated. For 
these reasons, the regulation gives institutions wide latitude to 
define terms, such as ``industry sectors'' according to their best 
business judgment and based on the familiarity with the types of 
agriculture in their territories.
    For those commenters expressing apprehension about which risk 
factors to identify, we have added language to the rule clarifying that 
quantitative methods need be established only for significant 
concentration risks that are reasonably foreseeable. We leave it to the 
discretion of each institution, using their experience in providing 
agricultural credit and their best business judgment, to determine 
which credit concentration risks are significant--that is, which risks 
have the most potential to lead to serious loss.
    The discretion the rule gives to System institutions is intended to 
ensure that institutions adequately control risk without limiting their 
ability to continue being a steady source of credit to all eligible and 
creditworthy borrowers in their respective territories. The policy 
should not result in System institutions having to make arbitrary 
credit decisions or turn away qualified borrowers. Rather, the policy 
requires institutions to mitigate rather than deny those loan 
concentrations presenting significant and reasonably foreseeable risks. 
Concentration risks caused, for example, by territories with producers/
borrowers that have limited agricultural markets or few agricultural 
sectors may be mitigated through one or more of the following options, 
including hold limits, an increase in capital, loss-sharing agreements 
or other risk mitigation tools.
    Consistent with the language in the preamble to the proposed 
regulations, we have deleted the reference to direct lender from the 
regulation text to make clear that the loan and lease concentration 
risk mitigation policy requirements also apply to title III System 
institutions.
4. Period for Adopting the New Loan and Lease Concentration Risk 
Mitigation Policy
    One commenter encouraged the FCA to carefully consider the 
difficulty System institutions are likely to have in implementing the 
proposed changes. This commenter also indicated that the 6-month period 
for adopting the risk mitigation policy would not provide sufficient 
time for System boards of directors to properly evaluate and adopt 
policies to address those concentrations in their current portfolios 
that are not currently measured. As discussed in detail above, the 
final regulation is being issued with a delayed effective date, giving 
all System institutions approximately a 1-year period to adopt such 
policies.

IV. 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 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.

[[Page 29997]]

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 amended as follows:

PART 614--LOAN POLICIES AND OPERATIONS

0
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]

0
2. Section 614.4352 is amended by:
0
a. Removing the comma after the word ``borrower'' and removing the 
number ``25'' and adding in its place, the number ``15'' in paragraph 
(a);
0
b. Removing the comma after the word ``Act'' and removing ``exceeds 
25'' and adding in its place ``exceed 15'' in paragraph (b)(1); and
0
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]

0
3. Section 614.4353 is amended by:
0
a. Adding the words ``direct lender'' after the word ``No'';
0
b. Removing the comma after the word ``borrower''; and
0
c. Removing ``exceeds 25'' and adding in its place ``exceed 15''.


Sec.  614.4354  [Removed]

0
4. Section 614.4354 is removed.


Sec.  614.4356  [Amended]

0
5. Section 614.4356 is amended by removing the number ``25'' and adding 
in its place, the number ``15''.

0
6. Section 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 title I, II, and III System 
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. The policy must include:
    (1) A purpose and objective;
    (2) Clearly defined and consistently used terms;
    (3) Quantitative methods to measure and limit identified exposures 
to significant and reasonably foreseeable loan and lease concentration 
risks (as set forth in paragraph (b) of this section); and
    (4) 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 measure and limit identified 
exposures to significant and reasonably foreseeable concentration risks 
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 identify significant and reasonably 
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 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: May 19, 2011.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2011-12771 Filed 5-23-11; 8:45 am]
BILLING CODE 6705-01-P