Maximum Interest Rates on Guaranteed Farm Loans, 13999-14005 [2013-04930]

Agencies

• DEPARTMENT OF AGRICULTURE
• Farm Service Agency

[Federal Register Volume 78, Number 42 (Monday, March 4, 2013)]
[Rules and Regulations]
[Pages 13999-14005]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-04930]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

========================================================================


Federal Register / Vol. 78, No. 42 / Monday, March 4, 2013 / Rules 
and Regulations

[[Page 13999]]



DEPARTMENT OF AGRICULTURE

Farm Service Agency

7 CFR Parts 761 and 762

RIN 0560-AH66


Maximum Interest Rates on Guaranteed Farm Loans

AGENCY: Farm Service Agency, USDA.

ACTION: Interim rule.

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

SUMMARY: The Farm Service Agency (FSA) is issuing this interim rule 
amending the regulations that specify interest rates on guaranteed farm 
loans. This rule will tie the maximum interest rate that may be charged 
on FSA guaranteed farm loans to nationally published indices, 
specifically the 3-month London Interbank Offered Rate (LIBOR) or the 
5-year Treasury note rate, unless the lender uses a formal written 
risk-based pricing practice for loans, in which case the rate must be 
at least one risk tier lower than the borrower would receive without 
the guarantee. These provisions are intended to increase clarity and 
specificity in the maximum rate requirements, while at the same time 
setting rates that will work in current credit market conditions.

DATES: Effective Date: May 3, 2013.
    Comment Date: We will consider comments that we receive by June 3, 
2013.

ADDRESSES: We invite you to submit comments on this interim rule. In 
your comment, please specify RIN 0560-AH66 and include the volume, 
date, and page number of this issue of the Federal Register. You may 
submit comments by either of the following methods:
     Federal eRulemaking Portal: Go to https://www.regulations.gov. Follow the instructions for submitting comments.
     Mail: Director, Loan Making Division, the Farm Loan 
Program (FLP), FSA, U.S. Department of Agriculture, 1400 Independence 
Avenue SW., Stop 0522, Washington, DC 20250-0522.
    Comments will be available for inspection online at https://www.regulations.gov and in the Office of the Director, Loan Making 
Division, FSA, USDA, 1400 Independence Avenue SW., Stop 0522, 
Washington, DC 20250-0522, between 8 a.m. and 4:30 p.m., except 
holidays.

FOR FURTHER INFORMATION CONTACT: Trent Rogers; telephone: (202) 720-
3889. Persons with disabilities or who require alternative means for 
communications should contact the USDA Target Center at (202) 720-2600 
(voice and TDD).

SUPPLEMENTARY INFORMATION: 

Background

    FSA guaranteed loans provide credit to farmers whose financial risk 
exceeds a level acceptable to commercial lenders. Loans are made to 
assist those eligible farmers as specified in 7 CFR 762.120 who are not 
able to obtain conventional loans at reasonable rates and terms. FSA 
provides commercial lenders (for example, commercial banks, mutual 
savings banks, mortgage banks, Farm Credit System institutions, credit 
unions) with a guarantee for up to 95 percent of the loss of principal 
and interest on a guaranteed loan (see 7 CFR 762.129). In fiscal year 
2010, FSA guaranteed over $3.3 billion farm ownership (FO) and 
operating loans (OL).
    The FSA guarantee reduces the lender's risk of loss. FSA believes 
the borrower should receive some of the benefit of the reduction in the 
lender's credit cost in the form of a lower interest rate than the 
borrower would otherwise receive. Therefore, the FSA regulations for 
the guaranteed loan program limit the amount of interest that a lender 
may charge guaranteed loan customers. The existing regulations in 7 CFR 
762.124(a)(3) tie the rate to that rate charged an ``average 
agricultural loan customer,'' as defined in 7 CFR 761.2. This rule 
would not change the core policy of limiting rates on guaranteed loans 
to allow the borrower to receive some of the benefit of the guarantee, 
but would make that policy clearer to implement by tying maximum 
interest rates to widely published indices. The specific maximum rates 
will also simplify compliance, as it will be easier to demonstrate that 
a rate was below the maximum on a specific date than demonstrate it was 
at or below the rate charged an average agricultural loan customer.
    This interim rule follows a proposed rule on the same topic that 
was published on September 30, 2008 (73 FR 56754-56756). The proposed 
rule included provisions tying maximum rates to widely published 
indices. The proposed maximum ``spread'' between the indices and the 
maximum rates was based on FSA analysis of over 10 years of data on 
actual guaranteed loan rates and indices. Based on that data, most 
guaranteed loans made between 1999 and 2010 would have met the 
requirements in the proposed rule. This interim rule addresses comments 
made on the proposed rule; substantive changes were made to address the 
comments.

General Discussion of Comments and Substantive Changes Made in Response 
to Comments

    In response to the proposed rule, FSA received 97 comments from 
individuals, organizations, banks, Farm Credit System lenders, lending 
associations, government agencies and FSA employees. Most comments 
supported the concept of more clear maximum interest rate requirements, 
but opposed the specifics of the proposed rule, although there was not 
a consensus on alternative provisions. Many commenters noted that the 
proposed interest rate benchmarks would not work in the unusual credit 
environment that was present in late 2008, when the proposed rule was 
published. Most comments strongly supported eliminating the term 
``average agricultural loan customer,'' which was generally considered 
to be lacking in clarity and enforceability.
    In balancing the need to clarify the regulations with the 
opportunity for public comment on how the amendments would function in 
more typical market conditions, FSA has decided to publish an interim 
rule with a 90 day period for additional public comment. The cost 
benefit analysis done for this rule, which updates the analysis done 
for the proposed rule, shows that more than 95 percent of guaranteed 
loans made in 2009 and 2010 would have met the requirements in this 
interim rule. We find that the substantive changes in this rule fully

[[Page 14000]]

address the issue raised by commenters regarding effective maximum 
rates in unusual market conditions. In response to the many comments 
received on the proposed rule stating that the proposed rates would not 
work in current credit market conditions, FSA has increased the maximum 
rates permitted in this rule, and will allow a further increase if the 
3-month LIBOR falls below 2 percent.
    This rule makes changes to FLP regulations in 7 CFR parts 761 and 
762. The changes in 7 CFR part 761, ``General Program Administration,'' 
remove the definition for ``average agricultural loan customer'' and 
add a reference to the abbreviation, LIBOR. The changes in 7 CFR part 
762, ``Guaranteed Farm Loans,'' clarify how maximum interest rates will 
be calculated for various types of guaranteed loans.
    The substantive differences in this interim rule as compared to the 
provisions in the proposed rule are:
     The indices used in this rule are different from those 
proposed;
     This rule increases the allowable maximum rate ``spread'' 
above the indices by 300 basis points (3 percentage points) from what 
was proposed;
     This rule sets the maximum rate based on the term over 
which the rate is fixed, rather than purpose of loan (maximum rates are 
now the same for operating and ownership loans);
     The proposed provisions allowing FSA to set a different, 
unspecified, rate during extraordinary market conditions are replaced 
with more specific provisions allowing a 100 basis point higher 
``spread'' if the 3-month LIBOR falls below 2 percent.
    As discussed in more detail below, the proposed rule based maximum 
rate on the New York Prime and the 10-year Treasury note rate indices. 
This interim rule uses the 3-month LIBOR and the 5-year Treasury note 
rate as the indices. The proposed rule specified that the maximum rate 
allowed for guaranteed loans would be a 250 basis point (2.5 percentage 
points) spread above New York Prime for Operating loans (OL), and a 350 
basis point (3.5 percentage points) spread above 10-year Treasury for 
Farm Ownership Loans (FO). This interim rule sets the maximum allowable 
spread at 650 basis points (6.5 percentage points) above 3-month LIBOR 
for variable rate loans and those fixed for less than five years, and 
550 basis points (5.5 percentage points) above 5-year Treasury for 
loans fixed for five years or more. The rates are the same for FO and 
OL in this rule.
    The proposed rule included a provision that the maximum interest 
rate limitations could be modified by FSA in times of extraordinary 
conditions. This interim rule specifies the extraordinary condition (3-
month LIBOR falls below 2 percent) that will automatically trigger a 
specific 100 basis point increase in the allowable spread. If the 3-
month LIBOR falls below 2 percent, the maximum allowable spreads will 
increase by 100 basis points (1 percentage points), to 750 basis points 
above the 3-month LIBOR for variable rate loans and 650 basis points 
above the 5-year Treasury note rate for loans fixed for terms of 5 or 
more years, regardless of the program type.
    We are issuing this interim rule in an attempt to provide clarity 
to borrowers and lenders in this marketplace and to reduce regulatory 
uncertainty. We do not believe that this change will substantially 
alter the interest rates available to borrowers, nor is it our 
intention to do so. In order to ensure that we have selected the right 
maximum rates, and to ensure that there are no unintended consequences 
of this action, we will carefully monitor the implementation of this 
rule. If we receive comments indicating that there is a substantial 
negative effect on either borrowers or lenders, we will take those 
comments into account in determining whether to suspend implementation 
of this rule. We welcome comments on our approach.

Discussion of Comments

    The following provides a discussion of the specific public comments 
received, and FSA's responses, including changes we are making to the 
regulations in response to the comments.
    Comment: FSA should suspend or delay action on this regulation and 
reconsider it at a later time when credit markets are more stable.
    Response: We are publishing this interim rule, with an additional 
90 day comment period, rather than proceeding directly to final rule. 
This provides more opportunity for public comment, and more time for 
markets to stabilize, while at the same time providing needed clarity 
to the guaranteed loan program regulations.
    Comment: FSA should withdraw its amendments due to the uncertainty 
and volatility in the current markets.
    Response: As mentioned above, we are publishing this interim rule 
to provide more opportunity for public comment and more time for 
markets to stabilize.
    Comment: FSA should publish an interim rule rather than a final 
rule because we would like to see how the options USDA implements 
actually work.
    Response: FSA agrees and is issuing an interim rule.
    Comment: FSA should let the market dictate what interest rate 
lenders charge guaranteed borrowers, rather than placing any limits on 
the rates. Guaranteed borrowers are inherently financially weaker than 
the lender's typical customer, and are more expensive to service. The 
guarantee does not reduce lender's risk of borrower default, and they 
should be permitted to price accordingly.
    Response: It is not FSA's intent to set interest rates, but rather 
to establish broad guidelines. While FSA believes the guarantee reduces 
risk of loss to the lender, we recognize that a guaranteed borrower may 
still be financially weaker and more expensive to service than their 
typical customer. This interim rule should provide lenders enough 
flexibility to set loan rates based on market factors and to reflect a 
lender's cost, a borrower's risk, and loan characteristics. Therefore, 
no change is made to the rule in response to this comment.
    Comment: Lenders should be able to base the rate on local market 
rates, not the maximums, if using the maximums would otherwise result 
in a denial of credit to the borrower.
    Response: Lenders using risk-based pricing practices specified in 7 
CFR 762.124(a) would not have to use the indexed rate maximum. This 
interim rule should enable other lenders sufficient flexibility to base 
rates on local conditions. Lenders will likely price loans based on 
their cost of funds or competition.
    Comment: There should not be any limits on interest rates. We 
disagree with USDA's assertion that guaranteed loans automatically 
reduce lender costs. Lenders should be allowed to charge a rate that is 
reflective of local market conditions.
    Response: Part of the intent of the program is for the borrower to 
receive the benefit of the reduction in the lender's credit cost in the 
form of a lower interest rate. The interim rule provides broad 
guidelines that will allow lenders to adjust accordingly.
    Comment: The rule should not limit the rate of a variable rate loan 
throughout the life of the loan.
    Response: It was not our intent for the rule to do so. The interest 
rate maximums in this rule will be applicable only at loan closing or 
restructuring, but then rates may

[[Page 14001]]

fluctuate according to the bank policy that applies to other, non-
guaranteed loans, without being restricted by any maximums. We have 
clarified the provisions in this rule for variable rate loans to state 
that the rate maximum applies only at the time of loan closing or loan 
restructuring.
    Comment: A national index would reduce lenders' ability to control 
profit margins.
    Response: Under the revised rule lenders should have substantial 
flexibility in loan pricing and, therefore profit margins.
    Comment: Rather than implementing the proposed interest rate 
maximums, the following language should be adopted: ``On the date of 
loan closing, the interest rate charged by the lender to a borrower 
with a Farm Service Agency guaranty shall not exceed the interest rate 
the lender charges a non-guarantee borrower of a similar type, term or 
loan purpose.''
    Response: A requirement that rates not exceed the interest rate 
charged a non-guarantee borrower and provides the specific language for 
loan type, term, loan purpose, and specific date would provide no 
benefit to the guaranteed borrower. One of the purposes of the 
amendments is to ensure that borrowers receive some of the benefit from 
the reduced risk provided by the guarantee, in the form of a lower 
rate, not the same rate, than a similar non-guarantee borrower. 
Therefore, no change is made to the rule in response to this comment.
    Comment: Eliminate ``average agricultural loan customer'' from the 
definitions. We do not have an average agricultural loan customer rate 
and it is difficult for lenders to apply this definition. The index and 
maximum spread is a reasonable and appropriate alternative to the 
ambiguous ``average agricultural loan customer.''
    Response: As proposed, we have removed the term.
    Comment: Don't remove the ``average agricultural loan customer'' 
definition. The existing regulations are clear and not vague and FSA's 
proposal to benchmark interest rates to published indices would add 
more complexity to the current FSA rules, and more compliance 
regulation for the small agricultural community banks.
    Response: The ``average agricultural loan customer'' implies a 
flat-rate loan pricing policy through which all farm customers receive 
the same rate, which is considered inconsistent with current industry 
practices. We received many comments that the ``average agricultural 
loan customer'' term is ambiguous and makes it difficult for lenders to 
demonstrate compliance, and it is therefore removed. The new rate 
maximums, which are clearly specified and based on widely published 
indices, are not complex; there are only two maximum rates in effect at 
any time, which should simplify compliance for all types of lenders.
    Comment: We support the basic concept to allow lenders to use an 
internal risk-based pricing practice. However, there are concerns with 
the way the provisions in the proposed rule are specified. The term 
``moderate risk borrower'' is still too vague and should not be used.
    Response: In response to this comment, this rule removes the 
references to a ``moderate risk borrower'' that were in the proposed 
rule and instead refers specifically to a lower risk tier than the 
borrower would otherwise qualify for.
    Comment: Provisions under the proposed rule do not allow a risk-
based pricing practice to work effectively within the community banking 
system.
    Response: It is not the intent of FSA to require banks to use risk-
based pricing practices in order to participate in the guaranteed loan 
program. Any lender without a written risk-based pricing practice may 
use any other pricing practices (for example, cost-plus, flat-rate, or 
market based) to price guaranteed loans, provided the rates do not 
exceed the required maximums.
    Comment: FSA has not established a clear limit for the interest 
rate that can be charged to a moderate risk borrower, and by not 
establishing a clear limit for lenders using risk-based pricing 
practices, there may be wide variances among lenders.
    Response: In response to this comment, this rule removes all 
references to a moderate risk borrower that were in the proposed rule 
and instead refers specifically to a lower risk tier than the borrower 
would otherwise qualify for.
    Comment: The proposed middle risk tier does not represent a typical 
or moderate strength customer. One risk-based pricing practice used 
within our institution uses a 14-tier scale, but tier 7 is not 
``moderate risk.'' In general, the first 9 tiers map to a Fully 
Acceptable loan, a 9 would be low Acceptable, 10 would be Special 
Mention, 11 and 12 would be Substandard and the remaining ratings map 
to Doubtful and Loss. Under this type of risk-based pricing practice, 
the moderate risk loan would likely be rated 10 or 11, not the middle 
tier of 7 and 8 as the FSA proposed rule specified. As an alternative, 
we suggest that for loans protected by a guarantee, the lender assign 
it a risk tier at least one tier lower (representing lower risk and 
therefore a lower interest rate) than that borrower would receive 
without a guarantee.
    Response: We agree that the suggested alternative of specifying one 
lower risk tier is a straightforward and objective methodology which 
accommodates lender pricing practices better than specifying that the 
middle tier be used. This alternative would satisfy the objective of 
providing benefit to the borrower with a lower interest rate, and is a 
clear and unambiguous requirement for lenders. In response to this and 
other similar comments, this rule removes all references to a moderate 
risk or middle tier borrower that were in the proposed rule and instead 
refers specifically to a risk tier one tier lower than the borrower 
would otherwise qualify for.
    Comment: The term ``model'' implies a much more sophisticated 
process than is typically used to price loans. A common understanding 
of a ``model'' would include pricing resulting from an economic capital 
model that is a pure form of a risk-based pricing, taking into 
consideration different levels of risk and the probability of default, 
exposure to default, and loss given default. That is more detailed 
analysis than is typically performed to develop loan pricing by 
agricultural lenders and we suggest that FSA therefore refer to it as a 
pricing ``practice'' rather than a pricing ``model.''
    Response: It is our intention to follow lender practices where 
practical. Therefore, this suggestion is adopted in this interim rule; 
references to ``pricing models'' in the proposed rule have been 
replaced with references to ``pricing practices.'' Additional guidance 
and examples will be published in FSA internal handbooks of how a risk-
based pricing practice may be used to determine the maximum loan rate.
    Comment: Our risk-based pricing practice uses detailed actuarial 
data. FSA should set the policy regarding risk rating without examining 
or challenging the actuarial detail.
    Response: If a risk-based pricing practice is used, the lender must 
provide FSA with information about its risk-based pricing practices if 
requested by FSA. That does not necessarily mean that FSA will 
challenge those practices. The purpose of requesting the information is 
so that FSA could determine compliance in the context of the lender's 
specific risk-based pricing practice, rather than to challenge the 
actuarial detail.
    Comment: A bank's pricing matrix is part of an institution's 
business model and therefore proprietary. FSA should state clearly in 
the regulation, not just the preamble, that a lender's pricing

[[Page 14002]]

matrix is not discoverable via a Freedom of Information Act (FOIA) 
request, and is not otherwise available for public inspection.
    Response: FSA understands the concern, but does not feel that a 
specific provision in the regulation is needed or appropriate. FSA does 
not intend to release a lender's risk-based pricing practice to any 
non-government entity or party as a result of a FOIA request. The 
lender's risk-based pricing practice would be protected under the 
Privacy Act of 1974 following FSA's normal procedures.
    Comment: The proposed interest rate limits and indices are not 
appropriate and will not allow us to extend credit under current market 
conditions.
    Response: FSA proposed new interest rate limits based on widely 
recognized indices, with the intent of providing simple, clear, 
straightforward limits that would not hamper lender participation in 
the program. As stated in the Supplementary Information section of the 
proposed rule, the proposed indices and rates were based on a detailed 
analysis of 10 years of interest rate data. The proposed rule's comment 
period occurred during a period of historic financial market 
disruption. In response to this comment and similar comments, we are 
publishing this interim rule with different indices and spreads 
resulting in higher interest rate maximums than in the proposed rule, 
with an additional provision for an even wider spread in market 
conditions such as those that existed from 2009 to 2010. As part of the 
cost benefit analysis for this rule, we determined that more than 95 
percent of guaranteed loans made in 2009 and 2010 by lenders of all 
sizes would meet the requirements in this interim rule.
    Comment: The selected indices are not the most appropriate ones. 
Alternatives include the Farmer Mac Cost of Funds Index (COFI), 3-Month 
COFI, 1-Year COFI, 5-Year Reset COFI, 10-Year Reset COFI, 15-Year Reset 
COFI, Federal Farm Credit Banks (FFCB) Funding Corporation Cost Index, 
LIBOR, LIBOR Swap Curve, Federal Home Loan Bank (FHLB), 5-year Treasury 
note rate, and 10-year Constant Maturities Treasury (CMT). Farmer Mac 
II COFI is particularly appropriate because of the availability to sell 
loans into the secondary market and it is nationally recognized and 
familiar to FSA.
    Response: Our analysis for the proposed rule showed that the Wall 
Street Journal Prime Rate and 10 year Treasury rate most closely 
tracked to guaranteed loan rates, using 10 years of data from 1999 to 
2008. However, given the input from commenters, we have done additional 
analysis using more recent 2009 and 2010 data. Based on the comments, 
FSA reviewed lending practices and the various indices and determined 
that the 3-month LIBOR was the most reflective of lender funding costs 
for variable rate loans or fixed rate loans with rates fixed for terms 
of less than 5 years regardless of program type. Similarly, the 5-year 
Treasury note rate was the most reflective for loans with rates fixed 
for 5 years or more. The use of these commonly used indices should not 
restrict the ability of lenders to sell loans into the secondary 
market. We also conducted an analysis, including a comparison to our 
proposed rule, to determine an appropriate maximum spread over these 
indices in a normal interest rate environment. Based on this analysis, 
we determined that for variable rate loans and loans with rates fixed 
for less than 5 years, the maximum rate will be 650 basis points (6.5 
percentage points) over the 3-month LIBOR, regardless of program type. 
Loans with rates fixed for 5 years or longer will be limited to no more 
than 550 basis points (5.5 percentage points) over the 5-year Treasury 
note rate, regardless of program type. The spread may increase by 100 
basis points when the 3-month LIBOR is below 2 percent, as it is now. 
These spreads result in higher maximum rates than those in the proposed 
rule. As noted earlier, more than 95 percent of guaranteed loans made 
in 2009 and 2010 by lenders of all sizes would meet the requirements in 
this rule.
    Comment: With the rates in the proposed rule, lenders would be 
prevented from making fixed rate loans to their farm customers, 
regardless of term or type, due to the fluctuation in yield curves and 
the availability to book or sell loans into the secondary market. With 
variable rate loans, at some time in the future, the effective interest 
rate, if based on the Treasury note rate or New York Prime rate, could 
increase, which would increase the payment amount and could place the 
borrower into a negative cashflow.
    Response: As noted earlier, this interim rule includes higher 
maximum rates for both fixed and variable rate loans than were in the 
proposed rule, in response to comments and continued atypical credit 
market conditions. It was not the intent to require that variable rate 
loans be pegged to the indices for the duration of the loan. This rule 
clarifies that variable rate loans must have an initial rate below a 
certain maximum at the time the loan is made or restructured, but that 
the rate can vary over the term of the loan. As with all variable rate 
loans, guaranteed or not, the rate may rise or fall in the future.
    Comment: The 10-year Treasury note rate, or any single rate, would 
eliminate most of the available long term fixed financing, particularly 
for operating loans.
    Response: The interim rule uses the 5-year Treasury note rate as 
the index for loans with rates fixed for five years or greater, and 
permits rates up to 5.5 percentage points greater than the index. For 
example, if the 5-year Treasury note rate is 2.5 percent, lenders may 
charge up to 8 percent on a guaranteed loan fixed for a term of 5 or 
more years. Lenders that use risk-based pricing practices do not have 
to use the indexed maximum rate, they may provide guaranteed loans at a 
rate that is at least one risk tier lower than the borrower would 
otherwise qualify for. This offers some flexibility for lenders who do 
not feel that the specified maximum rate fits their needs.
    Comment: The rule does not include provisions to ensure that 
interest rate adjustments made after loan origination on variable rate 
loans are reasonable.
    Response: Variable rates can fluctuate according to the bank's 
internal practices for similar, non-guaranteed loans and this rule 
specifies the lender must provide FSA with these rate adjustment 
policies, if requested. Our objective is to follow standard lender 
practices when practical and we have determined that this is an 
adequate control and will result in rates that are similar to those 
charged to other customers without the FSA guarantee.
    Comment: The rates or the indices used should be tied to the 
lenders' cost of funds rather than historical data.
    Response: The decision to use the 3-month LIBOR and 5-year Treasury 
rates as indices in the interim rule was that they more closely 
reflected a lenders' cost of funds. As discussed later, the cost 
benefit analysis explains that these indices did closely track rates on 
guaranteed loans charged by lenders' over the 1999 through 2010 time 
period.
    Comment: If maximum spreads are included in the regulations, banks 
should be allowed to raise the spreads 100 basis points if necessary to 
extend credit. This would allow lenders to react as necessary to 
unusual financial marketplace disruptions such as are now being 
witnessed.
    Response: That change has been made in this rule. If the 3-month 
LIBOR is below 2 percent, the maximum spreads are now 100 basis points 
higher than is permitted under more normal market conditions.
    Comment: FSA should consider using LIBOR or LIBOR swap curve index 
for

[[Page 14003]]

loans beyond short term variable and increase the spread to 400 basis 
points.
    Response: FSA changed the rule, to add the LIBOR index and to 
increase the allowable spread for loans with rates fixed for less than 
5 years.
    Comment: The spreads used to determine maximum rates should be 
larger.
    Response: FSA changed the rule in response to this comment. As a 
result of changing the indices and increasing spreads, the maximum 
rates in this interim rule averaged 200 basis points higher than in the 
proposed rule (193 basis points for loans fixed for less than 5 years; 
225 basis points for loans fixed for 5 or more years) over the 1999 
through 2010 period.
    Comment: There should not be any type of ceiling for interest rates 
because if interest rates were to rise, the interest rate compression 
with an interest rate ceiling could lead to lender inability to use 
this program.
    Response: There is no fixed ceiling specified in this rule; the 
maximum rate ``floats'' with the indices. If interest rates rise, the 
maximum rate rises. For example, if the 3-month LIBOR rises from 3 
percent to 4 percent, the maximum allowable rate on a guaranteed 
variable rate loan as specified in this rule rises from 9.5 percent to 
10.5 percent.
    Comment: Lenders typically charge less than the proposed maximum 
rates. Lenders would raise their rates to match these maximums, 
resulting in no benefit to the guaranteed loan borrower from the 
reduced risk of loss with a guarantee.
    Response: Competition should prevent lenders from raising their 
rates to match the maximum rate if that maximum is higher than the 
market rate. In nearly all regions of the country, FSA guarantees 
represent only a small overall market share (4 percent nationwide), and 
would be expected to have little influence on market rates. Therefore, 
it would be expected that guaranteed lenders who systemically attempt 
to price above the market rate would face substantive competitive 
pressure.
    Comment: The proposed indices and spreads are a good idea, as it is 
difficult to determine what the average farm customer receives. The New 
York prime rate plus 3 percent is reasonable for larger and more solid 
OLs, however loans to higher risk borrowers requesting loans of $50,000 
or less should have a spread up to New York Prime rate plus 4 percent. 
The maximums should be the same for all FOs, regardless of size.
    Response: This interim rule allows up to 650 basis points above the 
index for variable rate loans or fixed rate loans with rates fixed for 
less than 5 years and 550 basis points above the index for loans fixed 
for more than 5 years, regardless of size or purpose (FO vs. OL) of 
loan. Consequently, the maximum rates in this rule are 200 basis points 
higher than they would have been in the proposed rule. The size and 
purpose of loan are not used to determine which maximum rate applies, 
in part because FSA wanted to make the regulations clear and simple to 
implement. Since maximum rates are based on the term over which the 
rate is fixed, a shorter term FO could have a different rate than a 
longer term FO.
    Comment: If FSA imposes maximum spreads over the proposed indices, 
lenders should be able to set a ``floor'' in times of unusual financial 
market disruptions, in order for lenders to cover cost of lending and 
institutions operating expenses. The floor should be between 5 percent 
to 8 percent. Without a floor, lenders may not be able to extend credit 
to farmers in times of very low rates.
    Response: Lenders may set a floor (minimum rate), so long as it is 
at or below the maximum rates set in this rule, but lenders are not 
required by this rule to set such a floor. This rule addresses the 
issue of appropriate spreads in times of unusual market conditions by 
allowing higher maximum rates above the indices (650 basis points for 
variable rate loans and 750 basis points for fixed rate loans) if the 
3-month LIBOR is below 2 percent. This is considered less arbitrary 
than allowing lender to set ``floors'' during unusual financial times. 
(If the 3-month LIBOR were literally zero, that would allow maximum 
rates of 6.5 percent and 7.5 percent, which is within the range 
suggested by this comment.) This provision allows lenders to charge 
less than that maximum. FSA is concerned that a mandatory ``floor'' 
provision which prohibited lenders from charging interest rates below a 
certain minimum rate could discourage borrowers from using FSA loans in 
times of extraordinary market conditions, particularly if the floor was 
above market rates. FSA did not include a mandatory floor in the 
interim rule. Lenders are free to set any floor they want.
    Comment: Instead of the provisions for moderate risk borrowers, 
interest rates should be based on a point system like the one used by 
the Small Business Administration (SBA).
    Response: It is not clear what regulatory alternative is suggested 
with this comment. If this comment refers to SBA loan regulations that 
provide different loan rate maximums based on the size, purpose, and 
type of the loan, the goal in revising the FLP regulations was to make 
them as clear and simple to implement as possible. We feel that the 
simple structure of only two maximum levels, independent of the size or 
purpose of the loan, serves that goal.

Executive Orders 12866 and 13563

    Executive Order 12866, ``Regulatory Planning and Review,'' and 
Executive Order 13563, ``Improving Regulation and Regulatory Review,'' 
direct agencies to assess all costs and benefits of available 
regulatory alternatives and, if regulation is necessary, to select 
regulatory approaches that maximize net benefits (including potential 
economic, environmental, public health and safety effects, distributive 
impacts, and equity). Executive Order 13563 emphasized the importance 
of quantifying both costs and benefits, of reducing costs, of 
harmonizing rules, and of promoting flexibility.
    The Office of Management and Budget (OMB) designated this rule as 
significant under Executive Order 12866, ``Regulatory Planning and 
Review,'' and has reviewed this rule. A summary of the cost benefit 
analysis is provided below and is available at 
http:[sol][sol]www.regulations.gov and from the contact information 
listed above.

Clarity of the Regulation

    Executive Order 12866, as supplemented by Executive Order 13563, 
requires each agency to write all rules in plain language. In addition 
to your substantive comments on these proposed rules, we invite your 
comments on how to make them easier to understand. For example:
     Are the requirements in the rule clearly stated? Are the 
scope and intent of the rule clear?
     Does the rule contain technical language or jargon that is 
not clear?
     Is the material logically organized?
     Would changing the grouping or order of sections or adding 
headings make the rule easier to understand?
     Could we improve clarity by adding tables, lists, or 
diagrams?
     Would more, but shorter, sections be better? Are there 
specific sections that are too long or confusing?
     What else could we do to make the rule easier to 
understand?

Summary of Costs and Benefits

    In the cost benefit analysis, rates charged on FSA guarantees over 
the 1999 through 2010 period were

[[Page 14004]]

analyzed and compared with different indices. While the analysis 
indicated a substantial variability in rates charged on guaranteed 
loans, rates were generally consistent with similar purpose 
unguaranteed farm loans made at the same time by commercial banks. It 
was determined that if the interim rule had been in effect from 1999 
through 2010, over 95 percent of the guaranteed loans would have been 
under the maximum. While lower thresholds were considered, it was 
determined that these could be disruptive, as lenders might be inclined 
to make fewer guaranteed loans. That could result in an increase in 
demand for FSA direct loans, which are more costly to the Federal 
government.
    While most lenders and borrowers will benefit from the changes in 
this interim rule, a few farmers may be unable to obtain guaranteed 
loans and may turn to direct loans for capital. Since direct programs 
as more expensive to administer, this would impose a slight cost on 
taxpayers ($1 to $5 million). These costs must be considered in light 
of expected benefits, many of which are intangible. Elimination of the 
unclear ``average agricultural loan customer'' designation should 
benefit borrowers and lenders alike. Lenders with risk pricing 
procedures should find compliance easier. Other lenders will be free to 
use their existing loan pricing procedures, as long as the rates do not 
exceed the maximum. While implementation of absolute maximum rates 
could result in some farmers not being able to obtain guaranteed loans, 
our analysis suggests that this number would be very small. Also, 
guaranteed loans which lenders consider so risky that they require 
rates of 100 or more basis points above the maximum should probably be 
made as direct loans. As a direct loan, the easier terms would enable 
the borrower to have a greater chance of success.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601-612), as amended by 
the Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA), generally requires an agency to prepare a regulatory 
flexibility analysis of any rule subject to the notice and comment 
rulemaking requirements under the Administrative Procedure Act (5 
U.S.C. 553) or any other statute, unless FSA certifies that the rule 
will not have a significant economic impact on a substantial number of 
small entities. FSA has determined that this rule will not have a 
significant impact on a substantial number of small entities for the 
reasons explained below. Consequently, FSA has not prepared a 
regulatory flexibility analysis.
    This rule is not expected to change the ability of applicants, 
borrowers, or lenders to participate in the FSA guaranteed loan 
program, and would not increase the costs of compliance with the 
program for entities of any size. All applicants or borrowers affected 
by this rule are small entities. Many lenders are considered small 
entities, using the SBA size standard of less $175 million in assets. 
However, changes in this rule will be applied to all affected entities 
equally, without regard to their size. No comments were received on the 
proposed rule regarding significant impact on a substantial number of 
small entities. Our analysis, which is explained in more detail in the 
cost benefit analysis, shows that less than 0.3 percent of guaranteed 
loans made by small banks in 2009 and 2010 had interest rates above 
those specified in this rule, so this rule will not have a significant 
effect on small lenders. By setting specific maximum rates, this rule 
will reduce compliance complexity for entities of all sizes.

Environmental Evaluation

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

Executive Order 12372

    Executive Order 12372, ``Intergovernmental Review of Federal 
Programs,'' requires consultation with State and local officials. The 
objectives of the Executive Order are to foster an intergovernmental 
partnership and a strengthened Federalism, by relying on State and 
local processes for State and local government coordination and review 
of proposed Federal Financial assistance and direct Federal 
development. This rule neither provides Federal financial assistance 
nor direct Federal development; it does not provide either grants or 
cooperative agreements. Therefore this program is not subject to 
Executive Order 12372.

Executive Order 12988

    This rule has been reviewed in accordance with Executive Order 
12988, ``Civil Justice Reform.'' This rule would not preempt State and 
or local laws, and regulations, or policies unless they present an 
irreconcilable conflict with this rule. Before any judicial action may 
be brought regarding the provisions of this rule, the administrative 
appeal provisions of 7 CFR parts 11 and 780 must be exhausted.

Executive Order 13132

    This rule has been reviewed under Executive Order 13132, 
``Federalism.'' The policies contained in this rule do not have any 
substantial direct effect on States, the relationship between the 
Federal government and the States, or the distribution of power and 
responsibilities among the various levels of government. Nor does this 
interim rule impose substantial direct compliance costs on State and 
local governments. Therefore, consultation with the States is not 
required.

Executive Order 13175

    This rule has been reviewed for compliance with Executive Order 
13175, ``Consultation and Coordination with Indian Tribal 
Governments.'' The USDA Office of Tribal Relations has concluded that 
the policies contained in this rule do not have Tribal implications 
that preempt Tribal law. FSA continues to consult with Tribal officials 
to have a meaningful consultation and collaboration on the development 
and strengthening of FSA regulations.

Unfunded Mandates Reform Act of 1995

    Title II of the Unfunded Mandate Reform Act of 1995 (UMRA, Pub. L. 
104-4) requires Federal agencies to assess the effects of their 
regulatory actions on State, local, or Tribal governments or the 
private sector. Agencies generally must prepare a written statement, 
including a cost benefit analysis, for proposed and final rules with 
Federal mandates that may result in expenditures of $100 million or 
more in any 1 year for State, local, or Tribal governments, in the 
aggregate, or to the private sector. UMRA generally requires agencies 
to consider alternatives and adopt the more cost effective or least 
burdensome alternative that achieves the objectives of the rule. This 
rule contains no Federal mandates as defined by Title II of UMRA for 
State, local, or Tribal governments or for the private sector. 
Therefore, this rule is not subject to the requirements of sections 202 
and 205 of UMRA.

[[Page 14005]]

Federal Assistance Programs

    The title and number of the Federal assistance programs, as found 
in the Catalog of Federal Domestic Assistance, to which this rule 
applies are:

10.406--Farm Operating Loans
10.407--Farm Ownership Loans

Paperwork Reduction Act of 1995

    The provisions in this interim rule require no revisions to the 
information collection requirements that were previously approved by 
OMB under control number 0560-0155.

E-Government Act Compliance

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

List of Subjects

7 CFR Part 761

    Accounting, Loan programs--agriculture, Rural areas.

7 CFR Part 762

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

    For the reasons set out in the preamble, this rule amends 7 CFR 
parts 761 and 762 as follows:

PART 761--GENERAL PROGRAM ADMINISTRATION

0
1. The authority citation for part 761 continues to read as follows:

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


0
2. Amend Sec.  761.2 as follows:
0
a. In paragraph (a), add, in alphabetical order, the abbreviation 
``LIBOR'' to read as follows, and
0
b. In paragraph (b), remove the definition of ``average agricultural 
loan customer''.


Sec.  761.2  Abbreviations and definitions.

* * * * *
    (a) * * *
    LIBOR London Interbank Offered Rate.
* * * * *

PART 762--GUARANTEED FARM LOANS

0
3. The authority citation for part 762 continues to read as follows:

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


0
4. Amend Sec.  762.124 as follows:
0
a. Revise paragraphs (a)(2) and (a)(3) to read as set forth below,
0
b. Redesignate paragraphs (a)(4) and (a)(5) as (a)(5) and (a)(6), and
0
c. Add new paragraph (a)(4) to read as set forth below:


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

    (a) * * *
    (2) If a variable rate is used, it must be tied to an index or rate 
specifically agreed to between the lender and borrower in the loan 
instruments and the rate adjustments must be in accordance with normal 
practices of the lender for unguaranteed loans. Upon request, the 
lender must provide the Agency with copies of its written rate 
adjustment practices.
    (3) At the time of loan closing or loan restructuring, the interest 
rate on both the guaranteed portion and the unguaranteed portion of a 
fixed or variable rate OL or FO loan may not exceed the following, as 
applicable:
    (i) For lenders using risk-based pricing practices, the risk tier 
at least one tier lower (representing lower risk) than that borrower 
would receive without a guarantee. The lender must provide the Agency 
with copies of its written pricing practices, upon request.
    (ii) For lenders not using risk-based pricing practices, for 
variable rate loans or fixed rate loans with rates fixed for less than 
five years, 650 basis points (6.5 percentage points) above the 3-month 
LIBOR.
    (iii) For lenders not using risk-based pricing practices, for loans 
with rates fixed for five or more years, 550 basis points (5.5 
percentage points) above the 5-year Treasury note rate.
    (4) In the event the 3-month LIBOR is below 2 percent, the maximum 
rates specified in paragraph (a)(3) of this section do not apply. In 
that case, at the time of loan closing or loan restructuring, the 
interest rate on both the guaranteed portion and the unguaranteed 
portion of an OL or FO loan may not exceed 750 basis points above the 
3-month LIBOR for variable rate loans and 650 basis points above the 5-
year Treasury rate for fixed rate loans.
* * * * *

0
5. Amend Sec.  762.150 by revising paragraph (g) to read as follows:


Sec.  762.150  Interest assistance program.

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

    Signed on February 12, 2013.
Juan M. Garcia,
Administrator, Farm Service Agency.
[FR Doc. 2013-04930 Filed 3-1-13; 8:45 am]
BILLING CODE 3410-05-P