Criteria To Reinstate Non-Accrual Loans, 12959-12966 [2019-06216]

Agencies

• Farm Credit Administration

[Federal Register Volume 84, Number 64 (Wednesday, April 3, 2019)]
[Proposed Rules]
[Pages 12959-12966]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06216]


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FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 615, and 621

RIN 3052-AD09


Criteria To Reinstate Non-Accrual Loans

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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SUMMARY: The Farm Credit Administration (FCA, we, or our) proposes 
amending existing regulations governing how the Farm Credit System 
(System) classifies high-risk loans to improve the loan classification 
and reinstatement process. The proposed rule would clarify the factors 
considered when categorizing high-risk loans and placing them in 
nonaccrual status. The rule would also revise both the reinstatement 
criteria and its application to certain loans in nonaccrual status to 
distinguish between the types of risk that led to a loan being placed 
in nonaccrual status.

DATES: You may send us comments on or before June 3, 2019.

ADDRESSES: We offer a variety of methods for you to submit comments. 
For accuracy and efficiency reasons, commenters are encouraged to 
submit comments by email or through FCA's website. 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:
     Email: Send us an email at [email protected].
     FCA Website: https://www.fca.gov. Click inside the ``I want 
to . . .'' field near the top of the page; select ``comment on a 
pending regulation'' from the dropdown menu; and click ``Go.'' This 
takes you to an electronic public comment form.
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.

[[Page 12960]]

     Mail: Barry F. Mardock, Deputy Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of comments we receive at our office in 
McLean, Virginia, or on our website at https://www.fca.gov. Once you are 
on the website, click inside the ``I want to . . .'' field near the top 
of the page; select ``find comments on a pending regulation'' from the 
dropdown menu; and click ``Go.'' This will take you to the Comment 
Letters page where you can select the regulation for which you would 
like to read the public comments. We will show your comments as 
submitted, but for technical reasons we may omit items such as logos 
and special characters. Identifying information that you provide, such 
as phone numbers and addresses, will be publicly available. However, we 
will attempt to remove email addresses to help reduce internet spam.

FOR FURTHER INFORMATION CONTACT: 
    Technical information: Ryan Leist, Senior Accountant, Office of 
Regulatory Policy, (703) 883-4223, TTY (703) 883-4056.
    Legal information: Laura McFarland, Senior Counsel, Office of 
General Counsel, (703) 883-4020, TTY (703) 883-4056.

SUPPLEMENTARY INFORMATION:

I. Objectives

    The objectives of the proposed rule are to:
     Enhance the usefulness of high-risk loan categories;
     Replace the subjective measure of ``reasonable doubt'' 
used for reinstating loans to accrual status with a measurable 
standard;
     Improve the timely recognition of a change in a loan's 
status; and
     Update existing terminology and make other grammatical 
changes.

II. Background

    In 1993, we issued subpart C of part 621, ``Loan Performance and 
Valuation Assessment,'' in part to establish standard performance 
categories for high-risk loans and set the criteria for reinstating 
those loans to accrual status.\1\ The existing loan performance 
categories are in Sec.  621.6 and the criteria for reinstating loans to 
accrual status are in Sec.  621.9. Neither rule section has been 
substantively updated since 1993.\2\
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    \1\ 58 FR 48780, September 20, 1993.
    \2\ The existing regulatory performance category in 12 CFR 
621.6(b) was amended in 2013 to cite the Financial Accounting 
Standards Board's (FASB) ``Statement of Financial Accounting 
Standards No. 168,'' dated June 30, 2009. See 78 FR 21037, April 9, 
2013. The reinstatement criteria of 12 CFR 621.9 has not been 
amended since 1993.
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    Existing Sec.  621.6 sets forth three performance categories for 
high risk loans: (1) Nonaccrual loans, (2) Formally restructured loans, 
and (3) Loans 90-days past due still accruing interest. There are 
several conditions listed in paragraph (a) of Sec.  621.6 for moving a 
loan to ``nonaccrual'' (noninterest-earning) status. Among them are: 
Delinquency, questions regarding future ability to pay, loan servicing 
that resulted in a portion of the debt being charged off, and the value 
of security for the loan. Only one of these conditions needs to exist 
to categorize a loan as nonaccrual. If a loan satisfies the criteria 
for more than one performance category, the rule requires using the 
nonaccrual category, resulting in the nonaccrual category being the 
primary performance category of high-risk loans.
    Under Sec.  621.9, a loan in nonaccrual status may only be 
reinstated to accrual (interest-earning) status if four criteria are 
satisfied:
    (1) The loan is now current on payments,
    (2) Certain prior charge offs have been recovered,
    (3) There remains ``no reasonable doubt'' as to a borrower's 
willingness to remain current on payments, and
    (4) The borrower has remained current on payments for a sustained 
period.
    When developing these criteria in 1993, FCA explained the intent of 
the criteria was to verify resolution of the factor(s) causing the loan 
to be placed in nonaccrual status before its reinstatement to accrual 
status.\3\
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    \3\ Refer to: Preamble, proposed rule, 58 FR 32071, 32074 (June 
8, 1993).
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    The use of nonaccrual status to address high risk loans is common 
among financial institutions, with most commercial lenders applying the 
Federal Financial Institutions Examination Council (FFIEC) \4\ 
reporting standards. The FFIEC standards include the criterion of 
moving loans into nonaccrual status when there is a deterioration in 
the financial condition of the borrower, payment in full of principal 
or interest is not expected, or a loan is 90 days or more past due. 
Under FFIEC's standards, those loans that are 90 days past due and both 
well secured and in the process of collection do not have to be placed 
into nonaccrual status. Reinstating a loan to accrual status under the 
standards of FFIEC requires either: (1) The loan to be current and an 
expectation by the bank that repayment of the remaining principal and 
all accrued interest will occur, or (2) the loan is well secured and is 
in the process of collection.
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    \4\ FFIEC was created in 1979 through title X of Public Law 95-
630. FFIEC facilitates uniformity in those federal examinations of 
financial institutions conducted by the Board of Governors of the 
Federal Reserve System, the Federal Deposit Insurance Corporation, 
the National Credit Union Administration, the Office of the 
Comptroller of the Currency, and the Consumer Financial Protection 
Bureau. FFIEC issues uniform principles, standards and reporting 
formats used by these regulators.
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    FCA's present accounting classification rules are generally 
similar, although not identical, to FFIEC standards.\5\ Notably, a key 
difference from FFIEC standards is that our rule requires there be no 
reasonable doubt of the ``willingness'' of the borrower to repay before 
reinstatement to accrual status. Our rule makes no exception to this 
requirement for loans that are well secured and receiving servicing 
(i.e., ``in the process of collection''). Additionally, our rules allow 
placing, and retaining for an indefinite period, a current loan in 
nonaccrual status when questions exist on the future collection of the 
debt.
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    \5\ FCA is not a FFIEC regulatory agency and therefore not 
required to follow FFIEC standards. However, we consider the policy 
positions of other regulators to decide if we should follow them or 
take a different approach if appropriate to implement the 
requirements and expectations of the Farm Credit Act of 1971, as 
amended.
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III. Input Received

    In the past few years FCA has received requests from System 
institutions, as well as member-borrowers of the System, to reconsider 
the role that future debt collection plays when categorizing a high-
risk loan. For the System, the issue is generally directed at income 
recognition for payments made while a loan is in nonaccrual status. 
Nonaccrual loans that are current on payments technically accrue no 
interest for the lender even though the borrowers are making 
contractually scheduled payments. While those contractual loan payments 
are based on both principal and interest, the lender may, in accordance 
with generally accepted accounting principles (GAAP), elect not to 
recognize the interest portion as income if future payments are in 
doubt.\6\ Further, under FCA regulation Sec.  621.8(a), when the future 
collectability of a nonaccrual loan is in doubt, payments are applied 
in a manner ``necessary to eliminate such doubt.'' As a result, the 
interest portion of the scheduled payments is applied to principal in 
most cases. Then, after reinstatement to accrual status, those

[[Page 12961]]

prior payments may be recognized against both accrued interest and 
principal consistent with the terms of the loan. From member-borrowers, 
requests to reconsider the role that future debt collection plays in 
allowing a current loan to be in nonaccrual status are most often 
directed at the loss of certain cooperative benefits or, in some 
instances, the misapplication of distressed loan servicing rights. This 
proposed rulemaking addresses the requests of both the System and its 
member-borrowers.
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    \6\ Using cash-basis accounting under GAAP, earnings from 
nonaccrual loans may be recognized if the loan balance is deemed to 
be fully collectable.
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    In developing this proposed rule, consideration was also given to a 
comment letter submitted for the 2016 Basel III capital rulemaking,\7\ 
where the commenter remarked on our nonaccrual regulations. 
Specifically, the commenter asserted that our regulations for 
reinstatement of nonaccrual loans to accrual status were more 
restrictive and subjective than the reinstatement rules applicable to 
other regulated financial institutions. Additionally, the System has 
previously expressed that our unique categorization and reinstatement 
requirements often result in placing current loans into nonaccrual 
status and retaining them in that status for significantly longer 
periods than would be the case at a commercial bank. We believe our 
proposed changes to Sec. Sec.  621.6 and 621.9 appropriately respond to 
these comments.
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    \7\ 81 FR 49720, July 28, 2016.
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IV. Section-by-Section Analysis

    We are proposing revisions to Sec. Sec.  621.6 and 621.9 to reduce, 
but not remove, the emphasis on future debt collection when 
categorizing a high-risk loan. Instead of future debt collection, we 
propose using more measurable standards and aligning high-risk loan 
categories with the criteria used to determine when a loan is suitable 
for reinstatement to accrual status. As proposed, the rule would also 
emphasize the role loan servicing plays in addressing high-risk loans. 
In addition, we propose moving definitions currently located in the 
body of Sec. Sec.  621.6 and 621.9 to the existing definition section 
of part 621.
    We discuss the specifics of our proposal below.

A. Definitions

    We propose moving four existing terms, whose meanings are currently 
located in the body of regulatory provisions, to the ``Definitions'' 
section in Sec.  621.2. In moving the terms, we also propose contextual 
and grammatical changes to each of the four terms to improve clarity.
    First, we propose moving the term ``adequately secured'' from its 
current location in Sec.  621.6(a)(3)(i). We propose keeping the 
existing meaning and adding clarifying language to explain that the 
term describes collateral where there is a perfected security interest. 
We make the clarification because we want institutions to consider 
whether a lien on collateral is valid and enforceable when making 
``adequately secured'' decisions. Should a particular security interest 
not be properly perfected, we expect institutions to look to other 
collateral when deciding if the loan is ``adequately secured.'' We 
further propose replacing the existing phrase ``discharge the debt in 
full,'' used when defining ``adequately secured,'' with language 
clarifying it means repayment of the loan's outstanding principal and 
any accrued interest.
    Second, we propose moving the term ``in the process of collection'' 
from its current location in Sec.  621.6(a)(3)(ii). In doing so, we 
propose removing language on documented future collection of past due 
amounts. Instead, we propose language to clarify that the term ``in the 
process of collection'' includes both debt collection and loan 
servicing efforts expected to result in either the recovery of the loan 
balance (including accrued interest and penalties) or reinstatement of 
the loan to current status in the near future. We believe the 
definition, as proposed, aligns with FASB Accounting Standards 
Codification (ASU) Subtopic 310-10-35 on Credit Impairment.\8\ While 
the current incurred loss methodology under GAAP is based on a probable 
and incurred notion, the measurement of credit losses is changing under 
FASB's new accounting standard ``ASU No. 2016-13, Topic 326, Financial 
Instruments--Credit Losses.'' This new accounting standard introduces 
the current expected credit losses methodology for estimating 
allowances for credit losses. Although FASB's new accounting standard 
does not address when a financial asset should be placed in nonaccrual 
status, we believe updating the meaning of the term ``in the process of 
collection'' to reflect current FASB accounting standards is 
appropriate.
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    \8\ FASB is an independent, private-sector, not-for-profit 
organization that establishes GAAP-based financial accounting and 
reporting standards for public and private companies.
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    Third, we propose moving the Sec.  621.6(c)(2) meaning of ``past 
due.'' As part of this relocation, we also propose replacing language 
regarding default after loan servicing with the phrase ``remains due.'' 
We believe the intent behind the existing servicing language is 
captured with the proposed use of ``remains due.''
    Lastly, we propose moving the Sec.  621.9(d) meaning of ``sustained 
performance'' and clarifying that ``sustained performance'' on a loan 
is based on contractual payment terms. That is, we propose clarifying 
sustained performance means not only making the payments listed in the 
loan contract on or before the due date but making payments in the 
amount listed in the loan note. For example, if the loan contract calls 
for unequal annual payments or an initial interest-only payment 
followed by equally amortized annual payments, those listed payments 
covered by the sustained performance period (e.g., the most recent 2 
consecutive annual payments) are what demonstrate sustained 
performance, regardless of whether the scheduled payments are interest-
only, partial payments, regularly amortized installments, or a mixture 
of payment amounts. This proposed clarification follows our past 
explanations to System institutions that all payments listed in the 
contract, regardless of amount, scheduled to be made during the 
sustained performance period must be considered when determining 
``sustained performance.'' We make no changes to the existing specified 
number of payments required to demonstrate performance.
    As a conforming technical change, we propose removing the paragraph 
designations for all the terms in the ``Definitions'' section. No 
change to any term not discussed above is proposed beyond this format 
change. We also propose removing the parenthetical designations in the 
references to Sec.  621.2 currently located in Sec. Sec.  611.1205 and 
615.5131.

B. Categorizing High-Risk Loans

    We are proposing clarifying changes to the Sec.  621.6 categories 
for high-risk loans, including removing redundancies. Further, we 
propose changes to Sec.  621.6(a), (b), and (c) to align them with 
proposed changes to Sec.  621.9 discussed later in this preamble. Also, 
we propose a format change to the high-risk loan category of ``other 
property owned'' located in Sec.  621.6(d) by removing the word 
``means'' and adding punctuation to distinguish the heading from its 
contents. To ensure clarity, we also propose adding the word ``legal'' 
to Sec.  621.6(d) when describing the various methods of acquiring 
property.

[[Page 12962]]

1. General
    We propose renaming Sec.  621.6 as ``Categorizing high-risk loans 
and other property owned'' to add clarity. We also propose removing the 
last sentence of this section's introductory paragraph. This sentence 
requires loans meeting more than one performance category to be, in all 
cases, categorized as ``nonaccrual.'' We believe institutions should 
determine the most appropriate performance category for a high-risk 
loan, understanding that no more than one category may be used at any 
given time. We also believe the other proposed changes to Sec. Sec.  
621.6 and 621.9 will facilitate this decision-making process. However, 
we caution institutions that restructuring a past due nonaccrual loan 
will typically not qualify the loan to immediately be reported under 
another performance category. Past due nonaccrual loans that are 
restructured should remain in nonaccrual until the reinstatement 
requirements of Sec.  621.9 are met.
2. Identifying Nonaccrual Loans
    We propose updating language in Sec.  621.6(a) to clarify that a 
loan is properly categorized as a ``nonaccrual loan'' when there is a 
known risk to the continued collection of principal or interest. The 
updated language would also require a loan categorized as 
``nonaccrual'' to remain in that category, regardless of payment 
status, until the loan is eligible for reinstatement. For those loans 
current on payments while in nonaccrual status, we propose adding 
language to remind institutions of the notice and review provisions of 
part 617 of this chapter \9\ as a means of facilitating compliance with 
both part 621 and part 617.
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    \9\ See 12 CFR 617.7400(d), which provides certain notice and 
review rights if a borrower's loan is current, in nonaccrual status, 
and the nonaccrual status may result in an adverse action. See also, 
12 U.S.C. 2202d(d).
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    Additionally, we are proposing changes to the conditions listed in 
Sec.  621.6(a), which are used in determining if the ``nonaccrual'' 
performance category is appropriate. We believe the proposed changes to 
these conditions provide more objective measures and will facilitate 
improved consistency in using the nonaccrual performance category. We 
also propose clarifying that one or more of the conditions must exist 
before a loan is placed in nonaccrual status. We discuss the proposed 
changes to each of the conditions below.
a. Deterioration of Financial Condition
    We propose clarifying that the requirements of Sec.  621.6(a)(1) 
are not dependent upon whether a loan is past due. Instead, the focus 
is on the lender determining if collection of the loan is unlikely--
over the full term of the loan contract--based on a deterioration of 
the borrower's financial condition. Institutions should be proactive in 
identifying problem loans while the loans are still current. Because 
this provision would allow a current loan to be put in nonaccrual 
status, we expect the lender to have strong documented evidence 
supporting the forecast that collection of the loan is unlikely from 
all potential sources (e.g., farm and off-farm income, other revenue, 
or liquidation of collateral). For example, insufficient cashflow or 
earnings could merit nonaccrual consideration. Similarly, if the 
servicing plan includes partial liquidation of collateral to bring the 
account current but results in insufficient collateral to secure the 
remaining debt and the borrower lacks other assets to pledge, then 
nonaccrual status may be warranted.
    When evaluating the collectability of a loan, we believe there are 
many risks affecting current or future payments on the loan, including, 
but not limited to, the following:
     A third-party lender initiating foreclosure action against 
the primary collateral securing the borrower's loan with the 
institution;
     A primary obligor filing a voluntary petition in 
bankruptcy, or an involuntary petition in bankruptcy has been filed 
against a primary obligor;
     Substantial collateral has been abandoned or is in danger 
of disappearing or losing its value.
     Loss of off-farm income serving as a primary income source 
for loan payments;
     A lawsuit against a primary obligor adversely affecting 
repayment of the borrower's loan with the institution;
     Illness or injury to a primary operator of the farm 
significantly hindering the continued long-term operation of the farm 
business; and
     The cessation of farming operations where the primary 
obligors have not made other arrangements to repay the loan.
    We also expect the institution to consider the likelihood of 
current or future loan servicing actions improving collection of the 
loan.
b. Interest Charge Offs
    We propose amending the language of Sec.  621.6(a)(2) to clarify 
that the existing phrase ``taken as part of a formal restructuring'' 
includes both distressed loan servicing as discussed in part 617 and 
troubled debt restructurings (TDR).\10\ The use of the term ``charge 
off'' in Sec. Sec.  621.6 and 621.9 refers to earned but uncollected 
interest income that was accrued and determined to be uncollectible. 
Proper accounting requires this interest to be backed out or reversed 
from the lender's income and the appropriate balance sheet 
accounts.\11\ As part of a formal restructuring, the lender factors in 
recoupment of charged off amounts as well as reducing the risk 
associated with the loan. Thus, there is no need for a charge off 
already addressed by formal loan servicing to be a `stand alone' factor 
in classifying the loan. However, the provision's applicability would 
continue to apply to loans with any portion charged off through means 
other than formal loan servicing as discussed in part 617 or a TDR.
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    \10\ Under GAAP, a TDR is a restructuring in which the creditor, 
for economic or legal reasons related to the debtor's financial 
difficulties, grants a concession to the debtor that the lender 
would not otherwise consider. Distressed loan servicing is a type of 
servicing specific to the System that has formal, legal pre-
requisites and compliance requirements. The servicing available to a 
``distressed loan'' includes formal restructurings of the types 
contemplated under a TDR action. However, not all ``troubled loans'' 
are ``distressed loans'' or vice versa.
    \11\ See Also, 12 CFR 621.5 on ``Accounting for allowance for 
loan losses and charge offs.''
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c. Past Due More Than 90 Days
    To simplify the categorization process for past due loans, we 
propose revising the existing three conditions that a loan be 90 days 
past due, under secured, and not in the process of collection. We 
instead propose that this provision capture those loans 90 days past 
due, but which cannot be categorized under Sec.  621.6(c), ``Loans 90 
days past due still accruing interest.'' As such, those 90 days past 
due high-risk loans not otherwise categorized under Sec.  621.6(c) 
would be categorized as ``nonaccrual'' under Sec.  621.6(a)(3).
d. Legal Action Has Been Initiated
    We propose moving to its own paragraph that portion of existing 
Sec.  621.6(a)(3)(ii) discussing the role of legal actions when 
classifying a loan. As part of the relocation, we also propose to 
simplify, clarify, and expand coverage of this condition to allow 
placing a loan into nonaccrual status if the loan is subject to legal 
collection action initiated by the lender or other forms of collateral 
conveyances used to collect the debt (including those initiated by the 
borrower). As proposed, the specific reference to a bankruptcy

[[Page 12963]]

filing would be removed in recognition that bankruptcies may not always 
involve conveyances of collateral. Instead, loans in bankruptcy where 
collateral is not liquidated may be considered for nonaccrual status 
based on concerns regarding future collectability, depending on the 
type of bankruptcy filing and similar considerations. We also propose 
removing existing language requiring an expectation of debt collection 
within 180 days before placing a loan in nonaccrual status. We believe 
removing the 180 days criteria allows System institutions additional 
discretion in both determining the status of a loan and setting a 
reasonable time period for collection that is based on the type of 
operation or source of repayment for the loan. As a general matter, the 
proposed changes would put focus on collection efforts arising after 
loan servicing has failed to resolve the financial stress to the loan 
(e.g., beginning loan liquidation).
3. Categorizing Troubled Debt Restructurings
    Existing Sec.  621.6(b) identifies the loan performance category 
``Formally restructured loans'' for those loans meeting the definition 
of a TDR under GAAP.\12\ We propose adding a short explanation that 
borrowers of loans placed under this category are both experiencing 
financial difficulties and have received a financial concession from 
the lender. We believe adding this summary will improve the usefulness 
of the provision and the process used by an institution in determining 
whether the category may be applicable to the loan under consideration. 
We also propose removing specific reference to the FASB guidance 
document regarding TDR servicing to eliminate the need to revise the 
regulation solely because the FASB guidance has been modified.\13\
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    \12\ Under GAAP, a TDR is an accounting classification and 
involves a special set of accounting rules.
    \13\ The regulation currently identifies ``Financial Accounting 
Standards Board Accounting Standards Codification Subtopic 310-40, 
Receivables--Troubled Debt Restructurings by Creditors.'' As 
explained in footnote 2, the last change to this rule was solely to 
update the FASB reference.
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    Additionally, we propose adding to the Sec.  621.6(b) heading an 
abbreviation of ``(TDR).'' The abbreviation will provide a means of 
distinguishing these types of restructuring from other formal 
restructuring actions, such as those taken for distressed loans under 
part 617. The abbreviation should also add clarity that the accounting 
category is only for those loans receiving TDR assistance. While it is 
possible for a part 617 servicing action to also be subject to 
accounting treatment under GAAP rules for TDRs, institutions must make 
an individual assessment of each loan and the restructuring action it 
received to determine if it is appropriate to treat the loan servicing 
as a TDR. As explained by FASB, the determination of whether a 
restructuring of a debt instrument should be accounted for as a TDR 
requires consideration of all relevant facts and circumstances 
surrounding the transaction. Generally, no single characteristic or 
factor is determinative of whether the restructuring of a debt 
instrument is a TDR.
    We also explain in this preamble that a loan under this category 
can remain in accrual status. To do so, there should be a current, 
well-documented credit analysis showing collection of principal and 
interest is reasonably assured under the modified terms. Reasonable 
assurance of repayment can include both financial calculations and 
consideration of whether the borrower demonstrated sustained historical 
repayment performance for a reasonable period before the modification. 
For additional information using this loan category, refer to FCA 
Informational Memorandum, ``Accounting and Disclosure of Troubled Debt 
Restructurings, as required under GAAP,'' issued March 14, 2011.
4. Classifying Loans 90 Days Past Due
    We are proposing changes to the high-risk loan category at existing 
Sec.  621.6(c)(1), ``Loans 90 days past due still accruing interest,'' 
to improve readability and add clarity. We propose specifying in the 
rule that the past due payments under review are those identified in 
the loan contract. We also propose adding language to address loans 
that are under secured since an under secured loan tends to pose a 
different risk to collection than one that is fully secured. While 
loans under this category are generally adequately secured, there may 
be instances where a loan is under secured. We propose language to 
explain that if a loan is under secured and 90 days past due, it may be 
placed in this category if there is a likelihood of the loan returning 
to current status within the near future. We would expect institutions 
to document the reasons for expecting a resolution of the delinquency, 
including identification of the source and timing of repayment, similar 
to what they do under the existing requirements of Sec.  
621.6(a)(3)(ii).

C. Reinstatement to Accrual Status

    We propose replacing the existing Sec.  621.9 requirement that a 
loan must satisfy all four of the following criteria before being 
reinstated to accrual status:
     The loan is now current on payments;
     Certain prior charge offs have been recovered;
     There remains ``no reasonable doubt'' as to a borrower's 
willingness to remain current on a debt; and
     The borrower, after becoming current on payments while in 
nonaccrual status, has remained current on payments for a sustained 
period.
    Instead, we propose using different reinstatement requirements for 
loans based upon repayment patterns and loan security.
    As proposed, the existing criteria that a loan must be current 
before being reinstated to accrual status would remain, but the loan 
would also have to have been considered for loan servicing before 
reinstatement. The servicing component would replace the existing 
requirement that ``no reasonable doubt'' remain as to the ``willingness 
and ability of the borrower to perform in accordance with the 
contractual terms of the loan agreement,'' which we propose removing. 
In addition, we propose keeping the criteria requiring collection of 
certain charged off amounts. The existing sustained performance 
criteria would also remain to demonstrate future repayment capability, 
but we propose adding additional flexibility. By necessity, these 
proposed changes in reinstatement eligibility would result in rewriting 
the entirety of Sec.  621.9.
1. Repayment Status, Loan Security, and Repayment Capacity
a. Loans Continuously Current on Payments
    We propose those loans that are current when placed in nonaccrual 
status, and which remain current while in nonaccrual status, be 
reinstated after being offered servicing designed to improve the 
collectability of the loan.\14\ As proposed, these loans would no 
longer have to show an additional period of sustained performance or 
have charged off amounts collected. This proposed change would more 
closely align our rules with the FFIEC standards that allow a loan to 
be reinstated to accrual status when no principal or interest is past 
due, and the lender expects repayment of the remaining contractual 
principal and interest. Loans current when placed in nonaccrual status 
but later becoming past due would not be eligible for this 
reinstatement path. We propose the

[[Page 12964]]

different path for these loans because we believe a past due repayment 
pattern demonstrates additional risk to collection of the contractual 
principal and interest than what is posed by loans remaining current on 
payments. Therefore, loans remaining current on payments are allowed to 
be restated faster under the proposed rule than the present rule.
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    \14\ Institutions must offer servicing, however, a borrower is 
not required to accept it.
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b. Loans Past Due on Payments When in Nonaccrual Status
    We propose keeping the existing requirement to have certain charged 
off amounts recovered for loans past due when placed in nonaccrual 
status or becoming past due while in nonaccrual.\15\ Also, we propose 
keeping the requirement that these loans become, and remain, current on 
payments for a sustained period before being eligible for reinstatement 
to accrual status. However, we are proposing two different measures of 
repayment capacity based on the adequacy of loan collateral: Sustained 
performance or past payment patterns.
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    \15\ Refer to earlier discussion at section IV.B.2.b of this 
preamble explaining the use of the term ``charge offs'' in 
Sec. Sec.  621.6 and 621.9 refers to earned but uncollected interest 
income that was accrued and determined to be uncollectible.
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i. Repayment Capacity and Fully Secured Loans
    As proposed, those nonaccrual loans that were formerly past due but 
now current would, if fully secured, be allowed to demonstrate future 
repayment capability either through sustained performance or through 
consideration of past payment patterns. We are proposing that, if loan 
servicing results in modified loan terms, an institution could consider 
on-time payments made immediately before the loan was serviced, but 
only if those payments were of the same amount or higher than 
contractual payments in effect after servicing assistance. For example, 
a borrower who made partial payments before servicing and the servicing 
reduced structured payments to the level of the past partial payments, 
that prior repayment pattern may be considered. We believe this change 
will allow System institutions to recognize the reduced risk to a 
borrower's future performance capability on an adequately secured loan. 
We also consider this proposed change as responding to past comments 
asking us to make our rules more comparable to others within the 
financial services industry.
ii. Repayment Capacity and Under Secured Loans
    If a formerly past due loan is, or remains, under secured after 
becoming current, we propose only permitting consideration of sustained 
performance before reinstatement to accrual status. This means 
considering all contractual payments, whether the payments are 
interest-only or principal and interest, for the specified period of 
time. For example, a TDR for an under secured loan may require annual 
payments and list the first annual payment as an interest-only payment, 
with equally amortized principal and interest payments required for the 
remainder of the loan term. Under this payment structure, sustained 
performance would be demonstrated by the borrower timely making the 
interest-only payment in year one and the equally amortized payment in 
year two. After doing so, the loan may be reinstated to accrual status. 
However, as proposed, the consideration of past payment patterns would 
not be allowed for these under secured loans.
2. Servicing Actions for Reinstatement
    Our proposal would remove the existing criteria requiring ``no 
reasonable doubt'' remain as to the ``willingness'' of the borrower to 
repay the loan. When reviewing our existing rule, we looked at this 
requirement and determined it placed a higher standard on reinstatement 
to accrual status than is used for the initial classification as a 
nonaccrual loan. Existing Sec.  621.6(a) requires no similar finding on 
a borrower's willingness to pay before placing a loan in nonaccrual 
status. In addition, a person's ``willingness'' to repay a debt is 
extremely difficult to assess or document. We also considered the 
safety and soundness concerns behind the provision, which were mainly 
directed at ensuring the reasons for placing a loan in nonaccrual 
status were fully addressed before reinstatement to accrual status. As 
this remains a concern, we looked for alternative criteria that was 
more measurable and identified loan servicing as an appropriate 
substitute.
    In proposing a servicing element, we chose to use existing 
servicing policies required under 12 CFR 614.4170 and part 617 of this 
chapter. FCA regulation Sec.  614.4170 requires each direct lender to 
adopt loan servicing policies and procedures designed to assure that 
loans will be serviced fairly and equitably while minimizing risk to 
the lender. Part 617 requires additional servicing policies 
specifically addressing distressed loans. Both servicing policies are 
expected to include specific plans for helping preserve the quality of 
sound loans and correct credit deficiencies as they develop. As such, 
we considered it appropriate to require institutions to apply those 
policies to nonaccrual loans before reinstatement to accrual status.
3. Reinstatement of Loans and the Credit Review Committee (CRC)
    We are proposing to add language clarifying the impact CRC 
decisions may have on the accounting classification of loans. Section 
4.14D(d) of the Farm Credit Act of 1971, as amended (Act), provides 
borrowers with current loans in nonaccrual status certain rights when 
the nonaccrual status results in adverse actions toward the 
borrower.\16\ These borrower rights include written notice of the loan 
being moved to nonaccrual status and, if the loan is current, the 
opportunity to request the lender reinstate the loan to accrual status. 
Should such a request be denied, the borrower may seek a CRC review of 
the decision. FCA regulation Sec.  617.7310(e) provides that CRC 
decisions are the final decision of the institution when made in 
compliance with applicable laws and regulations. In consideration of 
these requirements, we propose adding a provision explaining an 
institution is not prevented by the requirements of Sec.  621.9 from 
reinstating a loan to accrual status if the CRC decides such action is 
appropriate and the CRC decision complies with all applicable laws, 
regulations, and is made in accordance with GAAP. We believe adding 
this provision not only facilitates compliance with the Act but 
emphasizes the potential impact a borrower may experience from changes 
in a loan's accounting status.
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    \16\ The term ``adverse action'' has broad meaning and should 
not be treated interchangeably with the more limited term ``adverse 
credit decision.'' Adverse actions can include may things, 
including, but not limited to, denial of patronage, a restricted 
opportunity to serve on the institution's board as a director, or 
revoking undisbursed loan commitments.
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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 would 
not have a significant economic impact on a substantial number of small 
entities. Each of the banks in the System, considered together with its 
affiliated associations, has assets and annual income in excess of the 
amounts that would qualify them as small entities. Therefore, System 
institutions are not

[[Page 12965]]

``small entities'' as defined in the Regulatory Flexibility Act.

List of Subjects in 12 CFR Parts 611, 615 and 621

    Accounting, Agriculture, Banks, Banking, Government securities, 
Investments, Reporting and recordkeeping requirements, Rural areas.

    For the reasons stated in the preamble, parts 611, 615 and 621 of 
chapter VI, title 12 of the Code of Federal Regulations is proposed to 
be amended as follows:

PART 611--ORGANIZATION

0
1. The authority citation for part 611 is revised to read as follows:

    Authority: Secs. 1.2, 1.3, 1.4, 1.5, 1.12, 1.13, 2.0, 2.1, 2.2, 
2.10, 2.11, 2.12, 3.0, 3.1, 3.2, 3.3, 3.7, 3.8, 3.9, 4.3A, 4.12, 
4.12A, 4.15, 4.20, 4.21, 4.25, 4.26, 4.27, 4.28A, 5.9, 5.17, 5.25, 
7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2002, 2011, 2012, 
2013, 2020, 2021, 2071, 2072, 2073, 2091, 2092, 2093, 2121, 2122, 
2123, 2124, 2128, 2129, 2130, 2154a, 2183, 2184, 2203, 2208, 2209, 
2211, 2212, 2213, 2214, 2243, 2252, 2261, 2279a-2279f-1, 2279aa-
5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; 
secs. 414 of Pub. L. 100-399, 102 Stat. 989, 1004.


Sec.  611.1205  [Amended]

0
2. Section 611.1205 is amended by removing ``Sec.  621.2(c)'' and 
adding in its place ``Sec.  621.2'' each place it appears.

PART 615--FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, 
AND FUNDING OPERATIONS

0
3. The authority citation for part 615 is revised to read as follows:

    Authority: Secs. 1.5, 1.7, 1.10, 1.11, 1.12, 2.2, 2.3, 2.4, 2.5, 
2.12, 3.1, 3.7, 3.11, 3.25, 4.3, 4.3A, 4.9, 4.14B, 4.25, 5.9, 5.17, 
6.20, 6.26, 8.0, 8.3, 8.4, 8.6, 8.8, 8.10, 8.12 of the Farm Credit 
Act (12 U.S.C. 2013, 2015, 2018, 2019, 2020, 2073, 2074, 2075, 2076, 
2093, 2122, 2128, 2132, 2146, 2154, 2154a, 2160, 2202b, 2211, 2243, 
2252, 2278b, 2278b-6, 2279aa, 2279aa-3, 2279aa-4, 2279aa-6, 2279aa-
8, 2279aa-10, 2279aa-12); sec. 301(a), Pub. L. 100-233, 101 Stat. 
1568, 1608; sec. 939A, Pub. L. 111-203, 124 Stat. 1326, 1887 (15 
U.S.C. 78o-7 note).


Sec.  615.5131  [Amended]

0
4. Section 615.5131 is amended by removing ``Sec.  621.2(f)'' and 
adding in its place ``Sec.  621.2'' each place it appears.

PART 621--ACCOUNTING AND REPORTING REQUIREMENT

0
5. The authority citation for part 621 is revised to read as follows:

    Authority: Secs. 4.12(b)(5), 41.4, 4.14A, 4.14D, 5.17, 5.22A, 
8.11 of the Farm Credit Act (12 U.S.C. 2183, 2202, 2202a, 2202d, 
2252, 2257a, 2279aa-11); sec. 514 of Pub. L. 102-552.

0
6. Section 621.2 is amended by:
0
a. Removing the paragraph designations (a) through (n); and
0
b. Adding definitions in alphabetical order for ``Adequately secured'', 
``In the process of collection'', ``Past due'', and ``Sustained 
performance'' to read as follows:


Sec.  621.2  Definitions.

* * * * *
    Adequately secured means the loan is collateralized by either or 
both:
    (1) A perfected security interest in, or pledge of, real or 
personal property (including securities with an estimable value) having 
a net realizable value sufficient to repay the loan's outstanding 
principal and accrued interest; or
    (2) The guarantee of a financially responsible party in an amount 
sufficient to repay the loan's outstanding principal and accrued 
interest.
* * * * *
    In the process of collection means debt collection and loan 
servicing efforts are proceeding in due course and, based on a probable 
and specific event, are expected to result in the recovery of the 
loan's principal balance, accrued interest and penalties or 
reinstatement of the loan to current status within a reasonable time 
period.
* * * * *
    Past due means a contractually scheduled loan payment has not been 
received on or before the contractual due date and remains due.
* * * * *
    Sustained performance means the borrower has resumed on-time 
payment of the full amount of scheduled contractual loan payments over 
a sustained period. In accordance with the contractual payment 
schedule, the sustained on-time repayment period is demonstrated by 
making 6 consecutive monthly payments, 4 consecutive quarterly 
payments, 3 consecutive semiannual payments, or 2 consecutive annual 
payments. The payments considered are those listed in the loan contract 
as due during the sustained performance period, regardless of whether 
scheduled payments are interest-only, unequally amortized principal and 
interest, equally amortized principal and interest, or a combination of 
payment amounts.
0
7. Revise Sec.  621.6 to read as follows:


Sec.  621.6  Categorizing high-risk loans and other property owned.

    Each institution must employ the practices of this section when 
categorizing high-risk loans and loan-related assets. A loan must not 
be put into more than one performance category.
    (a) Nonaccrual loans. A loan is categorized as nonaccrual if there 
is a known risk to the continued collection of principal or interest. 
Once a loan is categorized as nonaccrual, it must remain in that 
category until reinstated to accrual status pursuant to Sec.  621.9. 
Loans placed into nonaccrual status when current are also subject to 
the notice and review provisions of part 617 of this chapter. A loan 
must be categorized as nonaccrual if one or more of the following 
conditions exist:
    (1) The loan may or may not be past due, but the institution has 
determined collection of the outstanding principal and interest, plus 
future interest accruals, over the full term of the loan is not 
expected because of a documented deterioration in the financial 
condition of the borrower;
    (2) Any portion of the loan has been charged off, except in cases 
where the charge off resulted from a formal restructuring of the loan 
under part 617 of this chapter or troubled debt restructuring (TDR);
    (3) The loan is 90 days past due and is not otherwise eligible for 
categorization under paragraph (c) of this section; or
    (4) Legal action, including foreclosure or other forms of 
collateral conveyance, has been initiated to collect the outstanding 
principal and interest.
    (b) Formally restructured loans (TDR). A loan is categorized as a 
formally restructured loan (TDR) if the restructuring is determined to 
be a TDR under generally accepted accounting principles and the 
guidance issued by the Financial Accounting Standards Board. Borrowers 
with loans categorized as TDRs are experiencing both financial 
difficulties and have received financial concessions from the 
institution.
    (c) Loans 90 days past due still accruing interest. A loan is 
categorized as 90 days past due still accruing interest when it is 90 
days contractually past due, adequately secured, and in the process of 
collection. If the loan is not adequately secured, it cannot be 
categorized under this category unless there is evidence to suggest 
repayment within a reasonable time period of either the past due amount 
or the remaining principal and interest owed.
    (d) Other property owned. Any real or personal property, other than 
an interest-earning asset, that has been

[[Page 12966]]

acquired as a result of full or partial liquidation of a loan, through 
foreclosure, deed in lieu of foreclosure, or other legal means.
0
8. Revise Sec.  621.9 to read as follows:


Sec.  621.9  Reinstatement to accrual status.

    (a) Before being reinstated to accrual status, a loan must be 
current on contractual payments and the borrower offered servicing in 
accordance with the institution's policies maintained under either 
Sec.  614.4170 or part 617 of this chapter, whichever is applicable. 
Additional reinstatement eligibility requirements are dependent upon 
certain characteristics of the loan under review.
    (1) Loans that were current when placed in nonaccrual status may be 
reinstated to accrual status if the loans did not become past due while 
in nonaccrual status and known risks to the continued collection of 
principal or interest have been addressed through servicing efforts. If 
the loan became past due while in nonaccrual status, it may only be 
reinstated under paragraphs (a)(2) and either (a)(3) or (a)(4) of this 
section, as applicable.
    (2) Loans past due when placed in nonaccrual status, or becoming 
past due while in nonaccrual status, must have prior charge offs 
recovered prior to reinstatement to accrual status. Charge offs 
resulting from formal restructuring of the loan under part 617 of this 
chapter or a TDR are exempt from recovery under this provision.
    (3) Loans that are not adequately secured and were past due when 
placed in nonaccrual status, or became past due while in nonaccrual 
status, must remain current on contractual payments for a period of 
sustained performance before they may be reinstated.
    (4) Loans that are adequately secured but were past due when placed 
in nonaccrual status, or became past due while in nonaccrual status, 
must have a recent repayment pattern demonstrating future repayment 
capacity to make on-time payments before the loans may be reinstated. 
The repayment pattern is established in one of two ways:
    (i) Sustained performance in making on-time contractual payments, 
or
    (ii) A recent history of making on-time partial payments in amounts 
the same or greater than newly restructured payment amounts.
    (b) Nothing in this section prevents a current loan from being 
reinstated to accrual status in response to a Credit Review Committee 
decision issued under section 4.14D(d) of the Farm Credit Act of 1971, 
as amended, when that decision was made in compliance with applicable 
laws, regulations, and in accordance with generally accepted accounting 
principles.

    Dated: March 26, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-06216 Filed 4-2-19; 8:45 am]
BILLING CODE 6705-01-P