Organization; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Investment Eligibility, 49069-49071 [2019-19917]

Download as PDF 49069 Proposed Rules Federal Register Vol. 84, No. 181 Wednesday, September 18, 2019 This section of the FEDERAL REGISTER contains notices to the public of the proposed issuance of rules and regulations. The purpose of these notices is to give interested persons an opportunity to participate in the rule making prior to the adoption of the final rules. FARM CREDIT ADMINISTRATION 12 CFR Part 615 RIN 3052–AD35 Organization; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Investment Eligibility Farm Credit Administration. Proposed rule. AGENCY: ACTION: The Farm Credit Administration (FCA, Agency, us, our, or we) is proposing to amend its investment regulations to allow Farm Credit System (FCS or System) associations to purchase and hold the portion of certain loans that non-FCS lenders originate and sell in the secondary market, and that the United States Department of Agriculture (USDA) unconditionally guarantees or insures as to the timely payment of principal and interest. DATES: Please send us your comments on or before November 18, 2019. ADDRESSES: We offer a variety of methods for you to submit your comments. For accuracy and efficiency reasons, commenters are encouraged to submit comments by 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 of 1973, as amended, 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 atregcomm@fca.gov. • 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. khammond on DSKJM1Z7X2PROD with PROPOSALS SUMMARY: VerDate Sep<11>2014 16:29 Sep 17, 2019 Jkt 247001 • Federal eRulemaking Portal: https:// www.regulations.gov. Follow the instructions for submitting comments. • Mail: Barry F. Mardock, Acting Director, Office of Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102–5090. You may review copies of all comments we receive at our office in McLean, Virginia or 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, including any supporting data provided, 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: David J. Lewandrowski, Senior Policy Analyst, Office of Regulatory Policy, (703) 883–4212, lewandrowskid@ fca.gov; or Jeremy R. Edelstein, Associate Director of Finance and Capital Market Team, Office of Regulatory Policy, (703) 883–4497, edelsteinj@fca.gov; or Richard A. Katz, Senior Counsel, Office of General Counsel, (703) 883– 4020, TTY (703) 883–4056, katzr@ fca.gov. SUPPLEMENTARY INFORMATION: I. Objectives The objectives of the proposed rule are to authorize FCS associations to buy as investments for risk management purposes, portions of certain loans that non-System lenders originate, and the USDA fully guarantees as to principal and interest to: • Augment the liquidity of rural credit markets; • Reduce the capital burden on community banks and other non-System lenders who choose to sell their USDA guaranteed portions of loans, so they may extend additional credit in rural areas; and • Enhance the ability of associations to manage risk. PO 00000 Frm 00001 Fmt 4702 Sfmt 4702 II. Background In general, the authority for FCS association to buy and sell certain types of financial instruments, including the ones addressed in this proposed rule, is found in Sections 2.2(11) and 2.12(17) of the Farm Credit Act of 1971, as amended (Act). In 2014, FCA proposed amendments to the investment regulation for FCS associations.1 The proposed rule would have authorized associations to purchase and hold, as investments, obligations issued or guaranteed by the United States or its agencies for risk management purposes. Under the proposed rule, no association could hold investments in an amount that exceeds 10 percent of its total outstanding loans. FCA received more than 1,250 comment letters on this proposal. After consideration of these comments, FCA changed the term ‘‘obligations’’ in the proposed rule to the more narrow term ‘‘securities’’ in the final rule. FCA also added § 615.5140(b)(2) to the final regulation to clarify that loans purchased in the secondary market that are unconditionally guaranteed or insured by the U.S. Government or its agencies as to principal and interest are not eligible risk management investment for FCS associations. Such loans meet the statutory definition of ‘‘obligations’’, but we did not include them as securities in the final rule. Shortly after we approved and published the final rule, several FCS associations, community banks, and a broker-dealer expressed concern that final § 615.5140(b)(1) and (2) would disrupt the secondary market for the portions of loans that USDA fully and unconditionally guarantees as to both principal and interest. Representatives of the Office of the Administrator for the Rural Business Cooperative Service at USDA (USDA Administrator) contacted FCA to support these parties. More specifically, concerns were raised about the potential impact that the final rule could have on the secondary market for USDA-guaranteed portions of loans and, more broadly, on rural development. The USDA Administrator, two community banks, and the broker-dealer warned that the withdrawal of FCS associations from this market could substantially reduce the liquidity in this 1 See E:\FR\FM\18SEP1.SGM 79 FR 43301, July 25, 2014. 18SEP1 49070 Federal Register / Vol. 84, No. 181 / Wednesday, September 18, 2019 / Proposed Rules market and the availability of credit in rural areas. In response to the concerns raised by the USDA Administrator and market participants, FCA decided to review final § 615.5140(b)(1) and (2) and consider their impact on the secondary market for loans that the USDA fully and unconditionally guarantees as to principal and interest. As a result of this review, FCA is now initiating another rulemaking that would amend § 615.5140(b)(2) to exempt USDAguaranteed loan portions from § 615.5140(b)(1), as well as a conforming change to § 615.5140(b)(3). khammond on DSKJM1Z7X2PROD with PROPOSALS III. Secondary Market for USDA Guarantees of Loans USDA may guarantee up to 90 percent of certain loans that FCS banks and associations, commercial banks, and other lenders originate.2 These lenders may either hold the guaranteed portion of such loans or sell them in the secondary market.3 Data provided by USDA indicates that loan originators retain approximately 60 percent of the USDA-guaranteed portions of such loans and sell the remaining 40 percent in the secondary market, usually at a premium. There are risks to purchasers of these guaranteed portions of loans.4 According to the Rural Development Agency at USDA, FCS associations buy 2 USDA guarantees loans to borrowers under a variety of programs pursuant to its authorities, primarily subtitles A and B of the Consolidated Farm and Rural Development Act and title VI of the Rural Electrification Act of 1936. 3 Lenders who originate loans that are eligible for USDA guarantees only obtain a conditional guarantee from the USDA. The guarantee is conditional on the lender complying with the origination and servicing regulatory requirements applicable to the loan, as well as other program requirements. Loan originators may sell the USDAguaranteed portions of their loans, in the form of an assignment, to other persons, including individuals, corporate entities, and other financial institutions. See, 7 CFR 762.160, 1779.65, 3575.65, and 4279.75. Pursuant to these regulations, the seller must submit a form to the USDA that identifies the party that becomes the holder of record. Id. A purchaser who subsequently assigns the loan guarantee to another party must similarly comply with the same requirement. Only an assignee who is listed as the holder of record for the loan guarantee may seek payment from the USDA if the borrower defaults. The USDA provides an unconditional guarantee to a good-faith guarantee holder who purchased the guaranteed portion of the loan in the secondary market. 4 The primary risks are premium risk and operational risk. The USDA-guaranteed portions of these loans typically command significant premiums in the secondary market. The payment of premiums demonstrates the high demand for USDA loan guarantees in the marketplace because buyers consider them as financially valuable assets. However, premiums are not covered by the USDA guarantee. The buyer may not always recover the full amount of the premium paid if the borrower defaults on the loan. Operational risk to purchasers center on proper transfer of the assignment of the guarantee so that it is recognized by USDA. VerDate Sep<11>2014 16:29 Sep 17, 2019 Jkt 247001 approximately 40 percent of such USDA-loan guarantees in the secondary market. IV. Association Investment Authorities FCS associations derive their authority to make investments from sections 2.2(10) 2.2(11), 2.12(17), and 2.12(18) of the Act.5 The statutory provisions that are most relevant to this rulemaking are sections 2.2(11) and 2.12(17), which authorize System associations to ‘‘buy and sell obligations of or insured by the United States or of any agency thereof or of any banks of the Farm Credit System.’’ Pursuant to its authority under section 5.17(a)(9) of the Act,6 FCA promulgated current § 615.5140(b), which allows FCS associations to buy and hold obligations issued or guaranteed by the United States subject to certain restrictions. More specifically, § 615.5140(b)(1) and (2) specify that the obligations that associations acquire must be securities, but not loans, while § 615.5140(b)(4) imposes a portfolio cap of 10 percent of outstanding loans on such investments. The intended purpose of these limits in the regulation is to ensure that the FCS continue to operate as cooperative lending institutions that are owned and controlled by the farmers, ranchers, aquatic producers and harvesters, and cooperatives that borrow from them. As discussed in the preamble to the final rule, FCA decided, in response to the comment letters, that placing limits on association investments is necessary so that loans to eligible borrowers constitute most of the assets of each FCS association. Explanation of the Proposed Rule As discussed above, certain external parties communicated concerns that the final rule may have had the unintended consequence of disrupting the secondary market for USDA-guaranteed portions of loans. As noted above, FCS institutions constitute approximately 40 percent of the buyers in this market even though System purchases of USDA-guaranteed loan portions total only about $200 million per year. In this 5 Sections 2.2(10) and 2.12(18) of the Act authorize associations to invest their funds, as may be approved by their funding bank under FCA regulations. These two provisions also allow associations to deposit their funds and securities with their funding bank, a member bank of the Federal Reserve System or any bank insured by the Federal Deposit Insurance Corporation. 6 Section 5.17(a)(9) of the Act authorizes FCA to ‘‘prescribe rules and regulations necessary or appropriate for carrying out this Act.’’ Additionally, the introductory text to sections 2.2 and 2.12 of the Act state that each association is subject to regulation by FCA. PO 00000 Frm 00002 Fmt 4702 Sfmt 4702 context, the total amount of loan guarantees purchased in the secondary market represents a minimal portion of System assets, and it does not fundamentally shift the System away from its core mandate of lending to its voting member-borrowers, who are agricultural and aquatic producers, their cooperatives, and rural utilities. However, from the perspective of the USDA and certain secondary market participants for these loan guarantees, the impact is significant. The final rule may have an unintended impact by causing 40 percent of the existing buyers to be excluded from the secondary market. More importantly, USDA loan guarantees contribute to the flow of adequate and affordable credit into rural areas, which is related to the System’s mission as a governmentsponsored enterprise. For these reasons, FCA is now proposing an amendment to § 615.5140(b)(2) that would authorize FCS associations to help manage risk by holding portions of loans that: (1) Lenders, which are not Farm Credit System institutions, originate and then sell in the secondary market; and (2) USDA fully and unconditionally guarantees or insures as to both principal and interest. These loan obligations are within the statutory authority of associations in sections 2.2(11) and 2.12(17) of the Act, and the authority to purchase these obligations will remain subject to the portfolio restrictions in § 615.5140(b)(4). Under proposed § 615.5140(b)(2), FCS associations would purchase the USDAguaranteed portions of loans that nonSystem lenders, most of whom are commercial banks, originate. The loan originators decide whether to retain or sell the guaranteed portions of these loans. Originators that sell USDA loan guarantees in the secondary market, whether directly or through brokers, negotiate the terms of sale, and thus have knowledge of the buyers’ identities. As a result, the secondary market for USDA guaranteed loans brings together willing sellers and buyers and, therefore, the proposed regulation encourages cooperation between FCS associations, community banks, larger banks, and other nonSystem lenders. The scope of the proposed rule is limited to USDA loan guarantees, which is what USDA, community banks, the FCS, and a broker-dealer asked FCA to reconsider. For this reason, loans guaranteed by other United States government agencies are not in the scope of this rulemaking and, therefore, FCA is not addressing them in this proposed rule. However, FCA points out E:\FR\FM\18SEP1.SGM 18SEP1 Federal Register / Vol. 84, No. 181 / Wednesday, September 18, 2019 / Proposed Rules that the existing regulation allows FCS associations to purchase securities that are issued, insured, or guaranteed by the United States or its agencies, which includes securities issued by the Small Business Administration and the Government National Mortgage Association. Additionally, associations may buy securities issued by Farmer Mac pursuant to § 615.5174. 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 ‘‘small entities’’ as defined in the Regulatory Flexibility Act. List of Subjects in 12 CFR Part 615 Accounting, Agriculture, Banks, banking, Government securities, Investments, Rural areas. For the reasons stated in the preamble, part 615 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be amended 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, 8.7, 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–7, 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). 2. Section 615.5140 is amended by revising paragraph (b)(2) and paragraph (b)(3) introductory text to read as follows: khammond on DSKJM1Z7X2PROD with PROPOSALS ■ Eligible investments. * * * * (b) * * * (2) Secondary market Governmentguaranteed loans. In addition to investing in the securities described in paragraph (b)(1) of this section, each Farm Credit System association may 16:29 Sep 17, 2019 Jkt 247001 BILLING CODE 6705–01–P COMMODITY FUTURES TRADING COMMISSION 17 CFR Parts 3, 39, and 140 RIN 3038–AE65 Exemption From Derivatives Clearing Organization Registration On July 23, 2019, the Commodity Futures Trading Commission (Commission) published in the Federal Register a supplemental notice of proposed rulemaking (NPRM) titled Exemption from Derivatives Clearing Organization Registration. The comment period for the supplemental NPRM closes on September 23, 2019. The Commission is extending the comment period for this supplemental NPRM by an additional 60 days. DATES: The comment period for the supplemental NPRM titled Exemption from Derivatives Clearing Organization Registration is extended through November 22, 2019. ADDRESSES: You may submit comments, identified by ‘‘Exemption from Derivatives Clearing Organization Registration’’ and RIN number 3038– AE65, by any of the following methods: • CFTC Comments Portal: https:// comments.cftc.gov. Select the ‘‘Submit Comments’’ link for this rulemaking and follow the instructions on the Public Comment Form. • Mail: Send to Christopher Kirkpatrick, Secretary of the SUMMARY: 1. The authority citation for part 615 continues to read as follows: VerDate Sep<11>2014 [FR Doc. 2019–19917 Filed 9–17–19; 8:45 am] Commodity Futures Trading Commission. ACTION: Extension of comment period. ■ * Dated: August 14, 2019. Dale Aultman, Secretary, Farm Credit Administration Board. AGENCY: PART 615—FUNDING AND FISCAL AFFAIRS, LOAN POLICIES AND OPERATIONS, AND FUNDING OPERATIONS § 615.5140 also manage risk by holding those portions of loans that: (i) Lenders, which are not Farm Credit System institutions, originate and then sell in the secondary market; and (ii) The United States Department of Agriculture fully and unconditionally guarantees or insures as to both principal and interest. (3) Risk management requirements. Each association that purchases investments pursuant to paragraphs (b)(1) and (2) of this section-must document how its investment activities contribute to managing risks as required by paragraph (b)(1) of this section. Such documentation must address and evidence that the association: * * * * * PO 00000 Frm 00003 Fmt 4702 Sfmt 4702 49071 Commission, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. • Hand Delivery/Courier: Follow the same instructions as for Mail, above. Please submit your comments using only one of these methods. To avoid possible delays with mail or in-person deliveries, submissions through the CFTC Comments Portal are encouraged. All comments must be submitted in English, or if not, accompanied by an English translation. Comments will be posted as received to https:// comments.cftc.gov. You should submit only information that you wish to make available publicly. If you wish the Commission to consider information that you believe is exempt from disclosure under the Freedom of Information Act (FOIA), a petition for confidential treatment of the exempt information may be submitted according to the procedures established in § 145.9 of the Commission’s regulations.1 The Commission reserves the right, but shall have no obligation, to review, pre-screen, filter, redact, refuse or remove any or all of your submission from https://comments.cftc.gov that it may deem to be inappropriate for publication, such as obscene language. All submissions that have been redacted or removed that contain comments on the merits of the rulemaking will be retained in the public comment file and will be considered as required under the Administrative Procedure Act and other applicable laws, and may be accessible under the FOIA. FOR FURTHER INFORMATION CONTACT: Eileen A. Donovan, Deputy Director, 202–418–5096, edonovan@cftc.gov; Parisa Abadi, Associate Director, 202– 418–6620, pabadi@cftc.gov; Eileen R. Chotiner, Senior Compliance Analyst, 202–418–5467, echotiner@cftc.gov; Brian Baum, Special Counsel, 202–418– 5654, bbaum@cftc.gov; August A. Imholtz III, Special Counsel, 202–418– 5140, aimholtz@cftc.gov; Abigail S. Knauff, Special Counsel, 202–418–5123, aknauff@cftc.gov; Division of Clearing and Risk, Thomas J. Smith, Deputy Director, 202–418–5495, tsmith@ cftc.gov; Division of Swap Dealer and Intermediary Oversight, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581. SUPPLEMENTARY INFORMATION: On July 23, 2019, the Commission published in the Federal Register a supplemental NPRM proposing amendments to permit derivatives clearing organizations that 1 17 E:\FR\FM\18SEP1.SGM CFR 145.9. 18SEP1

Agencies

[Federal Register Volume 84, Number 181 (Wednesday, September 18, 2019)]
[Proposed Rules]
[Pages 49069-49071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-19917]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

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


Federal Register / Vol. 84, No. 181 / Wednesday, September 18, 2019 / 
Proposed Rules

[[Page 49069]]



FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AD35


Organization; Funding and Fiscal Affairs, Loan Policies and 
Operations, and Funding Operations; Investment Eligibility

AGENCY: Farm Credit Administration.

ACTION: Proposed rule.

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

SUMMARY: The Farm Credit Administration (FCA, Agency, us, our, or we) 
is proposing to amend its investment regulations to allow Farm Credit 
System (FCS or System) associations to purchase and hold the portion of 
certain loans that non-FCS lenders originate and sell in the secondary 
market, and that the United States Department of Agriculture (USDA) 
unconditionally guarantees or insures as to the timely payment of 
principal and interest.

DATES: Please send us your comments on or before November 18, 2019.

ADDRESSES: We offer a variety of methods for you to submit your 
comments. For accuracy and efficiency reasons, commenters are 
encouraged to submit comments by 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 of 1973, as amended, 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 [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.
     Mail: Barry F. Mardock, Acting Director, Office of 
Regulatory Policy, Farm Credit Administration, 1501 Farm Credit Drive, 
McLean, VA 22102-5090.
    You may review copies of all comments we receive at our office in 
McLean, Virginia or 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, including any supporting data provided, 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: 
    David J. Lewandrowski, Senior Policy Analyst, Office of Regulatory 
Policy, (703) 883-4212, [email protected]; or
    Jeremy R. Edelstein, Associate Director of Finance and Capital 
Market Team, Office of Regulatory Policy, (703) 883-4497, 
[email protected]; or
    Richard A. Katz, Senior Counsel, Office of General Counsel, (703) 
883-4020, TTY (703) 883-4056, [email protected].

SUPPLEMENTARY INFORMATION: 

I. Objectives

    The objectives of the proposed rule are to authorize FCS 
associations to buy as investments for risk management purposes, 
portions of certain loans that non-System lenders originate, and the 
USDA fully guarantees as to principal and interest to:
     Augment the liquidity of rural credit markets;
     Reduce the capital burden on community banks and other 
non-System lenders who choose to sell their USDA guaranteed portions of 
loans, so they may extend additional credit in rural areas; and
     Enhance the ability of associations to manage risk.

II. Background

    In general, the authority for FCS association to buy and sell 
certain types of financial instruments, including the ones addressed in 
this proposed rule, is found in Sections 2.2(11) and 2.12(17) of the 
Farm Credit Act of 1971, as amended (Act). In 2014, FCA proposed 
amendments to the investment regulation for FCS associations.\1\ The 
proposed rule would have authorized associations to purchase and hold, 
as investments, obligations issued or guaranteed by the United States 
or its agencies for risk management purposes. Under the proposed rule, 
no association could hold investments in an amount that exceeds 10 
percent of its total outstanding loans.
---------------------------------------------------------------------------

    \1\ See 79 FR 43301, July 25, 2014.
---------------------------------------------------------------------------

    FCA received more than 1,250 comment letters on this proposal. 
After consideration of these comments, FCA changed the term 
``obligations'' in the proposed rule to the more narrow term 
``securities'' in the final rule. FCA also added Sec.  615.5140(b)(2) 
to the final regulation to clarify that loans purchased in the 
secondary market that are unconditionally guaranteed or insured by the 
U.S. Government or its agencies as to principal and interest are not 
eligible risk management investment for FCS associations. Such loans 
meet the statutory definition of ``obligations'', but we did not 
include them as securities in the final rule.
    Shortly after we approved and published the final rule, several FCS 
associations, community banks, and a broker-dealer expressed concern 
that final Sec.  615.5140(b)(1) and (2) would disrupt the secondary 
market for the portions of loans that USDA fully and unconditionally 
guarantees as to both principal and interest. Representatives of the 
Office of the Administrator for the Rural Business Cooperative Service 
at USDA (USDA Administrator) contacted FCA to support these parties. 
More specifically, concerns were raised about the potential impact that 
the final rule could have on the secondary market for USDA-guaranteed 
portions of loans and, more broadly, on rural development. The USDA 
Administrator, two community banks, and the broker-dealer warned that 
the withdrawal of FCS associations from this market could substantially 
reduce the liquidity in this

[[Page 49070]]

market and the availability of credit in rural areas.
    In response to the concerns raised by the USDA Administrator and 
market participants, FCA decided to review final Sec.  615.5140(b)(1) 
and (2) and consider their impact on the secondary market for loans 
that the USDA fully and unconditionally guarantees as to principal and 
interest. As a result of this review, FCA is now initiating another 
rulemaking that would amend Sec.  615.5140(b)(2) to exempt USDA-
guaranteed loan portions from Sec.  615.5140(b)(1), as well as a 
conforming change to Sec.  615.5140(b)(3).

III. Secondary Market for USDA Guarantees of Loans

    USDA may guarantee up to 90 percent of certain loans that FCS banks 
and associations, commercial banks, and other lenders originate.\2\ 
These lenders may either hold the guaranteed portion of such loans or 
sell them in the secondary market.\3\ Data provided by USDA indicates 
that loan originators retain approximately 60 percent of the USDA-
guaranteed portions of such loans and sell the remaining 40 percent in 
the secondary market, usually at a premium. There are risks to 
purchasers of these guaranteed portions of loans.\4\ According to the 
Rural Development Agency at USDA, FCS associations buy approximately 40 
percent of such USDA-loan guarantees in the secondary market.
---------------------------------------------------------------------------

    \2\ USDA guarantees loans to borrowers under a variety of 
programs pursuant to its authorities, primarily subtitles A and B of 
the Consolidated Farm and Rural Development Act and title VI of the 
Rural Electrification Act of 1936.
    \3\ Lenders who originate loans that are eligible for USDA 
guarantees only obtain a conditional guarantee from the USDA. The 
guarantee is conditional on the lender complying with the 
origination and servicing regulatory requirements applicable to the 
loan, as well as other program requirements. Loan originators may 
sell the USDA-guaranteed portions of their loans, in the form of an 
assignment, to other persons, including individuals, corporate 
entities, and other financial institutions. See, 7 CFR 762.160, 
1779.65, 3575.65, and 4279.75. Pursuant to these regulations, the 
seller must submit a form to the USDA that identifies the party that 
becomes the holder of record. Id. A purchaser who subsequently 
assigns the loan guarantee to another party must similarly comply 
with the same requirement. Only an assignee who is listed as the 
holder of record for the loan guarantee may seek payment from the 
USDA if the borrower defaults. The USDA provides an unconditional 
guarantee to a good-faith guarantee holder who purchased the 
guaranteed portion of the loan in the secondary market.
    \4\ The primary risks are premium risk and operational risk. The 
USDA-guaranteed portions of these loans typically command 
significant premiums in the secondary market. The payment of 
premiums demonstrates the high demand for USDA loan guarantees in 
the marketplace because buyers consider them as financially valuable 
assets. However, premiums are not covered by the USDA guarantee. The 
buyer may not always recover the full amount of the premium paid if 
the borrower defaults on the loan. Operational risk to purchasers 
center on proper transfer of the assignment of the guarantee so that 
it is recognized by USDA.
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IV. Association Investment Authorities

    FCS associations derive their authority to make investments from 
sections 2.2(10) 2.2(11), 2.12(17), and 2.12(18) of the Act.\5\ The 
statutory provisions that are most relevant to this rulemaking are 
sections 2.2(11) and 2.12(17), which authorize System associations to 
``buy and sell obligations of or insured by the United States or of any 
agency thereof or of any banks of the Farm Credit System.''
---------------------------------------------------------------------------

    \5\ Sections 2.2(10) and 2.12(18) of the Act authorize 
associations to invest their funds, as may be approved by their 
funding bank under FCA regulations. These two provisions also allow 
associations to deposit their funds and securities with their 
funding bank, a member bank of the Federal Reserve System or any 
bank insured by the Federal Deposit Insurance Corporation.
---------------------------------------------------------------------------

    Pursuant to its authority under section 5.17(a)(9) of the Act,\6\ 
FCA promulgated current Sec.  615.5140(b), which allows FCS 
associations to buy and hold obligations issued or guaranteed by the 
United States subject to certain restrictions. More specifically, Sec.  
615.5140(b)(1) and (2) specify that the obligations that associations 
acquire must be securities, but not loans, while Sec.  615.5140(b)(4) 
imposes a portfolio cap of 10 percent of outstanding loans on such 
investments. The intended purpose of these limits in the regulation is 
to ensure that the FCS continue to operate as cooperative lending 
institutions that are owned and controlled by the farmers, ranchers, 
aquatic producers and harvesters, and cooperatives that borrow from 
them. As discussed in the preamble to the final rule, FCA decided, in 
response to the comment letters, that placing limits on association 
investments is necessary so that loans to eligible borrowers constitute 
most of the assets of each FCS association.
---------------------------------------------------------------------------

    \6\ Section 5.17(a)(9) of the Act authorizes FCA to ``prescribe 
rules and regulations necessary or appropriate for carrying out this 
Act.'' Additionally, the introductory text to sections 2.2 and 2.12 
of the Act state that each association is subject to regulation by 
FCA.
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Explanation of the Proposed Rule

    As discussed above, certain external parties communicated concerns 
that the final rule may have had the unintended consequence of 
disrupting the secondary market for USDA-guaranteed portions of loans. 
As noted above, FCS institutions constitute approximately 40 percent of 
the buyers in this market even though System purchases of USDA-
guaranteed loan portions total only about $200 million per year. In 
this context, the total amount of loan guarantees purchased in the 
secondary market represents a minimal portion of System assets, and it 
does not fundamentally shift the System away from its core mandate of 
lending to its voting member-borrowers, who are agricultural and 
aquatic producers, their cooperatives, and rural utilities. However, 
from the perspective of the USDA and certain secondary market 
participants for these loan guarantees, the impact is significant. The 
final rule may have an unintended impact by causing 40 percent of the 
existing buyers to be excluded from the secondary market. More 
importantly, USDA loan guarantees contribute to the flow of adequate 
and affordable credit into rural areas, which is related to the 
System's mission as a government-sponsored enterprise.
    For these reasons, FCA is now proposing an amendment to Sec.  
615.5140(b)(2) that would authorize FCS associations to help manage 
risk by holding portions of loans that: (1) Lenders, which are not Farm 
Credit System institutions, originate and then sell in the secondary 
market; and (2) USDA fully and unconditionally guarantees or insures as 
to both principal and interest. These loan obligations are within the 
statutory authority of associations in sections 2.2(11) and 2.12(17) of 
the Act, and the authority to purchase these obligations will remain 
subject to the portfolio restrictions in Sec.  615.5140(b)(4).
    Under proposed Sec.  615.5140(b)(2), FCS associations would 
purchase the USDA-guaranteed portions of loans that non-System lenders, 
most of whom are commercial banks, originate. The loan originators 
decide whether to retain or sell the guaranteed portions of these 
loans. Originators that sell USDA loan guarantees in the secondary 
market, whether directly or through brokers, negotiate the terms of 
sale, and thus have knowledge of the buyers' identities. As a result, 
the secondary market for USDA guaranteed loans brings together willing 
sellers and buyers and, therefore, the proposed regulation encourages 
cooperation between FCS associations, community banks, larger banks, 
and other non-System lenders.
    The scope of the proposed rule is limited to USDA loan guarantees, 
which is what USDA, community banks, the FCS, and a broker-dealer asked 
FCA to reconsider. For this reason, loans guaranteed by other United 
States government agencies are not in the scope of this rulemaking and, 
therefore, FCA is not addressing them in this proposed rule. However, 
FCA points out

[[Page 49071]]

that the existing regulation allows FCS associations to purchase 
securities that are issued, insured, or guaranteed by the United States 
or its agencies, which includes securities issued by the Small Business 
Administration and the Government National Mortgage Association. 
Additionally, associations may buy securities issued by Farmer Mac 
pursuant to Sec.  615.5174.

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

List of Subjects in 12 CFR Part 615

    Accounting, Agriculture, Banks, banking, Government securities, 
Investments, Rural areas.

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

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

0
1. The authority citation for part 615 continues 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, 8.7, 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-7, 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).

0
2. Section 615.5140 is amended by revising paragraph (b)(2) and 
paragraph (b)(3) introductory text to read as follows:


Sec.  615.5140  Eligible investments.

* * * * *
    (b) * * *
    (2) Secondary market Government-guaranteed loans. In addition to 
investing in the securities described in paragraph (b)(1) of this 
section, each Farm Credit System association may also manage risk by 
holding those portions of loans that:
    (i) Lenders, which are not Farm Credit System institutions, 
originate and then sell in the secondary market; and
    (ii) The United States Department of Agriculture fully and 
unconditionally guarantees or insures as to both principal and 
interest.
    (3) Risk management requirements. Each association that purchases 
investments pursuant to paragraphs (b)(1) and (2) of this section-must 
document how its investment activities contribute to managing risks as 
required by paragraph (b)(1) of this section. Such documentation must 
address and evidence that the association:
* * * * *

    Dated: August 14, 2019.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2019-19917 Filed 9-17-19; 8:45 am]
 BILLING CODE 6705-01-P
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