Amortization Limits, 60691-60694 [2020-18552]
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60691
Rules and Regulations
Federal Register
Vol. 85, No. 188
Monday, September 28, 2020
This section of the FEDERAL REGISTER
contains regulatory documents having general
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are keyed to and codified in the Code of
Federal Regulations, which is published under
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10 CFR Part 72
[NRC–2020–0059]
Guidance: Changes, Tests, and
Experiments
Nuclear Regulatory
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ACTION: Regulatory guide; issuance.
AGENCY:
The U.S. Nuclear Regulatory
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to Regulatory Guide (RG) 3.72,
‘‘Guidance for Implementation of
Changes, Tests, and Experiements.’’
Revision 1 to RG 3.72 endorses Nuclear
Energy Institute (NEI) 12–04, Revision 2.
NEI 12–04, Revision 2, updates and
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retrievable storage installations by
endorsing guidance document NEI 12–
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72.48 Implementation,’’ with
clarifications and exceptions.
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Dated: September 22, 2020.
For the Nuclear Regulatory Commission.
Meraj Rahimi,
Chief, Regulatory Guidance and Generic
Issues Branch, Division of Engineering, Office
of Nuclear Regulatory Research.
[FR Doc. 2020–21299 Filed 9–25–20; 8:45 am]
BILLING CODE 7590–01–P
FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052–AC92
Amortization Limits
Farm Credit Administration.
Final rule.
AGENCY:
ACTION:
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The Farm Credit
Administration (FCA, we, or our) is
repealing the regulatory requirement
that production credit associations
(PCAs) amortize their loans in 15 years
or less, while requiring Farm Credit
System (FCS or System) associations to
address amortization through their
credit underwriting standards and
internal controls.
DATES: This regulation will be effective
30 days after publication in the Federal
Register during which either or both
Houses of Congress are in session. We
will publish a document announcing
the effective date in the Federal
Register.
SUMMARY:
Lori
Markowitz, Senior Policy Analyst,
Office of Regulatory Policy, (703) 883–
4487, TTY (703) 883–4056, markowitzl@
fca.gov or Richard A. Katz, Senior
Counsel, Office of General Counsel,
(703) 883–4020, TTY (703) 884–4056,
katzr@fca.gov.
SUPPLEMENTARY INFORMATION:
FOR FURTHER INFORMATION CONTACT:
I. Objectives
The objectives of the final rule are to:
• Repeal regulatory provisions that
impose amortization limits on PCA
loans; and
• Require associations to address loan
amortization in their credit
underwriting standards and internal
controls.
II. Background
As FCS institutions restructured and
merged over the years, and the
agricultural economy evolved, FCA
periodically issued or revised
regulations in part 614 that implement
the statutory authorities of System
banks and associations to make,
participate in, and buy and sell other
interests in, loans to eligible borrowers.
Pursuant to statute, these regulations
also establish how the powers and
obligations of the constituent banks or
associations are consolidated, and to the
extent necessary, reconciled in the
successor institutions created by the
Agricultural Credit Act of 1987.
In 1997, FCA amended its regulations
governing lending authorities, credit
underwriting, and loan terms and
conditions and provided freestanding
PCAs greater flexibility to meet their
borrowers’ credit needs to purchase
expensive equipment and other chattels.
Since 1997, § 614.4040(a)(2) has allowed
PCAs, under policies approved by their
funding banks, to make loans with
maturities of 10 years or less, but
amortize them over a period not to
exceed 15 years, subject to the following
conditions: (1) Each such loan may be
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refinanced only if the PCA determines
at the time of refinancing that the loan
meets its loan policies and underwriting
criteria, (2) refinancing may not extend
repayment beyond 15 years from the
date of the original loan, and (3)
acquiring unimproved real estate is not
the sole purpose of the loan.
In 1997, FCA also made a substantive
revision to the agricultural credit
association (ACA) lending authority
regulation, § 614.4050, to recognize the
statutory authority of ACAs to make
long-term real estate loans that mature
in not less than 5 years nor more than
40 years either under their PCA or their
Federal land credit association (FLCA)
long-term mortgage lending authority.
Also, ACAs are subject to less stringent
regulatory requirements than PCAs
regarding aquatic loans, and loans that
mature between 7 and 10 years.
Over the years in regulatory burden
initiatives, we have received comments
that there is a discrepancy between PCA
and ACA lending authorities. A
common criticism is that the regulations
permit ACA parents to make 10-year
operating loans to borrowers, without
any restriction on amortization, while
PCA subsidiaries cannot amortize the
same loans for a period longer than 15
years.
III. Synopsis of the Proposed Rule
In response to the restructuring of the
System, changes in the agricultural
economy, and input we received from
the FCS, we published a proposed rule
on January 23, 2020,1 that would repeal
the above-mentioned restrictions on the
amortization of PCA loans in
§ 614.4040(a)(2). We also proposed
repealing § 614.4040(a)(3) which
requires that the maturities on shortand intermediate-term PCA loans are
appropriate for the purpose and
underlying collateral of each loan, and
comply with the association’s loan
underwriting standards adopted
pursuant to § 614.4150 and the general
requirements of § 614.4200. The FCA
also proposed to restructure § 614.4050
so our lending authority regulation for
ACAs would have the same structure
and format as comparable regulations
for PCAs and FLCAs. As noted in the
preamble to the proposed rule, FCA did
not substantively amend § 614.4050.2
The proposed rule would amend
§ 614.4200 to require direct lenders 3
1 85
FR 3867.
85 FR 3869 (Jan 23, 2020).
3 Currently, all direct lenders operating under
titles I and II of the Act are associations. All Farm
Credit banks operating under title I of the Act have
transferred their authority to make real estate
mortgage loans directly to eligible borrowers to
their associations. However, FCS banks retain
2 See
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that amortize loans over a period that is
longer than their term to maturity
(hereafter ‘‘balloon loans’’) to address
loan amortization in their credit
underwriting standards. More
specifically, FCA proposed to add a new
paragraph at the end of § 614.4200 that
would require FCS direct lenders to
establish loan amortization schedules
for balloon loans that are (1) Consistent
with their loan underwriting standards
that they adopt pursuant to § 614.4150
and, (2) are appropriate to the type and
purpose of the borrower’s loan, the
expected useful life of the asset being
financed, and repayment capacity of the
borrower.
IV. Comments and Our Responses
We received six comment letters, two
from System banks, two from System
associations, and two from trade
associations—one representing FCS
institutions and the other representing
commercial banks. Most of the
comments supported the rule as
proposed and the repeal of the PCA
amortization limit. One System
commenter requested that we reaffirm
prior guidance on unrestricted
amortization of ACA loans. The
commercial bank trade association
opposed the repeal of the amortization
limits for PCA loans. According to this
commenter, repeal of § 614.4040(a)(2)
would allow FCS institutions wide
latitude to agree to longer amortization
periods which could cause FCS
borrowers stress when the loans need to
be refinanced or repriced and interest
rates have risen. In addition, this
commenter urged FCA to conduct an
analysis of possible negative impacts
from relaxing the rules pertaining to
loan amortization.
After considering all the comments
that we received, we are finalizing the
proposed rule without change. The
Farm Credit Act of 1971, as amended,
establishes the terms to maturity on
loans made by direct lenders operating
under titles I or II. However, the statute
does not prohibit System direct lenders,
such as PCAs, FLCAs, or ACAs from
amortizing a loan over a period that is
longer than its term to maturity. Instead,
as discussed in greater detail below,
prudent credit underwriting standards
and practices at System direct lenders
are necessary and appropriate to control
the risks inherent in all loans,
particularly balloon loans.
An amortization schedule that
exceeds the term of the loan is often
residual authority under section 1.3 of the Act to
make mortgage loans directly to eligible borrowers
in geographic areas where no association operates.
For this reason, final § 614.4200(c) applies to both
Farm Credit banks and associations.
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used by financial institutions to provide
borrowers with credit repayment terms
that meet their needs. The balloon
payment that results when such loans
mature is either repaid, or the remaining
principal balance is refinanced. The
decision to refinance the balloon
payment at its due date is based on
many factors, including the borrower’s
financial position to cover payments
based on a new amortization schedule,
current interest rates, and the remaining
useful life of the asset being financed.
Under the final rule, all FCS direct
lenders that amortize loans over
timeframes that are longer than their
terms to maturity must address loan
amortization in their credit
underwriting standards. As noted
earlier, final § 614.4200(c) requires
associations that offer balloon loans to
set amortization schedules that are
consistent with loan underwriting
standards required by § 614.4150 and
appropriate to the type and purpose of
the borrower’s loan, the expected useful
life of the asset being financed, and the
repayment capacity of the borrower.
The FCA expects FCS direct lenders
to address these factors not only when
extending a loan, but also when
deciding whether to renew and
refinance the borrower’s loan. This
regulatory approach strikes a balance
between allowing FCS associations to
offer loan products that meet the
specific credit needs of each borrower,
while ensuring that every loan exhibit
sound credit underwriting practices.
More specifically, final § 614.4200(c)
provides System institutions latitude to
develop credit underwriting parameters
that meet the diverse credit needs of
their borrowers within a regulatory
framework that precludes loans from
being continually refinanced at maturity
by tying loan amortization to each
borrower’s repayment capacity and the
useful life of the underlying asset.
The final rule that the FCA adopts
reduces unnecessary regulatory burden
on FCS direct lender associations.
Offering balloon loans to customers is a
business decision. Managing credit risks
in loans that amortize over a longer
timeframe than their term to maturity is
the responsibility of the lender. The
most effective and efficient way to
control the risks in such loans is
through strong credit underwriting
standards and practices developed by
the lender, rather than prescriptive
regulations that substitute an agency’s
opinion for the financial institution’s
business judgement. We note that the
statutory, regulatory, and supervisory
framework for loans that amortize on a
different schedule than their terms to
maturity is virtually the same for FCS
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institutions, commercial banks, and
other non-System lenders.
As noted above, a commercial bank
trade association opposed repeal of
amortization requirements in
§ 614.4040(a)(2) on PCA loans because
the commenter believes that this
regulatory provision is necessary to
promote safety and soundness. We
respond that from 1997 until now, our
regulations only addressed the
amortization of PCA loans, but not
balloon loans originated by FLCAs or
ACAs. As a result, long-term real estate
mortgage loans made by FLCAs and
ACAs, and short- and intermediate-term
ACA loans have never been subject to
regulatory restrictions on amortization.
As explained in the preamble to the
proposed rule, the FCA added these
amortization requirements to § 614.4040
in 1997 so PCAs would have greater
flexibility in the terms they could offer
farmers and ranchers to purchase
expensive equipment and chattels
through loans that matured within 10
years in accordance with the statute. As
a result of corporate restructuring of
System associations over the past 23
years, there are no longer any standalone PCAs. All PCAs have become
subsidiaries of ACAs, which have
authority to make short-, intermediate,
and long-term loans.
In this context, it becomes clear that
the amortization limits for PCA loans in
§ 614.4040(a)(2) were not designed for
safety and soundness. Corporate
restructuring rendered the requirements
in § 614.4040(a)(2) obsolete. As we
stated in the proposed rule, FCA views
loan amortization as a credit
underwriting issue, not a legal authority
issue. For these reasons, we are
adopting the final rule, as proposed.
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
final 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 614
Agriculture, Banks, banking, Flood
insurance, Foreign trade, Reporting and
recordkeeping requirements, Rural
areas.
For the reasons stated in the
preamble, part 614 of chapter VI, title 12
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60693
of the Code of Federal Regulations is
amended as follows:
PART 614—LOAN POLICIES AND
OPERATIONS
1. The authority citation for part 614
is revised to read as follows:
■
Authority: 42 U.S.C. 4012a, 4104a, 4104b,
4106, and 4128; 12 U.S.C. 2011, 2013, 2014,
2015, 2017, 2018, 2019, 2071, 2073, 2074,
2075, 2091, 2093, 2094, 2097, 2121, 2122,
2124, 2128, 2129, 2131, 2141, 2149, 2183,
2184, 2201, 2202, 2202a, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a,
2219b, 2243, 2244, 2252, 2279a, 2279a–2,
2279b, 2279c–1, 2279f, 2279f–1, 2279aa,
2279aa–5; sec. 413 of Pub. L. 100–233, 101
Stat. 1568, 1639 (12 U.S.C. 2121 note).
2. Section 614.4040 is amended by
revising paragraph (a) to read as follows:
■
§ 614.4040
Production credit associations.
(a) Short- and intermediate-term
loans. Production credit associations are
authorized to make or guarantee shortand intermediate-term loans and
provide other financial assistance for a
term of:
(1) Not more than 7 years;
(2) More than 7 years, but not more
than 10 years, as set forth in policies
approved by the funding bank; or
(3) Not more than 15 years to
producers and harvesters of aquatic
products for major capital expenditures,
including but not limited to the
purchase of vessels, construction or
purchase of shore facilities, and similar
purposes directly related to the
operations of producers or harvesters of
aquatic products.
*
*
*
*
*
■ 3. Section 614.4050 is amended by:
■ a. Removing the introductory text;
■ b. Revising paragraph (a);
■ c. Removing paragraph (b);
■ d. Redesignating paragraphs (c) and
(d) as paragraphs (b) and (c)
respectively;
■ e. In newly redesignated paragraph
(c)(1)(i) introductory text, removing
‘‘(a)’’ and adding ‘‘(a)(1)’’ in its place;
■ f. In newly redesignated paragraph
(c)(1)(ii) introductory text, removing
‘‘(b) of this part’’ and adding ‘‘(a)(2) of
this section’’ in its place;
■ g. In newly redesignated paragraph
(c)(2)(i), removing ‘‘(a)’’ and adding
‘‘(a)(1)’’ in its place;
■ h. In newly redesiganted paragraph
(c)(2)(ii), removing ‘‘(b)’’ and adding
‘‘(a)(2)’’ in its place; and
■ i. In newly redesignated paragraph
(c)(3), removing ‘‘(c)’’ and adding ‘‘(b)’’
in its place.
The revision reads as follows:
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§ 614.4050 Agricultural credit
associations.
(a) Terms to maturity on loans.
Agricultural credit associations are
authorized to make or guarantee, subject
to requirements of § 614.4200:
(1) Long-term real estate mortgage
loans with maturities of not less than 5
nor more than 40 years, and continuing
commitments to make such loans; and
(2) Short- and intermediate-term loans
and provide other similar financial
assistance for a term of not more than:
(i) 10 years; or
(ii) 15 years to aquatic producers and
harvesters for their aquatic operations.
*
*
*
*
*
■ 4. Section 614.4200 is revised by
adding paragraph (c) to read as follows:
§ 614.4200
General requirements.
*
*
*
*
*
(c) Loan amortization. If a direct
lender amortizes a loan over a period of
time that is longer than the term to
maturity under § 614.4000(a),
§ 614.4010(a), § 614.4030(a),
§ 614.41040(a), or § 614.4050(a)(1) or (2),
it must establish a loan amortization
schedule that is:
(1) Consistent with its loan
underwriting standards adopted
pursuant to § 614.4150; and
(2) Appropriate to the type and
purpose of the loan, expected useful life
of the asset being financed, and the
repayment capacity of the borrower.
Dated: August 19, 2020.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020–18552 Filed 9–25–20; 8:45 am]
BILLING CODE 6705–01–P
DEPARTMENT OF COMMERCE
15 CFR Part 29
[Docket No. 200819–0223]
RIN 0605–AA57
Promoting the Rule of Law Through
Improved Agency Guidance
Documents
Department of Commerce.
Interim final rule; request for
comments.
AGENCY:
ACTION:
The Department of Commerce
(Department) issues regulations to
implement the requirements of an
Executive order entitled ‘‘Promoting the
Rule of Law Through Improved Agency
Guidance Documents’’ signed October 9,
2019. Consistent with the Executive
order, these regulations require that the
Department clearly state that guidance
SUMMARY:
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documents issued by the Department do
not bind the public, except as
authorized by law or as incorporated
into a contract; establish procedures for
the public to petition for withdrawal or
modification of guidance documents;
and provide, with certain exceptions,
that for significant guidance documents,
the Department will submit those
documents for review by the Office of
Management and Budget’s (OMB’s)
Office of Information and Regulatory
Affairs (OIRA) and provide for a period
of public notice and comment of at least
30 days.
DATES: The interim final rule is effective
October 28, 2020. Comments on the
interim final rule must be received by
October 28, 2020.
ADDRESSES: You may submit comments
by the following method:
Electronic submissions: Submit all
electronic public comments via the
Federal e-Rulemaking portal: https://
www.regulations.gov at docket number
DOC–2020–0004.
Instructions: All comments received
are a part of the public record and will
generally be posted to https://
www.regulations.gov without change.
All Personal Identifying Information (for
example, name, address, etc.)
voluntarily submitted by the commenter
may be publicly accessible. Do not
submit confidential business
information or otherwise sensitive or
protected information.
FOR FURTHER INFORMATION CONTACT:
Xenia Kler, Office of the Assistant
General Counsel for Legislation and
Regulation, 202–482–5354, or via email
xkler1@doc.gov.
SUPPLEMENTARY INFORMATION:
Background
On October 9, 2019 (84 FR 55235), the
President issued Executive Order 13891,
entitled ‘‘Promoting the Rule of Law
Through Improved Agency Guidance
Documents,’’ which seeks to ensure that
when Federal agencies issue guidance
documents, the agencies: Do not treat
those guidance documents alone as
imposing binding obligations both in
law and in practice, except as
incorporated into a contract; take public
input into account in formulating
significant guidance documents; and
make guidance documents readily
available to the public.
The Executive order, consistent with
previous OMB memoranda, defines
‘‘guidance document’’ as ‘‘an agency
statement of general applicability,
intended to have future effect on the
behavior of regulated parties, that sets
forth a policy on a statutory, regulatory,
or technical issue, or an interpretation
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of a statute or regulation.’’ It further
distinguishes guidance documents from,
among other things, rules promulgated
under the Administrative Procedure Act
(APA) (5 U.S.C. 553), which, as
authorized by statute, may bind the
public, and agency adjudications
conducted under the APA (5 U.S.C.
554), which may bind parties on a caseby-case basis. Guidance documents may
help clarify existing obligations, but
unlike statutes, regulations, and
adjudications, cannot themselves
impose obligations on the public.
The Department, through its
component bureaus, issues a variety of
guidance documents in an effort to
assist businesses and the public in
understanding their obligations, as well
as agency procedures, under existing
statutes and regulations. For example,
when the National Oceanic and
Atmospheric Administration modified
its regulations pertaining to fishing
quotas for widow rockfish in the Pacific
Groundfish fishery, it issued a small
entity compliance guide intended to
provide to fishermen in the region a
plain-language summary of the new
regulations and how they would work.
The guide includes information about
why the new rules were issued, how
fishermen could expect their existing
allocations to be affected, relevant
deadlines, and the opportunity to
appeal.1 The United States Patent and
Trademark Office, for its part, publishes
and periodically updates a trial practice
guide for patent bar attorneys practicing
before the Patent Trial and Appeal
Board.2 And the Enforcement and
Compliance unit of the International
Trade Administration, through its
External User Guide, provides guidance
to interested parties about how to
navigate its ACCESS electronic filing
system, which is used in trade
proceedings involving unfair imports.3
These guidance documents, and others
like them throughout the Department,
are intended only to be helpful to the
public, and none are intended to impose
new or additional obligations. The
Department’s guidance documents are,
furthermore, almost always published
on the Department’s website, or those of
its bureaus, in order to help ensure they
are readily available to the public.
In order to further assist the public,
going forward, the Department, as
explained in an earlier notice (85 FR
1 https://archive.fisheries.noaa.gov/wcr/
publications/fishery_management/groundfish/
catch_shares/rockfish-compliance-guide-2017.pdf.
2 https://www.uspto.gov/patents-applicationprocess/patent-trial-and-appeal-board/ptab-trialpractice-guide-august-2018.
3 https://access.trade.gov/help/ACCESS_User_
Guide.pdf.
E:\FR\FM\28SER1.SGM
28SER1
]]>Agencies
[Federal Register Volume 85, Number 188 (Monday, September 28, 2020)]
[Rules and Regulations]
[Pages 60691-60694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-18552]
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FARM CREDIT ADMINISTRATION
12 CFR Part 614
RIN 3052-AC92
Amortization Limits
AGENCY: Farm Credit Administration.
ACTION: Final rule.
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[[Page 60692]]
SUMMARY: The Farm Credit Administration (FCA, we, or our) is repealing
the regulatory requirement that production credit associations (PCAs)
amortize their loans in 15 years or less, while requiring Farm Credit
System (FCS or System) associations to address amortization through
their credit underwriting standards and internal controls.
DATES: This regulation will be effective 30 days after publication in
the Federal Register during which either or both Houses of Congress are
in session. We will publish a document announcing the effective date in
the Federal Register.
FOR FURTHER INFORMATION CONTACT: Lori Markowitz, Senior Policy Analyst,
Office of Regulatory Policy, (703) 883-4487, TTY (703) 883-4056,
[email protected] or Richard A. Katz, Senior Counsel, Office of
General Counsel, (703) 883-4020, TTY (703) 884-4056, [email protected].
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the final rule are to:
Repeal regulatory provisions that impose amortization
limits on PCA loans; and
Require associations to address loan amortization in their
credit underwriting standards and internal controls.
II. Background
As FCS institutions restructured and merged over the years, and the
agricultural economy evolved, FCA periodically issued or revised
regulations in part 614 that implement the statutory authorities of
System banks and associations to make, participate in, and buy and sell
other interests in, loans to eligible borrowers. Pursuant to statute,
these regulations also establish how the powers and obligations of the
constituent banks or associations are consolidated, and to the extent
necessary, reconciled in the successor institutions created by the
Agricultural Credit Act of 1987.
In 1997, FCA amended its regulations governing lending authorities,
credit underwriting, and loan terms and conditions and provided
freestanding PCAs greater flexibility to meet their borrowers' credit
needs to purchase expensive equipment and other chattels. Since 1997,
Sec. 614.4040(a)(2) has allowed PCAs, under policies approved by their
funding banks, to make loans with maturities of 10 years or less, but
amortize them over a period not to exceed 15 years, subject to the
following conditions: (1) Each such loan may be refinanced only if the
PCA determines at the time of refinancing that the loan meets its loan
policies and underwriting criteria, (2) refinancing may not extend
repayment beyond 15 years from the date of the original loan, and (3)
acquiring unimproved real estate is not the sole purpose of the loan.
In 1997, FCA also made a substantive revision to the agricultural
credit association (ACA) lending authority regulation, Sec. 614.4050,
to recognize the statutory authority of ACAs to make long-term real
estate loans that mature in not less than 5 years nor more than 40
years either under their PCA or their Federal land credit association
(FLCA) long-term mortgage lending authority. Also, ACAs are subject to
less stringent regulatory requirements than PCAs regarding aquatic
loans, and loans that mature between 7 and 10 years.
Over the years in regulatory burden initiatives, we have received
comments that there is a discrepancy between PCA and ACA lending
authorities. A common criticism is that the regulations permit ACA
parents to make 10-year operating loans to borrowers, without any
restriction on amortization, while PCA subsidiaries cannot amortize the
same loans for a period longer than 15 years.
III. Synopsis of the Proposed Rule
In response to the restructuring of the System, changes in the
agricultural economy, and input we received from the FCS, we published
a proposed rule on January 23, 2020,\1\ that would repeal the above-
mentioned restrictions on the amortization of PCA loans in Sec.
614.4040(a)(2). We also proposed repealing Sec. 614.4040(a)(3) which
requires that the maturities on short- and intermediate-term PCA loans
are appropriate for the purpose and underlying collateral of each loan,
and comply with the association's loan underwriting standards adopted
pursuant to Sec. 614.4150 and the general requirements of Sec.
614.4200. The FCA also proposed to restructure Sec. 614.4050 so our
lending authority regulation for ACAs would have the same structure and
format as comparable regulations for PCAs and FLCAs. As noted in the
preamble to the proposed rule, FCA did not substantively amend Sec.
614.4050.\2\
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\1\ 85 FR 3867.
\2\ See 85 FR 3869 (Jan 23, 2020).
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The proposed rule would amend Sec. 614.4200 to require direct
lenders \3\ that amortize loans over a period that is longer than their
term to maturity (hereafter ``balloon loans'') to address loan
amortization in their credit underwriting standards. More specifically,
FCA proposed to add a new paragraph at the end of Sec. 614.4200 that
would require FCS direct lenders to establish loan amortization
schedules for balloon loans that are (1) Consistent with their loan
underwriting standards that they adopt pursuant to Sec. 614.4150 and,
(2) are appropriate to the type and purpose of the borrower's loan, the
expected useful life of the asset being financed, and repayment
capacity of the borrower.
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\3\ Currently, all direct lenders operating under titles I and
II of the Act are associations. All Farm Credit banks operating
under title I of the Act have transferred their authority to make
real estate mortgage loans directly to eligible borrowers to their
associations. However, FCS banks retain residual authority under
section 1.3 of the Act to make mortgage loans directly to eligible
borrowers in geographic areas where no association operates. For
this reason, final Sec. 614.4200(c) applies to both Farm Credit
banks and associations.
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IV. Comments and Our Responses
We received six comment letters, two from System banks, two from
System associations, and two from trade associations--one representing
FCS institutions and the other representing commercial banks. Most of
the comments supported the rule as proposed and the repeal of the PCA
amortization limit. One System commenter requested that we reaffirm
prior guidance on unrestricted amortization of ACA loans. The
commercial bank trade association opposed the repeal of the
amortization limits for PCA loans. According to this commenter, repeal
of Sec. 614.4040(a)(2) would allow FCS institutions wide latitude to
agree to longer amortization periods which could cause FCS borrowers
stress when the loans need to be refinanced or repriced and interest
rates have risen. In addition, this commenter urged FCA to conduct an
analysis of possible negative impacts from relaxing the rules
pertaining to loan amortization.
After considering all the comments that we received, we are
finalizing the proposed rule without change. The Farm Credit Act of
1971, as amended, establishes the terms to maturity on loans made by
direct lenders operating under titles I or II. However, the statute
does not prohibit System direct lenders, such as PCAs, FLCAs, or ACAs
from amortizing a loan over a period that is longer than its term to
maturity. Instead, as discussed in greater detail below, prudent credit
underwriting standards and practices at System direct lenders are
necessary and appropriate to control the risks inherent in all loans,
particularly balloon loans.
An amortization schedule that exceeds the term of the loan is often
[[Page 60693]]
used by financial institutions to provide borrowers with credit
repayment terms that meet their needs. The balloon payment that results
when such loans mature is either repaid, or the remaining principal
balance is refinanced. The decision to refinance the balloon payment at
its due date is based on many factors, including the borrower's
financial position to cover payments based on a new amortization
schedule, current interest rates, and the remaining useful life of the
asset being financed.
Under the final rule, all FCS direct lenders that amortize loans
over timeframes that are longer than their terms to maturity must
address loan amortization in their credit underwriting standards. As
noted earlier, final Sec. 614.4200(c) requires associations that offer
balloon loans to set amortization schedules that are consistent with
loan underwriting standards required by Sec. 614.4150 and appropriate
to the type and purpose of the borrower's loan, the expected useful
life of the asset being financed, and the repayment capacity of the
borrower.
The FCA expects FCS direct lenders to address these factors not
only when extending a loan, but also when deciding whether to renew and
refinance the borrower's loan. This regulatory approach strikes a
balance between allowing FCS associations to offer loan products that
meet the specific credit needs of each borrower, while ensuring that
every loan exhibit sound credit underwriting practices. More
specifically, final Sec. 614.4200(c) provides System institutions
latitude to develop credit underwriting parameters that meet the
diverse credit needs of their borrowers within a regulatory framework
that precludes loans from being continually refinanced at maturity by
tying loan amortization to each borrower's repayment capacity and the
useful life of the underlying asset.
The final rule that the FCA adopts reduces unnecessary regulatory
burden on FCS direct lender associations. Offering balloon loans to
customers is a business decision. Managing credit risks in loans that
amortize over a longer timeframe than their term to maturity is the
responsibility of the lender. The most effective and efficient way to
control the risks in such loans is through strong credit underwriting
standards and practices developed by the lender, rather than
prescriptive regulations that substitute an agency's opinion for the
financial institution's business judgement. We note that the statutory,
regulatory, and supervisory framework for loans that amortize on a
different schedule than their terms to maturity is virtually the same
for FCS institutions, commercial banks, and other non-System lenders.
As noted above, a commercial bank trade association opposed repeal
of amortization requirements in Sec. 614.4040(a)(2) on PCA loans
because the commenter believes that this regulatory provision is
necessary to promote safety and soundness. We respond that from 1997
until now, our regulations only addressed the amortization of PCA
loans, but not balloon loans originated by FLCAs or ACAs. As a result,
long-term real estate mortgage loans made by FLCAs and ACAs, and short-
and intermediate-term ACA loans have never been subject to regulatory
restrictions on amortization. As explained in the preamble to the
proposed rule, the FCA added these amortization requirements to Sec.
614.4040 in 1997 so PCAs would have greater flexibility in the terms
they could offer farmers and ranchers to purchase expensive equipment
and chattels through loans that matured within 10 years in accordance
with the statute. As a result of corporate restructuring of System
associations over the past 23 years, there are no longer any stand-
alone PCAs. All PCAs have become subsidiaries of ACAs, which have
authority to make short-, intermediate, and long-term loans.
In this context, it becomes clear that the amortization limits for
PCA loans in Sec. 614.4040(a)(2) were not designed for safety and
soundness. Corporate restructuring rendered the requirements in Sec.
614.4040(a)(2) obsolete. As we stated in the proposed rule, FCA views
loan amortization as a credit underwriting issue, not a legal authority
issue. For these reasons, we are adopting the final rule, as proposed.
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 final 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 614
Agriculture, Banks, banking, Flood insurance, Foreign trade,
Reporting and recordkeeping requirements, Rural areas.
For the reasons stated in the preamble, part 614 of chapter VI,
title 12 of the Code of Federal Regulations is amended as follows:
PART 614--LOAN POLICIES AND OPERATIONS
0
1. The authority citation for part 614 is revised to read as follows:
Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; 12
U.S.C. 2011, 2013, 2014, 2015, 2017, 2018, 2019, 2071, 2073, 2074,
2075, 2091, 2093, 2094, 2097, 2121, 2122, 2124, 2128, 2129, 2131,
2141, 2149, 2183, 2184, 2201, 2202, 2202a, 2202d, 2202e, 2206,
2206a, 2207, 2211, 2212, 2213, 2214, 2219a, 2219b, 2243, 2244, 2252,
2279a, 2279a-2, 2279b, 2279c-1, 2279f, 2279f-1, 2279aa, 2279aa-5;
sec. 413 of Pub. L. 100-233, 101 Stat. 1568, 1639 (12 U.S.C. 2121
note).
0
2. Section 614.4040 is amended by revising paragraph (a) to read as
follows:
Sec. 614.4040 Production credit associations.
(a) Short- and intermediate-term loans. Production credit
associations are authorized to make or guarantee short- and
intermediate-term loans and provide other financial assistance for a
term of:
(1) Not more than 7 years;
(2) More than 7 years, but not more than 10 years, as set forth in
policies approved by the funding bank; or
(3) Not more than 15 years to producers and harvesters of aquatic
products for major capital expenditures, including but not limited to
the purchase of vessels, construction or purchase of shore facilities,
and similar purposes directly related to the operations of producers or
harvesters of aquatic products.
* * * * *
0
3. Section 614.4050 is amended by:
0
a. Removing the introductory text;
0
b. Revising paragraph (a);
0
c. Removing paragraph (b);
0
d. Redesignating paragraphs (c) and (d) as paragraphs (b) and (c)
respectively;
0
e. In newly redesignated paragraph (c)(1)(i) introductory text,
removing ``(a)'' and adding ``(a)(1)'' in its place;
0
f. In newly redesignated paragraph (c)(1)(ii) introductory text,
removing ``(b) of this part'' and adding ``(a)(2) of this section'' in
its place;
0
g. In newly redesignated paragraph (c)(2)(i), removing ``(a)'' and
adding ``(a)(1)'' in its place;
0
h. In newly redesiganted paragraph (c)(2)(ii), removing ``(b)'' and
adding ``(a)(2)'' in its place; and
0
i. In newly redesignated paragraph (c)(3), removing ``(c)'' and adding
``(b)'' in its place.
The revision reads as follows:
[[Page 60694]]
Sec. 614.4050 Agricultural credit associations.
(a) Terms to maturity on loans. Agricultural credit associations
are authorized to make or guarantee, subject to requirements of Sec.
614.4200:
(1) Long-term real estate mortgage loans with maturities of not
less than 5 nor more than 40 years, and continuing commitments to make
such loans; and
(2) Short- and intermediate-term loans and provide other similar
financial assistance for a term of not more than:
(i) 10 years; or
(ii) 15 years to aquatic producers and harvesters for their aquatic
operations.
* * * * *
0
4. Section 614.4200 is revised by adding paragraph (c) to read as
follows:
Sec. 614.4200 General requirements.
* * * * *
(c) Loan amortization. If a direct lender amortizes a loan over a
period of time that is longer than the term to maturity under Sec.
614.4000(a), Sec. 614.4010(a), Sec. 614.4030(a), Sec. 614.41040(a),
or Sec. 614.4050(a)(1) or (2), it must establish a loan amortization
schedule that is:
(1) Consistent with its loan underwriting standards adopted
pursuant to Sec. 614.4150; and
(2) Appropriate to the type and purpose of the loan, expected
useful life of the asset being financed, and the repayment capacity of
the borrower.
Dated: August 19, 2020.
Dale L. Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-18552 Filed 9-25-20; 8:45 am]
BILLING CODE 6705-01-P
