Organization; Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; Investment Eligibility, 62945-62950 [2020-19711]
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Federal Register / Vol. 85, No. 194 / Tuesday, October 6, 2020 / Rules and Regulations
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U.S.C. part 35), the information
collection and recordkeeping
requirements contained in the Order
and accompanying Rules and
Regulations have previously been
approved by OMB and were assigned
OMB control number 0581–0093. This
final rule does not increase or impose
any new information collection or
recordkeeping requirements.
Regulatory Flexibility Act
Pursuant to the requirements set forth
in the Regulatory Flexibility Act (RFA)
(5 U.S.C. 601–622), AMS considered the
economic effect of this action on small
entities and determined that this final
rule does not have a significant
economic impact on a substantial
number of small entities. The purpose of
RFA is to fit regulatory actions to the
scale of businesses subject to such
actions in order that small businesses
will not be unduly burdened. The Small
Business Administration (SBA)
published an interim final rule that
became effective on August 19, 2019,
(84 FR 34261) that adjusts the monetarybased size standards for inflation. As a
result of this rule, the size classification
for small egg-producing firms changed
from sales of $750,000 or less to sales
of $1,000,000 or less.
According to USDA’s NASS, USDA
collects data for the Agriculture Census
(Ag Census) using the North American
Industry Classification System (NAICS).
The NAICS classifies economic
activities and was developed to provide
a consistent framework for the
collection, analysis, and dissemination
of industrial statistics used by
government policy analysts, academia
and the business community. It is the
first industry classification system
developed in accordance with a single
principle of aggregation that production
units using similar production processes
should be grouped together.
In the 2017 Ag Census, the poultry
and egg production classification
(classification category 1123) was
comprised of establishments primarily
engaged in breeding, hatching, and
raising poultry for meat or egg
production. The 2017 Ag Census also
shows there were 164,099 reported
poultry farms in the United States and
36,012 egg producers. Ag Census data
includes sales category ranges for the
poultry sector but does not include
separate sales categories for egg
producers. Instead, NASS provides data
for the broader category of ‘‘Poultry and
Eggs.’’ Therefore, AMS is not able to
obtain stand-alone sales data for eggproducing farms. As a result, for this
RFA, AMS used the broader category of
poultry producers as the closest possible
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substitute as the basis for determining
the size of egg producers.
Of the 164,099 poultry producers
identified in the 2017 Census of
Agriculture, 148,788 (91 percent)
reported sales of less than $1,000,000
and thus fall under the SBA definition
of small business. Therefore, the
remaining 15,311 (9 percent) producers
are considered large. If the egg producer
segment has the same proportional
distribution across firm sizes, 91
percent, or 32,771 egg producers are
classified as small businesses, and 9
percent, or 3,241 egg producers are
considered large.
Sales data are also available at the
state level for the overall poultry sector.
Using this data, and the assumption that
the proportion of large and small
poultry farms similarly applies to egg
producers, Table 1 shows how the
changes in geographical areas shift
producer representation on the Board.
The final rule imposes no new burden
on the industry, as it only adjusts
representation on the Board to reflect
changes in egg production. The
adjustments are required by the Order
and do not result in a change in the
overall number of Board members. Even
if most egg producers are small entities,
this action does not change their ability
to qualify for representation on the
Board or add any new burden. In
conclusion, AMS believes that reducing
the regions from six to three and
increasing the number of States within
each region will contribute to greater
representation of egg producing firms on
the Board.
AMS is committed to complying with
the E-Government Act of 2002 to
promote the use of the internet and
other information technologies to
provide increased opportunities for
citizen access to government
information and services, and for other
purposes.
AMS has not identified any relevant
Federal rules that duplicate, overlap, or
conflict with this rule.
List of Subjects in 7 CFR part 1250
Administrative practice and
procedure, Advertising, Agricultural
research, Eggs and Egg products,
Reporting and recordkeeping
requirements.
For the reasons set forth in the
preamble, AMS amends 7 CFR part 1250
as follows:
PART 1250—EGG PROMOTION AND
RESEARCH
1. The authority citation for 7 CFR
part 1250 continues to read as follows:
■
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62945
Authority: 7 U.S.C. 2701–2718 and 7
U.S.C 7401.
2. Revise § 1250.510 to read as
follows:
■
§ 1250.510 Determination of Board
Membership.
(a) Pursuant to § 1250.328 (d) and (e),
the 48 contiguous States of the United
States shall be grouped into three
geographic areas, as follows: Area 1
(East)—Connecticut, Delaware, Maine,
Maryland, Massachusetts, New
Hampshire, New Jersey, New York,
Pennsylvania, Rhode Island, Vermont,
Virginia, West Virginia, the District of
Columbia, Alabama, Georgia, Florida,
Louisiana, Mississippi, North Carolina,
South Carolina, and Texas; Area 2
(Central)—Arkansas, Oklahoma, Illinois,
Indiana, Kentucky, Michigan, Missouri,
Ohio, Tennessee, and Wisconsin; Area 3
(West)—Arizona, California, Colorado,
Idaho, Iowa, Kansas, Minnesota,
Montana, Nebraska, Nevada, New
Mexico, North Dakota, Oregon, South
Dakota, Utah, Washington, and
Wyoming.
(b) Board representation among the
three geographic areas is apportioned to
reflect the percentages of United States
egg production in each area times 18
(total Board membership). The
distribution of members of the Board is:
Area 1–6, Area 2–6, and Area 3–6. Each
member will have an alternate
appointed from the same area.
Bruce Summers,
Administrator, Agricultural Marketing
Service.
[FR Doc. 2020–19431 Filed 10–5–20; 8:45 am]
BILLING CODE 3410–02–P
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.
Final rule.
AGENCY:
ACTION:
The Farm Credit
Administration (FCA, we, or our) adopts
a final rule that amends 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.
SUMMARY:
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Federal Register / Vol. 85, No. 194 / Tuesday, October 6, 2020 / Rules and Regulations
This regulation shall become
effective no earlier than 30 days after
publication in the Federal Register
during which either or both houses of
Congress are in session. Pursuant to 12
U.S.C. 2252(c)(1), FCA will publish
notification of the effective date in the
Federal Register.
FOR FURTHER INFORMATION CONTACT:
Jeremy R. Edelstein, Associate Director,
David J. Lewandrowski, Senior Policy
Analyst, Finance & Capital Market
Team, Office of Regulatory Policy, (703)
883–4414, TTY (703) 883–4056, or
Richard A. Katz, Senior Counsel, Office
of General Counsel, (703) 883–4020,
TTY (703) 883–4056, Farm Credit
Administration, 1501 Farm Credit Drive,
McLean, VA 22102–5090.
SUPPLEMENTARY INFORMATION:
DATES:
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I. Objectives
The objectives of the final 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 1916, Congress created the System
to provide permanent, stable, affordable,
and reliable sources of credit and
related services to American agricultural
and aquatic producers. The System
consists of 3 Farm Credit Banks, 1
agricultural credit bank, 67 agricultural
credit associations, 1 Federal land credit
association, service corporations, the
Federal Farm Credit Banks Funding
Corporation (Funding Corporation) and
the Federal Agricultural Mortgage
Corporation (Farmer Mac).1 Farm Credit
banks (which include both the Farm
Credit Banks and the agricultural credit
bank) issue System-wide consolidated
debt obligations in the capital markets
through the Funding Corporation,
which enable associations to provide
short-, intermediate-, and long-term
credit and related services to farmers,
ranchers, producers and harvesters of
aquatic products, rural residents for
housing, and farm-related service
1 The use of the terms ‘‘System’’ and ‘‘FCS’’ in
this preamble and final rule does not, from this
point forward, refer to Farmer Mac.
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businesses.2 The System’s enabling
statute is the Farm Credit Act of 1971,
as amended (Act).3
This rulemaking addresses
investments that associations purchase
and hold pursuant to their authority in
sections 2.2(11) and 2.12(17) of the Act.
In 2014, FCA proposed a new rule that
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.4 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 individual loan
portions purchased in the secondary
market that are unconditionally
guaranteed or insured by the United
States (U.S.) government or its agencies
as to principal and interest are not
eligible risk management investments
for FCS associations. The FCA delayed
the effective date of the final rule until
January 1, 2019.5
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 (b)(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
2 The agricultural credit bank lends to, and
provides other financial services to farmer-owned
cooperatives, rural utilities (electric and telephone),
and rural water and waste water disposal systems.
It also finances U.S. agricultural exports and
imports, and provides international banking
services to cooperatives and other eligible
borrowers. The agricultural credit bank operates a
Farm Credit Bank subsidiary.
3 12 U.S.C. 2001–2279cc. The Act is available at
www.fca.gov under ‘‘Laws and regulations,’’ and
‘‘Statutes.’’
4 See 79 FR 43301 (July 25, 2014).
5 See 83 FR 27486 (June 12, 2018).
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substantially reduce the liquidity in this
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 (b)(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 proposed to 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).6 More
specifically, the proposed rule would
amend § 615.5140(b)(2) to allow System
associations to purchase in the
secondary market, portions of loans that
are originated by non-FCS institutions,
and that the USDA fully and
unconditionally guaranteed or insured
as to both principal and interest.
The FCA also decided to grant
temporary regulatory relief to certain
System associations that had been active
or expressed an interest in the
secondary market for USDA-guaranteed
loan portions, notwithstanding the
prohibition in § 615.5140(b)(1) and
(b)(2) that became effective on January
1, 2019.7 We believe that granting the
‘‘No Action’’ requests of these
associations is appropriate to prevent
any disruption in the secondary market
for USDA-guaranteed loan portions and
to maintain the pre-existing status quo
while this rulemaking is pending and
we consider input from the public. FCA
placed strict conditions on those
associations that were granted
regulatory relief, and closely monitored
their activity.
III. Comment Letters
The comment period expired on
November 18, 2019. We received a total
of 34 comment letters from a trade
association representing FCS lenders, 2
Farm Credit banks, 7 FCS associations,
the National Rural Lenders’ Roundtable,
which is a forum for lenders that use
USDA guarantee programs, a
commercial bank trade association, 21
community bankers, and an individual.
6 See
84 FR 49069 (September 18, 2019).
System associations asked the FCA in
writing not take action against them for purchasing
USDA-guaranteed loan portions. FCA granted
limited ‘‘No-Action’’ relief to those associations that
demonstrated that they have: (1) Experience in the
secondary market for USDA-guaranteed loan
portions, and (2) appropriate risk management
controls in place to engage in this activity. In
granting ‘‘No-Action’’ relief requests, FCA placed
strong and appropriate Conditions of Approval on
each association to ensure that such loan portions
were purchased and managed in a safe and sound
manner.
7 Several
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Essentially, 24 commenters supported
the proposed rule, but asked us to
further revise the regulation so System
associations could buy loan portions
that any U.S. government agency fully
and unconditionally guarantees as to
principal and interest. One System
commenter suggested that our
regulations should grant both System
banks and associations the exact same
investment authorities. Nine
commenters opposed the proposed rule,
and asked FCA to withdraw it.
Commercial bank commenters were
divided with 13 supporting the
proposed rule and, for the most part,
seeking its expansion to all U.S.
government loan-guarantee programs,
while 9 bank commenters opposed it.
The individual commenter expressed no
opinion about whether FCA should
adopt, modify, or retract the proposed
rule.
Supporters claim that the proposed
rule mutually benefits community banks
and other non-System rural lenders,
System associations, and rural
communities. According to these
commenters, selling USDA-guaranteed
loan portions to FCS associations is
advantageous to rural community banks
because it increases their liquidity,
which can enable them to originate
more loans in rural areas. The proposed
rule also strengthens the informal
secondary market for USDA-guaranteed
loans in rural areas, in which
commercial bankers comprise the
majority of buyers and sellers. As
several commenters point out, System
institutions have historically played a
pivotal role in the secondary market for
USDA-guaranteed loans.8 The proposed
rule benefits System associations by
enabling them to diversify their
portfolios in a way that is consistent
with their statutory mission to provide
an adequate and flexible flow of stable
credit into rural areas.9 USDA
guarantees ensure that System
associations generally have no credit
risk 10 when they purchase these loan
8 USDA guarantees loans to borrowers who are
both eligible and ineligible to borrow from the
System. FCA lending regulations in Part 614
already authorize FCS banks and associations to
buy the USDA-guaranteed portions of loans to
eligible borrowers under their loan participation
authorities. USDA loan guarantees to eligible
borrowers that are purchased under the loan
participation regulations are not subject to a
portfolio limit, or other requirements of these
investment regulations. Final § 615.5140(b)(2) only
affects USDA guarantees for loans to ineligible
borrowers or borrowers whose eligibility status is
uncertain.
9 See preamble and section 1.1(a) of the Act.
10 However, these guaranteed loan portions may
expose investors to premium risk, operational risk,
and funding risk. The preamble to the proposed
rule addressed potential premium and operational
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portions in the secondary market, which
reduces risk exposure to capital and
increases resilience of the balance sheet.
Most commenters who supported the
proposed rule also told us that
§ 615.5140(b) should permit
associations to purchase and hold
portions of loans guaranteed by other
U.S. government agencies as
investments, such as the Small Business
Administration (SBA),11 Bureau of
Indian Affairs, and the Department of
Energy. According to these commenters,
the logic for allowing associations to
buy USDA-guaranteed loan portions
also applies to all U.S. governmentguarantee loan programs. More
specifically, expanding this regulatory
authority beyond USDA would, in the
opinion of these commenters, promote a
more robust secondary market for all
U.S. government loan programs, which
would ultimately benefit the customers
of commercial banks and their local
communities.
System commenters point out that the
plain language of sections 2.2(11) and
2.12(17) of the Act expressly authorize
associations to invest in obligations
issued or insured by the U.S. and its
risks. See 84 FR 49070, footnote 4 (September 18,
2019). In addition, System associations may also be
exposed to funding risk which could include basis
risk, interest rate risk, and risks related to the
transition away from the London Interbank Offered
Rate.
11 SBA administers various programs for
guaranteeing loans to small businesses under the
Small Business Act of 1953 and the Small Business
Investment Act of 1958. Pursuant to § 5(g)(1) of the
Small Business Act of 1953, 15 U.S.C. 634(g)(1) and
13 CFR 120.620, SBA guarantees the timely
payment of principal and interest, which is backed
by the full faith and credit of the United States, on
Pool Certificates issued by authorized brokers and
dealers who assemble these pools. Such Pool
Certificates are eligible investments for FCS
associations under § 615.5140(b)(1), and for FCS
banks under § 615.5140(a)(1).
A separate program under section 7(a) of the
Small Business Act of 1953, 15 U.S.C 636(a), and
13 CFR 120.621 addresses SBA guarantees of
portions of individual loans. Under the 7(a)
program, loan originators obtain SBA guarantees for
portions of individual loans. Each guaranteed
portion of a loan is evidenced by an individual
certificate. If the originator sells the guaranteed
portion of the loan in the secondary market, the
SBA’s fiscal transfer agent will record who is the
current registered holder of the loan guarantee
certificate. If the registered holder does not receive
timely payments of principal and interest because
the borrower defaulted, or the loan originator or the
fiscal transfer agent failed to perform its obligations
(in accordance with 13 CFR 120.621(b)), the SBA
will purchase the guaranteed portion of the loan
from the registered holder for an amount equal to
the unpaid principal and the accrued interest due
on the date of SBA’s purchase. SBA-guaranteed
portions of individual loans under the section 7(a)
program are not eligible investments for System
banks and associations under § 615.5140. However,
FCS banks and associations may purchase and hold
these individual SBA-guaranteed loan portions
under FCA’s loan participation regulations only if
the underlying borrowers are eligible System
borrowers.
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62947
agencies. Most System commenters
asked us to authorize associations to
buy loan portions guaranteed by other
U.S. government agencies after we enact
this final rule. System commenters
noted that our previous investment
regulations permitted FCS banks and
associations to buy and hold loan
obligations that U.S. government
agencies guaranteed, and they urged us
to restore this regulatory framework.
One System association opined that
FCA exceeded its statutory authority by
repealing the regulation that authorized
associations to buy any guaranteed
obligation issued by any U.S.
government agency. According to this
commenter, existing § 615.5140(b)(1)
and (b)(2) is incompatible with the
‘‘unambiguously expressed intent of
Congress.’’ This commenter asked the
FCA to authorize System associations to
buy and hold any obligation guaranteed
by all U.S. government agencies, either
in this final rule, or by another prompt
agency action.
As noted earlier, nine commercial
bank commenters asked the FCA to
withdraw the proposed rule and retain
the current investment regulation for
FCS associations. According to these
commenters, Congress specifically
established Farmer Mac as the System
institution that would operate the
secondary market for loan portions that
the USDA guarantees for loan
originators. Augmenting the liquidity of
rural credit markets and reducing the
capital burdens on loan originators is
the role that these commenters believe
Congress assigned to Farmer Mac, not
FCS associations. Opponents of the
proposed rule claim that the FCA, as the
regulator of both FCS lenders and
Farmer Mac, is creating ‘‘a duplicate
and redundant secondary market’’ that
will create unnecessary intra-System
competition to Farmer Mac’s detriment.
The proposed rule’s objective of
enhancing the ability of associations to
manage risks could, in the view of these
commenters, be achieved if associations
‘‘were to use Farmer Mac as a secondary
market as Congress intended, rather
than trying to create their own
secondary market.’’
These commenters also dispute that
sections 2.2(11) and 2.12(17) of the Act
authorize associations to purchase
interest in loans that non-System
lenders originate and USDA guarantees.
According to these commenters, these
two statutory provisions authorize
associations to buy and sell loans
insured by U.S. government agencies
and FCS banks, not loans originated by
non-System lenders. Opponents of the
proposed rule claim that FCS
associations are not indispensable to the
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secondary market of USDA-guaranteed
loan portions and, therefore, this rule is
not necessary to provide a flexible flow
of affordable credit into rural areas.
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IV. Final Rule
After reviewing and considering the
comment letters received on the
proposed rule, the FCA now finalizes
the proposed rule without change.
Specifically, the final rule amends
§ 615.5140(b)(2) to allow System
associations to purchase in the
secondary market, the portions of loans
that non-FCS institutions originate and
that the USDA fully and
unconditionally guarantee 12 or insured
as to both principal and interest.
The FCA proposed to amend existing
§ 615.5140(b)(2) so associations could
purchase only USDA-guaranteed loan
portions because it is specifically what
the USDA Administrator, several FCS
associations, community banks and a
broker-dealer requested. Loan guarantee
programs of other U.S. government
agencies are outside the scope of this
rulemaking. Most System commenters
urged us to promptly finalize the
proposed rule, and then subsequently
consider other U.S. agency-guaranteed
loan programs. For all these reasons,
this final rule allows FCS associations to
purchase and hold only loan portions
that the USDA fully and
unconditionally guarantees as to
principal and interest.
One System commenter claims that
sections 2.2(11) and 2.12(17) of the Act
reflects Congress’ ‘‘unambiguously
expressed intent’’ to allow associations
to buy and hold obligations guaranteed
by any U.S government agency as
investments. Therefore, any regulation
that prohibits or restricts the ability of
associations to do so would, in the
opinion of that commenter, exceed FCA
authority. For this reason, the
12 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 from the loan originator or a
holder of an assignment, including such transaction
made in the secondary market.
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commenter’s position is that the final
rule or another action by FCA must
immediately authorize associations to
buy loan obligations guaranteed under
any U.S. government agency program.
FCA disagrees with the commenter’s
interpretation of Act. The text,
structural framework, and history of the
Act indicates that Congress granted FCA
discretion to impose conditions and
constraints by regulation on how
System institutions exercise their
statutory powers in various
circumstances. We note that the
introductory text to sections 2.2 and
2.12 of the Act, which the commenter
invokes, expressly states the powers of
each association are subject to
regulation by FCA. Additionally, section
5.17(a)(9) of the Act authorizes FCA to
‘‘prescribe rules and regulations
necessary or appropriate for carrying out
this Act.’’
From time to time, FCA has exercised
its powers under these statutory
provisions to enact regulations that
place limits on the statutory authorities
of System banks and associations,
especially in the area of investments.
Reasons for limiting System’s statutory
authorities include, but are not limited
to: (1) Preserving the System’s safety
and soundness; (2) implementing
various legal requirements that apply to
the System; and (3) ensuring that FCS
activities and operations are compatible
with its status as a governmentsponsored enterprise that extends credit
to agriculture and other eligible
borrowers in rural America. For
decades, FCA regulations have limited
System investments by amount, type,
credit quality, and purpose even though
the Act is silent on these issues. For
these reasons, we conclude that FCA
has authority under the Act to impose
by regulations restrictions on the types
of obligations guaranteed by U.S.
government agencies that System
institutions may purchase and hold.
In this context, the final rule is within
the scope of the Act and FCA’s statutory
authority. We have amended our
association investment regulations
periodically in the past as
circumstances changed, and we may do
so again in the future if we determine
that evolving conditions require further
regulatory revisions. In the meantime,
the final rule strikes a balance between
the needs and interests of USDA, FCS
associations, a significant segment of
rural community banks, and rural credit
markets. We observe that USDA loan
guarantee programs focus primarily on
the credit needs of rural residents and
their communities, whereas similar loan
guarantee programs of other U.S.
government agencies do not. USDA loan
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guarantee programs overall are uniquely
compatible with the System’s mission,
as a government-sponsored enterprise,
to provide stable and affordable credit to
agriculture and other authorized needs
in rural America.
As noted earlier, one System
commenter opined that FCS banks and
associations should have the exact same
investment authorities under our
regulations. This issue is outside the
scope of our current rulemaking. The
preamble to the final Investment
Eligibility rule that we issued in 2018
explained why the investment
authorities of System banks and
associations are different under these
regulations.13
We now respond to comments from
the commercial bankers who opposed
the proposed rule. As discussed earlier,
these commenters point out that
Congress established Farmer Mac as the
System’s secondary market operator.
These commenters also note that the Act
expressly authorizes Farmer Mac, not
System associations, to operate the
secondary market for USDA-guaranteed
loans. These commenters claim that our
proposal would establish a duplicative
secondary market, without statutory
authority, and the resulting intra-System
competition will harm Farmer Mac as
well as ‘‘several hundred community
banks that actively conduct business
with Farmer Mac.’’
Farmer Mac did not submit a
comment letter. As a result, Farmer
Mac, on its own behalf, did not raise
any of the issues that the commenters
brought up.
This amendment to § 615.5140(b)(2)
neither violates the Act, nor is it
contrary to Congressional intent, as
these commenters allege. In response to
these commenters, sections 2.2(11) and
2.12(17) of the Act expressly authorize
associations to buy obligations of or
insured by the U.S. and its agencies, and
these provisions are separate and
distinct from Farmer Mac’s authority
under several provisions of title VIII of
the Act to purchase, hold, and securitize
loan portions guaranteed by USDA.14 In
13 See
83 FR 27493 (June 12, 2018).
VII and VIII of the Agricultural Credit
Act of 1987 chartered Farmer Mac. See Public Law
100–233, 101 Stat. 1568, 1686 (Jan. 6, 1988). The
former General Counsel of FCA issued a legal
opinion concluding that System institutions did not
have authority under the Act to securitize their
loans and sell the resulting securities in the
secondary market. This legal opinion influenced
Congress to create Farmer Mac. [See 133 Cong.
Rec.S. 16909 (daily ed. Dec. 2, 1987) Originally, the
only loans that qualified for Farmer Mac programs
were the types of agricultural and rural home
mortgages that System lenders, other than banks for
cooperatives, could originate. The Food,
Agriculture, Conservation, and Trade Act of 1990
added portions of loans that the USDA guarantees
14 Titles
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granting these authorities to Farmer
Mac, Congress did not repeal other
provisions of the Act that authorize FCS
banks and associations, subject to FCA
regulation, to invest in obligations of or
insured by the U.S. or its agencies,
including USDA fully-guaranteed loan
portions.
The opponents of the proposed rule
also claim that the Act does not allow
FCS associations to buy USDAguaranted loan portions from nonSystem loan originators. We respond
that these commenters have
misinterpreted the Act. Although FCA
banks and associations generally lack
authority to buy most loans (and
portions thereof) from the non-System
lenders, the Act carves out exceptions,
such as sections 2.2(11) and 2.12(17) of
the Act. Since USDA-guaranteed
obligations qualify as eligible
investments under sections 2.2(11) and
2.12(17), System associations may buy
them from any bona fide seller,
including community banks, and other
non-System lenders.
Beyond their legal arguments, these
commenters also claim that allowing
associations to buy USDA-guaranteed
loan portions from non-System
originators is detrimental to Farmers
Mac and the broader secondary market.
However, these commenters did not
provide any data, information, or
analysis that supports their claim that
the proposed rule would harm Farmer
Mac.15 Instead information provided by
the USDA, and comment letters
received from a majority of community
bank commenters contradict these
assertions. As noted in the preamble to
the proposed rule, USDA informed FCA
that the FCS in recent years has
constituted as much as 40 percent of the
secondary market for USDA loan
guarantees. The majority of community
bankers who commented on the
proposed rule told us that System
associations play a beneficial role in this
secondary market. These commenters
under the Consolidated Farm and Rural
Development Act to the statutory definition of
‘‘qualified loan’’ in section 8.0(7) of the Act. See
Public Law 101–624, § 1839(b), 104 Stat. 3359, 3835
(Nov 28, 1990). The Food, Conservation and Energy
Act of 2008 further expanded the definition of
‘‘qualified loan’’ in re-designated § 8.0(7) of the Act
to include loans and interest in loans for an electric
or telephone facility from a cooperative lender to
a borrower who is eligible for loans under the Rural
Electrification Act of 1936. See Public Law 110–
234, § 5406(a), 122 Stat. 923, 1158 (May 22, 2008).
15 Since Farmer Mac has been granted this
authority in 1990, it has been and continues to be
an active participant in this secondary market. It
currently holds over $2.2 billion in USDA’s
guaranteed loan portions (See Farmer Mac Reports
2019 Results, Pg. 9, https://www.farmermac.com/
wp-content/uploads/Farmer-Mac-Reports-2019Results.pdf).
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16:34 Oct 05, 2020
Jkt 253001
also stated that System associations that
buy these guaranteed loan portions
enable community banks to reinvest the
sale proceeds back into local
communities. These comments support
one of FCA’s objectives in this
rulemaking, which is to augment
liquidity of rural credit markets. As
stated above, Farmer Mac did not
comment on the proposed rule.
One commenter claimed that ‘‘FCS
lenders have long desired to operate
their own secondary market, and FCA’s
proposal would lay the groundwork
allowing them to do so.’’ We disagree
with this comment. As discussed in
greater detail above, the Act does not
authorize System banks and
associations to securitize assets and
then sell the resulting securities to
investors. Associations buy USDA
guaranteed loan portions in the
secondary market from willing sellers,
the majority of which are commercial
banks, and then hold those investments
for risk management purposes.
The proposed rule would not enable
FCS lenders to ‘‘operate their own
secondary market’’ as the commenter
alleges. At most, System associations
would resume their previous role as a
meaningful participant in the
longstanding informal secondary
market. FCA proposed this rule after
USDA provided data and information
that substantiated its claim 16 that the
System’s withdrawal from this
secondary market actually disrupts it.
Allowing System associations to return
to the informal secondary market for
USDA loan guarantees provides
additional liquidity and funding sources
to those market participants who opt to
engage in these transactions.
For the reasons discussed in the
preamble, the final rule amends
§ 615.5140(b)(2) to allow System
associations to purchase in the
secondary market, the portions of loans
that non-FCS institutions originate and
that the USDA fully and
unconditionally guarantee or insured as
to both principal and interest.
V. Regulatory Flexibility Act and Major
Rule Conclusion
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
16 In the proposed rule, we indicated that data
provided by USDA shows that loan originators
retain approximately 60 percent of the USDAguaranteed portions of such loans and sell the
remaining 40 percent in the secondary market, often
at a premium. See 84 FR 49069 (September 18,
2019).
PO 00000
Frm 00017
Fmt 4700
Sfmt 4700
62949
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.
Under the provisions of the
Congressional Review Act (5 U.S.C. 801
et seq.), the Office of Management and
Budget’s Office of Information and
Regulatory Affairs has determined that
this final rule is not a ‘‘major rule,’’ as
the term is defined at 5 U.S.C. 804(2).
Lists 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 are
amended as follows:
PART 615—FUNDING AND FISCAL
AFFAIRS, LOAN POLICIES AND
OPERATIONS, AND FUNDING
OPERATIONS
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).
§ 615.5140
[Amended]
2. Amend § 615.5140 by revising
paragraphs (b)(2) and (3) to read as
follows:
*
*
*
*
*
(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
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
■
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Federal Register / Vol. 85, No. 194 / Tuesday, October 6, 2020 / Rules and Regulations
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: September 1, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020–19711 Filed 10–5–20; 8:45 am]
BILLING CODE 6705–01–P
SMALL BUSINESS ADMINISTRATION
13 CFR Part 119
RIN 3245–AH11
Regulatory Reform Initiative: Program
for Investment in Microentrepreneurs
(PRIME)
U.S. Small Business
Administration.
ACTION: Final rule.
AGENCY:
The U.S. Small Business
Administration (SBA or Agency) is
revising one regulation and removing 19
regulations from the Code of Federal
Regulations (CFR) related to the
Program for Investment in
Microentrepreneurs (PRIME) that are
repetitive and unnecessary because they
duplicate identical guidance and
requirements already stipulated in other
legal sources and/or provided to grant
applicant and recipients in the annual
PRIME funding opportunity
announcement. The removal of these
regulations assists the public by
simplifying SBA’s regulations in the
CFR and reducing the amount of time
grant applicants and recipients must
spend reviewing programmatic
guidance.
DATES: This rule is effective on
November 5, 2020.
FOR FURTHER INFORMATION CONTACT:
Daniel Upham, Chief, Microenterprise
Development Division, Office of Capital
Access, at 202–205–7001 or
daniel.upham@sba.gov.
SUPPLEMENTARY INFORMATION:
SUMMARY:
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I. Background Information
A. Part 119—Program for Investment in
Microentrepreneurs (‘‘PRIME’’ or ‘‘The
Act’’)
Under the PRIME program, SBA is
authorized by 15 U.S.C. 6902 to make
grants to qualified organizations for the
purpose of funding: (i) Training and
technical assistance to disadvantaged
microentrepreneurs; (ii) training and
capacity-building services for
microenterprise development
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16:34 Oct 05, 2020
Jkt 253001
organizations; (iii) research and
development of the best practices in the
fields of microenterprise development
and technical assistance for
disadvantaged microentrepreneurs; and
(iv) other related activities as the
Agency deems appropriate.
In this rule, SBA is modifying one
regulation and removing 19 regulations
from the CFR related to the Program for
Investment in Microentrepreneurs
(PRIME) that are no longer necessary
because they duplicate identical
guidance and requirements already
stipulated in the enabling legislation (15
U.S.C. 6901, et seq.), the
governmentwide grant regulations (2
CFR part 200), and/or provided to grant
applicant and recipients in the PRIME
funding opportunity announcements
published annually by SBA at
www.grants.gov. The removal of these
regulations will assist the public by
simplifying SBA’s regulations in the
CFR and reducing the amount of time
grant applicants and recipients must
spend reviewing programmatic
guidance.
SBA proposed a rule with these
amendments on February 7, 2020, and
the comment period ended on April 7,
2020. 85 FR 7254. SBA received three
comments on the proposed rule. None
of the comments received contained any
substantive comments on the content of
the rule. Therefore, SBA is proceeding
with publication of the final rule with
no changes from the proposed rule text.
II. Section by Section Analysis
A. Section 119
This rule currently summarizes the
purpose of the PRIME program. SBA
retains this statement of programmatic
purpose and adds further subsections
addressing how qualified organizations
may apply for grant awards under the
PRIME program.
B. Sections 119.2 Through 119.20
These rules provided guidance to
PRIME program applicants regarding the
application and selection process, as
well as inform grant recipients of certain
restrictions and requirements related to
the conduct of PRIME grant projects.
They are no longer necessary because
the guidance, restrictions, and
requirements they reiterate are also
covered in other sources that are more
authoritative, informative, and/or
frequently updated. As such, they are
duplicative of, and of less utility, than
these other sources. SBA therefore is
removing these sections and instead
relying upon the content contained in
other Federal guidance, such as the
enabling legislation (15 U.S.C. 6901 et
PO 00000
Frm 00018
Fmt 4700
Sfmt 4700
seq.), the government-wide grant
regulations (2 CFR part 200), and the
PRIME program annual funding
opportunity announcements and award
terms and conditions issued by SBA.
Program information will be published
annually at www.grants.gov.
III. Compliance With Executive Orders
12866, 13771, 12988, and 13132, the
Paperwork Reduction Act (44 U.S.C.,
Ch. 35), and the Regulatory Flexibility
Act (5 U.S.C. 601–612)
A. Executive Order 12866
The Office of Management and Budget
(OMB) has determined that this rule
does not constitute a significant
regulatory action for purposes of
Executive Order 12866 and is not a
major rule under the Congressional
Review Act, 5 U.S.C. 801, et seq.
B. Executive Order 13771
This rule is an Executive Order 13771
deregulatory action with an annualized
net savings of $15,382 and a net present
value of $219,743 in savings, both in
2016 dollars. This rule will remove
redundant information which will save
grant applicants from reading the same
information from multiple sources. The
reduced burden assumes 130 grant
applicants read the regulation per year,
which is the average number of
applicants per year, and that they would
save 2 hours each from not reading the
removed information. This time is
valued at $62.82 per hour—the wage of
a community service manager based on
2018 U.S. Bureau of Labor Statistics
(BLS) data—and adding 100 percent
more for benefits and overhead for a
total savings per year of $16,333 in
current dollars.
It is assumed that there will be no
costs to this rule as it removes
duplicative information. SBA received
no comments on its regulatory economic
analysis.
C. Executive Order 12988
This action meets applicable
standards set forth in Section 3(a) and
3(b)(2) of Executive Order 12988, Civil
Justice Reform, to minimize litigation,
eliminate ambiguity, and reduce
burden. The action does not have
retroactive or preemptive effect.
D. Executive Order 13132
This rule does not have federalism
implications as defined in Executive
Order 13132. It will not have substantial
direct effects on the States, on the
relationship between the national
government and the States, or on the
distribution of power and
responsibilities among the various
levels of government, as specified in the
E:\FR\FM\06OCR1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 194 (Tuesday, October 6, 2020)]
[Rules and Regulations]
[Pages 62945-62950]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-19711]
=======================================================================
-----------------------------------------------------------------------
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: Final rule.
-----------------------------------------------------------------------
SUMMARY: The Farm Credit Administration (FCA, we, or our) adopts a
final rule that amends 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.
[[Page 62946]]
DATES: This regulation shall become effective no earlier than 30 days
after publication in the Federal Register during which either or both
houses of Congress are in session. Pursuant to 12 U.S.C. 2252(c)(1),
FCA will publish notification of the effective date in the Federal
Register.
FOR FURTHER INFORMATION CONTACT: Jeremy R. Edelstein, Associate
Director, David J. Lewandrowski, Senior Policy Analyst, Finance &
Capital Market Team, Office of Regulatory Policy, (703) 883-4414, TTY
(703) 883-4056, or Richard A. Katz, Senior Counsel, Office of General
Counsel, (703) 883-4020, TTY (703) 883-4056, Farm Credit
Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090.
SUPPLEMENTARY INFORMATION:
I. Objectives
The objectives of the final 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 1916, Congress created the System to provide permanent, stable,
affordable, and reliable sources of credit and related services to
American agricultural and aquatic producers. The System consists of 3
Farm Credit Banks, 1 agricultural credit bank, 67 agricultural credit
associations, 1 Federal land credit association, service corporations,
the Federal Farm Credit Banks Funding Corporation (Funding Corporation)
and the Federal Agricultural Mortgage Corporation (Farmer Mac).\1\ Farm
Credit banks (which include both the Farm Credit Banks and the
agricultural credit bank) issue System-wide consolidated debt
obligations in the capital markets through the Funding Corporation,
which enable associations to provide short-, intermediate-, and long-
term credit and related services to farmers, ranchers, producers and
harvesters of aquatic products, rural residents for housing, and farm-
related service businesses.\2\ The System's enabling statute is the
Farm Credit Act of 1971, as amended (Act).\3\
---------------------------------------------------------------------------
\1\ The use of the terms ``System'' and ``FCS'' in this preamble
and final rule does not, from this point forward, refer to Farmer
Mac.
\2\ The agricultural credit bank lends to, and provides other
financial services to farmer-owned cooperatives, rural utilities
(electric and telephone), and rural water and waste water disposal
systems. It also finances U.S. agricultural exports and imports, and
provides international banking services to cooperatives and other
eligible borrowers. The agricultural credit bank operates a Farm
Credit Bank subsidiary.
\3\ 12 U.S.C. 2001-2279cc. The Act is available at www.fca.gov
under ``Laws and regulations,'' and ``Statutes.''
---------------------------------------------------------------------------
This rulemaking addresses investments that associations purchase
and hold pursuant to their authority in sections 2.2(11) and 2.12(17)
of the Act. In 2014, FCA proposed a new rule that 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.\4\ Under the proposed rule, no association could hold
investments in an amount that exceeds 10 percent of its total
outstanding loans.
---------------------------------------------------------------------------
\4\ 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 individual loan portions
purchased in the secondary market that are unconditionally guaranteed
or insured by the United States (U.S.) government or its agencies as to
principal and interest are not eligible risk management investments for
FCS associations. The FCA delayed the effective date of the final rule
until January 1, 2019.\5\
---------------------------------------------------------------------------
\5\ See 83 FR 27486 (June 12, 2018).
---------------------------------------------------------------------------
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 (b)(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 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 (b)(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 proposed to 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).\6\ More specifically, the proposed rule would amend
Sec. 615.5140(b)(2) to allow System associations to purchase in the
secondary market, portions of loans that are originated by non-FCS
institutions, and that the USDA fully and unconditionally guaranteed or
insured as to both principal and interest.
---------------------------------------------------------------------------
\6\ See 84 FR 49069 (September 18, 2019).
---------------------------------------------------------------------------
The FCA also decided to grant temporary regulatory relief to
certain System associations that had been active or expressed an
interest in the secondary market for USDA-guaranteed loan portions,
notwithstanding the prohibition in Sec. 615.5140(b)(1) and (b)(2) that
became effective on January 1, 2019.\7\ We believe that granting the
``No Action'' requests of these associations is appropriate to prevent
any disruption in the secondary market for USDA-guaranteed loan
portions and to maintain the pre-existing status quo while this
rulemaking is pending and we consider input from the public. FCA placed
strict conditions on those associations that were granted regulatory
relief, and closely monitored their activity.
---------------------------------------------------------------------------
\7\ Several System associations asked the FCA in writing not
take action against them for purchasing USDA-guaranteed loan
portions. FCA granted limited ``No-Action'' relief to those
associations that demonstrated that they have: (1) Experience in the
secondary market for USDA-guaranteed loan portions, and (2)
appropriate risk management controls in place to engage in this
activity. In granting ``No-Action'' relief requests, FCA placed
strong and appropriate Conditions of Approval on each association to
ensure that such loan portions were purchased and managed in a safe
and sound manner.
---------------------------------------------------------------------------
III. Comment Letters
The comment period expired on November 18, 2019. We received a
total of 34 comment letters from a trade association representing FCS
lenders, 2 Farm Credit banks, 7 FCS associations, the National Rural
Lenders' Roundtable, which is a forum for lenders that use USDA
guarantee programs, a commercial bank trade association, 21 community
bankers, and an individual.
[[Page 62947]]
Essentially, 24 commenters supported the proposed rule, but asked us to
further revise the regulation so System associations could buy loan
portions that any U.S. government agency fully and unconditionally
guarantees as to principal and interest. One System commenter suggested
that our regulations should grant both System banks and associations
the exact same investment authorities. Nine commenters opposed the
proposed rule, and asked FCA to withdraw it. Commercial bank commenters
were divided with 13 supporting the proposed rule and, for the most
part, seeking its expansion to all U.S. government loan-guarantee
programs, while 9 bank commenters opposed it. The individual commenter
expressed no opinion about whether FCA should adopt, modify, or retract
the proposed rule.
Supporters claim that the proposed rule mutually benefits community
banks and other non-System rural lenders, System associations, and
rural communities. According to these commenters, selling USDA-
guaranteed loan portions to FCS associations is advantageous to rural
community banks because it increases their liquidity, which can enable
them to originate more loans in rural areas. The proposed rule also
strengthens the informal secondary market for USDA-guaranteed loans in
rural areas, in which commercial bankers comprise the majority of
buyers and sellers. As several commenters point out, System
institutions have historically played a pivotal role in the secondary
market for USDA-guaranteed loans.\8\ The proposed rule benefits System
associations by enabling them to diversify their portfolios in a way
that is consistent with their statutory mission to provide an adequate
and flexible flow of stable credit into rural areas.\9\ USDA guarantees
ensure that System associations generally have no credit risk \10\ when
they purchase these loan portions in the secondary market, which
reduces risk exposure to capital and increases resilience of the
balance sheet.
---------------------------------------------------------------------------
\8\ USDA guarantees loans to borrowers who are both eligible and
ineligible to borrow from the System. FCA lending regulations in
Part 614 already authorize FCS banks and associations to buy the
USDA-guaranteed portions of loans to eligible borrowers under their
loan participation authorities. USDA loan guarantees to eligible
borrowers that are purchased under the loan participation
regulations are not subject to a portfolio limit, or other
requirements of these investment regulations. Final Sec.
615.5140(b)(2) only affects USDA guarantees for loans to ineligible
borrowers or borrowers whose eligibility status is uncertain.
\9\ See preamble and section 1.1(a) of the Act.
\10\ However, these guaranteed loan portions may expose
investors to premium risk, operational risk, and funding risk. The
preamble to the proposed rule addressed potential premium and
operational risks. See 84 FR 49070, footnote 4 (September 18, 2019).
In addition, System associations may also be exposed to funding risk
which could include basis risk, interest rate risk, and risks
related to the transition away from the London Interbank Offered
Rate.
---------------------------------------------------------------------------
Most commenters who supported the proposed rule also told us that
Sec. 615.5140(b) should permit associations to purchase and hold
portions of loans guaranteed by other U.S. government agencies as
investments, such as the Small Business Administration (SBA),\11\
Bureau of Indian Affairs, and the Department of Energy. According to
these commenters, the logic for allowing associations to buy USDA-
guaranteed loan portions also applies to all U.S. government-guarantee
loan programs. More specifically, expanding this regulatory authority
beyond USDA would, in the opinion of these commenters, promote a more
robust secondary market for all U.S. government loan programs, which
would ultimately benefit the customers of commercial banks and their
local communities.
---------------------------------------------------------------------------
\11\ SBA administers various programs for guaranteeing loans to
small businesses under the Small Business Act of 1953 and the Small
Business Investment Act of 1958. Pursuant to Sec. 5(g)(1) of the
Small Business Act of 1953, 15 U.S.C. 634(g)(1) and 13 CFR 120.620,
SBA guarantees the timely payment of principal and interest, which
is backed by the full faith and credit of the United States, on Pool
Certificates issued by authorized brokers and dealers who assemble
these pools. Such Pool Certificates are eligible investments for FCS
associations under Sec. 615.5140(b)(1), and for FCS banks under
Sec. 615.5140(a)(1).
A separate program under section 7(a) of the Small Business Act
of 1953, 15 U.S.C 636(a), and 13 CFR 120.621 addresses SBA
guarantees of portions of individual loans. Under the 7(a) program,
loan originators obtain SBA guarantees for portions of individual
loans. Each guaranteed portion of a loan is evidenced by an
individual certificate. If the originator sells the guaranteed
portion of the loan in the secondary market, the SBA's fiscal
transfer agent will record who is the current registered holder of
the loan guarantee certificate. If the registered holder does not
receive timely payments of principal and interest because the
borrower defaulted, or the loan originator or the fiscal transfer
agent failed to perform its obligations (in accordance with 13 CFR
120.621(b)), the SBA will purchase the guaranteed portion of the
loan from the registered holder for an amount equal to the unpaid
principal and the accrued interest due on the date of SBA's
purchase. SBA-guaranteed portions of individual loans under the
section 7(a) program are not eligible investments for System banks
and associations under Sec. 615.5140. However, FCS banks and
associations may purchase and hold these individual SBA-guaranteed
loan portions under FCA's loan participation regulations only if the
underlying borrowers are eligible System borrowers.
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System commenters point out that the plain language of sections
2.2(11) and 2.12(17) of the Act expressly authorize associations to
invest in obligations issued or insured by the U.S. and its agencies.
Most System commenters asked us to authorize associations to buy loan
portions guaranteed by other U.S. government agencies after we enact
this final rule. System commenters noted that our previous investment
regulations permitted FCS banks and associations to buy and hold loan
obligations that U.S. government agencies guaranteed, and they urged us
to restore this regulatory framework.
One System association opined that FCA exceeded its statutory
authority by repealing the regulation that authorized associations to
buy any guaranteed obligation issued by any U.S. government agency.
According to this commenter, existing Sec. 615.5140(b)(1) and (b)(2)
is incompatible with the ``unambiguously expressed intent of
Congress.'' This commenter asked the FCA to authorize System
associations to buy and hold any obligation guaranteed by all U.S.
government agencies, either in this final rule, or by another prompt
agency action.
As noted earlier, nine commercial bank commenters asked the FCA to
withdraw the proposed rule and retain the current investment regulation
for FCS associations. According to these commenters, Congress
specifically established Farmer Mac as the System institution that
would operate the secondary market for loan portions that the USDA
guarantees for loan originators. Augmenting the liquidity of rural
credit markets and reducing the capital burdens on loan originators is
the role that these commenters believe Congress assigned to Farmer Mac,
not FCS associations. Opponents of the proposed rule claim that the
FCA, as the regulator of both FCS lenders and Farmer Mac, is creating
``a duplicate and redundant secondary market'' that will create
unnecessary intra-System competition to Farmer Mac's detriment. The
proposed rule's objective of enhancing the ability of associations to
manage risks could, in the view of these commenters, be achieved if
associations ``were to use Farmer Mac as a secondary market as Congress
intended, rather than trying to create their own secondary market.''
These commenters also dispute that sections 2.2(11) and 2.12(17) of
the Act authorize associations to purchase interest in loans that non-
System lenders originate and USDA guarantees. According to these
commenters, these two statutory provisions authorize associations to
buy and sell loans insured by U.S. government agencies and FCS banks,
not loans originated by non-System lenders. Opponents of the proposed
rule claim that FCS associations are not indispensable to the
[[Page 62948]]
secondary market of USDA-guaranteed loan portions and, therefore, this
rule is not necessary to provide a flexible flow of affordable credit
into rural areas.
IV. Final Rule
After reviewing and considering the comment letters received on the
proposed rule, the FCA now finalizes the proposed rule without change.
Specifically, the final rule amends Sec. 615.5140(b)(2) to allow
System associations to purchase in the secondary market, the portions
of loans that non-FCS institutions originate and that the USDA fully
and unconditionally guarantee \12\ or insured as to both principal and
interest.
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\12\ 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 from the loan originator or a holder
of an assignment, including such transaction made in the secondary
market.
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The FCA proposed to amend existing Sec. 615.5140(b)(2) so
associations could purchase only USDA-guaranteed loan portions because
it is specifically what the USDA Administrator, several FCS
associations, community banks and a broker-dealer requested. Loan
guarantee programs of other U.S. government agencies are outside the
scope of this rulemaking. Most System commenters urged us to promptly
finalize the proposed rule, and then subsequently consider other U.S.
agency-guaranteed loan programs. For all these reasons, this final rule
allows FCS associations to purchase and hold only loan portions that
the USDA fully and unconditionally guarantees as to principal and
interest.
One System commenter claims that sections 2.2(11) and 2.12(17) of
the Act reflects Congress' ``unambiguously expressed intent'' to allow
associations to buy and hold obligations guaranteed by any U.S
government agency as investments. Therefore, any regulation that
prohibits or restricts the ability of associations to do so would, in
the opinion of that commenter, exceed FCA authority. For this reason,
the commenter's position is that the final rule or another action by
FCA must immediately authorize associations to buy loan obligations
guaranteed under any U.S. government agency program.
FCA disagrees with the commenter's interpretation of Act. The text,
structural framework, and history of the Act indicates that Congress
granted FCA discretion to impose conditions and constraints by
regulation on how System institutions exercise their statutory powers
in various circumstances. We note that the introductory text to
sections 2.2 and 2.12 of the Act, which the commenter invokes,
expressly states the powers of each association are subject to
regulation by FCA. Additionally, section 5.17(a)(9) of the Act
authorizes FCA to ``prescribe rules and regulations necessary or
appropriate for carrying out this Act.''
From time to time, FCA has exercised its powers under these
statutory provisions to enact regulations that place limits on the
statutory authorities of System banks and associations, especially in
the area of investments. Reasons for limiting System's statutory
authorities include, but are not limited to: (1) Preserving the
System's safety and soundness; (2) implementing various legal
requirements that apply to the System; and (3) ensuring that FCS
activities and operations are compatible with its status as a
government-sponsored enterprise that extends credit to agriculture and
other eligible borrowers in rural America. For decades, FCA regulations
have limited System investments by amount, type, credit quality, and
purpose even though the Act is silent on these issues. For these
reasons, we conclude that FCA has authority under the Act to impose by
regulations restrictions on the types of obligations guaranteed by U.S.
government agencies that System institutions may purchase and hold.
In this context, the final rule is within the scope of the Act and
FCA's statutory authority. We have amended our association investment
regulations periodically in the past as circumstances changed, and we
may do so again in the future if we determine that evolving conditions
require further regulatory revisions. In the meantime, the final rule
strikes a balance between the needs and interests of USDA, FCS
associations, a significant segment of rural community banks, and rural
credit markets. We observe that USDA loan guarantee programs focus
primarily on the credit needs of rural residents and their communities,
whereas similar loan guarantee programs of other U.S. government
agencies do not. USDA loan guarantee programs overall are uniquely
compatible with the System's mission, as a government-sponsored
enterprise, to provide stable and affordable credit to agriculture and
other authorized needs in rural America.
As noted earlier, one System commenter opined that FCS banks and
associations should have the exact same investment authorities under
our regulations. This issue is outside the scope of our current
rulemaking. The preamble to the final Investment Eligibility rule that
we issued in 2018 explained why the investment authorities of System
banks and associations are different under these regulations.\13\
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\13\ See 83 FR 27493 (June 12, 2018).
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We now respond to comments from the commercial bankers who opposed
the proposed rule. As discussed earlier, these commenters point out
that Congress established Farmer Mac as the System's secondary market
operator. These commenters also note that the Act expressly authorizes
Farmer Mac, not System associations, to operate the secondary market
for USDA-guaranteed loans. These commenters claim that our proposal
would establish a duplicative secondary market, without statutory
authority, and the resulting intra-System competition will harm Farmer
Mac as well as ``several hundred community banks that actively conduct
business with Farmer Mac.''
Farmer Mac did not submit a comment letter. As a result, Farmer
Mac, on its own behalf, did not raise any of the issues that the
commenters brought up.
This amendment to Sec. 615.5140(b)(2) neither violates the Act,
nor is it contrary to Congressional intent, as these commenters allege.
In response to these commenters, sections 2.2(11) and 2.12(17) of the
Act expressly authorize associations to buy obligations of or insured
by the U.S. and its agencies, and these provisions are separate and
distinct from Farmer Mac's authority under several provisions of title
VIII of the Act to purchase, hold, and securitize loan portions
guaranteed by USDA.\14\ In
[[Page 62949]]
granting these authorities to Farmer Mac, Congress did not repeal other
provisions of the Act that authorize FCS banks and associations,
subject to FCA regulation, to invest in obligations of or insured by
the U.S. or its agencies, including USDA fully-guaranteed loan
portions.
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\14\ Titles VII and VIII of the Agricultural Credit Act of 1987
chartered Farmer Mac. See Public Law 100-233, 101 Stat. 1568, 1686
(Jan. 6, 1988). The former General Counsel of FCA issued a legal
opinion concluding that System institutions did not have authority
under the Act to securitize their loans and sell the resulting
securities in the secondary market. This legal opinion influenced
Congress to create Farmer Mac. [See 133 Cong. Rec.S. 16909 (daily
ed. Dec. 2, 1987) Originally, the only loans that qualified for
Farmer Mac programs were the types of agricultural and rural home
mortgages that System lenders, other than banks for cooperatives,
could originate. The Food, Agriculture, Conservation, and Trade Act
of 1990 added portions of loans that the USDA guarantees under the
Consolidated Farm and Rural Development Act to the statutory
definition of ``qualified loan'' in section 8.0(7) of the Act. See
Public Law 101-624, Sec. 1839(b), 104 Stat. 3359, 3835 (Nov 28,
1990). The Food, Conservation and Energy Act of 2008 further
expanded the definition of ``qualified loan'' in re-designated Sec.
8.0(7) of the Act to include loans and interest in loans for an
electric or telephone facility from a cooperative lender to a
borrower who is eligible for loans under the Rural Electrification
Act of 1936. See Public Law 110-234, Sec. 5406(a), 122 Stat. 923,
1158 (May 22, 2008).
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The opponents of the proposed rule also claim that the Act does not
allow FCS associations to buy USDA-guaranted loan portions from non-
System loan originators. We respond that these commenters have
misinterpreted the Act. Although FCA banks and associations generally
lack authority to buy most loans (and portions thereof) from the non-
System lenders, the Act carves out exceptions, such as sections 2.2(11)
and 2.12(17) of the Act. Since USDA-guaranteed obligations qualify as
eligible investments under sections 2.2(11) and 2.12(17), System
associations may buy them from any bona fide seller, including
community banks, and other non-System lenders.
Beyond their legal arguments, these commenters also claim that
allowing associations to buy USDA-guaranteed loan portions from non-
System originators is detrimental to Farmers Mac and the broader
secondary market. However, these commenters did not provide any data,
information, or analysis that supports their claim that the proposed
rule would harm Farmer Mac.\15\ Instead information provided by the
USDA, and comment letters received from a majority of community bank
commenters contradict these assertions. As noted in the preamble to the
proposed rule, USDA informed FCA that the FCS in recent years has
constituted as much as 40 percent of the secondary market for USDA loan
guarantees. The majority of community bankers who commented on the
proposed rule told us that System associations play a beneficial role
in this secondary market. These commenters also stated that System
associations that buy these guaranteed loan portions enable community
banks to reinvest the sale proceeds back into local communities. These
comments support one of FCA's objectives in this rulemaking, which is
to augment liquidity of rural credit markets. As stated above, Farmer
Mac did not comment on the proposed rule.
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\15\ Since Farmer Mac has been granted this authority in 1990,
it has been and continues to be an active participant in this
secondary market. It currently holds over $2.2 billion in USDA's
guaranteed loan portions (See Farmer Mac Reports 2019 Results, Pg.
9, https://www.farmermac.com/wp-content/uploads/Farmer-Mac-Reports-2019-Results.pdf).
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One commenter claimed that ``FCS lenders have long desired to
operate their own secondary market, and FCA's proposal would lay the
groundwork allowing them to do so.'' We disagree with this comment. As
discussed in greater detail above, the Act does not authorize System
banks and associations to securitize assets and then sell the resulting
securities to investors. Associations buy USDA guaranteed loan portions
in the secondary market from willing sellers, the majority of which are
commercial banks, and then hold those investments for risk management
purposes.
The proposed rule would not enable FCS lenders to ``operate their
own secondary market'' as the commenter alleges. At most, System
associations would resume their previous role as a meaningful
participant in the longstanding informal secondary market. FCA proposed
this rule after USDA provided data and information that substantiated
its claim \16\ that the System's withdrawal from this secondary market
actually disrupts it. Allowing System associations to return to the
informal secondary market for USDA loan guarantees provides additional
liquidity and funding sources to those market participants who opt to
engage in these transactions.
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\16\ In the proposed rule, we indicated that data provided by
USDA shows 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, often at a premium. See 84 FR 49069
(September 18, 2019).
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For the reasons discussed in the preamble, the final rule amends
Sec. 615.5140(b)(2) to allow System associations to purchase in the
secondary market, the portions of loans that non-FCS institutions
originate and that the USDA fully and unconditionally guarantee or
insured as to both principal and interest.
V. Regulatory Flexibility Act and Major Rule Conclusion
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.
Under the provisions of the Congressional Review Act (5 U.S.C. 801
et seq.), the Office of Management and Budget's Office of Information
and Regulatory Affairs has determined that this final rule is not a
``major rule,'' as the term is defined at 5 U.S.C. 804(2).
Lists 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 are 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).
Sec. 615.5140 [Amended]
0
2. Amend Sec. 615.5140 by revising paragraphs (b)(2) and (3) to read
as follows:
* * * * *
(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
[[Page 62950]]
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: September 1, 2020.
Dale Aultman,
Secretary, Farm Credit Administration Board.
[FR Doc. 2020-19711 Filed 10-5-20; 8:45 am]
BILLING CODE 6705-01-P
