Loan Policies and Operations; Loans to Designated Parties

AGENCY:

Farm Credit Administration.

ACTION:

Proposed rule.

SUMMARY:

The Farm Credit Administration (FCA), through the FCA Board, issues a proposed rule amending its regulations on the approval of loans to designated parties (Farm Credit System (System) “insiders” and those FCA and Farm Credit System Insurance Corporation (FCSIC) employees who may legally borrow from the System). The purpose of our proposal is to provide greater flexibility for banks and associations to approve loans to designated parties. The proposed rule also makes technical changes to conform to the Farm Credit Act of 1971, as amended. The existing regulations require a funding bank to approve all loans that it and its associations make to designated parties. The proposed amendment would give an association the option to let its own board of directors (or a committee of the board), or in some situations its own management, approve these loans. This amendment would benefit banks and associations because it provides clear guidelines and streamlined procedures for approving loans to designated parties.

DATES:

Please send your comments to us by April 17, 2000.

ADDRESSES:

You may send comments by electronic mail to “reg-com@fca.gov” or through the Pending Regulations section of our Web site at “www.fca.gov.” You may also send comments to Patricia W. DiMuzio, Director, Regulation and Policy Division, Office of Policy and Analysis, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090 or by fax to (703) 734-5784. You may review copies of all comments we receive in the Office of Policy and Analysis, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Eric Howard, Senior Policy Analyst, Office of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,

  or

Jennifer Cohn, Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Objectives

The objectives of our proposed amendment are to:

• Provide greater flexibility for banks and associations to approve loans to designated parties (System “insiders” and those FCA and FCSIC employees who may legally borrow from the System);
• Keep adequate controls on loans that banks and associations make to designated parties; and
• Make our regulations easier to understand and use.

II. Background

A. Withdrawn Direct Final Rule

Sections 614.4450, 614.4460, and 614.4470 of our regulations require a funding bank to approve all loans that it and its associations make to designated parties. On August 9, 1999, we published a direct final rule with opportunity to comment. This direct final rule would have, in relevant part, repealed two of these regulations and amended the third. The revision would have allowed a bank or association to make a loan to a designated party with the approval of its own board of directors. Under direct final rulemaking, a rule becomes effective without further proceedings unless we receive significant adverse comment.

One association provided a significant adverse comment on the revision. Four other associations also provided comments on the revision. Because of these comments, we withdrew the portion of the direct final rule on loans to designated parties on October 14, 1999.

B. Comments on Direct Final Rule

All five commenters objected to our direct final rule's requirement that the board of directors of a bank or association must approve all loans made to designated parties. Four commenters stated that we should allow an association board of directors to delegate approval of loans to designated parties to management, with post review by the board. One commenter stated that we should allow an association board of directors to delegate approval of loans under a certain dollar amount to association staff, with post review by management. The commenter further suggested that management preapprove loans over that dollar amount.

The commenters provided five main reasons for their concern. Their comments and our responses are as follows:

First Comment: Directors do not have the expertise to make credit decisions; this is a task that professional lending staff should perform.

Response: We believe directors, who are elected by their shareholders to represent them in conducting the business of their banks and associations, are qualified to make decisions on loans to designated parties. We remind directors that, as we explain in our publication entitled The Director's Role: Farm Credit System Institutions, they are ultimately responsible for all decisions their banks and associations make. In making these decisions, directors may want to consult with the professional lending staff at their banks and associations, as well as with other credit experts.

Second Comment: Directors may be biased in reviewing and analyzing audit results if they have made the credit decisions.

Response: Part 612 of our regulations requires directors to remain impartial in carrying out their duties. We expect that directors will review and analyze audit results on their credit decisions in an unbiased manner.

Third Comment: It may be difficult for the lending staff to remain independent and responsible to the board if they disagree with the board's credit decision.

Response: Boards of directors have the ultimate responsibility for conducting the affairs of the banks and associations they are elected to serve. Boards hire management and staff to conduct day-to-day operations. Management and boards must work together as teams to ensure that banks and associations meet the needs of their borrowers and satisfy safety and soundness concerns.

Fourth Comment: Directors may find it difficult to “pass judgment” on other directors.

Response: We agree that some directors may find it difficult to make decisions on the loans of other directors. We believe, however, that management may find it even more difficult to make such decisions. Because directors are ultimately responsible for the affairs of their bank or association, we believe it is more appropriate for them to consider and act on the credit requests of other directors. If directors feel unable to make an unbiased decision in a particular situation, they always have the choice of recusing themselves from that particular decision.

Fifth Comment: Directors do not want other directors to have access to their financial information.

Response: Section 612.2140(b) of our regulations prohibits directors from divulging or making use of any information they learn as directors. In addition, § 612.2135(b) requires directors to “exercise diligence and good judgment in carrying out their duties.” We believe, therefore, that our regulations sufficiently address the misuse of financial information.

III. The Proposed Regulation

When we withdrew the portion of the direct final rule on loans to designated parties, we said that we would continue with this rulemaking at a later date. We now propose an amended rule governing loans to designated parties. In developing this proposed rule, we considered carefully all the comments that we received.

Our proposed regulation would provide greater flexibility for you to approve loans to designated parties, while keeping adequate controls on these loans. The proposed regulation would continue to allow you to make loans to designated parties with bank approval, but it would also let an association's board of directors, and in some situations its own management, approve such loans. Because we are proposing the regulation in plain language, we believe it will be easier to understand and carry out.

The proposal would delete all references to district boards because the Agricultural Credit Technical Corrections Act of 1988 abolished these boards. The proposal would also repeal § 614.4450, which provides “the authority for loan approval is vested in the Farm Credit banks and associations.” More specific regulations providing for System lending authorities make this provision unnecessary.

A. Section 614.4450—Definitions Used in the Proposed Regulation

We provide definitions of three key terms used in the proposed regulation. As part of our goal to use plain language in our regulations, we use the word “you” in the text of the proposed rule. Accordingly, we define “you” as a bank or association.

We define the term “designated parties” by providing a list of these parties. We updated this list from the existing §§ 614.4460 and 614.4470. The list includes bank and association “insiders” as well as certain employees of FCA and FCSIC.

We define the term “loan” broadly. “Loan” means:

• The total of all loans and undisbursed commitments from you to a designated party; plus
• The total of all loans and undisbursed commitments from you to any other borrower if the designated party has a significant interest in the loan, proceeds or collateral.

B. Section 614.4460—Policy for Approval of Loans to Designated Parties

The proposed rule would require you to adopt a policy addressing the approval of loans to designated parties. Your policy must describe the procedures, as set forth in the proposed rule, you will follow in making these loans.

Depending on the size of the loan, you may choose any one of three procedures for making loans to designated parties. The first procedure allows your board of directors (or a committee of your board) to approve loans that you make to designated parties. The second procedure permits the existing practice of allowing the funding bank to approve a loan made by an association. Finally, the third procedure permits your board of directors to delegate approval of loans of $25,000 or less to designated parties to your management. Your board of directors must post review all loans to designated parties that management approves.

We continue to believe that management should not approve loans over $25,000 to designated parties. Because of their size, these loans have greater risk potential for banks and associations. Requiring board or funding bank preapproval of these credit decisions will help ensure the approval decision is independent, objective, and free from any real or perceived conflicts of interest. The commenters contended that association boards may be uncomfortable with their own members approving loans to designated parties. If this is the case, association boards have the option of continuing to have decisions on loans to designated parties made by their funding banks.

Because loans of $25,000 or less are relatively smaller, they create less potential risk for the banks and associations that make them. We believe our proposal will help to reduce the administrative burden of making loans of $25,000 or less to designated parties.

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, we propose to amend part 614 of chapter VI, title 12 of the Code of Federal Regulations to read as follows:

PART 614—LOAN POLICIES AND OPERATIONS

1. The authority citation for part 614 continues to read as follows:

Authority: 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128; secs. 1.3, 1.5, 1.6, 1.7, 1.9, 1.10, 1.11, 2.0, 2.2, 2.3, 2.4, 2.10, 2.12, 2.13, 2.15, 3.0, 3.1, 3.3, 3.7, 3.8, 3.10, 3.20, 3.28, 4.12, 4.12A, 4.13, 4.13B, 4.14, 4.14A, 4.14C, 4.14D, 4.14E, 4.18, 4.18A, 4.19, 4.25, 4.26, 4.27, 4.28, 4.36, 4.37, 5.9, 5.10, 5.17, 7.0, 7.2, 7.6, 7.8, 7.12, 7.13, 8.0, 8.5 of the Farm Credit Act (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, 2199, 2201, 2202, 2202a, 2202c, 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. 2. Revise subpart M to read as follows:

Subpart M—Approval of Loans to Designated Parties