Funding and Fiscal Affairs, Loan Policies and Operations, and Funding Operations; FCB Assistance to Associations

[Federal Register Volume 64, Number 178 (Wednesday, September 15, 1999)]
[Rules and Regulations]
[Pages 49959-49961]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23966]



========================================================================
Rules and Regulations
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains regulatory documents 
having general applicability and legal effect, most of which are keyed 
to and codified in the Code of Federal Regulations, which is published 
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents. 
Prices of new books are listed in the first FEDERAL REGISTER issue of each 
week.

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


Federal Register / Vol. 64, No. 178 / Wednesday, September 15, 1999 / 
Rules and Regulations

[[Page 49959]]


=======================================================================
-----------------------------------------------------------------------

FARM CREDIT ADMINISTRATION

12 CFR Part 615

RIN 3052-AB80


Funding and Fiscal Affairs, Loan Policies and Operations, and 
Funding Operations; FCB Assistance to Associations

AGENCY: Farm Credit Administration.

ACTION: Final rule.

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

SUMMARY: In this final rule, we amend the Farm Credit Administration 
regulation currently entitled ``Additional investments of Farm Credit 
Banks.'' We remove the requirement that Farm Credit Banks and 
agricultural credit banks (collectively referred to as banks) obtain 
our prior approval before making certain transfers of capital to 
affiliated associations. Instead, we require banks to take into account 
certain considerations, and to notify bank shareholders and us, before 
making such transfers. This amendment benefits banks and their 
associations because it provides clear guidelines and streamlined 
procedures for banks to follow when they wish to transfer capital to 
associations. It also enables them to transfer the capital in a more 
timely manner.

EFFECTIVE DATE: This regulation will become effective 30 days after 
publication in the Federal Register during which either one or both 
houses of Congress are in session. We will publish a notice of the 
effective date in the Federal Register.

FOR FURTHER INFORMATION CONTACT:
Dale L. Aultman, Policy Analyst, Office of Policy and Analysis, Farm 
Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 
883-4444, or
Jennifer A. Cohn, Attorney, Office of General Counsel, Farm Credit 
Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-
4444.

SUPPLEMENTARY INFORMATION:

I. Background

    On February 18, 1999, we proposed an amendment to Sec. 615.5171, 
which implements the authority of banks to purchase nonvoting stock in 
and to pay in surplus to affiliated associations (64 FR 8018). In the 
proposed amendment, we termed such purchases and payments ``financial 
assistance.'' We proposed replacing the requirement that banks obtain 
our prior approval before providing financial assistance to affiliated 
associations with a prior notification requirement. In addition, we 
defined and provided examples of financial assistance, set forth 
various considerations that banks must take into account before 
providing financial assistance, and required banks to notify their 
shareholders within a reasonable time of providing the assistance. We 
proposed this amendment as part of our commitment to keep regulatory 
prior approvals in our regulations only when the Farm Credit Act of 
1971, as amended (Act), requires them or when safety and soundness 
concerns exist.
    We received two comments on the proposed amendment. One comment was 
from the Farm Credit Council (Council), representing its member banks 
and associations, and the other comment was from CoBank, ACB (CoBank). 
Both commenters generally supported the proposed amendment, although 
they both suggested some changes. We considered these comments in 
making changes to our final rule.

II. Scope of Rule

    We change the title of this final regulation to ``Transfers of 
capital from banks to associations.'' In the rule text, we clarify that 
the rule applies to ``preferential transfers of capital'' and 
``nonroutine transfers of capital.'' We make these changes from the 
proposed amendment, which covered ``financial assistance,'' in response 
to the Council's concern that the term ``financial assistance'' appears 
limited to transfers made to assist distressed associations. These 
changes confirm that the rule applies to all transfers of capital that 
are preferential or nonroutine, not just to transfers made to assist 
distressed associations.

III. Definitions in this Regulation

    In our proposed amendment, we provided examples of the transfers of 
capital that the rule covers. The final rule includes these examples 
and adds definitions of the terms ``transfer of capital,'' 
``preferential transfer of capital,'' and ``nonroutine transfer of 
capital.''

A. Transfer of Capital

    We define ``transfer of capital'' as any payment or forbearance by 
a bank to an affiliated association. We add this definition to clarify 
that the term is not limited to the examples of transfers listed in the 
regulation. These examples include:
    •  The purchase of nonvoting stock or participation 
certificates;
    •  The payment of cash;
    •  Debt forgiveness or reduction;
    •  Interest rate concessions or interest-free loans;
    •  The transfer of loans at other than fair market value;
    •  The reduction or elimination of standard loan servicing or 
other fees; and
    •  The assumption of operating or other expenses, such as 
legal fees or insurance premiums.

B. Preferential Transfer of Capital

    We define ``preferential transfer of capital'' as a transfer of 
capital that is not available to all ``similarly situated'' affiliated 
associations. We add this definition in response to a comment by the 
Council. The Council recommended the term ``similarly situated'' to 
recognize that the rule does not apply if a bank treats associations 
differently based on differences in size, asset quality, management, 
financial performance, and the like, provided that the different 
treatment has a rational basis. The rule does apply if a bank treats 
associations differently when those associations are of similar size, 
asset quality, management, and financial performance. For example, the 
rule would apply if a bank made an interest rate concession to one 
association but not to other associations that were similarly situated.

C. Nonroutine Transfer of Capital

    We define ``nonroutine transfer of capital'' as a transfer of 
capital that is not available in the ordinary course of business. We 
add this definition in

[[Page 49960]]

response to the Council's concern that, without a definition, the rule 
might be construed to cover transfers made in the ordinary course of 
business. This definition clarifies that transfers in the ordinary 
course of business are not subject to this regulation. Transfers in the 
ordinary course of business may include bank payment of dividends or 
patronage, normal adjustments to interest rates, bank equalization of 
purchased equities, and other similar transfers. Routine transfers are 
often, but not always, addressed in bylaws, General Financing 
Agreements, loan participation agreements, and loan servicing 
agreements.
    In the preamble to our proposed amendment, we noted that we would 
consider loss-sharing agreement transfers to be subject to this rule. 
The Council expressed concern that we would consider transfers made 
under ``endorsement liability'' agreements also to be subject to this 
rule. The Council pointed out that banks and associations make 
transfers under these agreements, which allocate risks and benefits 
associated with specific assets, in the ordinary course of business. We 
agree, and clarify that the rule covers only those loss-sharing 
agreement transfers that are based on the troubled financial condition 
of the association receiving the transfer. Banks make transfers under 
these latter agreements infrequently, and therefore, these transfers 
are nonroutine.

IV. Considerations for Preferential or Nonroutine Transfers

    In our final regulation, we require that, before authorizing a 
preferential or nonroutine transfer of capital, a bank's board of 
directors must take into account and document the following 
considerations:
    •  Whether the transfer is in the best interests of all of 
the bank's shareholders;
    •  Whether the bank will be able to achieve its capital 
adequacy and business plan goals after making the transfer; and
    •  Whether the transfer is the ``least cost'' alternative 
available and will enable the association to maintain sound, adequate, 
and constructive service to borrowers.

These considerations contain changes, made in response to comments from 
the Council, from our proposed amendment.
    The Council provided both general comments on the applicability of 
the considerations and specific comments on individual considerations. 
In its general comments, the Council agreed that the first and second 
considerations are relevant, and should apply, to all preferential or 
nonroutine transfers. The Council asserted, however, that the third 
consideration is relevant, and should apply, only to transfers made to 
assist distressed associations. We believe, however, that all three of 
these considerations are relevant to most preferential or nonroutine 
transfers. In fact, under the current prior approval regulation, we 
have applied the third consideration in approving transfers to 
nondistressed associations. Accordingly, in the final rule we keep 
these three considerations, with some changes.
    Our proposed amendment included a fourth consideration that would 
have required the bank board to take into account and document whether 
the transfer was necessary, feasible, and the ``least cost'' 
alternative available. We remove the necessary and feasible 
consideration in the final rule because a bank will make these 
determinations when it reviews the remaining three considerations. We 
continue to believe that in deciding whether to make a transfer, a bank 
should take into account whether that transfer is less costly than 
other alternatives. Accordingly, we retain ``least cost'' and move it 
to the third consideration.
    The Council also made two specific comments on individual 
considerations. First, the Council expressed concern that our proposed 
consideration requiring the bank board to take into account whether the 
bank will continue to be financially sound and maintain adequate 
capital after the transfer was too subjective. We understand this 
concern, and we change the consideration to require the bank board to 
take into account whether the transfer will prevent the bank from 
achieving its capital adequacy or business plan goals, as the Council 
suggested. We emphasize that the bank's capital adequacy and business 
plan goals must ensure that the bank will be financially sound and 
maintain adequate capital.
    Second, the Council commented that the proposed consideration 
requiring the bank board to take into account whether the transfer 
would ``enable the association to maintain service to borrowers'' was 
not objective enough, because it did not set standards on the service. 
We agree and clarify that the bank must take into account whether the 
transfer will enable the association to maintain ``sound, adequate, and 
constructive'' service in accordance with section 1.1 (a) of the Act.
    We point out that the rule requires that a bank board ``take into 
account and document'' whether the transfer satisfies these 
considerations. The rule does not, however, require that banks satisfy 
these considerations in all cases. The rule does not, for example, 
require that the transfer be the ``least cost'' alternative available, 
merely that the bank board take into account and document its rationale 
in selecting the best solution taking into account all considerations, 
not just this consideration. Moreover, the rule does not set out the 
manner in which the bank board must take into account and document the 
considerations. In some cases, board minutes could provide satisfactory 
documentation of the considerations. Where appropriate, a bank board 
may decide that a particular consideration is not applicable. If so, 
the board must document why it believes the consideration is not 
applicable.

V. Notification Requirements

    The final rule requires banks to provide their shareholders and us, 
before making a preferential or nonroutine transfer, with: (1) A 
description of the transfer, and (2) the banks' documentation of the 
three considerations discussed in section IV of this preamble. The 
proposed amendment would have required banks to notify their 
shareholders within a reasonable time after the transfer. The Council 
requested that we require banks to notify shareholders in advance so 
the shareholders can evaluate transfers before they are made. We agree 
with the Council and change the rule to include the same notification 
requirement to shareholders (at least 30 days before a transfer) as we 
require for notification to us. While a bank may disclose the name of 
the association receiving a transfer, it need not do so if, after 
considering the specific circumstances, it determines the disclosure 
would be inappropriate.
    CoBank agreed that when it makes a preferential or nonroutine 
transfer to an affiliated association, it should be required to notify 
its affiliated associations. CoBank asserted, however, that when it 
makes such a transfer it should not be required to notify its 
approximately 2,000 cooperative association equityholders (including 
farmer cooperatives, rural utilities and international customers) who 
borrow under title III of the Act. CoBank argued that such notification 
would be ``somewhat burdensome'' and that it would be difficult to 
explain the transfer to its title III equityholders. We believe, 
however, that CoBank's title III equityholders have the same interests 
as association shareholders in being able to evaluate transfers made to 
affiliated associations. Accordingly, the rule continues to require 
that all banks (including CoBank) notify all

[[Page 49961]]

shareholders before they make preferential or nonroutine transfers to 
affiliated associations.

List of Subjects in 12 CFR Part 615

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

    For the reasons stated in the preamble, amend part 615 of chapter 
VI, title 12 of the Code of Federal Regulations to read 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) of 
Pub. L. 100-233, 101 Stat. 1568, 1608.

    2. Revise the heading of subpart F to read as follows:

Subpart F--Property, Transfers of Capital, and Other Investments

    3. Revise Sec. 615.5171 to read as follows:


Sec. 615.5171  Transfer of capital from banks to associations.

    (a) Definitions for this section. 
    (1) Transfer of capital means any payment or forbearance by a Farm 
Credit Bank or agricultural credit bank (collectively, bank) to an 
affiliated association, including but not limited to:
    (i) The purchase of nonvoting stock or participation certificates;
    (ii) The payment of cash;
    (iii) Debt forgiveness or reduction;
    (iv) Interest rate concessions or interest-free loans;
    (v) The transfer of loans at other than fair market value;
    (vi) The reduction or elimination of standard loan servicing or 
other fees; and
    (vii) The assumption of operating or other expenses, such as legal 
fees or insurance premiums.
    (2) Preferential transfer of capital means a transfer of capital 
that is not available to all similarly situated affiliated 
associations.
    (3) Nonroutine transfer of capital means a transfer of capital that 
is not available in the ordinary course of business.
    (b) Considerations for preferential or nonroutine transfers of 
capital. Before authorizing a preferential or nonroutine transfer of 
capital, a bank board of directors must take into account and document 
whether:
    (1) The transfer of capital is in the best interests of all of the 
shareholders;
    (2) The bank will be able to achieve its capital adequacy and 
business plan goals after making the transfer of capital; and
    (3) The transfer of capital is the ``least cost'' alternative 
available and will enable the association to maintain sound, adequate, 
and constructive service to borrowers.
    (c) Notification requirements. At least 30 days before making a 
preferential or nonroutine transfer of capital to an affiliated 
association, banks must provide shareholders and the Chief Examiner of 
the Farm Credit Administration with a description of the transfer and 
the documentation required by paragraph (b) of this section.

    Dated: September 8, 1999.
Vivian L. Portis,
Secretary, Farm Credit Administration Board.
[FR Doc. 99-23966 Filed 9-14-99; 8:45 am]
BILLING CODE 6705-01-P