Rule2025-03172
Statement on Regulatory Burden
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
March 3, 2025
Issuing agencies
Farm Credit Administration
Abstract
This document is part of the Farm Credit Administration's (FCA, our, or we) initiative to reduce regulatory burden for Farm Credit System (FCS or System) institutions, including the Federal Agricultural Mortgage Corporation (Farmer Mac). Several System institutions responded to our 2022 request for comments by identifying regulations they considered unnecessary, unduly burdensome or costly, duplicative of other requirements, outmoded, insufficient, ineffective, or not based on law, and this document responds to those comments.
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[Federal Register Volume 90, Number 40 (Monday, March 3, 2025)]
[Rules and Regulations]
[Pages 11013-11019]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-03172]
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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.
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Federal Register / Vol. 90, No. 40 / Monday, March 3, 2025 / Rules
and Regulations
[[Page 11013]]
FARM CREDIT ADMINISTRATION
12 CFR Chapter VI
RIN 3052-AD55
Statement on Regulatory Burden
AGENCY: Farm Credit Administration.
ACTION: Determination.
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SUMMARY: This document is part of the Farm Credit Administration's
(FCA, our, or we) initiative to reduce regulatory burden for Farm
Credit System (FCS or System) institutions, including the Federal
Agricultural Mortgage Corporation (Farmer Mac). Several System
institutions responded to our 2022 request for comments by identifying
regulations they considered unnecessary, unduly burdensome or costly,
duplicative of other requirements, outmoded, insufficient, ineffective,
or not based on law, and this document responds to those comments.
DATES: March 3, 2025.
FOR FURTHER INFORMATION CONTACT:
Technical Information: Mark Johansen, Associate Director, Office of
Regulatory Policy, Farm Credit Administration, McLean, VA 22102-5090,
(703) 883-4414, TTY (703) 883-4056, or <a href="/cdn-cgi/l/email-protection#e6a9b4b6ab878f8a84899ea6808587c8818990"><span class="__cf_email__" data-cfemail="cc839e9c81ada5a0aea3b48caaafade2aba3ba">[email protected]</span></a>; or
Legal Information: Jacqueline Baker, Attorney-Advisor, Office of
General Counsel, Farm Credit Administration, McLean, VA 22102-5090,
(703) 883-4020, TTY (703) 883-4056, or <a href="/cdn-cgi/l/email-protection#bcfeddd7d9cef6fcdadfdd92dbd3ca"><span class="__cf_email__" data-cfemail="c082a1aba5b28a80a6a3a1eea7afb6">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Objective
The objective of this document is to respond to the comments
submitted to us regarding our request to identify regulations that the
public considered unnecessary, unduly burdensome or costly, duplicative
of other requirements, outmoded, insufficient, ineffective, or not
based on law.
II. Background
On July 20, 2022, we published a document in the Federal Register
inviting the public to comment on our regulations that may duplicate
other requirements, are ineffective, are not based on law, or impose
burdens that are greater than the benefits received.\1\ We also
expressed interest in understanding how our regulations affect
associations differently based on their location, size, and complexity
of operations.
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\1\ 87 FR 43227 (July 20, 2022).
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We received letters from AgFirst, FCB; AgGeorgia, ACA; AgriBank,
FCB; AgTexas, ACA; Alabama, ACA; ArborOne, ACA; Central Texas, ACA;
CoBank, ACB; Colonial, ACA; Farm Credit East, ACA; Farm Credit
Illinois, ACA; Florida, ACA; Farm Credit Bank of Texas; the Farm Credit
Council; Farm Credit Mid-America, ACA; First South, ACA; Farm Credit
Foundations; the Federal Farm Credit Banks Funding Corporation; High
Plains, ACA; Idaho, ACA; Louisiana Land Bank, ACA; Plains Land Bank,
FLCA; Premier, ACA; Texas Farm Credit, ACA; and Western AgCredit, ACA.
The Farm Credit Council stated that in preparing its response letter on
behalf of all FCS institutions, it assembled and coordinated an FCS
Regulatory Burden Workgroup of experts representing institutions across
all four bank districts.
The letters commented on regulations concerning: investments,
disclosure requirements, preparing and filing reports, and other FCA
regulations and guidance. In addition, we received comments related to
the FCA Examination Manual and the examination process. We referred
those comments to FCA's Office of Examination.
This document restates the comments submitted, with certain non-
substantive, technical changes made to improve clarity and readability
(under the Comment heading), along with our response to the comments
(under the FCA Response heading). Our responses take into consideration
the comment and any proposed solution(s) the commenter suggested.
FCA organized the comments received into four categories. First,
for some of the comments received, we took action between comment
submission and publication of this document that addressed the concerns
raised. Second, many of the comments we received seek changes that we
cannot implement because they are inconsistent with the Farm Credit Act
of 1971, as amended (Act), safety and soundness, and/or other FCA
guidance or position(s). Third, some comments raise issues that are the
subject of existing regulatory projects scheduled for consideration by
FCA as set forth in our Fall 2024 Regulatory Projects Plan, which is
available on the FCA website, and those issues will be addressed in the
planned regulatory projects. Finally, in other cases, commenters
identified issues that need further evaluation before we can consider
whether changes are appropriate.
III. Action Taken by FCA Related to Comments Received
A. Accounting and Disclosure of Troubled Debt Restructuring (TDR)
(Sec. 621.6(b))
Comment: GAAP requirements have changed, resulting in the
elimination of TDRs. As a result, the maintenance of current
requirements for TDRs is operationally burdensome and immaterial to the
financial statements and credit quality of System institutions.
Retaining the legacy reporting requirements for TDRs will require
System institutions to maintain two operational and reporting processes
for TDRs and modifications under the updated reporting requirements.
The legacy process is highly manual and subjective, requiring extensive
documentation. The revised GAAP allows for systematic solutions and
automated processes for reporting in a more efficient manner. Further,
many System institutions plan to repurpose existing fields in loan
accounting systems and databases/data warehouses to achieve the new
reporting requirements. If FCA retains the legacy reporting
requirements for TDRs, then the repurposing of data fields will not be
possible and it will, therefore, be more costly to implement an
automated and well-controlled solution for modification disclosures
under the required GAAP implementation deadline of Q1 2023.
FCA Response: In response to the TDR changes under GAAP, we issued
an Informational Memorandum (IM) dated December 30, 2022, that, among
other
[[Page 11014]]
things, explained that the TDR loan performance category contained in
Sec. 621.6(b) was no longer required under GAAP after January 1, 2023.
Our Fall 2024 Regulatory Projects Plan indicates that we plan to
propose an update to Sec. 621.6(b) to reflect this change.
B. Call Reporting for Farm Credit Leasing (FCL) (Sec. 621.12)
Comment: FCA requires a separate Call Report for FCL, which adds
burden and costs to prepare and file. This separate Call Report
provides no value as FCL's financial results are fully incorporated in
the CoBank Call Report and CoBank backstops FCL's obligations. Section
621.12 requires Call Reports to be filed for each institution chartered
under the Act. However, wholly owned subsidiaries are typically
excluded from the requirement for filing a separate Call Report through
administrative action by FCA. In addition, FCA has previously
recognized that FCL is integrated into CoBank by waiving the
requirement for a separate Annual Report and providing regulatory
relief from separate capital requirements.
FCA Response: The Farm Credit Leasing Corporation (FCL) is a
chartered service corporation. It was chartered under section 4.25 of
the Act and is currently wholly owned by CoBank. Unrelated to this
comment, FCA determined and notified relevant parties that FCL is no
longer required to prepare and file separate Call Reports. The existing
structure and financial reporting from CoBank about FCL are sufficient
to not require separate Call Reports from FCL. If FCL's structure or
financial reporting changes in the future, FCA may require FCL to file
Call Reports.
IV. Comments That Will Not Result in Changes
A. Approval of Equity Investments in Unincorporated Business Entities
(UBEs) (Sec. 611.1155)
Comment: The detailed requirement of the information that must be
provided to FCA for its approval (Part 611 Subpart J) before a UBE can
be created is administratively burdensome, time consuming, and thus
expensive to System institutions. The process for creating and seeking
approval for UBEs to protect System institutions in their
administration of acquired assets is administratively burdensome and
should be simplified.
FCA Response: Section 611.1154 requires notice to FCA, and not FCA
prior approval, when a System institution wishes to make an equity
investment in UBEs whose activities are limited to acquiring and
managing unusual or complex collateral associated with loans, providing
hail or multi-peril crop insurance services with another System
institution in accordance with Sec. 618.8040, or another activity that
FCA determines is appropriate for this provision. This provision
provides a simplified process that avoids unnecessary administrative
burdens and costs for investments in UBEs for the specified activities.
For all other UBEs, however, Sec. 611.1155 requires pre-approval.
We are not persuaded by the comment that a change is needed for these
other UBEs. We continue to believe that it is prudent to have System
institutions obtain preapproval for investing in these UBEs to avoid
the burden and cost associated with potentially reversing investments
if such investments were later deemed through the examination process
to be inappropriate, unsafe or unsound, or contrary to law. FCA will,
however, consider whether additional categories of UBE investments
could be included in the provisions to reduce burden on System
institutions.
B. Floor Nominations (Sec. 611.326)
Comment: The requirement that associations permit voting
stockholders to make floor nominations for director positions
circumvents the nominating committee's process and creates
inefficiencies in the development of the association's election
materials. The same requirement is not imposed on banks. Banks are only
required to allow floor nominations if they are permitted by a bank's
election policies and procedures.
FCA Response: Section 4.15 of the Act requires associations to
allow for floor nominations for director positions. Therefore, we are
unable to make association floor nominations optional. In the preamble
to the final rule adopting Sec. 611.326, we thoroughly discussed this
requirement.\2\
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\2\ 75 FR 18726 (April 12, 2010).
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C. Preparing and Filing Reports (Sec. 620.2(c))
Comment: This regulation permits System institutions to provide the
reports made subject of this part (Part 620) electronically; however,
the regulation requires System institutions to obtain ``shareholder
agreement'' to do so. See Sec. 620.2(c). This language effectively
imposes an ``opt in'' requirement (a hurdle) for System institutions
and their customers to benefit from electronic delivery, Part 609, and
E-SIGN Act, rather than an ``opt out'' requirement. Sec. 609.920
confirms that System institutions may interpret the Act and FCA
``broadly to allow electronic transmissions, communications, records,
and submission, as provided by E-SIGN,'' Sec. 609.920(b), and the E-
SIGN Act ``preempts most statutes and regulations, including the Act
and FCA Regulation.'' Sec. 609.920(a). Section 620.2, therefore, seems
to impose a hurdle on, in most instances, the use of electronic
communications in System institution business, contrary to the purpose
and intent of Sec. 609.920 and the E-SIGN Act, presents a significant
financial, administrative, and logistical burden to System
institutions, without guaranteeing better receipt of, or access to, the
report by shareholders, is inconsistent with other FCA regulations,
which permit website access or notice (e.g., Sec. 620.15), is not in
alignment with shareholders' preferred method of communication, which
is electronic access or delivery in most circumstances, and does not
better serve or support the cooperative. System institutions must
operate efficiently and in the best interest of the cooperative. Many,
if not most, businesses operate, and engage in, electronic commerce,
with less reliance on paper due to preference, cost, administrative or
logistical burdens, and delays associated with mail, and not all System
institutions have shareholder agreements with all customers and/or may
not be able to secure shareholder agreements from all customers before
reports are required to be provided. Importantly, System institutions
provide ready access to reports on their websites, which are accessible
by all, and paper copies may also be available in branch offices, at
customer events, and upon request.
FCA Response: As the comment notes, Sec. 620.2(c) permits
institutions to deliver shareholder reports electronically only with
shareholder agreement. This is, effectively, an opt-in requirement for
electronic delivery of shareholder reports. If a shareholder does not
agree to electronic delivery, an institution is not permitted to
deliver the reports electronically.
FCA believes this requirement is appropriate and is consistent with
the E-SIGN Act, 15 U.S.C. 7001, et seq. Accordingly, FCA declines to
change this requirement.
D. Preparing and Providing the Annual Report (Sec. 620.4)
Comment: This regulation requires System institutions to provide,
within 90 calendar days of the end of its fiscal year, an annual report
substantively
[[Page 11015]]
identical to the copy of the report sent to FCA under subparagraph
(a)(1) of this regulation. System institutions are permitted to provide
the report made subject of this part electronically; however, System
institutions are required to obtain ``shareholder agreement'' to do so.
See Sec. 620.2(c). Requiring that System institutions mail a hard copy
of the report to shareholders unless they first ``opt in'' to
electronic delivery runs afoul of, or presents a hurdle to, Sec.
609.920 and the E-SIGN Act in most instances, presents a significant
financial, administrative, and logistical burden to System
institutions, without guaranteeing better receipt of, or access to, the
report by shareholders, is inconsistent with other FCA regulations,
which permit website access or notice (e.g., Sec. 620.15).
FCA Response: As discussed in FCA's response to the previous
comment, Sec. 620.2(c) permits institutions to deliver shareholder
reports electronically only with shareholder agreement. This
requirement applies to annual reports required by Sec. 620.4.
FCA believes this requirement is appropriate and is consistent with
the E-SIGN Act, 15 U.S.C. 7001, et seq. Accordingly, FCA declines to
change this requirement.
E. Preparing and Distributing the Information Statement (Sec. 620.20)
Comment: The regulation requires that System institutions post
their Annual Meeting Information Statement (AMIS) on their website
``[i]n addition to the mailed AMIS.'' The requirement that electronic
publication and notification is to be used as an additional, not
alternative, method of communication is burdensome and expensive.
Providing print communications to all stockholders provides a
substantial logistical and financial burden on System institutions and
often does not align with the communication method preferred by many
stockholders, which is electronic.
FCA Response: As an initial matter, FCA regulation Sec.
620.20(a)(3) does not require a System institution to post its AMIS on
its website. This regulation states that a System institution may
choose to post its AMIS on its website in addition to mailing the AMIS
and, if it does so, the posted AMIS must remain on its website for a
reasonable period of time, but not less than 30 calendar days.
As to the comment that providing a print AMIS to all stockholders
is burdensome, as discussed in FCA's response to the previous two
comments, Sec. 620.2(c) permits institutions to provide reports to
shareholders electronically with shareholder agreement. The AMIS is a
shareholder report that may be provided electronically with shareholder
agreement. Accordingly, FCA declines to change this requirement.
F. Use of Average Daily Balance (ADB) in Capital Ratio Calculations
(Sec. Sec. 615.5206, 628.10)
Comment: FCA call report requirements should be evaluated for
consistency with other financial institution regulators (e.g., OCC,
FRB). Any additional reporting requirements need to be evaluated to
determine the necessity of the information or perform a cost benefit
analysis. For example, FCA should modify its regulatory capital ratio
calculations to be consistent with other financial institution
regulators. The current calculations requiring a 3-month average daily
balance (``ADB''), in addition to calculating it based on ending
balance, is overly burdensome, and the 3-month ADB actually materially
misrepresents an entity's capital ratios during quarter-end reporting.
The requirement to calculate quarterly averages (e.g., 3-month ADBs)
results in challenges to the System. For example, the requirement often
results in the need for ad-hoc calculations and modifications to loan
accounting/reporting systems as this is often not a standard offering
from providers who are primarily focused on commercial banking needs.
FCA Response: As we noted in a 2020 preamble, FCA has long required
institutions to compute their capital ratios using three-month average
daily balances.\3\ FCA continues to believe using the three-month
average daily balances in its capital ratios is the appropriate safety
and soundness measure given the seasonality in agriculture. The
requirement to reconcile the three-month average daily balance amounts
with the quarterly financial statements provides financial statement
users the appropriate level of detail regarding the capital levels of
System institutions.
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\3\ See 85 FR 55786, 55794 (September 10, 2020). See also FCA
regulation 615.5206(b) (requiring permanent capital and the asset
base to be computed using 3-month ADBs); FCA regulation Sec.
628.10(a) (requiring regulatory capital ratios to use 3-month ADBs).
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G. Outside Director (Sec. 619.9235)
Comment: Section 619.9235 defines an outside director to be ``[a]
member of a board of directors selected or appointed by the board, who
is not a director, officer, employee, agent, or stockholder of any Farm
Credit System institution.'' The commenter agrees that the Act
prohibits an outside director from holding any other Farm Credit System
position at the time of their initial appointment. However, the
commenter asks that FCA consider amending this definition to allow an
outside director to concurrently serve on the boards of subsidiary
institutions and, with the association board's approval, serve on the
boards of institutions that perform functions or services the
association might otherwise perform on its own behalf. As currently
drafted, Sec. 619.9235 (i) places requirements on outside directors
that are broader than the Act and other regulations; (ii) discourages
associations from utilizing Section 4.25 Service Corporations; (iii)
treats outside directors differently than elected directors; and (iv)
can deny System institutions valuable skills and expertise possessed by
outside directors.
FCA Response: The comment states that FCA regulation Sec.
619.9235, which defines an outside director as, in pertinent part, a
board member who is appointed or selected by the board and who is not a
director of a System institution,\4\ goes beyond the Act's
requirements.\5\ However, Sec. 619.9235 implements provisions in the
Act that prevent outside directors from serving more than one System
institution at any given time.\6\ Therefore, FCA is unable to change
Sec. 619.9235 to permit a bank or association outside director to
concurrently serve on a service corporation board, or vice versa.
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\4\ Section 4.27 of the Act states that a service corporation is
a Farm Credit System institution.
\5\ 619.9235 defines an outside director as ``A member of a
board of directors selected or appointed by the board, who is not a
director, officer, employee, agent, or stockholder of any Farm
Credit System institution.''
\6\ Section 1.4 of the Act states that for a System bank, ``at
least one member [of the board of directors] shall be elected by the
other directors, which member shall not be a director . . . of a
System institution.'' Sections 2.1, 2.11, and 3.2 impose the same
requirements for associations and banks for cooperatives.
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The comment also contends the independence requirement for outside
directors results in disparate treatment from what is required to be a
stockholder-elected director. The differences in treatment result from
the required legal distinction that outside directors are independent
of any System affiliation \7\ while other directors in the
[[Page 11016]]
cooperatively-structured System are not. As a cooperative, System
institutions must be owner controlled. That owner control is partially
achieved by having a board composed mainly of stockholder-elected
directors, which directors must be owners of voting stock in the System
institution.
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\7\ The brief discussion of this issue in the 1987 legislative
history states that Congress ``believed it would be prudent for all
boards to have a disinterested, objective member . . . . '' 133
Cong. Rec. S. 16831 (December 1, 1987). Congress explained that an
outside director on the System boards adds a disinterested,
objective member experienced in agricultural finance. (133 Cong.
Rec. S16,836 (daily ed. Dec. l, l987) (comment of Sen. D. Boren,
Chairman of the Subcommittee on Agricultural Credit)).
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For these reasons, we decline to make the change sought by the
commenter.
H. Confidentiality and Security in Voting (Sec. 611.340)
Comment: Regarding regulation Sec. 611.340 (Confidentiality and
security in voting, and specifically Sec. 611.340(e)), the regulation
is overly burdensome and creates undue costs regarding the
interpretation at the Agency of the duty to maintain and preserve
undeliverable, late, and invalid ballots. To retain late ballots that
come in months or even years after the close of an election will not
change the outcome of the election, yet it does cause burden and cost
to the association to pay tabulators to continue to track and retain
late ballots. It is reasonable to put a limit on how long a tabulator
should be required to retain late ballots (e.g. 30 days after the close
of election) and allow for a shorter retention time in the regulation
as it relates to undeliverable, late, or invalid ballots.
FCA Response: In an election of directors, ballots, proxy ballots,
and election records must be retained at least until the end of the
term of office of the director. This retention period applies to all
ballots, including those that were undeliverable, late, or invalid.
This retention enables an institution to document how it conducted a
vote, including being able to show why a ballot was undeliverable,
late, or invalid. The recordkeeping and storage burden is minimal when
compared with the benefits derived from having access to materials in
the event of a challenge to procedures involved in the election of a
board member.
We are not persuaded by the comment that a change is needed.
I. Criminal Referral (Bookletter-073)
Comment: Bookletter-073 ``Criminal Referral Guidance'' has
increased the cost, complexity, and burden of filing criminal referrals
under Sec. 612 subpart B. It requires System institutions to file a
criminal referral if a borrower has misstated financial statements or
converted collateral valued at more than $5,000 regardless of intent,
which is required to support a known or suspected violation of criminal
law. This requirement does not provide latitude for an analysis of
intent or a factual determination as to whether this was an isolated
incident or mistake. As a result, institutions are required to report
more incidents that do not constitute known or suspected violations of
criminal law, which may require unnecessary, misleading, or otherwise
inaccurate reports, but may also require separation of employment or
other relationships unnecessarily and which may not warrant the safe
harbor protections afforded under law. Further, reporting incidents
prophylactically and without satisfying all of the requirements of
Sec. 612 subpart B is not legally required, may be impermissible,
would increase the administrative and cost burdens on System
institutions, would reduce the impact of any event that may actually
warrant the attention of the authorities (e.g., the FBI and U.S.
Attorney's Office), would waste the resources of governmental agencies
who are charged with receiving and reviewing such reports, and may
impair a System institution's reputation and credibility with federal
and local authorities. Other regulatory burdens are also caused by
FCA's requirement to use its portal to file criminal referrals. The
portal is an awkward tool that requires multiple entries of the same
information. The portal does not readily allow the editing of a
completed draft within the portal and does not consistently (if ever)
allow for the linking of a supplemental referral to an original or
initial referral. Relatedly, a criminal referral cannot be subsequently
amended after it has been submitted through the portal, which may
necessitate the filing of a new referral through the portal to update
or append any additional information. Such steps result in
administrative costs and inefficient uses of System resources.
FCA Response: Section 612.2301(a) requires that ``within 30
calendar days of determining that there is a known or suspected
criminal violation . . . the institution shall refer such criminal
violation . . . '' to various Federal law enforcement agencies using
the FCA referral form. FCA Bookletter-073, which provides guidance on
criminal referrals, including frequently asked questions (FAQs), states
that ``known or suspected criminal activity'' means there appears to be
a reasonable basis through discovery of relevant facts that a known or
suspected federal criminal violation has occurred.\8\
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\8\ FCA Bookletter BL-073, Criminal referral guidance, dated
January 19, 2021.
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FAQ #2 discusses the factual determinations that a System
institution should consider when determining whether it must file a
criminal referral. The FAQ explains that the institution should
consider whether all the relevant facts constitute a reasonable basis
for filing a criminal referral and conduct an objective analysis to
determine whether to file a criminal referral. Intent, or a lack
thereof, by itself is not a reason for not filing a criminal referral.
To the extent institutions are worried about liability for making a
criminal referral, FAQ #13 explains the safe harbor provisions that
provide immunity from liability for institutions and their personnel
who make criminal referrals in good faith. Fear of reprisal,
litigation, or reputation risk should not keep anyone from filing a
criminal referral.
We believe that the criminal referral regulations, as explained by
Bookletter BL-073, impose reasonable requirements to ensure the safety
and soundness of the Farm Credit System. The FCA criminal referral
regulations promote consistency, efficiency, and timeliness by FCS
institutions in reporting and aiding the prosecution of known or
suspected criminal activities. Federal law enforcement agencies need to
receive timely and specific information from System institutions on
known or suspected criminal violations to determine whether
investigations and prosecutions are warranted. See section 5.17(a)(10)
of the Farm Credit Act. As such, we are not persuaded by the comment
that a change is needed at this time.
The commenter also raised issues with FCA's criminal referral
portal. We are considering updates to the criminal referral portal to
address the issues raised. In the meantime, institutions that have
questions on completing and filing the FCA Referral Form may contact
FCA's Office of General Counsel (OGC).\9\ Institutions that have
technical questions about the online criminal referral system may
contact FCA's Helpline.\10\ Both OGC and Helpline routinely help
institutions with the criminal referral process.
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\9\ OGC's phone number for this purpose is 703-883-4020.
\10\ FCA's Helpline may be contacted at 877-322-4503 or
<a href="/cdn-cgi/l/email-protection#f39b969f839f9a9d96b3959092dd949c85"><span class="__cf_email__" data-cfemail="7b131e170b1712151e3b1d181a551c140d">[email protected]</span></a>.
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J. Loan Purchases and Sales (Independent Credit Judgement) (Sec.
614.4325)
Comment: Section 614.4325(e) requires an association to reproduce a
full Credit Summary (evidencing a complete analysis and independent
credit decision) when purchasing a loan participation from another
System
[[Page 11017]]
institution. This is time-consuming, burdensome, and redundant when the
originating lender has already performed the analysis. Each institution
is responsible for their loans including participations; however, a
simplified credit summary or abbreviated review of the original CDA
should be sufficient.
FCA Response: Section 614.4325(e) requires each FCS institution to
make a judgement on the creditworthiness of the borrower that is
independent of the originating or lead lender when purchasing an
interest in a loan. The purchasing institution may use information,
such as appraisals or collateral inspections, furnished by the
originating or lead lender, or any intermediary seller or broker, but
must independently evaluate such information when exercising its
independent credit judgment.
The independent credit judgment must be documented by a credit
analysis that considers factors established within the institution's
loan underwriting standards adopted pursuant to Sec. 614.4150 and be
independent of the originating institution and any intermediary seller
or broker. Sec. 614.4325(e) clarifies that an evaluation of the
capacity and reliability of the servicer must be included as part of
the credit analysis of a prudent lender.
The regulation does not refer to a ``full'' or ``complete'' credit
summary as indicated by the commenter. As such, we are not persuaded by
the comment that a change is needed.
V. Comments That We Will Address in Existing Regulatory Projects
A. Contents of Annual Report to Shareholders (ARS) (Sec. 620.5)
Comment: The requirement to include permanent capital ratio in the
annual report is administratively burdensome and costly, is not relied
upon by FCA or other key stakeholders and does not provide valuable
information on the System institution.
FCA Response: We plan to address this comment as part of the
proposed permanent capital rulemaking project listed on our Fall 2024
Regulatory Projects Plan. This project will consider removing the
permanent capital ratio as an ARS disclosure.
B. Similar Entities (Sec. 613.3300)
Comment: The regulation is more restrictive than required by the
Act. Based on the language of the statute, it appears as if Congress
intended the 50 percent test to be satisfied only at the time the
System institution first enters the transaction, whereas the regulation
requires an ``at any time'' requirement. For example, the regulation
provides, in relevant part: ``Percentage held in the principal amount
of the loan. The participation interest in the same loan held by one or
more Farm Credit bank(s) or association(s) shall not, at any time,
equal or exceed 50 percent of the principal amount of the loan.'' Sec.
613.3300(c)(2). Compare, e.g., 12 U.S.C. 2122, Sec.
3.1(11)(B)(i)(I)(bb); 12 U.S.C. 2206a, Sec. 4.18A(b)(2) (the Act uses
the words ``would'' and ``will'' when applied to the similar entity
requirements; ``would'' and ``will'' imply a prospective pro-forma test
at the time the System institution enters the transaction, not an
ongoing compliance obligation).
FCA Response: FCA is currently engaged in a rulemaking that plans
to consider the commenter's point raised about the limit in Sec.
613.3300(c)(2). On September 6, 2024, FCA published an Advanced Notice
of Proposed Rulemaking in the Federal Register requesting comment on
certain provisions in the current similar entity regulation, Sec.
613.3300.\11\
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\11\ See 89 FR 72759 (Sep. 6, 2024).
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VI. Comments That Need Further Evaluation
A. Disclosure Requirements for Sales of Borrower Stock (Sec. 615.5250)
Comment: This regulation requires that System institutions provide
a prospective borrower with the annual report, the most recent
quarterly report, if filed more recently than the annual report, the
capitalization bylaws, and a written description of the terms and
conditions under which the equity is issued, prior to closing. Section
609.920 permits System institutions to provide the disclosures
electronically, confirms that System institutions may interpret the Act
and FCA regulations ``broadly to allow electronic transmissions,
communications, records, and submission, as provided by E-SIGN,'' Sec.
609.920(b), and the E-SIGN Act ``preempts most statutes and
regulations, including the Act and [FCA regulations].'' The commenter
cited section 609.920(a). And, neither the Act nor FCA regulation
provides how long prior to closing the disclosures must be provided.
Providing the disclosures prior to consummation of the loan documents
(even on the same day and within the same sitting) is prior to closing,
and certain loans (e.g., personal property or equipment loans, point-
of-sale financing) must be closed efficiently to satisfy the needs of
the customer or operation, support the mission, and/or remain
competitive. There has been an inconsistency in the System on the
examination (interpretation) of ``prior to closing'' and on the
delivery requirements associated with these disclosures. The
inconsistency in examination (interpretation) and approach exceed not
only the Act and FCA regulation but also the E-SIGN Act, which preempts
the Act and FCA regulation. In some of the examinations performed or
interpretations being made, words would have to be read into the E-SIGN
Act, the Act, and/or FCA regulation (e.g., a System institution must
provide the disclosures at least 24 hours in advance of closing or by
mail or paper form) to support the positions being taken. Such
interpretations and approaches not only exceed the regulator's
authority, which is impermissible, but also impose administrative costs
and burdens on System institutions, threaten their competitiveness in
the market, fail to support the mission, do not guarantee receipt prior
to closing, do not comport with preferred methods of delivery for most
customers, and are inconsistent with delivery methods of other
financial institutions that are similarly situated.
FCA Response: Further evaluation is needed before we can consider
whether changes are appropriate.
B. Disclosures in Annual Report to Shareholders (ARS) (Sec. 620.6)
Comment: As identified in the 2017 FCC commentary, the requirements
of Sec. 620.6, and, in particular, to the provisions relating to
retirement account information policies, are not only unduly burdensome
and costly, but also confusing, if not misleading to stockholders.
FCA Response: Further evaluation is needed before we can consider
whether changes are appropriate.
C. Monitoring of Performance Categories and Other Property Owned (Sec.
621.10)
Comment: Nonaccrual reporting requirements are significantly
greater under FCA call reports than other regulators. The costs
associated with tracking nonaccruals and modifying loan accounting
systems to meet FCA requirements are overly burdensome. The nonaccrual
reporting requirements can cost in excess of $1,000,000 in custom code
and personnel costs to customize the core functionality of a premier
loan accounting service provider's software. This is the same software
as others are using in the System, which means the cost to the System
overall is considerable. Accrual loan roll forward (RC-K) is overly
[[Page 11018]]
burdensome and inconsistent with prudential regulator reporting
requirements.
FCA Response: Further evaluation is needed before we consider
whether a change to this regulation is appropriate.
D. Eligible Investments (Sec. 615.5140)
Comment: FCA's regulations regarding eligible investments found in
Part 615, and specifically in Sec. 615.5140(b) include a restricted
list of investments that can be purchased by Farm Credit Associations.
The regulation also limits the investments of associations to no more
than 10 percent of total outstanding loans. Both limitations are
unnecessarily restrictive and place undue burden on associations'
ability to manage risk. Association investment options currently are
limited to (i) securities that are issued by or unconditionally
guaranteed or insured by the United States Government or its agencies
and (ii) those guaranteed portions of loans that are originated by non-
Farm Credit lenders and sold into the secondary market that USDA fully
and unconditionally guarantees or insures as to both principal and
interest. System institution investment portfolios are reviewed
approximately every six months and System institutions are constantly
required to tweak investment policies and procedures, with little to no
beneficial impact. At a minimum, because these investments are
guaranteed, there should be less scrutiny (or fewer limitations)
imposed on these investments and the review cycle should be extended.
Moreover, the regulatory restrictions on eligible investments in Sec.
615.5140(b) limit opportunities for balance sheet diversification and
liquidity needs. Banks were once the direct lender, with associations
being the service providers; the relationships, roles, and
sophistication levels of associations have significantly changed since
then. Associations are also more complex, larger, and have a greater
need to better manage their own safety and soundness, with reduced
reliance on banks. Associations have gained expertise to manage
investments in a safe and sound manner that supports the ability to
expand their investments, diversify their earnings, and allow for more
stabilization of their balance sheets to better support the cooperative
model. There is no reason to differentiate between associations and
banks with regard to eligible investments as there once was, and System
institution guidance and regulations require the monitoring of, and
reporting on, such investments, and such investments are audited and
subject to examination. With these and other controls and reviews,
eligible investment limitations should no longer be applied to
associations in a way that is dissimilar to those of banks. The
eligible list of investments that can be purchased by associations,
therefore, should be broadened to match those that can be purchased by
banks.
FCA Response: Further evaluation is needed before we can consider
whether changes are appropriate.
E. Audit Committee Financial Expert (Sec. 620.30(a))
Comment: Section 620.30(a) requires that an association's audit
committee ``must include any director designated as a financial expert
under Sec. 61l.210(a)(2) of this chapter.'' This requirement, along
with the time commitment required to serve on a board committee, places
an undue burden on other board committees by limiting who is able to
serve on those committees. As discussed more fully below, the aims of
Sec. 620.30(a) can be served, without unduly burdening other board
committees, by requiring one director designated as a financial expert
to serve on the audit committee instead of every so designated
director. Associations typically have several board committees, such as
audit, compensation, risk, governance, etc. Committees allow boards to
divide the work of the board into manageable sections and address
complex issues in depth. Because board committees often take deep dives
into complex issues, the time commitment required to serve on a
committee often precludes a director from serving on two committees at
the same time. This is particularly true of the audit committee, which
tends to require a great deal of time and effort by each member. As a
result, a director serving on the audit committee likely is not able to
serve on other board committees. As association boards become more
sophisticated, they often include several directors who satisfy the
``financial expert'' qualifications set forth in Sec. 611.210(a)(2).
By requiring each designated financial expert to be a member of the
audit committee, Sec. 611.210(a)(2) effectively precludes any
designated financial expert from serving on any other board committee.
As association may satisfy Sec. 620.30(a) by having one designated
financial expert on its board and audit committee. If a board has more
than one director who qualifies as a financial expert, the association
should be able to satisfy Sec. 620.30(a) by having any of the
designated financial experts serve on the audit committee. An
association should otherwise be able to determine where its directors'
expertise will best serve the association. For the reasons stated, we
request that Sec. 620.30(a) be revised to require an audit committee
to include at least one director designated as a financial expert under
Sec. 611.210(a)(2).
FCA Response: Further evaluation is needed before we can consider
whether the recommended changes are appropriate.
F. Electronic Filing of Part 620 (Informational Memorandum, Electronic
Filing of Part 620 Regulatory Report, Dated October 13, 2006)
Comment: This Informational Memorandum requires each System
institution to maintain a dated and signed hard copy of regulatory
reports filed in compliance with Sec. 620. The IM exceeds the
requirements of the Act and FCA regulation and imposes costs on System
institutions beyond those imposed by law. No reasonable basis exists
for maintaining paper copies of System institution records, and other
applicable law (e.g., federal rules of evidence) does not require same.
FCA Response: Further evaluation is needed before we can consider
whether updates to this Informational Memorandum are appropriate.
G. Revised Guidelines on Submission of Proposals to Merge (Merger
Guidance)
Comment: The practical merger process adopted by FCA is
inconsistent with FCA regulations and guidance provided. For example,
in practice, FCA's review period of merger applications far exceeds the
regulatory 60-day period. FCA routinely asks for additional items for
review that are neither listed in FCA regulations nor the corresponding
informational memoranda. Increasingly, FCA is requiring entities to
address issues unrelated to the safety and soundness of the proposed
merged entity (e.g., climate-related risk assessments) in their
disclosure materials. Additionally, there appears to be very little
practical consideration given to the specific circumstances of each
merger when structuring the merger conditions. For example, often the
conditions of merger are the same regardless of the size of the merging
institutions, whether the particular merger being reviewed would have a
material financial impact or any other factors related to the specific
proposed merger. Finally, the costs associated with sending required
disclosures and information in hard copy form by mail to stockholders,
which often is hundreds of pages in length, contains reports and
information
[[Page 11019]]
that many stockholders have previously received, and which may be stale
by the time disclosures are sent to shareholders, is excessive and the
process is impractical.
FCA Response: Further evaluation is needed before we can consider
whether updates to FCA's merger guidance are appropriate.
VII. Non-Regulatory Comments Received
FCA also received comments related to the Examination Manual,
examination process, and to FCA regulatory interpretations and
explanations. We referred the examination-related comments to FCA's
Office of Examination, which has taken or may take action to address
the comments, as appropriate. We will not provide any further response
to those comments within this document. In this document, we responded
to comments related to regulatory interpretations and explanations.
VIII. Future Efforts To Reduce Regulatory Burden on System Institutions
For over 30 years, we have been making a concerted effort to remove
regulatory burden whenever possible and will continue to do so into the
future. However, we will maintain regulations that are necessary to
implement the Act and/or are critical for the safety and soundness of
the System. Our approach is intended to enable the System to continue
to provide credit to America's farmers, ranchers, aquatic producers,
their cooperatives, and rural communities.
Dated: February 24, 2025.
Ashley Waldron,
Secretary to the Board, Farm Credit Administration.
[FR Doc. 2025-03172 Filed 2-28-25; 8:45 am]
BILLING CODE 6705-01-P
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