CUNA Regulatory Comment Call


May 2, 2000

Revisions to Farm Credit System Lending

(NOT A MAJOR RULE)

EXECUTIVE SUMMARY

  • The Farm Credit Administration (FCA) has issued an advanced notice of proposed rulemaking (ANPR) regarding possible changes on how Farm Credit Banks lend to non-system institutions, such as credit unions. ANPRs are sometimes published in order for agencies to raise issues and to receive comments on these issues prior to publishing a proposed rule.
  • In the ANPR, the FCA is requesting comments on certain issues in this area. These include the following:
  • The appropriate risk weighting of loans made by Farm Credit Banks to non-system lenders, such as credit unions;
  • The public availability of the identities of the non-system lenders;
  • The ability of Farm Credit Banks to lend to other lenders outside their chartered territory; and
  • Other ways to improve Farm Credit funding for non-system lenders.

Comments on the ANPR are due by June 19, 2000. Please submit your comments to CUNA by June 12, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at mdunn@cuna.com or to Assistant General Counsel Jeffrey Bloch at jbloch@cuna.com; or mail them to Mary or Jeff in c/o CUNA’s Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. Click here for a copy of the rule, if you are viewing this from the CUNA website, or contact Jeff if you would like a copy sent to you.

BRIEF BACKGROUND

The Farm Credit Act of 1971 (Act) authorizes Farm Credit Banks and agricultural credit banks (collectively referred to as "System Banks") to fund and discount loans for certain non-system lenders, which includes credit unions. The loans are generally made to various types of farmers and ranchers, with maturities of up to ten years in most cases.

The FCA has decided to issue an ANPR to solicit comments on revising Farm Credit lending requirements in order to further develop relationships with non-system lenders, such as credit unions, so that farmers and ranchers will have better access to credit.

DESCRIPTION OF THE ANPR

Risk Weighting of Loans to Non-System Lenders

The Act imposes risk-based capital requirements on System Banks. Under these requirements, the amount of capital that a System Bank must hold against loans depends at least in part on whether it is a loan to a non-system lender. Loans to non-system lenders receive a risk weighting of 100 percent. This means that in order to meet the required 7-percent capital requirement on a $100 loan, the System Bank must hold $7 in capital on a loan (100% of $7). In contrast, for loans to other entities within the Farm Credit System, the risk weighting is only 20%. For the same $100 loan, the System Bank would only need to hold $1.40 in capital (20% of $7). The reason for the difference in risk weighting is due to the increased risk reducing features that exist for entities within the Farm Credit System.

The FCA is requesting comment on how to revise the risk weighting of loans to non-system lenders, such as credit unions. The FCA has offered the following alternatives:

  • Lower the risk weighting to a number below 100% (no specific percentage is offered).
  • Place loans to non-system lenders in different risk-weighting categories to reflect the differences between the non-system lenders. Here, FCA is suggesting that non-system lenders with capital requirements similar to commercial banks may qualify for a lower risk weighting. This may affect credit unions since they are not subject to the same capital rules or prompt corrective action rules that apply to commercial banks and thrifts.
  • Lower the risk weighting for non-system lenders that take actions to mitigate risk. Possible alternatives would be if the lender pledges additional readily marketable and highly liquid securities or if the lender agrees to meet certain capital requirements, as suggested by a System Bank.
Disclosure of Names of Non-System Lenders

The FCA is considering amending the rules to require disclosure of the names of non-system lenders, which again would apply to credit unions. The names of the individual farmers or ranchers are not disclosed due to privacy concerns and to protect against unwanted marketing solicitations. The FCA does not believe that such concerns apply to non-system lenders. The disclosure of non- system lenders may have positive benefits because the individual farmers and ranchers will learn more about the credit options available to them. The only information that will be disclosed is the name of the lender and the type of agricultural credit that is offered by the lender.

Cross-District Lending

Under current rules, a System Bank may provide funding to a non-system lender that maintains its headquarters in the System Bank’s chartered territory or has more than 50 percent of its loan volume in that territory. The non-system lender may apply to a System Bank in another territory if the System Bank in the chartered territory fails to act on a funding request within 60 days of receipt of an application. A System Bank within a chartered territory may also give the non-system lender permission to seek financing from another System Bank. The rules also provide that a non-system lender does not have to terminate an existing relationship with a System Bank within a chartered territory if the lender later relocates the headquarters or if the loan volume within the territory drops below 50 percent.

The FCA is interested in exploring different alternatives in order to provide greater access to funding from System Banks. As part of this process, the FCA is requesting comment on other ways to provide greater flexibility for establishing and maintaining funding relationships with System Banks in different territories.

QUESTIONS TO CONSIDER REGARDING THE REVISIONS TO FARM CREDIT SYSTEM LENDING

  • If a 100% risk-weighting category is not appropriate, what category would be appropriate for non- system lenders, such as credit unions? Please provide reasons for the category that you choose.










  • Is it appropriate to base the risk-weighting category on the capital rules that apply to each type of lender? Should the risk-weighting category be lowered on a case-by-case basis? If so, what criteria should be used for the various levels of risk weighting?












  • Should FCA consider the actions taken by the lender to mitigate risk? How should risk mitigation be addressed under these rules?










  • What is the appropriate level of risk weighting on loans to non-system lenders that meet the risk mitigation criteria? Why is this level appropriate?












  • Should the System Banks release the names of non-system lenders? Are there drawbacks to the release of this information? Do you believe there should be limits on the release of this information? Please explain your reasons for any drawbacks or limitations that you suggest.










  • Should the rules be changed with regard to the territorial limits for access to the System Banks? If so, what if any factors should limit the choice of a System Bank? Please explain the reasons for your suggested limits or explain why there should not be any limits










  • Are there other changes or alternatives that would improve a System Bank’s ability to serve a non- system lender, such as a credit union? Please explain any changes or alternatives that you would suggest?










Eric Richard • General Counsel • (202) 508-6742 • erichard@cuna.com
Mary Mitchell Dunn • SVP & Associate General Counsel • (202) 508-6736 • mdunn@cuna.com
Jeffrey Bloch • Assistant General Counsel • (202) 508-6732 • jbloch@cuna.com
Catherine Orr • Senior Regulatory Counsel • (202) 508-6743 • corr@cuna.com
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