CUNA Regulatory Comment Call


May 2, 2000

Revisions to Farm Credit System Lending

(NOT A MAJOR RULE)

EXECUTIVE SUMMARY

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:

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

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